The government has dismissed appraiser Paul E. Nicolace, without prejudice, from the indictment pending against F. Jeffrey Miller, developer, and his alleged co-conspirators in Kansas. Angela Parenza and Elizabeth L. Hessel, both formerly loan officers with one of Miller's companys, entered guilty pleas to count one of the indictment and agreed to tesify against the other defendants.

The alleged scheme involved the sale of homes constructed by Miller to homebuyers that would otherwise not qualify, through the use of false documents and inflated appraisals. The charges include one count of conspiracy, 52 counts of bank fraud, five counts of money laundering, and forfeiture.

Defendant Nicolace, was charged in eight of the substantive counts. At a Status Conference in July 2006, the judge advised the parties that she had, as an Assistant United States Attorney, prosecuted Nicolace’s brother for drug charges and allowed the parties the opportunity to raise the issue of recusal (where the judge declines to site on a particular case and the case is thereafter transferred to a different judge.) At a Status Conference in September 2006, Nicolace requested that the judge recuse herself from this case. Meanwhile, defendants Parenza and Hessel scheduled a change of plea for October 16, 2006 before the Court.

The government argued that the judge did not have a sufficient basis for recusal. In particular, that familiarity of a judge with an individual is not sufficient under 28 USC 455(a) to merit recusal and, in this case, the judge’s familiarity was not even with the defendant but with his brother. The government also posited that the court could fashion a remedy, including recusal only from the charges against Nicolace – creating a situation where Nicolace would be tried separately from his co-defendants.

Nicolace replied that his brother had become a cooperating witness in the drug conspiracy case prosecuted by the judge when she was an Assistant US Attorney and spent considerable time with the now judge who had recommended downward departure at sentencing and was later involved in obtaining a prison sentence against the brother for violation of the terms of that sentence. Nicolace pointed out that it is not impartiality but the appearance of impartiality that requires recusal. He further stated that was not only inappropriate and would be unfair in this case but should not be considered by the court in connection with a recusal motion (as recusal would terminate the court’s authority, the newly appointed judge should rule on any motion to sever the charges.)

The Court conditionally granted the recusal motion, finding that, although the judge would certainly preside over the case with impartiality and fairness, there was an appearance of impartiality based on the previous connection with Nicolace’s brother and the knowledge gained by the Court through that relationship. The Court allowed the government the alternative of dismissing the charges against Nicolace without prejudice within seven days of the order. By allowing the government to dismiss without prejudice, the government would be able to refile charges against Nicolace in a separate indictment so long as no issues existed with respect to the statute of limitations. On October 20, the government filed a motion to dismiss the indictment as to Nicolace – and Nicolace was dismissed from the case, without prejudice on October 31, 2006.

On October 16, 2006, Angela Parenza entered a guilty plea to count 1 of the indictment, stating in the petition to enter the plea that she “provided down payments to homebuyers from Jeff Miller without disclosing that to lending institutions, among other over acts.” Elizabeth Hessel entered a plea of guilty as to count 1 of the indictment.

The guilty pleas of both Parenza and Hessel state that the object of the conspiracy was to enrich the conspirators by manipulating home buyers, manipulating appraisal and submitting materially false and fraudulent loan applications to obtain loan proceeds from federally insured financial institutions.

According to the pleas, as part of the scheme, the coconspirators:

Advertised in newspapers that homes would be sold to home buyers with poor credit and financial problems for little or no down payment. They established a “One Stop Shop” for home buyers by establishing Associated Capital and Associated Finance to go along with Miller’s building company, Miller Enterprises. Homebuyers that went to Miller Enterprises to pick out a home could also obtain financing – Miller thereby controlled the flow of information to the lender.

The “One Stop Shop” was turned into a fraudulent real estate machine as Miller manipulated the appraisal process. He obtained intentionally inflated appraisals by (1) refusing to pay the appraisers if his price was not met and (2) manufacturing comparables by selling homes in subdivisions to his employees at inflated prices and then agreeing to forgive the second mortgagees on the homes. Miller also falsified loan applications and accompanying documents such as tax returns, employment verifications, rental agreements, rental verifications and payment histories in order to qualify borrowers for loans that they would not have otherwise been able to obtain. He would also provide home buyers with down payments and closing costs without disclosing this to the lenders.

The homeowners would be manipulated into moving into the home before closing. The sales price would then be increased and closing - creating a situation where the homeowners were forced to chose between closing on the home with the increased sales price or facing eviction and homelessness. The increased sales price would be secured by a second mortgage with an illegal interest rate serviced through his company, Associated Finance. Miller and Earnshaw created a form called the Principal Reduction Form to reduce the second mortgage balance by permitting the homeowner a discount on the mortgage if the reduced amount was paid off in a specified time.

The conspiracy was later reconfigured to sell homes to investors in volume. The actual sales price was discounted but this was not disclosed to the lenders – who continued to be provided with false documentation on the financial condition of the investors as well as false lease/purchase agreements. Miller would also pay the investors undisclosed kickbacks that were concealed as referral fees or interior design fees.

According to the guilty please, $25,042,670.39 in loan proceeds were obtained from federally insured financial institutions in connection with the conspiracy.

Click here for the original Mortgage Fraud Blog article on the indictment.