phs third circuit reply brief 1.27.11 as filed
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UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
________________
__________
No. 10-3431
DENNIS A. RHODES et al, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants,
- v.- ROSEMARY DIAMOND et al, Defendants-Appellees.
__________________
APPEAL FROM AN ORDER OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA,
09-cv-1302
______________________________________________
APPELLANTS’ REPLY BRIEF
JOHN G. NARKIN BHN LAW FIRM
951 Rohrerstown Road, Suite 102 Lancaster, Pennsylvania 17601 (717) 756-0835 Attorneys for Plaintiffs-Appellants
____________________________________________
Case: 10-3431 Document: 003110420531 Page: 1 Date Filed: 01/27/2011
i
TABLE OF CONTENTS
TABLE OF CITATIONS………….……………………………………………… ii
ARGUMENT……………………………………………………………………… 1
I. THE COURT BELOW ABUSED ITS DISCRETION
BY DENYING APPELLANT-HOMEOWNERS LEAVE
TO FILE THE PROPOSED AMENDED COMPLAINT……………………...1
II. THE LOWER COURT ERRONEOUSLY FOUND THAT
THE PROPOSED AMENDED COMPLAINT IS “FUTILE”
WITHOUT ANALYSIS UNDER RULE 12(b)(6) STANDARDS……………2 A. The PAC Asserts Claims Relating to Non-Bankrupt Homeowners
and Legal Issues Having Nothing to Do With Bankruptcy Law……......5
B. The PAC‟s Allegations Are Plausible…………………………………...9
C. Rooker-Feldman and Res Judicata Do Not Apply…………………….. 14
D. The PAC States a Claim For Relief Under RICO……………………...17
III. THE COURT BELOW ERRONEOUSLY DISMISSED
THE HOMEOWNERS‟ ORIGINAL COMPLAINT…………………….20
CONCLUSION………………………………………………………………….. 22
Case: 10-3431 Document: 003110420531 Page: 2 Date Filed: 01/27/2011
ii
TABLE OF CITATIONS
CASES
Allen v. LaSalle Bank, 2011 U.S. App. LEXIS 587
(3d Cir. Jan 11, 2011)..............................................................................................21
Ashcroft v. Iqbal, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2008) ................................... 3
Bank of N.Y. v. Raftogianis, 2010 N.J. Super. LEXIS 221
(Super. Ct., Ch. Div, June 29, 2010) ........................................................................16
Bell Atlantic Corp. v. Twombly, 550 U. S. 544,
127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) ................................................................ 3
Birschall v. Countrywide Home Loans, Inc.,
2009 U.S. Dist. LEXIS 106813 (E.D. Pa. Nov. 12, 2009) .....................................15
Boyle v. United States, 129 S.Ct. 2237, 2243-45 (2009) .........................................17
Brown v. Card Serv. Ctr., 464 F.3d 450, 553 (3d Cir. 2006) ..................................21
Exxon Mobil Corp. v. Saudi Basic Industries Corp.,
544 U.S. 280 (2007) ................................................................................................14
Foman v. Davis, 371 U.S. 178 (1962) ....................................................................... 2
Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009) .......................... 4
Franks v. Food Ingredients International, Inc.,
2010 WL 3046416 (E.D.Pa., July 30, 2010 .............................................................. 2
Graziano v. Harrison, 950 F.2d 107, 113 (3d Cir. 1991) ........................................22
Hannon v. Countrywide, 2010 Bankr. LEXIS 3690
(Bankr. M.D. October 18, 2010) .................................................................. 6, 20, 21
Hannon v. Countrywide, 421 B.R. 728 (Bankr. M.D. Pa. 2009) .................. 6, 20, 21
Case: 10-3431 Document: 003110420531 Page: 3 Date Filed: 01/27/2011
iii
In re Insurance Brokerage Antitrust Litig., 618 F.3d 300 (3d. Cir. 2010) ..............17
In re Randall, 358 B.R. 145, 161 (Bankr. E.D.Pa. 2006 .........................................15
International Brotherhood of Boilermakers v. Kelly,
815 F.2d 912 (3d Cir. 1987) ...................................................................................... 5
Oppong v. First Union Mortg. Corp.,
215 Fed. Appx. 114 (3d. Cir. 2007) ........................................................................15
Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008) .................................. 3
Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004) ............................................21
Rivera v. Ragan & Ragan, P.C.
2010 U.S. Dist. 63821 (E.D.Pa. June 25, 2010) ......................................................15
Romero v. Allstate Insurance Co.,
2010 WL 2996963 (E.D. Pa. July 28, 2010)............................................................. 2
Rosenau v. Unifund Corp., 539 F.3d 218, 221 (3d Cir. 2008) ................................21
United States Bank Nat'l Ass'n v. Ibanez,
2011 Mass. LEXIS 5 (S.Ct. Mass., Jan. 7, 2011); ..................................................16
Venner v. Bank of America,
387 Fed. Appx. 232 (3d. Cir. 2010) ........................................................................14
Wainright v. Bank of America,
2010 U.S. Dist. LEXIS 99100 (M.D. Pa. Sept. 21, 2010) ......................................15
Weiss v. Regal Collections, 385 F.3d 337 (3d Cir. 2004) ........................................22
Whiteford v. Reed, 155 F.3d 671 (3d Cir. 1998)......................................................14
Zen Investments, LLC v. Unbreakable Lock Co.,
276 Fed.Appx. 200 (3d Cir. 2008) ............................................................................ 2
Case: 10-3431 Document: 003110420531 Page: 4 Date Filed: 01/27/2011
iv
STATUTES
18 U.S.C. § 1962(c) .................................................................................................18
15 U.S.C. § 1692(e) .................................................................................................20
15 U.S.C. § 1692k ....................................................................................................22
15 U.S.C. § 1692k(a)(2)(B) .....................................................................................22
RULES
3d Cir. L.A.R. 28.1 ...................................................................................................11
Fed. R. Civ. P. 12(b)(6) ................................................................................... 2, 3, 11
Fed. R. Civ. P. 15(a).............................................................................................9, 10
OTHER AUTHORITIES
In re Residential Mortgage Foreclosure
Pleading and Document Irregularities,
Administrative Order 01-2010
(N.J. Super. Ct., Ch. Div. Mercer Co., Dec. 20, 2010) ...........................................13
Case: 10-3431 Document: 003110420531 Page: 5 Date Filed: 01/27/2011
1
ARGUMENT
I. THE COURT BELOW ABUSED ITS DISCRETION BY DENYING APPELLANT-HOMEOWNERS LEAVE TO FILE THE PROPOSED AMENDED COMPLAINT
In their opening brief (“Homeowner Br.”), Appellants demonstrated that the
court below abused its discretion and abdicated its judicial responsibilities by
denying the homeowners‟ motion for leave to amend without addressing
allegations in their proposed amended complaint (“PAC”). See Homeowner Br. at
15-16; 17-21.
In their opposition brief (“Phelan Br.”), Appellee foreclosure law firm and
its attorneys (“Phelan”) do not defend the lower court‟s abuse of discretion. They
repeat, almost verbatim, the same arguments made to the court below. Compare
Phelan Br. at 32-54 with Defendants' Memorandum in Opposition To Plaintiffs'
Motion for Leave to Amend, dated February 1, 2010 (“Phelan R.15 Br.”) (A248-
A308).1 The lower court accepted Phelan‟s arguments without articulated analysis
and without giving Appellants a chance to respond to them. See Homeowner Br. at
18-19 and n. 10, citing, Plaintiffs' Motion for Leave to File Reply Brief (A309 –
A310) (“Ignored Motion”) and (Proposed) Plaintiffs' Reply Memorandum of Law
In Further Support of their Motion for Leave To File Amended Complaint and
exhibits (“Ignored Brief”) (A310 – A337). 1 Citations are to the Appendix filed on December 6, 2010, supplemented by the
Addendum to Appendix filed on December 9, 2010.
Case: 10-3431 Document: 003110420531 Page: 6 Date Filed: 01/27/2011
2
The law governing motions under Fed. R. Civ. P. 15(a) is well established
and easily applied. See, e.g. Foman v. Davis, 371 U.S. 178, 182 (1962); Zen
Investments, LLC v. Unbreakable Lock Co., 276 Fed.Appx. 200, 202 (3d Cir.
2008); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir.
1997) (Alito, J.); Romero v. Allstate Insurance Co., 2010 WL 2996963, at *3 (E.D.
Pa. July 28, 2010). The law is so fundamental that the court below recognized and
applied it in another case. Franks v. Food Ingredients International, Inc. 2010 WL
3046416, at *7, *8 (E.D.Pa., July 30, 2010) (Jones, J.).
Here, the lower court ignored the law. Phelan ignores it again in its brief. To
maintain the integrity of precedent, the Court should apply it correctly here.
II. THE LOWER COURT ERRONEOUSLY FOUND THAT THE PROPOSED AMENDED COMPLAINT IS “FUTILE” WITHOUT ANALYSIS UNDER RULE 12(b)(6) STANDARDS
The claims in the PAC are sufficient to survive Phelan‟s challenge under
Fed. R. Civ. P. 12(b)(6). The lower court had an obligation to address this issue
itself rather than leave it for decision by this Court. In re Burlington Coat Factory
Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997) (Alito, J.).
This Court could vacate the lower court‟s Order and remand the action to
the court below. But because this litigation has been pending since March 25,
2009, the PAC has been shunted aside since January 10, 2010, important public
interests are at stake, and the court below has been disinclined to examine the
Case: 10-3431 Document: 003110420531 Page: 7 Date Filed: 01/27/2011
3
pleading sufficiency of the PAC with the speed and analytical vigor it deserves, the
homeowners request the Court to decide the issue.
The Court developed the Rule 12(b)(6) standards that apply in this Circuit,
and it can apply them here with no great difficulty. Explaining the meaning of
Ashcroft v. Iqbal, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2008); Bell Atlantic Corp. v.
Twombly, 550 U. S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) and Phillips v.
County of Allegheny, 515 F.3d 224 (3d Cir. 2008), the Court summarized the
pleading requirements mandated by Rule 12(b)(6):
To prevent dismissal, all civil complaints must now set out
"sufficient factual matter" to show that the claim is facially
plausible. This then "allows the court to draw the reasonable
inference that the defendant is liable for the misconduct
alleged." [Iqbal, 129 S. Ct.] at 1948. The Supreme Court's
ruling in Iqbal emphasizes that a plaintiff must show that the
allegations of his or her complaints are plausible. See Id. at
1949-50; see also Twombly, 550 U.S. at 555 & n.3….
[I]n Twombly, [the Supreme Court held] that a pleading
offering only "labels and conclusions" or "a formulaic recitation
of the elements of a cause of action will not do." Twombly, 550
U.S. at 555; Phillips, 515 F.3d at 232. In Phillips, we discussed
the appropriate standard for evaluating Rule 12(b)(6) or
12(b)(1) motions … : "courts accept all factual allegations as
true, construe the complaint in the light most favorable to the
plaintiff, and determine whether, under any reasonable reading
of the complaint, the plaintiff may be entitled to relief."
Phillips, 515 F.3d at 233…. The Supreme Court's opinion in
Iqbal extends the reach of Twombly, instructing that all civil
complaints must contain "more than an unadorned, the-
defendant-unlawfully-harmed-me accusation." Iqbal, 129 S. Ct.
at 1949.
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4
Therefore, after Iqbal, when presented with a motion to dismiss
for failure to state a claim, district courts should conduct a two-
part analysis. First, the factual and legal elements of a claim
should be separated. The District Court must accept all of the
complaint's well-pleaded facts as true, but may disregard any
legal conclusions. Id. Second, a District Court must then
determine whether the facts alleged in the complaint are
sufficient to show that the plaintiff has a "plausible claim for
relief." 129 S.Ct. at 1950. In other words, a complaint must do
more than allege the plaintiff's entitlement to relief. A
complaint has to "show" such an entitlement with its facts. See
Phillips, 515 F.3d at 234-35.
Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009) (footnotes
omitted).
The facts alleged in the PAC demonstrate that the homeowners have a
plausible claim for relief against the Phelan firm and its mortgage servicer clients.
These facts not only suggest -- they specifically show -- when, where, how and
why lawyers at the Phelan firm systematically imposed manufactured or overstated
foreclosure fees upon homeowners, in many instances through fraudulent legal
documents fabricated to file foreclosure cases on behalf of parties without legal
standing. With no serious explanation, the court below denied the homeowners an
opportunity to prove their claims through discovery. See Homeowner Br. at 25 and
A9.
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5
A. The PAC Asserts Claims Relating to Non-Bankrupt Homeowners and Legal Issues Having Nothing to Do With Bankruptcy Law
The lower court declared that the PAC was “moot”2 and “futile” because of
the “reasons” it gave for dismissal of the homeowners‟ initial Complaint.
Homeowner. Br at 4, citing District Court Order dated July 14, 2010 (A4 n.1). The
only reasons given by the court relate exclusively to allegations implicating the
U.S. Bankruptcy laws. District Court Memorandum dated July 14, 2010 (“Dist.Ct.
Mem. at 3-13 (A8 – A13). The claims in the PAC involve demonstrably more than
just two discrete bankruptcy issues.
Now as before the lower court and in numerous other trial courts, outside
litigation counsel for the Phelan firm is Wilentz Goldman & Spitzer, P.A.
(“WSG”). On the Phelan firm‟s behalf, WGS argues that the PAC is a “diatribe”
intended to “criminalize” the “entire” residential mortgage foreclosure industry,
and that PAC‟s claims: (a) “added only new one substantive allegation” [sic] and
(b) “the only acts alleged to have been taken of which Plaintiffs complained are
those of the Phelan firm alone in (1) instituting foreclosure cases against the
Plaintiffs; (2) filing proofs of claim and (3) handling sheriff‟s refunds. None of the
other defendants are alleged to have taken any action directly or indirectly that
2 The doctrine of mootness does not apply. As Judge Higginbotham explained in
International Brotherhood of Boilermakers v. Kelly, 815 F.2d 912, 915 (3d Cir.
1987), mootness relates to the Article III requirement that there be a live case or
controversy, or to the prudential consideration of whether parties have sufficient
functional adversity to sharpen issues presented for judicial resolution.
Case: 10-3431 Document: 003110420531 Page: 10 Date Filed: 01/27/2011
6
affect the Plaintiffs.” See, e.g., Phelan Br. at 7, 32 and 45 (emphasis in original).
See also Phelan R.15 Br. (A248-A308).
This assertion is made despite knowledge that (1) "an attorney is an agent
acting in the name of its principal" (Phelan Br. at 18), (2) foreclosure activities of
mortgage servicers and outside counsel are interdependent,3 (3) in U.S. Bankruptcy
Court, proposed defendant Countrywide is now defending charges that it
systematically failed to account for sheriffs‟ deposit refunds by amending proofs of
claim, including in cases where Phelan acted as foreclosure counsel for
Countrywide,4 (4) in addition to claims in the original complaint, the homeowners
3 As shown by foreclosure firms‟ compulsory use of default servicing software
programs dictated by servicers (PAC ¶¶ 148-158), foreclosure lawyers can do little
without knowledge or approval of its clients. Servicers‟ involvement in the
activities of their outside law firms is demonstrated in other ways. Attempting to
change the culture of unlawful mortgage servicing practices inherited from
proposed defendant Countrywide Home Loans, Inc., proposed defendant Bank of
America (1) required its foreclosure law firms to subscribe to a new internal code
of professional conduct; (2) is conducting onsite inspections at the offices of its
outside foreclosure firms; and (3) summoned foreclosure lawyers in New Jersey,
including Phelan, to attend a mandatory training program at Bank of America‟s
facilities in Plano, Texas. See Bank of America‟s Response to Show Cause filed
January 5, 2010 at 6-7, 10-12, In re Residential Mortgage Foreclosure Pleadings
and Document Irregularities, Docket F-59551-10 (N.J. Super. Ct., Ch. Div.,
Mercer Co.), available at
http://www.judiciary.state.nj.us/superior/January%205,%202011%20%20BOA-
BAC%20Home%20Response.pdf 4 See Homeowners‟ Br. at 21-22, citing, Hannon v. Countrywide, 421 B.R. 728
(Bankr. M.D. Pa. 2009) and 2010 Bankr. LEXIS 3690, at * 5-6 (Bankr. M.D. Pa.
Oct. 18, 2010).
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7
allege that proposed defendant Wells Fargo obtained overstated post-bankruptcy
foreclosure fees from Appellant Edward Wolfred resulting, not from a bankruptcy
proof of claim, but from a loan modification accepted after Mr. Wolferd’s Chapter
13 proceeding was dismissed5;and (5) the PAC alleges that Phelan‟s servicer
clients benefitted financially and in other ways from Phelan‟s misconduct (see,
e.g., PAC ¶¶ 3-4, 56-73, 148-159, 175-193).
Phelan‟s wholesale reconstruction of the homeowners‟ allegations bears no
resemblance to what the PAC asserts. See Homeowner. Br. at 2-11; Ignored Brief
at 2-13 (A313 – A324). The homeowners informed the lower court that Phelan‟s
opposition to the filing of the PAC was predicated upon “a litigation record that
has been distorted beyond recognition.” (Ignored Motion at 2; A310). Instead of
evaluating and addressing the homeowners‟ point-by-point response to Phelan‟s
mischaracterizations, the court below acquiesced to them. On that basis, it disposed
of the homeowners‟ Rule 15(a), taking no responsibility for its decision by
providing the homeowners and this Court nothing more than an uninformative
footnote to understand its reasoning.
The allegations in the PAC should have been accepted as true under Rule
12(b)(6). See above at 3-4. For unclear reasons, the lower court assumed the truth
of Phelan’s farfetched version of the homeowners‟ allegations.
5 See PAC ¶¶ 98-101, 109(d) and Ignored Brief at 2.
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8
Phelan‟s repackaging of the PAC‟s allegations is particularly puzzling in the
instance of Charles Giles, a named plaintiff in the PAC and an exemplary class
representative if this Court allows the case to proceed. See PAC ¶¶14, 109, 121-
134; Ignored Brief at 2, 9-10 (A-313, A-319, A320).
Mr. Giles was an emergency medical technician who became medically
disabled while trying to help others escape the smoke and fire of the World Trade
Center on September 11, 2001 and during subsequent search efforts at Ground
Zero. Dust and debris invaded Charlie Giles‟ lungs, causing hospitalizations,
endless medical procedures and treatments, and a loss of his ability to earn a living,
all of which continue to this day.
Charles Giles encounters with Phelan and Wells Fargo are recounted in
detail in the PAC. The Court and anyone who wants to understand the human
tragedy of the foreclosure crisis would do well to know his story. To Phelan,
Charlie Giles is worth only a few fleeting, hard-to-find mentions in their briefs.
Phelan tried to Photoshop® Charlie Giles out of the picture and pretend that he
does not exist.6
6 Phelan‟s inattentiveness to the facts and its careless representations to courts
should not be taken lightly. The worst example of Phelan‟s assault on the
homeowners here is its formal statement to a bankruptcy court that Charlie Giles is
a deceased woman. See In re Bender, memorandum at 3, No. 08-21193 (Bankr.
E.D.Pa. March 11, 2010), Doc. 84 (identifying Mr. Giles as a “9/11 widow”),
https://ecf.paeb.uscourts.gov/doc1/152114259948.
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9
Charlie Giles was effectively concealed by Phelan. The lower court did not
recognize him although he was hidden in plain sight. But Charlie Giles is there,
prominently in the caption of the PAC and in the minute detail of its pages.
Phelan represented to the court below, as it does again to this Court, that all
of the homeowners‟ claims are precluded by the U.S. Bankruptcy Code. There is
one problem with the Alice in Wonderland-like fable spun by Phelan: Charlie
Giles’ never sought or obtained protection from the Bankruptcy Court.7
B. The PAC’s Allegations Are Plausible
While not as unsettling as its mistreatment of Charles Giles, Phelan asks this
Court to resolve complex merits-based factual issues in its favor as a matter of law.
Included among these questions are the purpose and effect of a “limited” power of
attorney that Phelan claims to have authorized it to bring foreclosure actions on
behalf of Wachovia Bank, N.A., a former collateralized debt obligation trustee8 –
7 Phelan‟s abusive debt collection practices could have forced Mr. Giles to seek
bankruptcy relief on top of the other miseries he has endured since September 11,
2001. Had he made that decision, Phelan would have taken the thousands of dollars
in overstated or manufactured foreclosure fees that it had already drummed up (see
PAC ¶ ¶109, 133) and piled them straight into “Wachovia’s” bankruptcy claim. 8 This document was not presented to the court below in connection with
homeowners‟ Rule 15(a) motion. It was included in a toxic memorandum filed in
response to the lower court‟s June 2, 2010 Order directing Phelan to submit a brief
“limited to the issue of what effect, if any, the [a settlement between the FTC and
proposed defendant Counrywide] should have on their pending Motion to
Dismiss.” (A235) (emphasis supplied). Phelan ignored that directive by wrapping
its customary boilerplate insults inside “arguments” directed more to the PAC and
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10
the same institution whose senior vice president notified Phelan that Wachovia had
no standing to sue. Compare Phelan Br. at 8-9; 42 (purporting to describe
documents referenced at S.A. 110, 191) with PAC ¶ 131 (A77-A78), Ignored Brief
at 9 (A320), and letter dated October 24, 2007 from Mark A. Farmer (Senior Vice
President and Assistant General Counsel of Wachovia Corporation) to Vladimir
Palma (Phelan firm attorney) (A335) (“As you are aware since Wachovia Bank,
N.A. is not the Trustee and not the holder of the subject of the subject mortgage we
are unable to address Mr. Charles Giles‟ situation. Thank you for your prompt
attention to this matter and for your efforts to correct the public record. I look
forward to receipt of an Order deleting the name Wachovia Bank, N.A. from the
foreclosure action and recorded evidence correcting the public record”).
At most, this issue involves a disputed question of material fact
inappropriate for disposition at the pleading stage of litigation. Resolution of the
issue requires further development through depositions of Mr. Farmer, Mr. Palma
and other individuals who can testify about the “limited” power of attorney cited
the homeowners‟ counsel than to their motion to dismiss, thereby conflating
distinct issues and distinct motions. The court below then entered the Order under
appeal, which (1) shunned mandatory discussion of Rule 15(a) issues, (2)
implicitly adopted Phelan‟s crude accusations of bad faith by the homeowners‟
counsel and (3) tried to “conflate” the PAC out of existence.
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11
by Phelan.9 Full production of corporate and law firm documents is also needed
before this issue will be ripe for determination as a matter of law by the District
Court or, more appropriately, by a jury after presentation of evidence at trial.
It is not a proper function of a Court of Appeals to address issues of this
nature, much less a court like this one that has been placed in the position of (1)
rectifying a lower court‟s disregard of Rule 15(a) precedent; (2) evaluating the
legal sufficiency of a proposed amended complaint that a trial court rejected
without addressing Rule 12(b)(6) standards; and (3) deciphering a brief filed by
Phelan that contains tangential or irrelevant legal citations, unreliable and
circuitous comment, and personal attacks that violate 3d Cir. L.A.R. 28.1.10
9 If the “limited” power of attorney had the effect ascribed to it by Phelan, the
public record would have been accurate, there would have been no need to correct
it and Mr. Farmer would not have sent a letter to Phelan reminding it of its legal
responsibilities. The document emphasized by Phelan is precisely what it says it is
– a limited power of attorney. Wachovia and U.S. Bank executed this document
“solely for the purposes of the indemnification provisions” of a “Servicing
Agreement dated as of December 20, 2005,” which has not been produced and is
not part of the record.
10
Personal attacks achieved the result sought by Phelan in the court below. See
Letter dated February 2, 2010 from WGS partner Daniel S. Bernheim 3d to the
court below, which (1) disregarded the lower court‟s policy prohibiting arguments
in correspondence to the court; (2) mischaracterized the PAC as a “109 page
diatribe” that was “reckless[ly]” filed by the homeowners‟ counsel as part of a
“sanctionable event” and (3) asserted that dismissal of the homeowners‟ original
complaint would “render the motion for leave to amend moot.” (A337). Taking
WGS at its word -- without considering the homeowners‟ point-by-point
explanation of why that word can‟t be accepted at face value (Ignored Brief, A310
– A337) – the court below entered the Order on appeal.
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12
Notwithstanding rhetoric and posturing,11
the “plausibility” of the claims in
the PAC cannot be doubted seriously. To assess plausibility, the Court can look to
measures undertaken by the Chief Justice of the State of New Jersey.
In December 2010, the Chief Justice Stuart Rabner announced that he had
taken “steps to protect the integrity of filings of foreclosures in New Jersey,”
including issuance of “an Order directing six lenders and service providers [among
them proposed defendants Wells Fargo and Bank of America] who have been
implicated in irregularities in connection with their foreclosure practices to show
cause why the processing of uncontested residential mortgage foreclosure actions
they have filed should not be suspended.” See New Jersey Courts Press Release
dated December 20, 2010.12
Chief Justice Rabner stated that “evidence of flaws in the foreclosure
process” required immediate action because “for judges to sign an order
foreclosing on a person's home, they must first be able to rely on the accuracy of
documents submitted by lenders. That step is critical to the integrity of the judicial
process.” Id.
At the Chief Justice‟s direction, New Jersey‟s court administrator entered an
Order that turns the harsh glare of judicial disapproval directly on Phelan.
12
See http://www.judiciary.state.nj.us/superior/press_release.htm.
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13
Compare, e.g., In re Residential Mortgage Foreclosure Pleading and Document
Irregularities, Administrative Order 01-2010 at 4-5 (N.J. Super. Ct., Ch. Div.
Mercer Co., Dec. 20, 2010)13
with PAC ¶¶ 137-145 (identifying false affidavit
notarizations signed by Thomas Strain, an employee of a Phelan-controlled entity,
at the behest of his employer, Appellee Francis S. Hallinan).
Despite Phelan‟s effort to distance itself from its servicer clients and other
wrongdoers in its industry (and to falsely accuse the homeowners‟ counsel of a
variety of ethical transgressions), the allegations in the PAC foreshadowed the
foreclosure scandal that had not yet broken when the homeowners submitted the
PAC to the lower court in January 2010. Since then, the “shameful” foreclosure
practices that have impelled the New Jersey courts to intervene forcefully have
also prompted 50 state attorneys general and countless federal officials to form
“the broadest coalition of law enforcement, investigatory and regulatory agencies
ever assembled to combat fraud.” Homeowner Br. at 14-15 (A239). The claims
asserted in the PAC are certainly plausible.
Acting Administrative Director of th The PAC Is Not Otherwise FutiThe PAC is Not Precluded By Rooker-Feldman or Res Judicata
13
See http://www.judiciary.state.nj.us/notices/2010/n101220b.pdf. See also Kaja
Whitehouse, Report Rips NJ Foreclosure Robo-signing Notary, N.Y. POST, Dec.
29, 2010,
http://www.nypost.com/p/news/business/sign_of_the_times_wOvGHrYMdbzZqE
VgonGR4K (describing Mr. Hallinan‟s employee as “the face of New Jersey's
robo-signing scandal”).
Case: 10-3431 Document: 003110420531 Page: 18 Date Filed: 01/27/2011
14
C. Rooker-Feldman and Res Judicata Do Not Apply
Phelan argues that the PAC is nothing more than a claim that other “state
and bankruptcy courts „got it wrong‟” and that such claim is barred by the Rooker-
Feldman doctrine and the doctrine of res judicata.” See, e.g., Phelan Br. at 33.
The only way that Rooker-Feldman could apply is if the issue for decision
involves "claims that have been previously adjudicated in state court or that are
inextricably intertwined with a state adjudication." Whiteford v. Reed, 155 F.3d
671, 674 (3d Cir. 1998) (citation omitted). Quoting the Supreme Court‟s opinion
in Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 283-84
(2007), this Court observed that only “narrow ground [is] occupied by Rooker-
Feldman” and that if “a federal plaintiff presents some independent claim, albeit
one that denies a legal conclusion that a state court has reached in a case to which
he was a party, then there is jurisdiction….” Venner v. Bank of America, 387 Fed.
Appx. 232, 236 (3d. Cir. 2010) (references omitted).
Although the homeowners tried to bring this distinction to the attention of
the court below,14
none of the claims in the PAC impair state foreclosure
judgments. Foreclosure actions are in rem proceedings in which claims for
14
See Ignored Brief at 9-10 and cases cited therein (A320-A321).
Case: 10-3431 Document: 003110420531 Page: 19 Date Filed: 01/27/2011
15
monetary damages from consumer protection law violations are not permitted.15
Although the propriety of some class members‟ foreclosure judgments is a legal
conclusion denied, their claims do not implicate any determination of in rem
liability. Resolution of in personam damage claims in federal court will not
invalidate or diminish any act of a state judge, nor will it affect anyone‟s property
rights.16
See In re Randall, 358 B.R. 145, 161 (Bankr. E.D.Pa. 2006) (“The amount
due the mortgagee can be adjusted by this court without affecting the validity of
the mortgage itself, nor the right of the mortgagee to foreclose upon its judgment”).
Application of res judicata is similar. In Oppong v. First Union Mortg.
Corp., 215 Fed. Appx. 114, 116 (3d. Cir. 2007), lawyers representing Wells Fargo
persuaded a district court to grant a motion to dismiss on the ground that a debtor‟s
FDCPA claims were precluded by res judicata. This Court reversed the lower
court‟s order, stating that the debtor‟s “FDCPA claims are not barred by res
15
In Pennsylvania foreclosure actions, Phelan seeks dismissal of counterclaims
because of the in rem nature of foreclosure judgments. See., i.e., Plaintiffs‟ Brief in
Support of its Preliminary Objections, Wells Fargo v. Nevling, No. 09-12785 (C.P.
Lancaster, Dec. 22, 2009),
http://lcapp1.co.lancaster.pa.us/bannerwebimg/
16
Accord: Wainright v. Bank of America, 2010 U.S. Dist. LEXIS 99100, at *6-10
(M.D. Pa. Sept. 21, 2010); Rivera v. Ragan & Ragan, P.C.2010 U.S. Dist. 63821,
at *5-13 (E.D.Pa. June 25, 2010); Birschall v. Countrywide Home Loans, Inc.,
2009 U.S. Dist. LEXIS 106813, at *11-22 (E.D. Pa. Nov. 12, 2009) (“Rooker-
Feldman [does] not bar claims under the FDCPA where the plaintiff disputed the
collection practices utilized by the debt collector, rather than the validity of the
state court judgment” [at *11]).
Case: 10-3431 Document: 003110420531 Page: 20 Date Filed: 01/27/2011
16
judicata because they were never adjudicated on the merits” insomuch as: (1)
under Pennsylvania law, parties cannot assert counterclaims in mortgage
foreclosure actions when they are not “part of or incident to the creation of the
mortgage itself" and (2) FDCPA damage claims are not part of or incidental to
creation of a mortgage. Id. at 118.
The Third Circuit‟s opinion in Oppong was unambiguous. Although the
opinion was non-precedential, the legal conclusions expressed in it are entitled to
deference and respect. Oppong should have made an impression on Wells Fargo‟s
counsel, but, if an impression was made, it was insufficiently deep. The lawyers
representing Wells Fargo in Oppong were Daniel S. Bernheim 3d and Jonathan J.
Bart of WGS,17
who now try to resurrect arguments rejected by this Court four
years ago.
17
WGS also misinformed the lower court that the homeowners‟ claims were
“precluded” by proceedings in In re Bender, No. 08-21193 (Bankr. E.D.Pa.)
because Bender “lost” a bankruptcy court challenge to Phelan‟s authority to file
proofs of claim on behalf of Wachovia, a party having no legal interest in Bender‟s
mortgage. See SA-166; Ignored Brief at 9 (A320) and Exhibit B thereto (A328-
335). Bender‟s bankruptcy objection was temporarily withdrawn without prejudice
(SA117) based on Phelan‟s promise that it would produce documents evidencing
the chain of title to Bender‟s mortgage from Wachovia to its current legal owner,
as is necessary to establish proper legal standing. See United States Bank Nat'l
Ass'n v. Ibanez, 2011 Mass. LEXIS 5, at 23-27 (S.Ct. Mass., Jan. 7, 2011); Bank of
N.Y. v. Raftogianis, 2010 N.J. Super. LEXIS 221 (Super. Ct., Ch. Div, June 29,
2010). No such information has been provided, perhaps because title to Bender‟s
mortgage cannot be established.
Case: 10-3431 Document: 003110420531 Page: 21 Date Filed: 01/27/2011
17
D. The PAC States a Claim For Relief Under RICO
Phelan‟s scattershot arguments attacking the homeowners‟ RICO claims
were addressed before the lower court, which declined to elucidate any view
concerning the issues. See Ignored Brief at 10-12 (A321-A323). No further
discussion is necessary here, except for Phelan‟s professed indignation about the
homeowners‟ “ludicrous,” “outrageous,” “reprehensible,” and “tactically
frivolous” RICO enterprise allegations, which were supposedly made by
homeowners‟ counsel in “bad faith” (Phelan Br. 45-46, 49-54).
The charges strewn about by Phelan are so serious that a casual observer
might think, as the court below evidently did, that Phelan must have a legitimate
reason for putting on such a vehement display of outrage. However, the
homeowners‟ enterprise allegations comply fully with the law enunciated by the
Supreme Court in Boyle v. United States, 129 S.Ct. 2237, 2243-45 (2009). See
Ignored Brief at 11.
In In re Insurance Brokerage Antitrust Litig., 618 F.3d 300 (3d. Cir. 2010),
the Third Circuit interpreted Boyle‟s “obviously broad” definition of “enterprise”
under RICO, which must be “construed liberally to effectuate its remedial
purposes.” Id. at 366. The Court held: (1) all that is needed to establish a RICO
enterprise is a common "purpose, relationships among those associated with the
enterprise, and longevity sufficient to permit these associates to pursue the
Case: 10-3431 Document: 003110420531 Page: 22 Date Filed: 01/27/2011
18
enterprise's purpose” (Id. and at 368); (2) a RICO enterprise includes “both
legitimate and illegitimate enterprises within its scope” (Id. at 364, citation
omitted); and (3) “membership in an enterprise is not the touchstone of [18 U.S.C.]
§ 1962(c) liability. Rather, it is the operation of that enterprise's affairs through a
pattern of racketeering that constitutes a violation.” Id at 376 n.76.
The PAC alleges a proper RICO enterprise, and WGS is properly included in
it. See Ignored Brief at 11. This is true because WSG (acting as co-counsel with
and not independent litigation counsel to Phelan) assisted Phelan in asserting
claims on behalf of a party without legal standing. See Ignored Brief at 11-12. It is
also true because (1) WSG rendered legal services to another member of the
alleged enterprise, Thomas Strain, whose false notarizations of affidavits “signed”
by Appellee Francis Hallinan earned Mr. Strain designation as “the face of New
Jersey's robo-signing scandal” (see above at 13 and n.13); and (2) WGS‟s
representation of Thomas Strain was financed by the principals of Phelan,
including Hallinan.18
Despite WGS‟s exaggerated protests, WGS was not named as defendant in
the PAC, even if a colorable claim might have been asserted. Nor did the
18
These are similar to circumstances that required counsel‟s disqualification in
United States v. Gotti, 771 F.Supp. 552, 560 (E.D.N.Y. 1991). The analogy is to a
comparable situation. It is hardly “slanderous.” (A258).
Case: 10-3431 Document: 003110420531 Page: 23 Date Filed: 01/27/2011
19
homeowners move to disqualify WGS from representing Phelan in this litigation,
although there remain ample grounds to do so.19
While Boyle and International Brokerage provide a definitive answer to the
question of what constitutes a proper RICO enterprise, WGS makes no mention of
these cases in any of its briefs. This omission is difficult to understand because
Phelan‟s defense lawyers have unlimited opportunities to educate themselves about
RICO from a nationally respected expert in their own firm.
In Boyle and International Brokerage, WGS shareholder Kevin P. Roddy
and Professor Robert G. Blakely wrote amicus curie briefs that advocated positions
diametrically opposed to the arguments made by WGS here.20
The briefs were filed
19
WGS has acted as co-counsel with Phelan on multiple occasions. On May 29,
2009, Daniel S. Bernheim 3d of WGS appeared with Appellee Francis Hallinan on
behalf of a foreclosing trustee at a hearing in which a New Jersey chancery court
judge expressed concern about mortgage assignments signed by Mr. Hallinan and
notarized by Thomas Strain. See Transcript of Hearing at page 10, line 33 – page
13, line 11, U.S. Bank v. Sinchegarcia, No. F-18446-08 (Super. Ct., Ch. Div.,
Hudson Co.), http://www.lsnj.org/keyRecentDevelopments/Foreclosure/materials/EXHIBITNHearing.PDF.
The Court was told “I represent [the] trustee in this matter. I also for a number of
years had what I state sincerely as the privilege of serving as counsel to the law
firm of Phelan Hallinan & Schmieg, and represented them in a number of different
varieties [sic] and have found that the folks there take to heart what it is they are
doing….” Transcript of Hearing at page 13, lines 17-24. Of assignments notarized
by Thomas Strain, the Court was also told, “we couldn‟t tell you on any given
assignment which was or which wasn‟t [improper]. It was almost like asking the
short order cook do you recall flipping which hamburger on which particular
day.” Id. at page 14, lines 16-19 (emphasis supplied). 20
See Amicus Brief filed March 14, 2008, In re Insurance Brokerage Antitrust
Litig., No. 07-4046 (3d Cir.), available at [continued next page]
Case: 10-3431 Document: 003110420531 Page: 24 Date Filed: 01/27/2011
20
by WGS on behalf of National Association of Shareholder and Consumer
Attorneys (“NASCAT”), a group of class action law firms “committed to the
vigorous prosecution of corporate fraud” and advocating “a strong system of
federal and state legal protections for investors and consumers.”21
In this litigation, WGS has used every means at its disposal to eviscerate
legal protections available to homeowners whose rights have been trampled by
Phelan, Wells Fargo and Countrywide.
III. THE COURT BELOW ERRONEOUSLY DISMISSED THE HOMEOWNERS’ ORIGINAL COMPLAINT
The homeowners opening brief demonstrates that bankruptcy creditors are
obligated to amend inaccurate proofs of claim. Homeowners‟ Br. at 21-22, citing,
inter alia, Hannon v. Countrywide, 421 B.R. 728, 733-34 (Bankr. M.D. Pa. 2009)
and 2010 Bankr. LEXIS 3690, at * 5-6 (Bankr. M.D. Pa. Oct. 18, 2010). The
opening brief also explains why the Bankruptcy Code does not preclude claims
under the Fair Debt Collection Practices Act in the context of institutionalized debt
http://www.wilentz.com/Files/ArticlesandPublicationsFileFiles/132/ArticlePublicat
ionFile/Nascat%20Brief%20Amicus%20Curiae.pdf. See also Amicus Brief filed
Dec. 29, 2008, Boyle v. United States, No. 07-1309 (S.Ct.),
http://www.wilentz.com/Files/ArticlesandPublicationsFileFiles/134/ArticlePublicat
ionFile/Edmund%20Boyle%20v.pdf 21
See http://www.nascat.org/.
Case: 10-3431 Document: 003110420531 Page: 25 Date Filed: 01/27/2011
21
collection abuses that cannot be redressed effectively through ordinary bankruptcy
claim adjustment procedures. Homeowners‟ Br. at 23-30.
Phelan does not address the substance of these issues, preferring instead to
rely without analysis upon previously cited cases on one side of a split of authority
among circuits.
In Allen v. LaSalle Bank, 2011 U.S. App. LEXIS 587, at *6-10 (3d Cir. Jan
11, 2011), this Court recognized the important remedial purpose served by the
FDCPA‟s prohibition against debt collection abuses, and it rejected a narrow
interpretation that would have allowed a law firm to “escape FDCPA liability” and
“undermine the deterrent effect of strict liability.” See also Rosenau v. Unifund
Corp., 539 F.3d 218, 221 (3d Cir. 2008); Brown v. Card Serv. Ctr., 464 F.3d 450,
553 (3d Cir. 2006). For reasons expressed in its previous opinions, this Court
should adopt the position taken by the Seventh Circuit in Randolph v. IMBS, Inc.,
368 F.3d 726, 730-33 (7th Cir. 2004) (“operational differences” between the
bankruptcy code and FDCPA do not “add up to irreconcilable conflict”; they are
overlapping statutes that can be simultaneously enforced).
While WGS and Phelan maintain that consumer protection attorneys like
homeowners‟ counsel and members of NASCAT are part of a disreputable
“cottage industry” of plaintiffs attorneys interested only in their ability to “obtain
class action legal fees” (SA6), consumers who prevail on FDCPA claims are
Case: 10-3431 Document: 003110420531 Page: 26 Date Filed: 01/27/2011
22
statutorily “entitled to an award of damages, costs of suit and reasonable attorneys'
fees” under 15 U.S.C. § 1692k. Brown v. Card Serv. Ctr., 464 F.3d at 453. Such
awards serve an important public purpose.
As this Court held in Weiss v. Regal Collections, 385 F.3d 337, 345 (3d Cir.
2004):
Congress explicitly provided for class damages in the FDCPA.
See 15 U.S.C. § 1692k(a)(2)(B)…. Congress also intended the
FDCPA to be self-enforcing by private attorney generals….
Graziano v. Harrison, 950 F.2d 107, 113 (3d Cir. 1991)
("[FDCPA] mandates an award of attorney's fees as a means of
fulfilling Congress's intent that the Act should be enforced by
debtors acting as private attorneys general."). Representative
actions, therefore, appear to be fundamental to the statutory
structure of the FDCPA. Lacking this procedural mechanism,
meritorious FDCPA claims might go unredressed because the
awards in an individual case might be too small to prosecute an
individual action.
The homeowners‟ lawyers are doing precisely what Congress intended.
CONCLUSION
For the above reasons and for the reasons expressed in their opening brief,
Appellant homeowners respectfully request this Court to reverse the lower court‟s
Order dated July 14, 2010 in its entirety. Because this appeal involves issues that
could offend the sensibilities of the court below, Appellants also respectfully
suggest that it may be appropriate for this Court to direct the Chief Judge of the
United States for the Eastern District of Pennsylvania to reassign this litigation to
another trial court judge presiding in the Third Circuit.
Case: 10-3431 Document: 003110420531 Page: 27 Date Filed: 01/27/2011
23
Dated: January 27, 2011 Respectfully submitted,
BHN LAW FIRM
By: /s/John G. Narkin
John G. Narkin
PA Bar No. 36301
951 Rohrerstown Road, Suite 102
Lancaster, Pennsylvania 19601
Telephone: (717) 756-0835
www.bhn-law.com
Case: 10-3431 Document: 003110420531 Page: 28 Date Filed: 01/27/2011
24
CERTIFICATE REGARDING BAR MEMBERSHIP
The undersigned attorney is a member of the bar of the Third Circuit of
Appeals.
/s/John G. Narkin
John G. Narkin
Dated: January 27, 2011
Case: 10-3431 Document: 003110420531 Page: 29 Date Filed: 01/27/2011
25
CERTIFICATE OF COMPLIANCE
The undersigned attorney certifies that his brief complies with the type-
volume limitation of Fed. R. App. P. 32(a)(7)(B) because this brief contains 6905
words.
/s/John G. Narkin
John G. Narkin
Dated: January 27, 2011
Case: 10-3431 Document: 003110420531 Page: 30 Date Filed: 01/27/2011
26
CERTIFICATE IDENTICALNESS
The undersigned attorney certifies that the PDF file and the hard copies of
the APPELLANT‟S REPLY BRIEF are identical.
/s/John G. Narkin
John G. Narkin
Dated: January 27, 2011
Case: 10-3431 Document: 003110420531 Page: 31 Date Filed: 01/27/2011
27
CERTIFICATE OF VIRUS CHECK
The undersigned attorney certifies that a virus check was performed upon
this document on January 27, 2011, with TREND MICRO Office Scan software.
/s/John G. Narkin
John G. Narkin
Dated: January 27, 2011
Case: 10-3431 Document: 003110420531 Page: 32 Date Filed: 01/27/2011
28
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
________________
__________
No. 10-3134
DENNIS A. RHODES et al, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants,
- v.- ROSEMARY DIAMOND et al, Defendants-Appellees.
__________________
CERTIFICATE OF SERVICE
I, John G. Narkin, hereby certify under penalty of perjury that on January 27, 2011,
I caused to be filed (electronically, electronic_briefs@ca3.uscourts.gov) and,
because of a snow emergency, will promptly thereafter hand deliver 10 copies and
serve the foregoing
APPELLANTS‟ REPLY BRIEF
By causing two (2) copies of said document to be mailed, via U.S. Mail, first class,
postage prepaid to:
Daniel S. Bernheim, 3d
Jonathan J. Bart
WILENTZ, GOLDMAN & SPITZER, P.A.
Two Penn Center, Suite 910
Philadelphia, PA 19102
/s/John G. Narkin
John G. Narkin
Case: 10-3431 Document: 003110420531 Page: 33 Date Filed: 01/27/2011
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