ph mtf opp bs filed 2.30.13
TRANSCRIPT
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY
CHARLES J. and DIANE GILES, : Individually and on behalf of all others : similarly situated, : : Civil Action Plaintiffs, : No. 11-6239 (JBS-KMW) : v. : : WELLS FARGO BANK, N.A., PHELAN : HALLINAN & SCHMIEG, P.C., LAWRENCE : T. PHELAN, FRANCIS S. HALLINAN, : DANIEL S. SCHMIEG, ROSEMARIE : DIAMOND, FULL SPECTRUM SERVICES, : INC., and LAND TITLE SERVICES OF : NEW JERSEY, INC., :
: Defendants. :
PLAINTIFFS’ MEMORANDUM IN OPPOSITION TO MOTION OF
THE PHELAN PARTIES TO DISMISS PLAINTIFFS’ THIRD AMENDED COMPLAINT WITH PREJUDICE, AND RELATED RELIEF
Dated: February 20, 2013 NARKIN LLC John G. Narkin 1662 South Loggers Pond Place, #31 Boise, Idaho 83706 Tel: (208) 995-6119 HARWOOD FEFFER LLP Robert I. Harwood James G. Flynn 488 Madison Avenue, 8th Floor New York, New York 10022 Tel: (212) 935-7400
TRUJILLO RODRIGUEZ & RICHARDS LLC Lisa J. Rodriguez 258 Kings Highway East Haddonfield, New Jersey 08033 Tel: (856) 795-9002 Attorneys for Plaintiffs and the Proposed Class
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 1 of 40 PageID: 1852
i
Table Of Contents Table of Authorities .................................................................................................. ii I. INTRODUCTION ........................................................................................... 1 II. ARGUMENT ................................................................................................. 11 A. The Giles’ Claims Are Fully Preserved .............................................. 11
B. The TAC Alleges a Plausible and Viable RICO Claim ...................... 17
1. RICO Does Not Immunize “Professionals”.............................. 17 2. The Action Was Timely Filed Pursuant To Fed. R. Civ. P. 6(a) .............................................................. 20 3. The Phelan Defendants’ Activities Were Improper Under New Jersey Law ................................... 22 4. The TAC Alleges a RICO Pattern of Racketeering .................. 25 5. Plaintiffs Suffered Injury Caused by
The Predicate Acts .................................................................... 30 III. CONCLUSION .............................................................................................. 34
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 2 of 40 PageID: 1853
ii
Table Of Authorities Cases Page Agency Holding Corp. v. Malley-Duff & Assocs., Inc.,
483 U.S. 143 (1987) ...................................................................................... 20 Bank of New York v. Raftogianis,
418 N.J. Super. 323 (Ch. Div. 2010) ...................................................... 23-24 Beals v. Bank of Am. N.A.,
No. 10-5427 (KSH), 2011 U.S. Dist. LEXIS 128376 (D.N.J. Nov. 4, 2011) ................................ 32
Bridge v. Phoenix Bond & Indem. Co.,
553 U.S. 639 (2008) ...................................................................................... 31 Cedric Kushner Promotions, Ltd. v. King,
533 U.S. 158 (2001) ...................................................................................... 29 Cotter v. Skylands Cmty. Bank (In re Cotter),
Adv. No.: 11-01619, 2011 Bankr. LEXIS 4579 (Bank. D.N.J. Oct. 24, 2011) ........................ 15, 17
DeHart v. US Bank, N.A.,
811 F. Supp. 2d 1038 (D.N.J. 2011) ....................................................... 15, 16 Deutsche Bank v. Russo,
429 N.J. Super. 91 (App. Div. 2012) ................................................ 22, 23, 24 Emcore Corp. v. PriceWaterhouseCoopers LLP,
102 F. Supp. 2d 237 (D.N.J. 2000) ......................................................... 18, 29 Feld Entm’t, Inc. v. ASPCA,
873 F. Supp. 2d 288 (D.D.C. 2012) .............................................................. 18 Forbes v. Eagleson,
228 F.3d 471 (3d Cir. 2000) ......................................................................... 20
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 3 of 40 PageID: 1854
iii
Fraternal Order of Police v. Del. River Port Auth., Civil No. 12-2170 (JBS/KMW), 2013 U.S. Dist. LEXIS 19732 (D.N.J. Feb. 13, 2013) .................................. 15
Frey v. Woodard,
748 F.2d 173 (3d Cir. 1984) ................................................................... 20-21 Gasoline Sales, Inc. v. Aero Oil Co.,
39 F.3d 70 (3d Cir. 1994) ............................................................................. 29 Genty v. Resolution Trust Corp.,
937 F.2d 899 (3d Cir. 1991) ......................................................................... 33 Giles v. Phelan, Hallinan & Schmieg, L.L.P.,
Civ. No. 11-6239, 2012 U.S. Dist. LEXIS 140289 (D.N.J. Sept. 28, 2012) ........................ 13, 14
H.J. Inc. v. Northwestern Bell Tel. Co.,
492 U.S. 229 (1989) .......................................................................... 25, 26, 27 HT of Highlands Ranch, Inc. v. Hollywood Tanning Sys., Inc.,
590 F. Supp. 2d 677 (D.N.J. 2008) ......................................................... 27, 28 Handeen v. Lemaire,
112 F.3d 1339 (8th Cir. 1997) ................................................................ 17-18 Hemi Group, LLC v. City of New York, N.Y.,
559 U.S. 1 (2010) .......................................................................................... 33 Hemmingsen v. Messerl, Kramer, P.A.,
675 F.3d 814 (8th Cir. 2012) ........................................................................ 13 In re Hawkins, 231 B.R. 222 (Bankr. D.N.J. 1999) ............................................................... 17 In re Hurley, 285 B.R. 871 (Bankr. D.N.J. 2002) .............................................................. 17
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 4 of 40 PageID: 1855
iv
Kisby Lees Mech. LLC v. Pinnacle Insulation, Inc., Civil No. 11-5093 (JBS/AMD), 2012 U.S. Dist. LEXIS 106521 (D.N.J. July 31, 2012) ............................... 17
LaSalle Bank Nat. Ass’n v. Lehman Bros. Holdings, Inc.,
237 F. Supp. 2d 618 (D. Md. 2002) .............................................................. 25 Lasalle Bank Nat’l v. Nomura Asset Capital,
180 F. Supp. 2d 465 (S.D.N.Y. 2001) .................................................... 24-25 Mosely v. Quarterman,
2008 U.S. Dist. LEXIS 17964 (N.D. Tex. Mar. 6, 2008) ......................... 1, 10 Pappa v. Unum Life Ins. Co. of Am.,
No. 3:07-cv-0708, 2008 U.S. Dist. LEXIS 21500 (M.D. Pa. 2008) ........................................... 33
Pearson v. LaSalle Bank,
No. 08-2306, 2009 U.S. Dist. LEXIS 48904 (E.D. Pa. June 9, 2009) ................................ 20
Robbins v. Wilkie,
300 F.3d 1208 (10th Cir. 2002) .................................................................... 34 Rycoline Prod., Inc. v. C & W Unlimited,
109 F.3d 883 (3d Cir. 1997) ......................................................................... 16 Sovereign Bank, FSB v. Kuelzow,
687 A.2d 1039, 297 N.J. Super. 187 (N.J. Super. A.D. 1997) ............................................... 15
Sykes v. Harris,
757 F. Supp. 2d 413 (S.D.N.Y. 2010) .................................................... 18, 32
Tabas v. Tabas, 47 F.3d 1280 (3d Cir. 1995) ....................................................... 25-26, 27, 28
US Bank Nat’l Ass’n v. Guillaume,
209 N.J. 449, 38 A.3d 570 (2012) ................................................................ 24
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 5 of 40 PageID: 1856
v
U.S. Bank Nat’l Ass’n v. Nesbitt Bellevue Prop. LLC, 859 F. Supp. 2d 602 (S.D.N.Y. 2012) .......................................................... 25
United States v. Bergrin,
682 F.3d 261 (3d Cir. 2012) ......................................................................... 18 Univ. of Maryland v. Peat, Marwick, Main & Co.,
996 F.2d 1534 (3d Cir. 1993) ....................................................................... 19 Walter v. Palisades Collection, LLC,
480 F. Supp. 2d 797 (E.D. Pa. 2007) ...................................................... 32-33 Weiss v. First Unum Life Ins. Co.,
482 F.3d 254 (3d Cir. 2007) ......................................................................... 32 Statutes & Regulations 18 U.S.C. § 1962(c) ................................................................................................. 29 Fed. R. Civ. P. 6(a) ............................................................................................ 20, 21 Fed. R. Civ. P. 9(b) ............................................................................................ 33-34
Fed. R. Civ. P. 11 .............................................................................................. 10, 25 N.J. Rule 4:50-1 ....................................................................................................... 30 N.J. Rule 4:50-1(a) ................................................................................................... 23 N.J. Rule 4:50-1(d) ................................................................................................... 23 N.J. Rule 4:64-1(b)(10) ............................................................................ 4, 22-23, 25
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 6 of 40 PageID: 1857
“‘Once is happenstance, twice is coincidence, the third time it’s enemy action.’” And the fourth time proves intent.” – Mosely v. Quarterman, 2008 U.S. Dist. LEXIS 17964, at *22-
23 n.13 (N.D. Tex. Mar. 6, 2008) (quoting Ian Fleming, Goldfinger, at v (Penguin Books 2002)).
I. INTRODUCTION Plaintiffs Charles and Diane Giles allege that WFB, a mortgage servicer,
working together with its outside law firm, Phelan P.C., its primary partners, and
the partners’ wholly-owned “default services” companies (collectively, the “Phelan
Defendants”), engaged in a scheme in which they initiated and prosecuted
improper mortgage foreclosure actions in the name of Wachovia or U.S. Bank.
Defendants named Wachovia and U.S. Bank as plaintiffs in these foreclosures as
purported “trustee” of an entity consistently and erroneously called “Pooling and
Servicing Agreement dated as of November 1, 2004, Asset-Backed Pass-Through
Certificate Series 2004-WWF1” (the “Park Place Trust”).
The Third Amended Complaint (the “TAC”)1 alleges that at no time during
the pendency of these foreclosure actions did Wachovia, the entity identified by
WFB and Phelan P.C. as the foreclosing plaintiff, own the homeowners’ mortgages
or have a right to assert any legal rights under them. ¶¶ 3, 29, 46-47, 54. Rather,
Wachovia sold all of its interest in the Park Place Trust, if any, on December 30,
1 Paragraphs in the TAC are herein referred to simply as “¶ ___.” The same abbreviations in the TAC identifying parties in this litigation will be also used in this memorandum.
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 7 of 40 PageID: 1858
2
2005. ¶ 47. That did not stop Defendants from subsequently naming Wachovia as
the foreclosing plaintiff in cases brought against the Giles and members of the
Proposed Class.
For example, just months before Defendants commenced the foreclosure
action against the Giles, they had contested the identical issue – whether Wells
Fargo had standing to prosecute actions on behalf of the Park Place Trust – with a
separate homeowner. See Wachovia Bank, N.A. v. Good, CI-06-05585 (Pa. C.P.
Lancaster Co.), cited at ¶ 77(g). Just weeks after a senior vice president and
counsel of Wachovia informed Phelan P.C. and WFB that Wachovia was
improperly identified as plaintiff in the foreclosure against the Giles (¶ 63), WFB
and Phelan P.C.’s Pennsylvania alter ego, Phelan LLP, filed a substantively
identical foreclosure action on behalf of Wachovia against former plaintiff Laurine
Spivey. See Wachovia Bank, N.A. v. Spivey, No. 07-004303 (Pa. C.P. Phila. Co.),
cited at ¶ 77(a). In the Giles foreclosure action, the varied “signatures” of Phelan
P.C. attorney Rosemarie Diamond were evidently forged on court documents. ¶¶
50-54, 56-57, 76.
The TAC also identifies a non-exhaustive sample of five other foreclosure
cases prosecuted improperly by Phelan P.C., Phelan LLP, and WFB without legal
authority of the legal owner of mortgages purportedly included in the Park Place
Trust. ¶ 77(b)-(f). As the Phelan Defendants themselves point out, by December
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 8 of 40 PageID: 1859
3
20, 2010,2 the New Jersey Judiciary took formal action against mortgage servicers
and their lawyers for prosecuting foreclosures without regard for proper
investigation into the truth of facts alleged or “certified” in court filings. Yet, as
late as 2011, the Superior Court for Bergen County, New Jersey found that Phelan
P.C. was still prosecuting a foreclosure action “without documentation …
establish[ing its client’s] right to sue.” ¶ 78.
The Phelan Defendants try to minimize their recurring conduct by
dismissively describing it as a mere “misidentifi[cation] of the named plaintiff”
that caused no harm to Plaintiffs (Phelan Br. at 14) and “the result of a mistake, not
a grand conspiracy.” (Phelan Br. at 11). However, as the TAC alleges in plausible
detail, Defendants’ misconduct is not remotely innocent or isolated. Both WFB
and the Phelan Defendants had plenty to gain from their repeated, systematic, and
willful misuse of Wachovia’s name as foreclosing plaintiff, despite having ample
notice that Wachovia no longer acted as trustee for any entity since well before
their foreclosure actions against Proposed Class members were filed.
2 See Phelan Br. at 31, referring to Admin. Order 01-2010, signed by the Hon. Glenn A. Grant, acting director of the Administrative Office, http://www.judiciary.state.nj.us/notices/2010/n101220b.pdf. Earlier in this litigation, the Phelan Defendants had insisted that Plaintiffs’ references to these proceedings were “irrelevant, impertinent, and scandalous.” Brief in Support of Motion of Phelan Party Defendants to Dismiss or Strike the Complaint (Docket Item 20-1) at 2-4.
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 9 of 40 PageID: 1860
4
The TAC alleges that WFB and Phelan P.C. could not produce bona fide
evidence of a chain of title to Plaintiffs’ mortgages, even though New Jersey law
so required. ¶¶ 43, 68, 69. See N.J. Rule 4:64-1(b)(10) (“[I]f plaintiff is not the
original mortgagee or original nominee mortgagee,” the complaint must provide
“the name of the original mortgagee and a recital of all assignments in the chain of
title”).
Without a name – any name – identifying that legal owner, WFB and the
Phelan firm were unable to commence and prosecute any foreclosure action against
the Giles and other members of the Proposed Class, regardless of whether they had
fallen behind in their mortgage payments. Lacking evidence of ownership, WFB
and Phelan P.C. made the “evidence” up by preparing, executing, and certifying
court documents intended to create the false appearance that Wachovia had
standing to prosecute these actions (¶¶ 8, 79), which put them in a position where
they could and did bill and obtain inflated foreclosure fees – all based on the
fundamental myth of manufactured standing. ¶¶ 6, 72-73. But for this deception,
WFB, Phelan P.C. and its partners lacked even the veneer of legal capacity to take
action to seize Plaintiffs’ property and collect inflated foreclosure fees.
Foreclosure actions in New Jersey are uncomplicated proceedings that can
be processed by an inexpensive and swift assembly-line operation because, as the
Phelan Defendants and WFB know well, more than 93 percent of foreclosure cases
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 10 of 40 PageID: 1861
5
result in default judgments. ¶¶ 11, 41, 73, 81. It is for precisely this reason that the
New Jersey judiciary undertook the unprecedented step of investigating improper
practices in the residential mortgage foreclosure industry and to implement revised
court rules designed to ensure that law firms like Phelan P.C. get their facts straight
instead of racing into court to file uninvestigated foreclosure cases.
As the Chief Justice of the New Jersey Supreme Court Stuart Rabner
observed on December 20, 2010:
Today’s actions are intended to provide greater confidence that the tens of thousands of residential foreclosure proceedings underway in New Jersey are based on reliable information. Nearly 95 percent of those cases are uncontested, despite evidence of flaws in the foreclosure process…. 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.3
Despite subsequent improvements in the system, the “integrity of the judicial
process” had already been compromised severely by the misconduct of WFB and
the Phelan Defendants. As the TAC alleges, Defendants’ only consideration has
been to start and finish the foreclosure process as quickly and cheaply as possible.
¶¶ 7, 35-36. The primary factor determining defendants’ ability to stay
competitive in the foreclosure industry remained how aggressively they could start
and close their exploding volume of cases to a profitable finish. ¶¶ 38, 42. The
3 See http://www.judiciary.state.nj.us/superior/press_release.htm.
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 11 of 40 PageID: 1862
6
“business model” devised in 2005 by defendant Lawrence T. Phelan was
specifically designed to exploit flaws in the foreclosure process while, at the same
time, enhancing its profitability by adapting to “changes” in the residential
mortgage foreclosure “industry” mandated by government-sponsored enterprises
and the mortgage servicers they hire. ¶¶ 37-42.
It was in single-minded pursuit of these economic incentives that WFB and
the Phelan firm operated collectively in their common purpose to (1) remove
distressed homeowners from their houses through improper foreclosure pleadings
and manufactured mortgage assignments and (2) pile on fabricated or inflated fees
that benefitted themselves while making it harder for distressed families to pay
those fees, a necessary condition of staying in their homes.
In opposing these well-pleaded allegations, the Phelan Defendants fire a
blunderbuss of arguments which fall into several categories.
First, the Phelan Defendants argue that the claims are barred by various
claim preclusion doctrines, namely, the Entire Controversy Doctrine, res judicata,
and collateral estoppel. The linchpin behind each argument is the Phelan
Defendants’ not-so-subtle substitution of a single word in the Order of the state
court preserving the Giles’ RICO claim: the Chancery Court for Ocean County,
New Jersey ordered that the Giles’ “rights as to all affirmative claims are hereby
preserved.” See Mitchell Certification, Ex. D (emphasis supplied). The Phelan
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 12 of 40 PageID: 1863
7
Defendants recast this, however, to “preserv[ation of] the Giles’ FDCPA claim.”
(Phelan Br. at 12; emphasis supplied.) Such legerdemain cannot be countenanced.
The Giles’ RICO claims are not subject to any prior state law ruling because the
order itself preserved all the Giles’ claims. (See Point II-A, below.)
Next, the Phelan Defendants press a panopoly of arguments under RICO,
each without merit:
The Phelan Defendants claim that RICO immunizes professionals
from their reach. (Phelan Br. at 26-27.) Nothing, however, in the RICO statute or
case law supports this assertion. RICO itself addresses conduct during litigation,
and courts have held attorneys and their agents liable under RICO. Moreover, as
the repetitive nature of their profit-making “mistakes” shows, the Phelan
Defendants’ litigation activities extended far beyond the mere rendering of
professional services. (See Point II-B-1, below.)
The Phelan Defendants contend that the Giles’ RICO claim accrued
on June 5, 2007 or, alternatively, on October 23, 2007. (Phelan Br. at 27-28.)
RICO’s four-year statute of limitations, however, runs from discovery of facts that
should have triggered an investigation, none of which occurred until, at the earliest,
October 23, 2007. Under the method of calculating time provided by Fed. R. Civ.
P. 6(a), the suit filed by the Giles on October 24, 2011 (a Monday) was timely.
(See Point II-B-2, below.)
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 13 of 40 PageID: 1864
8
The Phelan Defendants claim that the TAC fails to satisfy a pattern of
RICO activity for lack of continuity. (Phelan Br. at 31-33.) The Phelan
Defendants contend that the TAC alleges only a “closed-ended” RICO scheme
lasting less than a year, and as such, is too brief to constitute a RICO pattern. The
Phelan Defendants recast, however, the pattern of misconduct alleged by Plaintiffs
to the Giles’ individual litigation experience, ignoring Plaintiffs’ explicit
allegations that the Defendants’ fraudulent scheme persisted against other
homeowners both before and after the Giles action came to its unadjudicated
conclusion. The TAC alleges that Defendants’ RICO activity began on December
31, 2005 (the date after Wachovia disposed of its corporate and institutional trust
operations and thus had no interest in Park Place Trust mortgages) (¶¶ 47, 63-64,
79) through the present (with one specific instance of Defendants’ false claims
concerning Wachovia occurring through an Essex County sheriff’s sale scheduled
as recently as August 31, 2010). See ¶ 77(b) and Plaintiffs’ Memorandum in
Opposition to Motion of Wells Fargo Bank N.A. to Dismiss Plaintiffs’ Third
Amended Complaint (“Pl. WFB Br.”), filed concurrently herewith, at 22-23. This
readily satisfies any “closed-ended” analysis. (See Point II-B-3, below.)
The Phelan Defendants claim that the TAC fails to allege a RICO
“enterprise” separate and apart from the parties named as RICO Defendants.
(Phelan Br. at 33.) As demonstrated below, however, the TAC amply explains
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 14 of 40 PageID: 1865
9
how the enterprise operated and how the Phelan Defendants acted (and profited)
beyond their capacity as mere agents of WFB. (See Point II-B-4, below.)
The Phelan Defendants argue that the Plaintiffs suffered no injury as a
result of the alleged RICO predicate acts. (Phelan Br. at 33-39.) As demonstrated
below, however, the Phelan Defendants and WFB knowingly or recklessly
prosecuted foreclosure actions against New Jersey homeowners on behalf of
illusive “clients” that had no standing to bring them. Viewed another way, rather
than conduct their business in a responsible manner, these defendants adopted and
implemented a profit model based on a deceptive “sue-now-ask-later”
methodology. The direct effect of this practice was to cause Plaintiffs and other
Proposed Class members to incur costs defending legally defective foreclosure
actions and left many homeowners, including the Giles, no choice but to sell their
homes fast and at below-market rates before they were driven into bankruptcy.
Other proposed Class members lost their homes altogether, while some of the more
“fortunate” among them were stripped of substantial equity in their property. All
of these things occurred, not because of homeowner defaults, understandable or
otherwise, but most directly because WFB and the Phelan Defendants took it upon
themselves to traduce the judicial system and the legal rights of homeowners in
blind pursuit of financial gain. While the Phelan Defendants insist that they and
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 15 of 40 PageID: 1866
10
WFB did not engage in “a grand conspiracy” (Phelan Br. at 11.), the facts alleged
in the TAC demonstrate plausibly otherwise.
At very least, this issue involves disputed facts inappropriately decided as a
matter of law on a motion to dismiss. An open-minded jury at trial should be given
a full and fair opportunity to hear and evaluate the parties’ evidence, and to
conclude, in the apt words of Ian Fleming, that the misconduct of WFB and the
Phelan Defendants constituted “enemy action” taken with fraudulent “intent.” See
Mosely, 2008 U.S. Dist. LEXIS 17964, at *22-23 n.13. (See Point II-B-5, below.)
* * *
The Phelan Defendants also ask the Court to consider imposing sanctions
against Plaintiffs’ counsel under Fed. R. Civ. P. 11 for making what they call
“repugnant” “factual misrepresentations” to the Court, including “inexcusably false
and defamatory allegations.” (Phelan Br. at 2-3, 8-10.)4 Because the Phelan
4 Sad to say, the Phelan Defendants themselves engage in name-calling that, reluctantly, merits a footnoted response. They (1) insist the Giles are engaged in a “shameless ploy for undeserved sympathy by attempting to tie their Mortgage default to the tragic events of 9/11” (Phelan Br. at 2-3, 8-10), and (2) level a demonstrably false charge that the Giles somehow “walked away with $30,000 in cash” from their coerced distress sale. Id. (emphasis in original). With regard to the first point, the TAC makes only three, muted references to Mr. Giles’ devastating injuries sustained during his rescue efforts on 9/11. ¶¶ 45, 61-62, 71. This information, while hardly a “key them[e]” of this lawsuit (Phelan Br. at 3), dispels any suggestion that the Giles were financially irresponsible people who somehow deserved “the consequences of their failure to pay their Mortgage.” See, e.g., id. at 12. As to the second point, Plaintiffs are prepared, if so requested by the Court, to proffer the Giles HUD-1 Settlement Statement from their January 15,
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 16 of 40 PageID: 1867
11
Defendants have not themselves complied with Rule 11’s notice requirements, it is
unnecessary for Plaintiffs to respond further to their spurious charges of bad-faith
litigation conduct.
II. ARGUMENT
A. The Giles’ Claims Are Fully Preserved
The Phelan Defendants argue that the Giles cannot prosecute their RICO
claim because the core allegation – that the foreclosing plaintiff lacked standing –
was raised and decided in state court. According to the Phelan Defendants, this
now precludes the Giles from litigating their RICO claims under any one of three
doctrines: (1) the Entire Controversy Doctrine; (2) principles of res judicata; or
(3) collateral estoppel.
There is one glaring, and fundamentally fatal, error in the Phelan
Defendants’ ten-page treatment of these issues: the state court expressly
“preserved” the Giles “rights as to all affirmative claims” relating to the wrongful
prosecution of a foreclosure action against them by the Phelan Defendants and
WFB. The order in question, dated January 18, 2008, contains four handwritten
elements:
2008 home sale to rebut the Phelan Defendants’ claim that the Giles “walked away with $30,000 in cash.” Plaintiffs are loathe, however, to introduce another distraction to the Court which is distant from the merits of the instant motion.
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 17 of 40 PageID: 1868
12
Plaintiff’s Motion to Rescind Document Assignment and to Amend All Pleadings is Granted;
Defendants’ Motion To Dismiss is Denied and Defendant’s
Motion to Stay January 22, 2008 Sheriff’s Sale is Denied as Moot;
Defendants’ Rights As to All Affirmative Claims are Hereby
Preserved; and
Plaintiff’s Foreclosure Action Is Hereby Voluntarily Dismissed.
See Jan. 18, 2008 Order of the Ocean County Superior Court, Chancery Division,
New Jersey, reproduced in the Mitchell Certification, Ex. D [Docket Item 75-6]
(emphasis supplied).
Rather than come to terms with the unambiguous language of the critical
third component of the January 18, 2008 order, the Phelan Defendants try to
rewrite it in a manner more to their liking by switching the term “All” to their
preferred expression “FDCPA.” See Phelan Br. at 12 (“the 2008 orders . . . . (v)
preserved the Giles’ FDCPA claim.”) (emphasis supplied). Like the Phelan
Defendants’ persistent misuse of the name Wachovia in their post-December 30,
2005 foreclosure filings, this is not a one-time scriviner’s error. The Phelan
Defendants state repeatedly in their brief that what the Ocean County Court
“really” meant was “FDCPA,” when it said “All”: “The only affirmative claim
which the Giles ever asserted, namely their claim render the Fair Debt Collection
Practices Act . . . was subject to a one year statute of limitation.” (Phelan Br. at 5.)
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 18 of 40 PageID: 1869
13
They also compound their self-created confusion by citing and highlighting
language from an irrelevant Eighth Circuit decision, Hemmingsen v. Messerl,
Kramer, P.A., 675 F.3d 814 (8th Cir. 2012), an FDCPA case, to argue that a cause
of action under the FDCPA cannot be maintained by the Giles here, even though
they have never sought to assert one in this case. (Phelan Br. at 13-14).5 Because
the preservation of “all” of the Giles’ “affirmative claims” was ordered by the
Ocean County Court, all of the Giles’ claims have been effectively preserved for
adjudication in this action.
Moreover, the Phelan Defendants’ claim preclusion arguments are nothing
more than a warmed-over version of the Rooker-Feldman doctrine contention that
has already been rejected by the Court – a contention so patently erroneous that not
even WFB could support it. See Giles v. Phelan, Hallinan & Schmieg, L.L.P., Civ.
No. 11-6239, 2012 U.S. Dist. LEXIS 140289, at *25 (D.N.J. Sept. 28, 2012)
(“WFB’s counsel said that he was not arguing Rooker-Feldman applied to the
Giles because there was a voluntary dismissal in the Giles’ foreclosure action”).
Now, despite having the benefit of the Court’s clear guidance, the Phelan
Defendants continue to assert that (1) “TAC ¶ 9 admits the validity of the Final
Foreclosure Judgment, which subsumes all of the issues that were or could have
5 As noted above at 5, n.4, the Phelan Defendants’ odd fixation with unasserted FDCPA claims has been a “key theme” in their attempted defense of this lawsuit.
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 19 of 40 PageID: 1870
14
been raised in the Foreclosure” (Phelan Br. at 1) and (2) “TAC ¶ 9’s attempt to
split hairs by characterizing its claims not as seeking review of the Final
Foreclosure Judgment, but as based on practices involved in obtaining that
Judgment, is too fine a distinction….” (Phelan Br. at 23.)
As to the first contention, Plaintiffs have never “admit[ted] the validity” of
the fraudulently obtained default judgment against the Giles, despite the Phelan
Defendants’ insistence otherwise.6
As to the second contention, this Court has explicitly recognized and
endorsed the “too fine a distinction” that the Phelan Defendants deride as
“split[ing] hairs. Giles, 2012 U.S. Dist. LEXIS 140289, at *25 (“Plaintiffs here are
not challenging the state court judgments; they are challenging the Defendants’
actions in procuring those judgments. The Third Circuit has held that the Rooker-
Feldman doctrine does not bar such a lawsuit, even though the lawsuit may require
review of the state court litigation and may hold that the state court judgments are
erroneous”).
As this Court also noted, “[a] final judgment is mandatory for application of
the Rooker-Feldman doctrine. Giles, 2012 U.S. Dist. LEXIS 140289, at *25,
(citing Lance v. Dennis, 546 U.S. 459 (2006)). A final judgment is likewise
6 See, e.g., Pl. Gag Order Br. at 17-18, quoting Romano Certification at ¶¶ 3, 8, 33.
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 20 of 40 PageID: 1871
15
necessary for application of the Entire Controversy Doctrine,7 res judicata,8 and
collateral estoppel.9 Here, there was no final judgment.
Although a fraudulently obtained default judgment was taken against the
Giles in June 2007, the Ocean County Court retained jurisdiction over the action.
See Sovereign Bank, FSB v. Kuelzow, 687 A.2d 1039, 297 N.J. Super. 187, 196
(N.J. Super. A.D. 1997) (citing Hardyston Nat’l Bank v. Tartamella, 56 N.J. 508,
513, 267 A.2d 495 (1970) (“The Chancery judge …. presides over a court of
equity. [A] foreclosure action, although already the subject of a judgment, is not
totally concluded until the defendants’ equity of redemption is cut off by the
delivery of the sheriff’s deed”)). In these circumstances, there was nothing
conclusive or outcome determinative about the default judgment against the Giles,
which is inherently provisional under New Jersey law until a sheriff’s deed is
delivered.
Moreover, none of the purposes served by New Jersey’s claim preclusion
doctrines would be served if the fraudulently procured default judgment against the
Giles was considered “final” under the circumstances present here. For example, 7 DeHart v. US Bank, N.A., 811 F.Supp.2d 1038, 1045 (D.N.J. 2011). 8 Cotter v. Skylands Cmty. Bank (In re Cotter), Adv. No.: 11-01619, 2011 Bankr. LEXIS 4579, at *6-7 (Bank. D.N.J. Oct. 24, 2011). 9 Fraternal Order of Police v. Del. River Port Auth., Civil No. 12-2170 (JBS/KMW), 2013 U.S. Dist. LEXIS 19732, at *14 (D.N.J. Feb. 13, 2013) (citing In re Estate of Dawson, 136 N.J. 1, 20 (1994)).
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 21 of 40 PageID: 1872
16
the essential rationale underlying the Entire Controversy Doctrine is “the need for
complete and final disposition through the avoidance of piecemeal decisions.”
Rycoline Prod., Inc. v. C & W Unlimited, 109 F.3d 883, 885 (3d Cir. 1997) (citing
DiTrolio v. Antiles, 142 N.J. 253, 662 A.2d 494, 502 (1995), and Mystic Isle Dev.
Corp. v. Perskie & Nehmad, 142 N.J. 310, 662 A.2d 523, 529 (1995)). The Ocean
County Court did not envision that the default judgment constituted a “complete
and final disposition” of the Giles Foreclosure Action. The opposite is true. In
entering its January 18, 2008 Order preserving “all affirmative claims” of the Giles
resulting from Defendants’ actions in the foreclosure proceedings, the Ocean
County Court expressly contemplated subsequent “piecemeal decisions.”
Furthermore, under New Jersey law, a foreclosure defendant is unable to
assert counterclaims that are not “germane” to a state foreclosure action. DeHart,
811 F. Supp. 2d at 1045 (citing Jackson v. Midland Funding, LLC, 754 F. Supp. 2d
711, 714 (D.N.J. 2010)). The Phelan Defendants are not only aware of this
fundamental legal principle, they acknowledge that FDCPA claims are “plainly
non-germane” in New Jersey foreclosure cases. Phelan Br. at 21 n.14. It follows
axiomatically that RICO claims are not properly asserted in New Jersey
foreclosure actions.
It is well settled that “[a] party will not be barred from raising additional
claims in a subsequent proceeding if he was unable to assert these claims in the
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 22 of 40 PageID: 1873
17
initial proceeding…. For instance, the doctrine will not apply to a claim that was
barred for want of jurisdiction or that was unknown or had not accrued at the time
of the original action. Cotter, 2011 Bankr. LEXIS 4579, at *15-16) (citing In re
Hawkins, 231 B.R. 222, 232 (Bankr. D.N.J. 1999), and In re Hurley, 285 B.R. 871,
876 (Bankr. D.N.J. 2002)). Not only were the Giles disabled from asserting a
RICO cause of action before the Ocean County Court, they did not discover the
requisite pattern of racketeering necessary to prove a RICO claim until well after
entry of the Ocean County Court’s January 18, 2008 Order.
Given the clarity of the law on this subject, none of the Phelan Defendants’
claim preclusion arguments has the slightest degree of merit. Inasmuch as the
affirmative defenses claimed by the Phelan Defendants are “not apparent on the
face of the complaint,” the Court “should not resolve the case on a Rule 12(b)(6)
motion.” Kisby Lees Mech. LLC v. Pinnacle Insulation, Inc., Civil No. 11-5093
(JBS/AMD), 2012 U.S. Dist. LEXIS 106521, at *11-12 (D.N.J. July 31, 2012).
B. The TAC Alleges a Plausible and Viable RICO Claim
1. RICO Does Not Immunize “Professionals”
The Phelan Defendants assert that professionals cannot be held liable under
RICO for providing professional services to clients. (Phelan Br. at 26.) RICO,
however, offers no blanket exemption to attorneys and their clients. “An
attorney’s license is not an invitation to engage in racketeering, and a lawyer no
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 23 of 40 PageID: 1874
18
less than anyone else is bound by generally applicable legislative enactments.”
Handeen v. Lemaire, 112 F.3d 1339, 1349 (8th Cir. 1997). Where, as here,
attorneys, law firms, and their clients have acted in a manner inimical to the
integrity of the judicial system, courts do not permit them to evade liability under
RICO. See, e.g., United States v. Bergrin, 682 F.3d 261 (3d Cir. 2012) (attorney
allegedly engaged in, inter alia, witness tampering); Sykes v. Harris, 757 F. Supp.
2d 413, 426-27 (S.D.N.Y. 2010) (“Complaint sufficiently describes a collective
enterprise among [lawyer, law firm and client] defendants, formed for the common
purpose of securing default judgments through fraudulent means”); Feld Entm’t,
Inc. v. ASPCA, 873 F. Supp. 2d 288, 315-16 (D.D.C. 2012) (confirming propriety
of an association-in-fact enterprise comprised of lawyers and client accused of
bribery and illegal witness payments); Emcore Corp. v. PriceWaterhouseCoopers
LLP, 102 F. Supp. 2d 237, 251-57 (D.N.J. 2000) (accounting firm, officers,
partners, and in-house counsel constitute proper association-in-fact enterprise); and
Handeen, 112 F.3d at 1349 (court warned that it would “not shrink from finding an
attorney liable when he crosses the line between the traditional rendition of legal
services and active participation in directing the enterprise. The polestar is the
activity in question, not the defendant’s status.”)
The TAC alleges that the Phelan Defendants’ conduct extends far beyond
the rendering of professional and ancillary accounting services found inadequate
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 24 of 40 PageID: 1875
19
by the Third Circuit in Univ. of Maryland v. Peat, Marwick, Main & Co., 996 F.2d
1534 (3d Cir. 1993). Under Univ. of Maryland, the issue is not whether the
defendants are professionals but whether they participated in the affairs of the
RICO enterprise. Id. at 1539. In Univ. of Maryland, the alleged extent of the
defendant’s “wrongdoing” was to have (1) performed a deficient audit and
rendered unqualified auditor’s opinions, id., (2) attended board meetings, id., and
(3) provided accounting and consulting services “from time to time.” Id. In
contrast, the TAC alleges that the Phelan Defendants not only provided
professional and ancillary services, but that, in order to convince courts and
litigation victims alike, they certified objectively baseless assertions to the court,
not once but multiple times, such that their fraudulent deviation from professional
standards was itself the norm. ¶¶ 2-8, 77, 93-97, 98(f), 101-105.
Independently from WFB, the Phelan Defendants obtained financial gain
directly from victimized homeowners through the imposition of inflated and
churned fees. ¶¶ 6, 37-42, 72-73, 96, 101(c)-(e), 102-103. Moreover, the Phelan
firm billed its non-clients directly separately for the use of its ancillary services
such as title searches. ¶¶ 6, 101(d). This constitutes more than sufficient
uncontrolled participation by the Phelan Defendants in the affairs of the alleged
RICO enterprise.
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 25 of 40 PageID: 1876
20
Finally, the Phelan Defendants assert that “RICO was not created as a means
for a federal court to review the details and procedures of foreclosure litigation.”
(Phelan Br. at 15). The Phelan Defendants, however, fail to provide support for
this blanket immunity for a particular brand of litigation. Instead, the sole
authority upon which the Phelan Defendants rest this erroneous assumption,
Pearson v. LaSalle Bank, No. 08-2306, 2009 U.S. Dist. LEXIS 48904, at *1 (E.D.
Pa. June 9, 2009) (cited at Phelan Br. at 15), did not involve RICO at all, but rather
only claims under the FDCPA and state law.
2. The Action Was Timely Filed Pursuant To Fed. R. Civ. P. 6(a)
RICO actions are subject to a four-year statute of limitations. Agency
Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143, 156-57 (1987). In the
Third Circuit, the four-year period begins at the time “when the plaintiffs knew or
should have known of their injury.” Forbes v. Eagleson, 228 F.3d 471, 484 (3d
Cir. 2000). The Phelan Defendants maintain that this action was not brought
within the four-year statute of limitations applicable to Federal RICO claims and
is, therefore, barred as a matter of law. Inexplicably, the Phelan Defendants
disregard the manner in which time is computed under the Federal Rules.
Federal courts rely on Fed. R. Civ. P. 6(a) to calculate the expiration of
limitation periods. Frey v. Woodard, 748 F.2d 173, 174-75 (3d Cir. 1984). Fed. R.
Civ. P. 6(a) provides:
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 26 of 40 PageID: 1877
21
(a) Computing Time. The following rules apply in computing any time period specified in these rules, in any local rule or court order, or in any statute that does not specify a method of computing time.
(1) Period Stated in Days or a Longer Unit. When the
period is stated in days or a longer unit of time:
(A) exclude the day of the event that triggers the period;
(B) count every day, including intermediate Saturdays,
Sundays, and legal holidays; and (C) include the last day of the period, but if the last day
is a Saturday, Sunday, or legal holiday, the period continues to run until the end of the next day that is not a Saturday, Sunday, or legal holiday.
(Emphasis supplied.)
This action was filed on Monday October 24, 2011. The TAC alleges (TAC
¶ 63) that discovery of the alleged wrongdoing occurred on October 23, 2007,
when Wachovia informed the Giles’ counsel that Wachovia was not the trustee for
the Plaintiffs’ mortgage loan and had not acted in a trust capacity since December
30, 2005. Under Fed. R. Civ. P. 6(a), the accrual of an action excludes the day of
the event that triggers the period, and it expressly provides that a limitations period
cannot expire on a Saturday, Sunday, or legal holiday. Because October 23, 2011
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 27 of 40 PageID: 1878
22
was a Sunday,10 the statute of limitations could not have run against the Giles until
the end of Monday October 24, 2011. This action is indisputably timely.
3. The Phelan Defendants’ Activities Were Improper Under New Jersey Law
The Phelan Defendants contend that they are “not liable for conduct which is
valid under New Jersey law” (Phelan Br. at 9). Yet, misconduct of the Phelan
Defendants has been documented in the well-pleaded allegations of the TAC and
recognized through actions taken by the New Jersey judiciary to redress
widespread abuses in the residential mortgage foreclosure industry, including those
by the Phelan Defendants themselves.11
The Phelan Defendants assert that the “name of the Trustee [is]
inconsequential” and “not dispositive” to the proper prosecution of a foreclosure
action in New Jersey (Phelan Br. at 6, 11), repeatedly citing Deutsche Bank v.
Russo, 429 N.J. Super. 91 (App. Div. 2012). Russo is, however, inapposite: the
court neither dispensed with standing requirements in foreclosure actions nor
relaxed the New Jersey Court rule providing that “if plaintiff is not the original
mortgagee or original nominee mortgagee,” the complaint must provide “the name
10 See United States Supreme Court Calendar for October 2011 term, http://www.supremecourt.gov/oral_arguments/2011TermCourtCalendar.pdf. 11 See, e.g., Second Amended Class Action Complaint (Docket Item 65) at ¶¶ 89-91.
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 28 of 40 PageID: 1879
23
of the original mortgagee and a recital of all assignments in the chain of title.” N.J.
Rule 4:64-1(b)(10). Instead, the Deutsche Bank court addressed cases where
foreclosure defendants demonstrated an “unexcused, years-long delay in asserting”
a defense challenging the proper standing of a mortgagee in the context of motions
under Rule 4:50-1(a) (to set aside a default judgment) and Rule 4:50-1(d)
(challenging a judgment as void). Deutsche Bank, 429 N.J. Super. at 101
(emphasis supplied).12
Deutsche Bank held merely that the remedy for lack of standing in this
particular context is left to the discretion of the lower court judge (which is
accorded “substantial deference”) and that dismissal of a foreclosure action is not
necessarily the exclusive remedy available to New Jersey Chancery Courts.13 In
doing so, the Court reconfirmed the holding in Bank of New York v. Raftogianis,
418 N.J. Super. 323 (Ch. Div. 2010), which held that a party seeking to foreclose a
mortgage must own or control the underlying debt and that, without a showing of
such ownership or control, a purported mortgagee lacks standing to proceed with a
foreclosure action. Raftogianis further stated that: “[w]hether any particular action
12 Rule 4:50-1(a) requires that movant must “establish that his failure to answer was due to excusable neglect.” “Rule 4:50-1(d) motion …. does not require a showing of excusable neglect but must be filed within a reasonable time after entry of the judgment.” Because the standing issue was raised before the Ocean County Court on a timely basis, neither of these rules apply here. 13 Deutsche Bank, 429 N.J. Super. at 98.
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 29 of 40 PageID: 1880
24
should in fact be dismissed should be addressed on a case-to-case basis, dependent
on all the circumstances. As a general matter, dismissal will probably be
appropriate, if only to provide a clear incentive to plaintiffs to see that the issue of
standing is properly addressed before any complaint is filed.” Deutsche Bank v.
Deutsche Bank, 429 N.J. Super. at 100, quoting Raftogianis, 418 N.J. Super. at
356. Although the Phelan Defendants portray Deutsche Bank v. Russo as a
revolutionary change in New Jersey jurisprudence, it is nothing of the sort,
particularly when viewed against the facts and circumstances of this litigation.
Defying their own practice of naming trustees of securitized mortgages as
the legal owner of mortgages identified as plaintiff in foreclosure complaints (not
to mention established case law and court rules requiring that practice), the Phelan
Defendants also say that the identity of a trustee is of no importance because
securitized trust investors are the beneficial owners of securitized mortgages, and
defaulted homeowners communicate only with mortgage servicers and their
foreclosure lawyers. (Phelan Br. at 11-12.) This argument, however, disregards
the decision in US Bank Nat’l Ass’n v. Guillaume, 209 N.J. 449, 458, 38 A.3d 570,
474 (2012), where the New Jersey Supreme Court held that actual lenders must be
identified to homeowners facing foreclosure and that disclosure of the mortgage
servicer alone is insufficient. 209 N.J. at 458, 38 A.3d at 574. See also Pl. WFB
Opp. Br. at 16-17. The Phelan Defendants’ argument also contradicts well-
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 30 of 40 PageID: 1881
25
established precedent holding that “a trustee of an express trust is the real party in
interest when suing on behalf of that trust.” Lasalle Bank Nat’l v. Nomura Asset
Capital, 180 F. Supp. 2d 465, 471 (S.D.N.Y. 2001)(citing Navarro Sav. Ass’n v.
Lee, 446 U.S. 458, 464 (1980)). See also U.S. Bank Nat’l Ass’n v. Nesbitt Bellevue
Prop. LLC, 859 F. Supp. 2d 602, 609 (S.D.N.Y. 2012); LaSalle Bank Nat. Ass’n v.
Lehman Bros. Holdings, Inc., 237 F. Supp. 2d 618, 632 (D. Md. 2002).14
4. The TAC Alleges a RICO Pattern of Racketeering
The Phelan Defendants also argue that the TAC fails to allege the requisite
pattern of RICO predicate acts. This argument simply ignores the law and the
TAC. To establish the requisite pattern of racketeering activity, a plaintiff must
allege that (i) predicate racketeering acts are related, and (ii) they “amount to or
pose a threat of continued criminal activity.” H.J. Inc. v. Northwestern Bell Tel.
Co., 492 U.S. 229, 239 (1989). Under the relatedness requirement, “predicate acts 14 The Phelan Defendants also accuse Plaintiffs of violating Fed. R. Civ. P. 11 because “TAC ¶¶ 53-54 make inexcusably false and defamatory allegations directed at the Phelan firm partner who executed the two certifications regarding party joinder and title searches required by R. 4:5-1 to be attached to the Foreclosure Complaint … claiming that these certifications were “false and misleading” when they plainly are not.” (Phelan Br. at 8-9.) Ironically, the Phelan Defendants make this unfounded assertion based in part on additions to “to R. 4:64-1 effective December 2010, well after the [Giles] Foreclosure was filed, to provide assurances beyond those previously required concerning the accuracy of foreclosure documents.” (Phelan Br. at 7-8 and n.5.) The rule amendments were implemented – on an emergency basis no less – precisely because of foreclosure litigation abuses committed by lawyers like defendant Rosemarie Diamond, whose varying signatures purported to “verify” uninvestigated “facts.”
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 31 of 40 PageID: 1882
26
are related if they have the same or similar purposes, results, participants, victims,
or methods of commission, or otherwise are interrelated by distinguishing
characteristics and are not isolated events.” Tabas v. Tabas, 47 F.3d 1280, 1292
(3d Cir. 1995) (internal quotations and citations omitted).
Here, the Phelan Defendants do not contest the relatedness component of the
pattern requirement. The predicate acts, as alleged, relate to the same purpose
(seizing and disposing of homeowners’ property without establishing their legal
right to do so and collection of manufactured or inflated fees), results (default
judgments and collection of manufactured or inflated fees), participants (all
Defendants in this action), victims (New Jersey homeowners sued in foreclosure
actions by the Phelan Defendants and WFB involving mortgages that were part of
the Park Place Trust), and methods of commission (meritless foreclosure
litigation). Id.
The continuity requirement of a RICO claim “is both a closed-and open-
ended concept, referring either to a closed period of repeated conduct, or to past
conduct that by its nature projects into the future with a threat of repetition.” H.J.,
492 U.S. at 242. The “temporal concept” of continuity may be established by
demonstrating either: (1) a closed-ended continuity through allegations of repeated
predicate acts extending over a “substantial” (at least twelve-month) period, Tabas
v. Tabas, supra; or (2) an open-ended continuity through allegations that “the
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 32 of 40 PageID: 1883
27
predicates are a regular way of conducting defendant’s ongoing legitimate business
(in the sense that it is not a business that exists for criminal purposes) . . . .” H.J.,
492 U.S. at 243. See HT of Highlands Ranch, Inc. v. Hollywood Tanning Sys.,
Inc., 590 F. Supp. 2d 677, 687-88 (D.N.J. 2008). Tabas, 47 F.3d at 1294-95. A
period of twelve months or longer may satisfy the requirement of long-term
conduct under the closed-ended continuity analysis. Tabas, 47 F.3d at 1293; HT,
590 F. Supp. 2d at 688.
Here, continuity is satisfied on a closed-end basis. The alleged RICO
actions extend from any and all foreclosure litigation commenced on “behalf” of
Wachovia after Wachovia’s sale of its corporate and institutional trust business on
December 30, 2005. ¶ 47. The Phelan Defendants’ wrongful actions continued
through and including the Giles’ discovery of WFB’s lack of standing on October
23, 2007, and persisted up to the time the New Jersey Judiciary initiated its efforts
to bring abusive foreclosure practices to a halt in December 2010, proceedings
that the Phelan Defendants themselves now openly acknowledge – despite their
earlier boisterous contention that Plaintiffs’ references to the New Jersey
Judiciary’s action were “irrelevant, impertinent, and scandalous.” (See above at 2
n.2).15 This period, lasting nearly five years, easily satisfies the closed-ended
15 The Phelan Defendants refer to the December 20, 2010 Supreme Court Order and the Notice to the Bar re: Emergent Amendments to R. 1:5-6, R. 4:64-1 and R. 4:64-2; and the December 10, 2010 Administrative Order Directing
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 33 of 40 PageID: 1884
28
continuity requirement. Tabas, 47 F.3d at 1293; HT, 590 F. Supp. 2d at 688.
Discovery may well confirm that Defendants’ misconduct continued unabated,
presenting the possibility that the open-ended continuity requirement may also be
established.
The Phelan Defendants focus inordinately on the circumstances of the Giles’
individual foreclosure litigation and assert that the period to be measured is less
than one year, the time it took for this foreclosure action to arrive at its
unadjudicated conclusion. In “analyzing” the issue in this myopic fashion, the
Phelan Defendants ignore altogether Plaintiffs’ well-pleaded allegations that
Defendants were on notice to investigate Wachovia’s lack of standing at least two
months before they commenced proceedings against the Giles. ¶ 77(g). They
continued to portray themselves as legal counsel for Wachovia after they were
bluntly informed otherwise on October 23, 2007 (¶¶ 63-64), and they persisted in
acting in this improper manner until at least August 31, 2010, when a sheriff’s sale
was scheduled by the Phelan Defendants and WFB “on behalf” of Wachovia. ¶ 77;
Pl. WFB Br. at 9. Although the exact dates of the beginning and end of
Defendants’ scheme are yet to be determined, the duration lasts beyond the 15
Submission of Information from Residential Mortgage Foreclosure Plaintiffs Concerning Their Document Execution Practices to a Special Master. (Phelan Br. at 31-32).
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 34 of 40 PageID: 1885
29
months or even 2 years required. Emcore Corp., 102 F. Supp. 2d at 252 (14
months sufficient).
The Phelan Defendants next argue that the enterprise alleged in the TAC is
insufficient because it fails to adequately allege that the “enterprise” exists
separately from its individual members. A proper § 1962(c) claim must allege “the
existence of two distinct entities: (1) a ‘person’; and (2) an ‘enterprise’ that is not
simply the same ‘person’ referred to by a different name.” Cedric Kushner
Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001). In general, a corporation must
be sufficiently distinct from the alleged “enterprises.” Gasoline Sales, Inc. v. Aero
Oil Co., 39 F.3d 70, 73 (3d Cir. 1994).
WFB and the Phelan Defendants are separate entities. The TAC does not
allege that WFB owns Phelan P.C., Phelan LLP, their “litigation service provider”
affiliates, or their buildings. Rather, the TAC alleges that the Phelan partners
control two law firms, Phelan P.C. and Phelan LLC, ¶¶ 21-23, that three of the
partners together own Land Title and Full Spectrum, ¶¶ 25-26, and that defendants
Lawrence Phelan, Francis S. Hallinan together own Camelot Enterprises, LLC,
which owns the building in New Jersey where Phelan, P.C., Land Title and Full
Spectrum are located. ¶¶ 20-26. Furthermore, the TAC sets forth how the Phelan
Defendants obtained improper payments, in the form of overstated legal fees and
also through “default management” fees that the Phelan Defendants charged
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 35 of 40 PageID: 1886
30
directly to targeted homeowners, a portion of which was kicked back as profit to
WFB ¶¶ 100(b), 102(d).
The alleged enterprise includes, not only WFB and Phelan P.C., but also
individual defendants Lawrence T. Phelan, Francis S. Hallinan, and Daniel S.
Schmieg, equity owners of both Phelan P.C. and Phelan LLP. Earlier in this
litigation, two of these same defendants represented that they are so distinct from
Phelan P.C. that this Court may not even exercise personal jurisdiction over them.
As a matter of fact and law, the members of the enterprise alleged by Plaintiffs are
not synonymous.
5. Plaintiffs Suffered Injury Caused by The Predicate Acts
Finally, the Phelan Defendants allege that the alleged predicate acts did not
injure the Giles. (Phelan Br. at 33-39). Neither the law nor the facts support this
claim. The Giles knew nothing about Phelan P.C. and WFB’s deception until
October 23, 2007, after a non-final default judgment was entered against them on
June 5, 2007. Once the deception was revealed by Wachovia to their lawyer, the
Giles promptly challenged the non-final judgment as required by N.J. Rule 4:50-1.
Had the Giles discovered the misrepresented facts earlier, they would have
raised these same issues before entry of any default judgment. ¶ 55. Had the
Ocean County Court known about these misrepresentations, it would not have
entered the judgment in the first place. ¶ 12. The Giles’ relied – and had every
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 36 of 40 PageID: 1887
31
right to rely – upon the integrity of the judicial system and the trustworthiness of
formal court filings by lawyers and litigants that avail themselves of the benefits of
the system.
Perhaps most significantly, WFB and Phelan P.C.’s fraudulent scheme was
perpetrated against New Jersey Chancery Judges assigned to adjudicate foreclosure
cases, presumably none of whom would tolerate institutionalized deceit in their
courtrooms. ¶¶ 10, 12, 55, 58, 82(c), 93, 95, 100(a), 101(b) and 106-107.
The issue of “reliance” is a mere smokescreen. Bridge v. Phoenix Bond &
Indem. Co., 553 U.S. 639, 658–59 (2008) (reliance “is not in and of itself
dispositive” of whether injury is “sufficiently direct to satisfy [18 U.S.C.] §
1964(c)’s proximate-cause requirement”). But the Phelan Defendants’ smoke-and-
mirrors artifice does not hide the specific items of damage to the Giles and the
Proposed Class alleged in the TAC:
(a) diminution or complete loss of value of property taken or sold as a result of wrongful foreclosure lawsuits filed by Phelan P.C. and WFB in the name of entities other than the still-undetermined bona fide legal owner of Plaintiffs’ mortgages; (b) attorneys’ fees incurred by Proposed Class members who (like the Giles) retained counsel to represent their interests in connection with wrongful default judgments procured by Phelan P.C. and WFB; and (c) payment of manufactured and inflated foreclosure-related “costs,” including (i) padded legal fees charged by Phelan P.C. in amounts that exceeded uniform fee schedules established by Fannie Mae and Freddie Mac; and (ii) payment of manufactured and inflated
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 37 of 40 PageID: 1888
32
foreclosure-related “costs” that exceeded amounts established in uniform fee schedules published by Fannie Mae and Freddie Mac.
¶ 110(a)-(c).
Fees paid by the Giles to their attorney to (1) oppose the wrongful
foreclosure prosecution by WFB and Phelan P.C. and (2) resist Phelan P.C.’s
attempt to extract foreclosure fee overcharges (¶¶ 70, 72-73) are damages caused
directly by defendants, notwithstanding the Phelan Defendants’ shrill
characterization of this claim as “absurd.” (Phelan Br. at 4.) Sykes, 757 F. Supp.
2d at 427-28 (“defendants’ pursuit of default judgments and attempts to enforce
them against plaintiffs proximately caused their injuries . . . which include . . .
incurring of legal costs to challenge those default judgments”); Beals v. Bank of
Am. N.A., No. 10-5427 (KSH), 2011 U.S. Dist. LEXIS 128376, at *44 (D.N.J.
Nov. 4, 2011) (recognizing homeowners’ “damages in having to defend against [a]
foreclosure and in losing other options to avoid foreclosure”).
Further, costs associated with remediating or taking legal action against
RICO conduct amount to an “out-of-pocket loss” that is actionable under RICO.
See Weiss v. First Unum Life Ins. Co., 482 F.3d 254, 258 n.2 (3d Cir. 2007) (losses
from sale of home and personal property to remediate harm and payment of IRS
fees and penalties arising from defendant’s racketeering scheme involving illegal
policy of rejecting long-term disability benefits “were out-of-pocket expenses . . .
and thus qualify as an injury to property for RICO purposes.”); Walter v. Palisades
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 38 of 40 PageID: 1889
33
Collection, LLC, 480 F. Supp. 2d 797, 804 (E.D. Pa. 2007) (“[P]ayment of legal
fees can be actionable injuries under RICO.”); Pappa v. Unum Life Ins. Co. of Am.,
No. 3:07-cv-0708, 2008 U.S. Dist. LEXIS 21500, at *24 (M.D. Pa. 2008) (payment
of legal fees is an injury “proper to a RICO claim.”).16
Whatever damages may ultimately be proven at trial, “at the pleading stage
of civil RICO actions, a plaintiff must plead damages to business or property in a
manner consistent with Rule 8 to show standing and is not required to plead with
16 In Hemi Group, LLC v. City of New York, N.Y., 559 U.S. 1 (2010), the RICO plaintiff, the City of New York, alleged that an out-of-state vendor sold cigarettes in New York City without acquiring customer information required under New York State’s Jenkins Act. NYC argued that, without the required customer information, the State of New York State could not, in turn, send it to the City of New York to collect sales taxes. The Supreme Court rejected plaintiff’s RICO theory of causation as too attenuated: “Here, the conduct directly responsible for the City’s harm was the customers’ failure to pay their taxes. And the conduct constituting the alleged fraud was Hemi’s failure to file Jenkins Act reports. ... [T]he conduct directly causing the harm was distinct from the conduct giving rise to the fraud.” 559 U.S. at 17.
Here, in contrast, the link is direct: the conduct at issue – commencing fraudulent foreclosing litigation – was the very cause of the homeowner’s need to expend wasteful costs, including attorneys’ fees, and the forced, pell-mell sale of a home to avoid foreclosure. As many courts have recognized, the initiation of baseless litigation can form the basis for recovery of attorney’s fees and loss of market value to homes. See, e.g., Genty v. Resolution Trust Corp., 937 F.2d 899, 918 (3d Cir. 1991) (plaintiffs permitted to recover damages under RICO for economic harm occasioned by loss of the market value of their homes as a consequence of defendants’ fraud). Moreover, the Phelan Defendants cannot claim ignorance that they sought and obtained an order for a sheriff’s sale, ¶ 60, and that the Giles were scrambling desperately to sell their home, ¶ 70, a fact they told the Ocean County Court of Chancery on September 12, 2007. (See Mitchell Decl. Ex. A [Docket Item 75-3, at 69-70]).
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 39 of 40 PageID: 1890
34
the particularity required by Rule 9(b). Robbins v. Wilkie, 300 F.3d 1208, 1211
(10th Cir. 2002)(citing NOW v. Scheidler, 510 U.S. 249, 256 (1994)).
III. CONCLUSION
For the reasons identified above, Plaintiffs respectfully request this Court to
deny the Phelan Defendants’ motion to dismiss the TAC with prejudice.
Dated: February 20, 2013 Respectfully submitted,
TRUJILLO RODRIGUEZ & RICHARDS LLC s/ Lisa J. Rodriguez 258 Kings Highway East Haddonfield, New Jersey 08033 Tel: (856) 795-9002 NARKIN LLC John G. Narkin 1662 South Loggers Pond Place, #31 Boise, Idaho 83706 Tel: (208) 995-6119 HARWOOD FEFFER LLP Robert I. Harwood James G. Flynn 488 Madison Avenue, 8th Floor New York, New York 10022 Tel: (212) 935-7400 Attorneys for Plaintiffs and the Proposed Class
Case 1:11-cv-06239-JBS-KMW Document 83 Filed 02/20/13 Page 40 of 40 PageID: 1891