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Giles v. Phelan, Hallinan & Schmieg, L.L.P.

United States District Court, D. New Jersey

September 28, 2012

Charles GILES, et al., Plaintiffs,
PHELAN, HALLINAN & SCHMIEG, L.L.P., et al., Defendants.

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John Narkin, Narkin LLC, Boise, ID, James G. Flynn, Robert I. Harwood, Harwood Feffer LLP, New York, NY, for Plaintiffs Charles J. Giles, Diane Giles, and Laurine Spivey.

Bradley L. Mitchell, Brian Phillip Sullivan, Steven J. Adams, Stevens & Lee, PC, Lawrenceville, NJ, for Defendants Wells Fargo & Company and Wells Fargo Bank, N.A.

Kenneth Goodkind, Flaster Greenberg, PC, Cherry Hill, NJ, for Defendants Phelan Hallinan & Schmieg, LLP; Phelan Hallinan & Schmieg, P.C.; Lawrence T. Phelan; Francis S. Hallinan; Daniel G. Schmieg; Rosemarie Diamond; Full Spectrum Services, Inc.; and Land Title Services of New Jersey, Inc.


SIMANDLE, Chief Judge:


Plaintiffs brought this proposed class action on behalf of all homeowners who were defendants in New Jersey or Pennsylvania foreclosure actions prosecuted by Phelan Hallinan & Schmieg, P.C. or Phelan Hallinan & Schmieg, L.L.P. and who were damaged by abusive foreclosure practices, including imposition of inflated default management fees and use of fraudulent documents to bring foreclosure actions on behalf of plaintiffs who lacked standing. The named Plaintiffs are Charles and Diane Giles, New Jersey residents, and Laurine Spivey, a Pennsylvania resident. The Giles and Spivey were defendants subject to default foreclosure judgments in the state courts of New Jersey and Pennsylvania respectively. The Giles independently sold their home before a sheriff's sale occurred. Spivey filed for bankruptcy and established a Chapter 13 restructuring plan.

Defendants are the law firms that prosecuted the foreclosure actions, individual partners and attorneys in the law firms, the mortgage servicer, the mortgage servicer's parent company, and title and mortgage search companies. Plaintiffs bring this action under the Racketeer Influenced and Corrupt Organizations Act (" RICO" ), 18 U.S.C. § 1962(c); the New Jersey Consumer Fraud Act (" NJCFA" ), N.J. Stat. Ann. § 56:8-1 et seq. ; and the Pennsylvania Unfair Trade Practices and Consumer Protection Law (" UTPCPL" ), 73 P.S. § 201, et seq.

This matter comes before the Court on three motions to dismiss and a Motion to Strike Plaintiffs' Notice of Additional Authorities,

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namely Defendant Wells Fargo Bank, N.A.'s Motion to Dismiss [Docket Item 27], Defendant Wells Fargo & Company's Motions to Dismiss [Docket Items 26], and the Phelan Party Defendants' Motion to Strike or Dismiss [Docket Item 20]. Defendants' Motion to Strike Plaintiffs' Notice of Additional Authorities [Docket Item 52] will also be addressed.

For reasons that follow, there are three primary holdings: (1) All of Plaintiff Spivey's claims are dismissed with prejudice because she cannot challenge bankruptcy proofs of claims in this forum; (2) the Giles' NJCFA claims are dismissed with prejudice because the New Jersey litigation privilege bars NJCFA claims concerning litigation statements and tactics complained of herein; and (3) the Giles' RICO claims are stricken without prejudice because the Amended Complaint is prolix and contains immaterial allegations, without prejudice to the Giles Plaintiffs' right to replead same in a Second Amended Complaint consistent with this Court's determinations applying Rules 8(a), 9(b), and 12(f), Fed.R.Civ.P.


In this section, the Court outlines this action's procedural history and the factual and legal allegations in Plaintiffs' Amended Complaint.

A. Procedural History

This action first came before this court on a Motion for Preliminary Injunction [Docket Item 5] filed by several Defendants. The Court denied the Preliminary Injunction Motion without prejudice. [Docket Item 11.] At oral argument for the preliminary injunction, the Court encouraged Plaintiffs to shorten their Complaint [Docket Item 1], which was 105 pages long, excluding exhibits. Plaintiffs filed an Amended Complaint [Docket Item 16] consisting of 90 pages and 277 paragraphs that is the subject of the present Motions to Strike or Dismiss. The Court heard oral argument on the Motions to Dismiss on September 18, 2012.

B. Factual Background

In this section, the Court summarizes the Amended Complaint. The Court has focused on the allegations that pertain to the parties and events presently at issue and has disregarded Plaintiffs' general allegations about the foreclosure industry and the foreclosure crisis. The Court then describes the ten Defendants. Next, the Court outlines the Giles' and Spivey's factual allegations, Plaintiffs' class action allegations, Plaintiffs' allegations regarding false signatures used in myriad court proceedings, the relief Plaintiffs seek, and Plaintiffs' legal claims.

i. Other Foreclosure Proceedings and Investigations

The Amended Complaint is 90 pages long, containing 277 paragraphs. Plaintiffs have quoted congressional testimony, described myriad lawsuits relating to foreclosure practices, cited newspaper articles and press releases relating to the housing market collapse, chronicled government investigations, and, generally, provided a dissertation on mortgage industry operations, software programs, and economics. The Court will disregard all allegations that pertain to the general state of the real estate crisis in the United States.

Plaintiffs have also quoted liberally from other lawsuits involving some of the same Defendants, but different Plaintiffs. Plaintiffs claim that Defendants' fraudulent activities are described by: " federal and state judges who have identified and condemned Defendants' unlawful practices," (Am. Compl. ¶ 242); " the New Jersey judiciary ... in

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In the Matter of Residential Mortgage Foreclosure Pleading and Document Irregularities," ( id. ¶ 243); " the investigations and actions of the Fed, OCC, FDIC and other federal regulators," ( id. ¶ 244); and " the investigations, settlement negotiations, and potential prosecutions of state attorneys general and the U.S. Department of Justice," ( id. ¶ 245). Many of these statements and averments are, at best, attenuated to the conduct of the Defendants toward these Plaintiffs; at worst, the background averments are prejudicial to defendants because they confuse and obscure the central allegations of the Amended Complaint and make it difficult for Defendants to know what conduct they are charged with by these Plaintiffs, and harder still for the Court to analyze and interpret their prolix pleading. The problems caused by so much extraneous matter, and the remedy to cure it, are examined further below.

ii. Defendants

Plaintiffs have brought this action against ten Defendants: Phelan Hallinan & Scmieg, LLP; Phelan Hallinan & Schmieg, P.C.; Lawrence T. Phelan; Francis S. Hallinan; Daniel G. Schmieg; Rosemarie Diamond; Full Spectrum Services, Inc.; Land Title Services of New Jersey, Inc.; Wells Fargo & Company; and Wells Fargo Bank, N.A.

Defendant Phelan Hallinan & Schmieg, LLC is " a high-volume mortgage foreclosure law firm" with its principal place of business in Philadelphia, Pennsylvania. (Am. Compl. ¶ 20.) Defendant Phelan Hallinan & Schmieg, P.C. has offices in Mount Laurel and Newark, New Jersey. ( Id. ¶ 21.) Plaintiffs refer to these two entities, collectively, as " the Phelan Firm." The Phelan firm is the " premier default services operation in Pennsylvania and New Jersey." ( Id. ¶ 152.) Defendant Lawrence T. Phelan (" Larry Phelan" ) is the Phelan Firm's principal equity partner. ( Id. ¶ 22.) Defendant Francis S. Hallinan (" Frank Hallinan" ) is an equity partner and administrator of the Phelan firm. ( Id. ¶ 23.) Defendant Daniel G. Schmieg (" Dan Schmieg" ) is an equity partner in the Phelan firm. ( Id. ¶ 24.) Defendant Rosemarie Diamond is " an attorney with the Phelan firm who has responsibility for the firm's New Jersey operations." ( Id. ¶ 25.)

Defendant Full Spectrum Services, Inc. provides services to Pennsylvania and New Jersey law firms, " including process serving, mortgage and judgment searches, and publication of legal notices." ( Id. ¶ 26.) It is based in Mount Laurel, New Jersey and is owned and controlled by Larry Phelan, Frank Hallinan, and Dan Schmieg. ( Id. ¶ 26.) Full Spectrum Services used to be known as " Foreclosure Review Services, Inc." and " now operat[es] through an entity called FSS Acquisitions." ( Id. ¶ 26.)

Defendant Land Title Services of New Jersey, Inc. (" Land Title Services" ) is a New Jersey corporation located in Mount Laurel, New Jersey. ( Id. ¶ 27.) It " provides title searches and other real property services to the Phelan firm and its mortgage servicer clients." ( Id. ¶ 27.) It is owned and controlled by Larry Phelan, Frank Hallinan, and Dan Schmieg. ( Id. ¶ 27.)

Defendant Wells Fargo & Company " is a diversified financial services company" incorporated in Delaware and with executive offices in San Francisco, California. ( Id. ¶ 28.)

Defendant Wells Fargo Bank, N.A. (" WFB" ) is a banking association that " originates and services residential mortgages through its division Wells Fargo Home Mortgage or its trade name America's Servicing Company." ( Id. ¶ 29.) Its principal offices are in San Francisco, California, and it is chartered in Sioux Falls, South Dakota. ( Id. ¶ 29.) WFB is a mortgage servicer: it collects homeowners'

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mortgage payments on behalf of financial institutions that own mortgage loan securities. ( Id. ¶ 30.) Plaintiffs allege that, when homeowners fail to make payments or default on their mortgages, WFB must " cure the default ( i.e. recover past due payments and costs incurred in doing so) and .. restore the income producing value of the mortgage assets, including if necessary, by foreclosure proceedings...." ( Id. ¶ 30.) The present action essentially challenges the means by which WFB, through its agent the Phelan firm, cured defaults.

iii. Plaintiffs Charles and Diane Giles

Plaintiffs Charles J. and Diane Giles, husband and wife, were homeowners who resided in Ocean County, New Jersey. ( Id. ¶ 18.) The Giles " fell behind on their mortgage," and the Phelan firm filed a foreclosure complaint against them on February 16, 2007 in the Superior Court, Chancery Division for Ocean County, New Jersey (" Ocean County Court" ). (Am. Compl. ¶ 74.) The Phelan firm allegedly brought the foreclosure action at the direction of Wells Fargo Bank. ( Id. 85.)

The foreclosure complaint alleged that the mortgage holder was Wachovia Bank, N.A. ( Id. ¶ 75.) Rosemarie Diamond, a Phelan Hallinan & Schmieg, P.C. attorney, also allegedly certified in the foreclosure complaint that all necessary parties had been joined and that Ms. Diamond had conducted a title search to identify entities with an interest in the property. ( Id. ¶ 78.)

Plaintiffs allege that the foreclosure complaint and Ms. Diamond's certifications were false because the Phelan firm had " no authority" to act on Wachovia's behalf ( Id. ¶ 80), and Wachovia was not the mortgage holder ( Id. ¶ 84). Plaintiffs claim that Wachovia sold its mortgage portfolio on December 30, 2005, before foreclosure action against the Giles began. ( Id. ¶ 85). On April 18, 2007, after filing the foreclosure complaint, Defendants allegedly filed two assignments with the County Clerk of Ocean County, New Jersey. ( Id. ¶ 81.) The first assignment conveyed ownership of the Giles' mortgage from Argent (the loan originator) to Ameriquest Mortgage Company. ( Id. ¶ 82.) The second assignment allegedly conveyed ownership of the Giles' mortgage from Ameriquest to Wachovia. ( Id. ¶ 83.) The Giles Plaintiffs allege that neither of these assignments cured Wachovia's alleged standing deficiencies in the state foreclosure action. ( Id. ¶ 85.)

The Giles did not contest the foreclosure complaint. ( Id. ¶ 86.) On June 5, 2007, the Ocean County Court entered a default judgment against the Giles, authorized a Sheriff's sale of their home, and held that Wachovia was entitled to recover $204,391.70 plus $2,193.92 in costs and legal fees. ( Id. ¶ 87.) The Giles placed their house for sale ( Id. ¶ 88), and hired an attorney, ( Id. ¶ 89).

The Giles also solicited assistance from Wachovia's corporate headquarters, at which point " Wachovia found out that the Phelan firm was acting in its name without authorization." ( Id. ¶ 93.) Wachovia's Senior Vice President and Assistant General Counsel communicated with a Phelan firm associate attorney and confirmed via letter that (1) Wachovia was not the holder of the Giles mortgage and (2) the foreclosure sale would be postponed until the associate attorney discovered the proper plaintiff and filed a corrective motion. ( Id. ¶ 95.) On November 15, 2007, the Phelan firm filed a motion stating that Wachovia had been " incorrectly named" and that " U.S. Bank as Trustee" was the correct plaintiff. ( Id. ¶ 97.) According to Plaintiffs, U.S. Bank also allegedly lacked standing. ( Id. ¶ 99.)

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The Giles eventually accepted a " low ball" offer to sell their home in December 2007 to " stave off what they were misled to believe was an inevitable loss of their home...." ( Id. ¶ 102.) They sold their home through a private sale on January 15, 2008 for $49,000 less than its alleged market value. ( Id. ¶ 105.)

The Giles also allege that the Phelan firm subjected them to invalid fees. On December 10, 2007, the Giles received a letter claiming that they owed $7,817 in legal fees and costs and $340 in property inspection fees. ( Id. ¶ 103.) Their attorney objected to the " fraudulently manufactured junk fees." ( Id. ¶ 104.) The objections " caused WFB to remove much of the bogus ... fees." ( Id. ¶ 105.) They paid $2,500 in legal fees to their attorney and " other counsel" at closing. ( Id. ¶ 105.) The Complaint does not specify whether these " other counsel" were counsel conducting the real estate closing, Phelan firm attorneys recovering costs from the foreclosure proceeding, or some other counsel. Essentially, the Amended Complaint does not specify whether the Giles paid any fees to the Phelan Firm or WFB.

On January 18, 2008, the Ocean County Court granted the Phelan firm's Motion to Rescind and Correct the plaintiff's name and preserved the Giles' rights " as to all affirmative claims" resulting from the Phelan firm's " wrongful foreclosure activities." ( Id. ¶ 106.) The Phelan firm voluntarily dismissed the foreclosure lawsuit. ( Id. ¶ 106.)

iv. Plaintiff Laurine Spivey

Plaintiff Laurine Spivey is a homeowner who resides in Philadelphia, Pennsylvania. ( Id. ¶ 19.) On December 28, 2007, " at the direction of WFB," the Phelan firm brought a foreclosure action against Laurine Spivey in the Philadelphia Court of Common Pleas (" Philadelphia Court" ) on behalf of Wachovia Bank, N.A. ( Id. ¶ 110.) The Spivey foreclosure complaint stated that " amounts due on the mortgage included $1,250 in Attorney's fees and $550 for Cost of Title." ( Id. ¶ 112.) Plaintiffs allege that " the Phelan firm and Hallinan knew or willfully disregarded the fact that they had no authority to act on behalf of Wachovia...." ( Id. ¶ 116.) And Plaintiffs also allege that, as with the Giles' action, Wachovia " had no legal standing to prosecute a foreclosure action against Laurine Spivey...." ( Id. ¶ 119.)

On February 21, 2008, the Phelan firm obtained a default foreclosure judgment against Laurine Spivey. ( Id. ¶ 39.) And, on May 7, 2008, the Phelan firm filed a " Motion to Reassess Damages" with the Philadelphia Court, listing expenses incurred on Laurine Spivey's behalf. ( Id. ¶ 126.) These sums included $2,100 for legal fees, $1,333.40 for costs of suit and title, $285 for appraisal/brokers price opinions, and $165 for property inspections/property preservation. ( Id. ¶ 126.) On June 10, 2008, the Philadelphia Court issued an order granting the Phelan firm's motion and incorporating all these expenses. ( Id. ¶ 127.)

On June 3, 2008, Laurine Spivey filed a petition for relief under Chapter 13 of the U.S. Bankruptcy Code. ( Id. ¶ 128.) On August 27, 2008, the Phelan firm filed a proof of claim for Wachovia as creditor in Spivey's bankruptcy proceeding. ( Id. ¶ 130.) The proof of claim listed $3,900 in legal fees, $6,691.90 in legal costs, $285 in broker price opinion fees, property preservation costs of $210, and $150 for preparation and filing the proof of claim. ( Id. ¶ 130.) These charges were incorporated into a Chapter 13 restructuring plan, and Plaintiff Spivey began making payments on March 10, 2009. ( Id. ¶ 131.)

Plaintiffs allege that the expenses that the Phelan firm listed in the Spivey foreclosure

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complaint, the motion to reassess damages, and the proof of claim were " grossly and systematically inflated" and " were not actually or reasonably incurred." ( Id. ¶¶ 131-32.)

v. Class Action Allegations

Plaintiffs Diane Giles, Charles Giles, and Laurine Spivey brought this lawsuit as representative homeowners on behalf of a class. The class includes homeowners who, between January 1, 2005 and the present, were

(a) Defendants in New Jersey or Pennsylvania mortgage foreclosure actions prosecuted by Phelan Hallinan and Schmieg, P.C. or Phelan Hallinan & Schmieg, LLP; and
(b) were damaged by one or both of the following abusive foreclosure practices:
i) Preparation, execution and notarization of fraudulent court documents and property records used to initiate and prosecute improper foreclosure actions in the name of ...

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