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,
Plain tiffs-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' OPENING BRIEF
AND APPENDIX VOLUME I (Pages A1-A13)
JOHN G. NARKIN
BHNLAWFIRM
951 Rohrerstown Road, Suite 102
Lancaster, Pennsylvania 17601
(717) 756-0835
Attorneys for Plaintiffs-Appellants
TABLE OF CONTENTS
STATEMENT OF JURISDICTION ...................................................... 1
STATEMENT OF ISSUES ....................................................................................... 1
STATEMENT OF THE CASE ............................................................ 2
STATEMENTOFFACTS ............................................................... 4
Appellees' Foreclosure Practices ...................................................................... .4
Facts Alleged in the PAC ................................................................................... 8
Independent Confirmation of Abusive Foreclosure Practices ......................... 11
SUMMARY OF THE ARGUMENT ..................................................... 15
ARGUMENT ................................................................................ 17
I. THE COURT BELOW ABUSED ITS DISCRETION BY DENYING
THE HOMEOWNERS' MOTION FOR LEAVE TO FILE THE PAC ............ 17
II. THE COURT BELOW ERRONEOUSLY DISMISSED
THE HOMEOWNERS' ORIGINAL COMPLAINT ......................................... 21
A. Bankruptcy Creditors Have A Duty to Amend Inaccurate Claims .......... 21
B. The U.S. Bankruptcy Code Does Not Preclude FDCPA Lawsuits
Brought to Remedy Institutionalized Debt Collection Abuses ............... 21
CONCLUSION .............................................................................. 30
CERTIFICATION REGARDING BAR MEMBERSHIP ............................. 31
CERTIFICATE OF COMPLIANCE ..................................................... 32
CERTIFICATE OF IDENTICALNESS .................................................. 33
CERTIFICATE OF VIRUS CHECK .................................................... 34
TABLE OF CITATIONS
CASES
Adams v. Gould, Inc.,
739 F.2d 858 (3d Cir. 1984) .................................................................................... 18
Azzam v. Echehoyen,
2010 Md. Cir. Ct. LEXIS 2 (Md. App. Mar. 15, 2010) .......................................... 23
Bacelli v. St. Joseph's Hospital, Inc.,
2010 U.S. Dist. LEXIS 75926 (M.D. Fla. July 28, 2010) ..................................... 24
Bagwell v. Portfolio Recovery Associates, LLC,
2009 WL 1708227 (E.D.Ark. June 5, 2009) ........................................................... 24
Bechtel v. Robinson,
886 F .2d 644 (3d Cir.1989) ..................................................................................... 18
Brown v. Card Service Center,
464 F.3d 450, 453 (3d Cir. 2006) ............................................................................ 30
Carcieri v Salazar,
129 S.Ct. 1058 (2009) ............................................................................................. 24
Clark v. Brumbaugh & Quandahl, P.C.,
2010 WL 3190587 (D. Neb. Aug. 12. 201 0) .......................................................... 24
Del Sontro v. Cendant Corp.,
223 F. Supp. 2d 563 (D.N.J. 2002) ......................................................................... 18
Dole v. Area Chemical Co.,
921 F.2d 484 (3d Cir. 1990) .................................................................................... 18
Dougherty v. Wells Fargo Home Loans, Inc.,
425 F .Supp 2d 599 (E.D.Pa. 2006) ......................................................................... 23
ll
Evans v. Midland Funding LLC,
574 F.Supp.2d 808 (S.D. Ohio 2008) ..................................................................... 24
Foman v. Davis,
371 U.S. 178 (1962) ......................................................................................... 15, 19
Franks v. Food Ingredients International, Inc.
2010 WL 3046416 (E.D.Pa., July 30, 2010) ........................................................... 19
Hannon v. Countrywide,
2010 Bankr. LEXIS 3690 (Bankr. M.D. Pa. Oct. 18, 2010) ................ 16, 21, 25, 26
Hannon v. Countrywide,
421 B.R. 728 (Bankr. M.D. Pa. 2009) ....................................................... 16, 21, 26
Harrison Beverage Co. v. Dribeck Importers, Inc.,
133 F.R.D. 463 (D. N.J. 1990) ................................................................................ 21
Heintz v. Jenkins, 514 U.S. 291,292 (1995) ........................................................... 23
Hey! & Patterson Int'l, Inc. v. F.D. Rich Housing,
663 F.2d 419 (3d Cir.1981) ..................................................................................... 18
Hoffmann-La Roche Inc. v. Cobalt Pharmaceuticals, Inc.,
2010 U.S. Dist. LEXIS 79114 (D.N.J. Aug. 5, 2010) ............................................ 18
Holmes v. Mann Bracken LLC,
2009 U.S. Dist. LEXIS 119940 (E.D. Pa. Dec. 22, 2009) ...................................... 30
In re Burlington Coat Factory Sec. Litig.,
114 F.3d 1410 (3d Cir. 1997) ..................................................................... 15, 19, 20
In re Callery,
274 B.R. 51 (Bankr. D. Mass. 2002) ...................................................................... 22
In re Gunter,
334 B.R. 900 (Bankr. S.D.Ohio 2005)) .................................................................. 24
lll
In re Jones,
418 B.R. 687 (Bankr. E.D. La. 2009), affd,
2010 U.S. Dist. Lexis 98127 (E.D. La. Aug. 19, 2010) ........................... 6, 7, 16,28
In re Stewart,
2008 Bankr. LEXIS 3226 (Bankr.E.D.La. Oct. 14 2008) ...................................... 22
In re Stewart,
2009 U.S. Dist. LEXIS 76851 (E.D. La., Aug. 7, 2009) .......................................... 6
In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008),
aff'd in part, rev 'din part, 391 B.R. 577 (E.D.La. 2008) ....................................... 6
In re Taylor, 407 B.R. 618 (Bank:r. E.D.Pa .. 2009),
rev'd, 2010 U.S. Dist. LEXIS 16080 (E.D.Pa. Feb. 18, 2010) .................... 6, 16,28
Jerman v. Carlisle, McNellie, Tini, Kramer & Urlich LPA,
130 S. Ct. 1605 (2010) ..................................................................................... 17,30
Joubert v. ABN AMRO Mortgage Group, Inc.,
411 F .3d 452 (3d Cir.2005) ..................................................................................... 26
Kline v. Mortgage Electronic Security Systems, Inc.,
2009 WL 3064660 (S.D. Ohio Sept. 21, 2009) ...................................................... 24
McDermott v. Countrywide Home Loans, Inc.,
Case No. 07-51027, Adv. No. 08-5031 (Bank. N.D. Ohio,
Slip. Op. dated July 31, 2009), rev 'd, 426 B.R. 267 (N.D. Ohio 2010) .......... 17, 28
Ndubizu v. Drexel University,
2009 U.S. Dist. LEXIS 99966 (E.D. Pa.Oct. 26, 2009), ........................................ 20
Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004) ......................... 16, 24, 25, 27
Romero v. Allstate Insurance Co.,
2010 WL 2996963 (E.D. Pa. July 28, 2010) .................................................... 19, 20
Rosenau v. Unifund Corp.,
539 F.3d 218 (3d Cir. 2008) .................................................................................... 23
lV
Simmons v. Roundup Funding, LLC,
622 F.3d 93 (2d Cir. 2010) ............................................................................... 23, 24
Walls v. Wells Fargo Bank, N.A.,
276 F.3d 502 (9th Cir. 2002) ........................................................................... 23, 24
Williams v. Asset Acceptance, LLC,
392 B.R. 882 (Bankr. M.D. Fla. 2008); .......................................................... 16, 24
Young v. Wells Fargo,
2009 U.S. Dist. LEXIS 100419 (S.D. Iowa Oct. 27, 2009) .................................... 21
Zen Investments, LLC v. Unbreakable Lock Co.,
276 Fed.Appx. 200 (3d Cir. 2008) .......................................................................... 19
STATUTES
11 U.S.C 105(a) ............................................................................ 26
15 U.S.C. 1692(e) ................................................................................................. 30
15 U.S.C. 1692e(11) ............................................................................................. 23
15 U.S.C. 1692k(a) ............................................................................................... 25
15 U.S.C. 1692(e)(2)(A) and (B), 1692f(l), and 1692(g)(2) ............................ 2, 3
18 U.S.C. _152(4) ................................................................................................... 22
18 U.S.C. 1962(c) .................................................................................................... 2
28 U.S.C. 1291 ........................................................................................................ 1
73 P.S. 201 et seq . ................................................................................................... 3
v
OTHER AUTHORITIES
Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims,
87 Texas L. Rev. 121, 124 (2008) ................................................................... 16, 28
RULES
Fed. R. Civ. P. 12(b) (6) ............................................................................................. 4
Fed. R. Civ. P. 15(a) ........................................................................................ 1, 4, 17
Fed. R. Evid. 201(f) ................................................................................................. 14
Fed. R. Bankr. P. 9011 ...................................................................................... 26, 28
vi
STATEMENT OF SUBJECT MATTER
AND APPELLATE JURISDICTION
The district court had jurisdiction over this case pursuant to 28 U.S.C.
1331, 1332(d)(2) and (6), 1334 and 1337. Based upon the timely filing of a notice
of appeal from a final judgment entered on July 14, 2010, this Court has
jurisdiction pursuant to 28 U.S.C. 1291.
STATEMENT OF ISSUES
I. Whether the court below abused its discretion under Fed. R. Civ. P. 15(a)
by denying, without explanation, Appellants' motion for leave to file an amended
class action complaint alleging that a high-volume mortgage foreclosure law firm
and two of its mortgage servicer clients violated the Racketeer Influenced and
Corruption Act and other laws by inflating or fabricating foreclosure costs and by
filing and prosecuting uninvestigated foreclosure lawsuits on behalf of entities that
have no standing to bring suit.
II. Whether the court below erred as a matter of law by dismissing
Appellants' original complaint with prejudice on the grounds that a creditors' law
firm has no duty to amend inaccurate bankruptcy proofs of claim and that bankrupt
homeowners are precluded from obtaining relief under the Fair Debt Collection
Practices Act even though they, like other non-bankrupt homeowners, have been
harmed by identical institutionalized collection abuses by the creditors' law firm.
STATEMENT OF THE CASE
Appellants are financially distressed homeowners prosecuted in mortgage
foreclosure actions by the Philadelphia-based law firm Phelan Hallinan & Schmeig
("PHS") and two of its national mortgage servicer clients, Countrywide Home
Loans, Inc. ("CHL") and Wells Fargo Bank, N.A. ("WFB").
In their proposed amended complaint filed on January 15, 2010 ("PAC")
(A14-A126), the homeowners allege that PHS worked in concert with CHL and
WFB in systematic schemes to:
( 1) inflate or fabricate foreclosure costs, including misappropriated
sheriffs' deposit refunds; unearned attorneys' fees; and unjustifiable
fees for title searches, appraisals, litigation "support" services, and
property inspection and maintenance services -- often generated
through related-party transactions with affiliates controlled by
defendants themselves (A19-A21; A55-A68); and
(2) file and prosecute uninvestigated foreclosure lawsuits on behalf of
entities that have no ownership interest in homeowners' mortgages
and thus no legal standing to bring suit. A20-A21; A68-A84.
The PAC asserts claims against PHS, CHL and WFB arising under (1) the
Racketeer Influenced and Corruption Act ("RICO"), 18 U.S.C. 1962(c); (2) the
Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. 1692(e)(2)(A) and
2
(B), 1692f(l), and 1692(g)(2)
1
; (3) Pennsylvania's Unfair Trade Practices and
Consumer Protection Law, 73 P.S. 201 et seq. and (4) common law remedies for
fraud, breach of contract, breach of good faith and fair dealing, money had and
received, and negligent misrepresentation.
In addition to damages, the homeowners seek equitable and injunctive
relief, including appointment of an auditor or special master to (1) recommend
business management and accounting procedures that PHS, WFB and CHL must
adopt and implement to avoid future mortgage foreclosure abuses and (2) monitor
compliance by PHS, WFB and CHL with business management or accounting
procedures directed by the court. A21; A93; A124-A125.
This action was initially filed on March 25, 2009, based on more narrowly
circumscribed grounds that were supplemented and essentially superseded by the
expanded allegations of the PAC. Appellants' original complaint ( 1) restricted its
claims to PHS only, (2) invoked the FDCP A and its state law counterparts as the
homeowners' exclusive remedy for damages and (3) was brought on behalf of
bankrupt homeowners based on PHS's filing of false bankruptcy proofs of claim,
which is but one component of PHS's broader institutionalized practice of
misappropriating sheriffs' deposit refunds from defrauded borrowers. A115-A162.
1
FDCPA claims are asserted against PHS only. A115.
3
By Order dated July 14, 2010 (A4n.l), the court below denied the
homeowners' motion under Fed. R. Civ. P. 15(a) for leave to file the PAC. In a
two-line footnote reference to unspecified "reasons" for its dismissal of the
homeowners' original (and fundamentally different) Complaint, the court below
concluded without explanation that the PAC was "moot" and "futile."
The court below also held that the original Complaint failed to state a claim
for relief under Fed. R. Civ. P. 12(b )( 6) based on purely legal grounds having
nothing to do with the many non-bankruptcy-related claims in the PAC.
2
The court
below concluded that ( 1) PHS had "no duty" to amend bankruptcy proofs of claim
(A8-All) and (2) "redress for Plaintiffs' allegations of 'systematic' violations by
Defendants for filing allegedly inflated Proofs of Claim lie solely within the
Bankruptcy Court." A10-Al3.
STATEMENT OF FACTS
Appellees' Foreclosure Practices
PHS is a "premier foreclosure operation" in Pennsylvania and New Jersey
(A54). With a staff of"17 lawyers and 250 support personnel" (ASS), PHS handled
an estimated 24,000 to 26,000 foreclosure cases in Pennsylvania and New Jersey in
2008 alone. A55-A56. This law firm, which is "both Fannie Mae and Freddie Mac
2
Three of the five homeowners named as proposed class representatives in the
PAC, Charles and Diane Giles and Edward H. Wolferd, Jr., assert claims that are
unrelated to the bankruptcy process. A59-A63; A73-A78.
4
designated counsel," has been retained by "almost every maJor lender and
servicer" in the United States (AS4), including CHL and WFB.
To obtain the business of these financial institutions, PHS emphasizes the
"speed and efficiency" with which it prosecutes foreclosure cases. AS4-A56; A85-
86. Speed is allegedly achieved through PHS's ability to "leverage technology" by
"completely computeriz[ing]" its office with "every case management and invoice
reporting syste[m]" used in the foreclosure industry. ASS. PHS also stresses its
ownership and control of the "majority of its vendors to ensure a turnaround time
as quick as humanly possible." ASS.
PHS has no choice but to use mortgage servicers' "client-based web sites,"
which include computerized "default management" programs created and
maintained by Lender Processing Services, Inc. A84-A89, ASS n.1S8. These
programs make initial case referrals to PHS and similar high-volume foreclosure
law firms, which are monitored for their compliance with strict timeline
benchmarks from "referral to resolution" (id. ); acceptable time management
"report cards" generated by these programs are the principal determinant of these
law firms' ability to obtain further business from the servicers (id. ).
Speed is of such paramount concern to servicers and their foreclosure law
firms that, given their compulsory use of "default management" programs,
"outside" lawyers have been discouraged or prohibited from initiating verbal
5
communication with employees of the servicers. A87-A88. Some judges familiar
with practices in this industry believe that lenders and servicers, together with their
high-volume foreclosure law firms, have fostered a corrosive "assembly line"
culture of practicing law. A88 n.174.
3
Uncritical reliance on computer programs dictated by servicer clients is
"essential to the economic structure" of law firms like PHS that employ few
lawyers but have a staggering number of foreclosure cases to prosecute as quickly
as "humanly possible." A55. Loan information provided to PHS comes directly
from its servicer clients via these mandatory "default management" programs. In
the case of CHL and WFB, several federal courts have criticized and sanctioned
PHS's servicer clients for maintaining accounting systems that systematically
produce unreliable and inaccurate information about homeowners' mortgage
accounts, which result in overcharges that "potentially signal billions in improperly
earned revenue." A47-A48, quoting, In re Jones, 418 B.R. 687, 701 n. 59 (Bankr.
E.D.La. 2009), aff'd, 2010 U.S. Dist. Lexis 98127 (E.D. La. Aug. 19, 2010)
4
3
See In re Taylor, 407 B.R. 618, 641 (Bankr. E.D.Pa. 2009), rev'd on other
grounds, 2010 U.S. Dist. LEXIS 16080 (E.D.Pa. Feb. 18, 2010), quoting, In re
Parsley, 384 B.R. 138, 183 (Bankr. S.D.Tex. 2008). The district court's order is
now on appeal to the Third Circuit at Docket No. 10-2154.
4
See also In re Stewart, 2009 U.S. Dist. LEXIS 76851 (E.D. La., Aug. 7, 2009); In
re Stewart, 391 B.R. 327, 340, 342, 351 (Bankr. E.D. La. 2008), aff'd in part,
rev 'd in part on other grounds, 391 B.R. 577 (E.D.La. 2008); In re Haque, 395
6
Motivated by their desire to obtain such revenue through "default service"
fee overcharges, WFB, CHL and their foreclosure law firms also systematically
file and prosecute mortgage foreclosure actions in the absence of any entity with
legal standing to sue. A20-A21; A49-A54; A69-A84.
5
In these instances, WFB,
CHL and PHS willfully fail to undertake time-consuming factual investigations to
determine ownership of borrowers' mortgages; because these mortgages are
frequently bought and sold to investors as collateralized debt obligations
("CDOs"),
6
even a diligent investigation may be insufficient to demonstrate a
proper chain of title to a mortgage from a loan originator to a trustee acting on
behalf of CDO investors.
7
Seizing their chance to make fast profits from
foreclosure cases, WFB, CHL and PHS disregard legal requirements and
B.R. 799, 803, 804, 805 (Bankr. S.D. Fla. 2008). In re Jones, 366 B.R. 584
(Bankr.E.D.La. 2007); In re Jones, 2007 WL 2480494 (Bankr. E.D.La.2007).
5
See, e.g., In re Foreclosure Cases, 2007 WL 3232430 (N.D. Ohio, Oct. 31,
2007); Wells Fargo v. Janosik, No. GD08-2561 (Pa. C.P. Allegheny Co., Mar. 23,
2009), Slip.Op. at 5, citing, Wells Fargo v. Long, 934 A.2d 76 (Pa. Super. 2007),
aff'd, 970 A.2d 488 (2009); U.S. Bank, NA. et. al. v. Ibanez et. al., No.08 MISC
38675517; LCR 679; 2009 Mass. LCR LEXIS 134, at *61-62 (Mass. Land Court,
Oct. 14, 2009).
6
In re Nosek, 386 B.R. 374, 382 (Bankr. D. Mass 2008), modified, 609 F.3d 6 (1st
Cir, 2010).
7
Navarro Sav. Ass'n v. Lee, 446 U.S. 458, 461 (1980) (real party in interest is
trustee).
7
manufacture and file false affidavits and mortgage assignments that operate as a
fraud on homeowners and the courts. A20-21; A68-A84.
Facts Alleged in the PAC
The facts alleged in the PAC demonstrate the precise manner in which
appellant-homeowners have been harmed by the above-described pattern of
foreclosure abuses by WFB, CHL and PHS. Acting for the benefit of itself and
servicer clients like WFB and CHL, PHS inflates or manufactures mortgage
foreclosure costs on an institutionalized basis and in virtually identical ways. ASS-
A68.
Homeowners delinquent in paying their mortgages and desiring to stay in
their homes must "cure" their delinquencies and pay what is known as
"arrearages," the actual amount of money overdue on their loans, including the
mortgagees' reasonable costs of foreclosure proceedings. ASO. In calculating
arrearages allegedly due from homeowners who keep their houses through loan
modifications or bankruptcy filings (or the amount deducted from proceeds of
borrowers' houses sold below fair market value in distress sales), PHS, WFB and
CHL systematically "pile on" overstated and manufactured fees, making it more
difficult for struggling families to stay in their homes and out of poverty. A41-
A49; ASS-A68.
There are common ways that PHS, WFB and CHL pile on foreclosure fees.
8
Expanding upon their initial circumscribed Complaint (A127-A169), the
homeowners named as plaintiffs in the PAC detail the fraudulent scheme in which
PHS and/or its clients systematically misappropriate sheriffs' deposit refunds that
are wrongfully included in arrearages charged to bankrupt and non-bankrupt
homeowners alike. The PAC itemizes the precise dates in which PHS obtained
sheriffs' refunds, the exact amount of the refunds improperly withheld from the
homeowners' accounts, and the results of an empirical investigation undertaken by
the homeowners' counsel that demonstrates the existence of an institutionalized
course of unlawful conduct undertaken by PHS and/or its clients. A55-A63.
None of these allegations involving non-bankrupt homeowners were
addressed by the court below.
The PAC also details the manner in which PHS uses owned and controlled
affiliates - misleadingly termed "vendors" - as a vehicle for inflating and
fabricating charges relating to title searches, appraisals, litigation "support"
services, and property inspection and maintenance services. A63-A68. The PAC
further documents how PHS and its clients conceal their piled-on overcharges
through arrearage statements that are, by calculated design, so uninformative and
cryptic they cannot be understood. A66. The PAC also documents the amount and
similar manner in which these overcharges are reflected in appellant-homeowners'
own arrearage statements. A67.
9
None of these allegations were addressed by the court below.
With particularity, the PAC demonstrates that PHS, on behalf ofWFB, filed
foreclosure complaints against appellant Gerald A. Bender in Pennsylvania and
putative class representatives Charles and Diane Giles in New Jersey in the
absence of any entity with legal standing to sue. A69-A79. The PAC alleges that
the foreclosure complaints against these homeowners were accompanied by
certifications by PHS lawyers, who swore falsely under oath that Wachovia Bank
was the proper party to these cases, which were brought by PHS almost two years
after Wachovia divested itself of any interest in the homeowners' mortgages. A69-
A70; A74-A78. To cover up its misrepresentations to the courts, PHS procured and
filed with county land recording agencies bogus mortgage assignments purporting
to show that W achovia was the record owner of the mortgages during the pendency
of the foreclosure proceedings. A71-A72; A75-A76. Even after PHS was informed
by a vice president and assistant general counsel of Wachovia that Wachovia had
no ownership interest in the Giles' mortgage (A77-A78; A335), PHS continued to
represent itself as Wachovia's counsel in subsequent legal proceedings involving
the same pool of mortgages comprising a CDO investment in which Wachovia had
years before relinquished legal interest as trustee. A79-A80; A329-335.
The PAC also identifies a lawsuit entitled Bank of New York v. Ukpe
(Docket No. F-10209-08 (N.J. Ch. Ct. Atlantic County) in which (1) an "in-house
10
notary" for a company owned and controlled by PHS "testified during deposition
that over the previous three years, he falsely acknowledged tens of thousands of
mortgage assignments for [PHS]" (A81-A82); (2) the New Jersey state court judge
adjudicating that litigation called for a "plenary hearing" to "get to the bottom of
what it viewed as a possible systemic problem involving the alleged false
notarization of assignments in which a [PHS] lawyer played a central role in the
process" (A83); and (3) after the state judge alerted other members of the New
Jersey judiciary about falsified mortgage assignments associated with PHS
foreclosure cases, PHS's senior partner sent an ex parte letter to the judge notifying
him that PHS had at its own expense re-executed and re-recorded 2,921 mortgage
assignments notarized by the employee who testified about his employer's false
notarization practices. A83.
None of the foregoing matters were addressed by the court below. In their
motion for leave to file the PAC, the homeowners invited the court below to
review a compendium of 36 exhibits that substantiated their allegations. Al70. The
court below did not review those exhibits.
Independent Confirmation of Abusive Foreclosure Practices
A few months after the homeowners filed their motion for leave to file the
PAC, the identical pattern of foreclosure abuses identified in the PAC began to
receive overdue national attention.
11
On June 7, 2010, the Federal Trade Commission ("FTC") announced that it
filed a Complaint against CHL and entered into a Consent Judgment under which
CHL agreed to pay $108 million to resolve charges that it systematically
imposed false and excessive "default-related fees" upon distressed homeowners, in
part through a "so-called 'vertical integration' strategy" in which CHL used its
own "default services subsidiaries" that "exist[ ed] solely to generate revenue" for
CHL.
8
Al75-A215. (This same "strategy" was used by PHS for the same improper
revenue generation purpose (A63-A66); at least one affiliated company controlled
by PHS functioned as a "vendor" to one of the CHL subsidiaries identified by the
FTC. A66 n.lll. Default-related fees charged to thousands of class member
homeowners were thus unlawfully multiplied by both CHL and PHS).
In a public statement announcing his agency's Consent Judgment, FTC
Chairman Jon Leibowitz characterized CHL 's institutionalized misbehavior as
8
As part of the FTC's Consent Judgment, CHL agreed to make changes to its
flawed accounting systems and to submit to independent oversight of its efforts to
remedy the improprieties identified by the FTC. Al88-Al89. This equitable relief
parallels what the homeowners sought previously in the PAC. A215-A216. Upon
announcement of the FTC settlement, the U.S. Department of Justice's Office of
the United States Trustee discontinued numerous bankruptcy court proceedings
against CHL, some of which were identified in the PAC. A215-A216; A41-A43.
While PHS and WFB are not party to the FTC action, serious questions remain
about the limitations of that settlement and extent to which defrauded homeowners
are compensated for losses caused by CHL' s wrongful conduct.
12
"callous conduct [that] took advantage of consumers already at the end of their
financial rope" (A219). The Chairman explained (A220):
Countrywide took advantage of homeowners in . . . utterly
unprincipled ways. First, when homeowners fell behind in their
payments, Countrywide overcharged them for default-related
services, like property inspections, dramatically marking up the
actual cost of those services. It did this by creating affiliated
companies, companies that it controlled, which in tum hired
third-party vendors to perform the services, and the affiliates
added a big markup, 1 00%, 200%, 400%, sometimes even more
to what the services cost. Countrywide, of course, passed on
those marked-up fees to borrowers. . .. All of this was part of
what Countrywide called its "counter-cyclical diversification
strategy," which really is just a euphemism for a business model
based on deceit, designed to ensure a steady stream of fees over
the entire lifetime of a loan and illegally extract the last dollar
out of the pockets of the most desperate consumers ....
During chapter 13 bankruptcy cases, Countrywide made
inaccurate claims about amounts that homeowners allegedly
owed. Countrywide's outdated computer systems have made the
records incredibly difficult to sort out, but we believe thousands
of consumers in bankruptcy, and maybe more, ended up
overpaying .... That is not only wrong, it is unacceptable."
On June 9, 2010, the homeowners brought the FTC/CHL Complaint and
Consent Judgment and Order to the attention of the court below through the filing
of a Notice (1) asserting that the Consent Judgment and Order are "relevant" both
to the pending motion for leave to amend and to the substantive allegations of the
PAC (which included specific allegations against CHL necessitating its joinder as a
defendant in this litigation) (A171-A172) and (2) invited the court below to
13
compare the allegations in the FTC's Complaint with specifically enumerated
allegations in the earlier-filed PAC. Al72.
In an Order dated June 11, 2010, the court below directed PHS to file a brief
"limited to the issue of what effect, if any, the [Notice] should have on their
pending Motion to Dismiss.'' A235. On July 14, 2010, the court below entered the
Order now under appeal, stating in its memorandum opinion "that the contents of
[the FTC/CHL Consent Judgment and Order] do not affect the findings set forth
herein regarding Defendants' Motion to Dismiss." A13 n.7.
The court below did not address the homeowners' request for consideration
of the direct relevance of the Consent Judgment and Order to their motion for leave
to file the PAC.
Pursuant to Fed. R. Evid. 201 (f), the Court may also take judicial notice that,
m October 2010, following disclosures that mortgage servicers systematically
submitted false affidavits and other documents signed by persons without
knowledge of the facts, law enforcement agencies throughout the United States
have begun investigations into fraudulent practices in the foreclosure industry.
Investigations are now being conducted by ( 1) a coordinated group of 50 state
attorneys general and regulators (A236-A238); (2) the Financial Fraud
Enforcement Task Force and 20 federal agencies led by the U.S. Justice
Department, including the Federal Housing Administration, the Federal Housing
14
Finance Agency and the Office of the Comptroller of the Currency (A239-240);
and (3) the Federal Reserve System and the Federal Deposit Insurance
Corporation. A241-A242.
In the words of Shaun Donovan, U.S. Secretary for Housing and Urban
Development, "shameful" foreclosure practices that have "rightly outraged the
American people" are "issue priority number one" to "the broadest coalition of law
enforcement, investigatory and regulatory agencies ever assembled to combat
fraud." A23 9.
SUMMARY OF ARGUMENT
The court below abused its discretion by denying the homeowners' motion
for leave to file the PAC because, in making only a passing reference to its
"reasons" for dismissing the more circumscribed original Complaint (and by
ignoring the more pervasive unlawful conduct alleged the PAC), the lower court
failed to provide any 'justifying reason" supporting its denial, as was required by
Farnan v. Davis, 371 U.S. 178, 182 (1962) and In re Burlington Coat Factory Sec.
Litig., 114 F.3d 1410, 1434 (3d Cir. 1997) (Alito, J.).
In dismissing the homeowners' original Complaint with prejudice, the court
below also erred as a matter of law in concluding that PHS has no legal duty to
amend bankruptcy proofs of claim to ensure that claims against mortgage
borrowers are accurately reported. The lower court failed to recognize, much less
15
consider, legal authority that confirms explicitly that such a duty exists. See
Hannon v. Countrywide, 421 B.R. 728, 733-74 (Bankr. M.D. Pa. 2009), Hannon v.
Countrywide, 2010 Bankr. LEXIS 3690, at *1 (Oct. 28, 2010 Bankr. M.D. Pa.); In
re Stewart, 2008 Bankr. LEXIS 3226, at *9-10, 11 (Bankr.E.D.La. October 14
2008).
The court below also erred as a matter of law in concluding that the
Bankruptcy Code precludes consideration of FDCP A lawsuits by bankrupt
individuals alleging institutionalized debt collection abuses. While there is a split
of authority concerning Bankruptcy Code "preclusion" of FDCP A claims
generally, this Court should adopt the reasoning of the Seventh Circuit in Randolph
v. IMBS, Inc., 368 F.3d 726, 730-33 (7th Cir. 2004). There, the Hon. Frank H.
Easterbrook noted that "operational differences" between the Bankruptcy Code and
FDCP A do not "add up to irreconcilable conflict," but they are instead overlapping
statutes that can be simultaneously enforced.
The Seventh Circuit's reasoning is particularly sound in cases like this
involving systematic debt collection abuses that are not addressed effectively by a
bankruptcy system designed to provide a "simple" way to achieve "claim
resolution" of "very unimpressive amounts" through "reduced judicial labor."
Williams v. Asset Acceptance, LLC, 392 B.R. 882, 883-84 (Bankr. M.D. Fla.
16
2008).
9
Preclusion of such FDCP A claims by the Bankruptcy Code would
undermine the purposes of the FDCP A to "eliminate abusive debt collection
practices, to ensure that debt collectors who abstain from such practices are not
competitively disadvantaged, and to promote consistent state action to protect
consumers." Jerman v. Carlisle, McNellie, Tini, Kramer & Urlich LPA, 130 S. Ct.
1605, 1608 (2010).
ARGUMENT
I. THE COURT BELOW ABUSED ITS DISCRETION BY DENYING
THE HOMEOWNERS' MOTION FOR LEAVE TO FILE THE PAC
In denying the homeowners' motion for leave to amend without addressing
the allegations in the PAC, the court below abused its discretion and abdicated its
judicial responsibilities.
Leave of the court to file amended pleadings must be freely given when
justice requires. Fed. R. Civ. P. 15(a). While district courts have discretion in
considering Rule 15(a) motions, that discretion is limited by an "amendment
philosophy" that is so "liberal" that a "district court may deny leave to amend only
if a plaintiffs delay in seeking amendment is undue, motivated by bad faith, or
9
See, e.g., In re Jones, 418 B.R. 687, 698-99 (Bankr. E.D. La. 2009); McDermott
v. Countrywide Home Loans, Inc., Case No. 07-51027, Adv. No. 08-5031 (Bank.
N.D. Ohio, Slip. Op. dated July 31, 2009) (A341-A350), rev'd, 426 B.R. 267 (N.D.
Ohio 2010); In re Taylor, 407 B.R. 618, 623, 639, 649 and 651 (Bankr. E.D.Pa ..
2009), rev 'd, 2010 U.S. Dist. LEXIS 16080 (E.D.Pa. Feb. 18, 2010); Katherine
Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Texas L.
Rev. 121, 124 (2008).
17
prejudicial to the opposing party" or if the proposed amendment "fails to state a
cause of action." Adams v. Gould, Inc., 739 F.2d 858, 864 (3d Cir. 1984) (and
cases cited therein).
This "strong liberality" has been emphasized by this Court to ensure that
"claim[s] will be decided on the merits rather than on technicalities." Dole v. Area
Chemical Co., 921 F.2d 484, 486-87 (3d Cir. 1990), citing, Bechtel v. Robinson,
886 F.2d 644 (3d Cir.1989) and Heyl & Patterson Int'l, Inc. v. F.D. Rich Housing,
663 F.2d 419, 425 (3d Cir.1981). See also Hoffmann-La Roche Inc. v. Cobalt
Pharmaceuticals, Inc., 2010 U.S. Dist. LEXIS 79114, at *5 (D.N.J. Aug. 5, 2010),
quoting, Del Sontro v. Cendant Corp., 223 F. Supp. 2d 563, 576 (D.N.J. 2002)
("[a] general presumption exists in favor of allowing a party to amend its
pleadings").
In denying appellant homeowners leave to file the PAC, the court below
offered no coherent explanation of its decision, stating instead cryptically (A4):
Subsequent to the conclusion of briefing regarding
Defendants' Motion to Dismiss, Plaintiffs filed a Motion
for Leave to File Amended Complaint (Doc. No. 8) and
Defendants filed an Opposition thereto (Doc. No.9). This
Court has reviewed same and is of the opinion that in
light of the reasons for granting Defendants' Motion to
Dismiss, amendment would be futile.
In reaching this decision, the court below did not consider the homeowners'
proposed 14-page reply brief that directly addressed each argument made by PHS
18
in its 27-page opposition to the filing of the PAC, including charges that the
homeowners' counsel acted in bad faith and with undue delay in asserting claims
unrelated to the bankruptcy issues raised in the original Complaint.
10
A242-A308.
By denying the homeowners leave to file the PAC as "futile" in such an off-
handed and unreflective manner, the court below committed reversible error.
As the Supreme Court held in Foman v. Davis, 371 U.S. 178, 182 (1962),
"outright refusal to grant the leave without any justifying reason appearing for the
denial is not an exercise of discretion; it is merely abuse of that discretion and
inconsistent with the spirit of the Federal Rules." See also 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).
Two weeks after it summarily denied the homeowners' motion for leave to
file the PAC, the lower court described the same controlling legal standards that it
ignored in this litigation. In Franks v. Food Ingredients International, Inc. 2010
WL 3046416, at *7, *8 (E.D.Pa., July 30, 2010) (Jones, J.), citing, In re Burlington
Coat Factory, 114 F.3d at 1435, the court below said it was "cognizant" of the
10
On February 7, 2010, pursuant to the lower court's chambers policies and
procedures, the homeowners filed a motion requesting permission to file the
proposed reply brief. A312-A337. The court below did not grant the motion,
although it earlier allowed PHS to file a reply brief in further support of its motion
to dismiss. A338.
19
Third Circuit's "mandate" to "clearly articulate its grounds for denying leave to
amend" because of "the need to avoid dismissing a possibly meritorious claim
based on defects in the pleadings, particularly in a fraud case."
The court below paid no attention to that mandate here.
The lower court's failure to more than superficially address the
homeowners' Rule lS(a) motion is especially egregious because its denial of the
motion was predicated on a finding that all claims in the PAC are "futile."
"Futility" means that an amended complaint would fail to state a claim upon which
relief could be granted, an assessment that requires a district court to apply the
same standard of legal sufficiency as applies under Rule 12(b )( 6). In re Burlington
Coat Factory, 114 F.3d at 1434.
Given the liberal standard for the amendment of pleadings, "courts place a
heavy burden on opponents who wish to declare a proposed amendment futile" and
"[i]f a proposed amendment is not clearly futile, then denial of leave to amend is
improper." Romero v. Allstate Insurance Co., 2010 WL 2996963, at *4 (emphasis
in original; citations omitted). Before a district court can deny a motion to amend a
complaint on futility grounds, it must "determine whether the newly asserted
claims 'appear to be sufficiently well grounded in fact or law that it is not a
frivolous pursuit.'" Ndubizu v. Drexel University, 2009 U.S. Dist. LEXIS 99966,
20
at * 10 (E.D. Pa. Oct. 26, 2009), quoting, Harrison Beverage Co. v. Dribeck
Importers, Inc., 133 F.R.D. 463, 468-69 (D. N.J. 1990).
The court below failed to make any determination necessary to a finding of
futility. Because the PAC is not remotely frivolous, ll the lower court should have
granted the homeowners' motion to amend.
II. THE COURT BELOW ERRONEOUSLY DISMISSED
THE HOMEOWNERS' ORIGINAL COMPLAINT
A. Bankruptcy Creditors Have A Duty to Amend Inaccurate Claims
In dismissing the homeowners' original Complaint with prejudice, the
district court erred as a matter of law in concluding that PHS has no legal duty to
amend bankruptcy proofs of claim to ensure that claims against mortgage
borrowers are accurately reported.
While the court below discussed Hannon v. Countrywide, 421 B.R. 728
(Bankr. M.D. Pa. 2009) in its opinion (A1 0-All ), it overlooked the central holding
of that case: A mortgagee does have an affirmative duty to amend a bankruptcy
proof of claim when it receives a sheriffs refund after an initial claim is filed --
"failure to amend the claim in a timely manner merits reference to the local
United States Attorney to determine whether a violation of 18 U.S.C. 152(4)
has occurred." 421 B.R. at 733-34 (emphasis supplied). See also Hannon v.
II See above at 12-15. See also Young v. Wells Fargo, 2009 U.S. Dist. LEXIS
100419 (S.D. Iowa Oct. 27, 2009).
21
Countrywide, 2010 Bankr. LEXIS 3690, at* 5-6 (Bankr. M.D. Pa. Oct. 18, 2010)
("Hannon II) (permitting CHL to withdraw allegedly "unauthorized" stipulation by
outside counsel who, "for reasons unknown," admitted that CHL "had no
procedure to amend proofs of claim after credits were received" -- an admission
that the bankruptcy court deemed to be a concession of "actual reprehensible
conduct" that could be "devastating" to CHL given the potential criminal
consequences of a violation of 18 U.S.C. 152(4)).
While the court below stated that the homeowners "fail[ ed] to provide any
legal basis" in support of their contention that PHS had a duty to amend its proof
of claim (A9-A10), the homeowners not only brought the Hannon decision to the
lower court's attention (A339-A340), but both the PAC and their proposed reply
brief in support of their motion to amend (which the court below did not consider,
see above at 19 and n.1 0) highlight authority that expressly holds that creditors do
have a duty to amend proofs of claim. A61, citing, In re Stewart, 2008 Bankr.
LEXIS 3226, at *9-10, 11 (Bankr.E.D.La. October 14 2008) ("[I]t is incumbent
upon Wells Fargo to correct its error for all affected debtors. To do otherwise is to
ignore its obligation to correct pleadings that are no longer accurate").
12
12
In deciding that creditors have no duty to correct inaccurate bankruptcy claims,
the court below relied inappropriately on In re Callery, 274 B.R. 51, 56 (Bankr. D.
Mass. 2002) (AlO), which held only the Internal Revenue Service could file an
amended proof of claim that increased a debtors' tax obligation after expiration of
the bar date. In re Callery, 274 B.R. at 55-56. The issue in Callery was narrow and
22
B. The U. S. Bankruptcy Code Does Not Preclude FDCPA Lawsuits
Brought to Remedy Institutionalized Debt Collection Abuses
A split of authority exists among the circuits concerning whether the
Bankruptcy Code precludes judicial consideration of FDCP A claims asserted by
bankrupt individuals. Dougherty v. Wells Fargo Home Loans, Inc., 425 F.Supp 2d
599, 604 (E.D.Pa. 2006).
The Ninth and Second Circuits hold that bankruptcy court procedures
provide the sole avenue of relief for bankrupt persons. Walls v. Wells Fargo Bank,
N.A., 276 F.3d 502, 510 (9th Cir. 2002); Simmons v. Roundup Funding, LLC, 622
F.3d 93, 95-96 (2d Cir. 2010).
The Seventh Circuit holds that the Bankruptcy Code has no preclusive
effect on claims asserted by bankrupt debtors under the FDCP A because
precise; the bankruptcy court there did not purport to "effectively summarize[ e] the
law regarding amendment of a Proof of Claim" in any universal sense. A 10.
The court below also misunderstood the significance of a 1996 amendment to 15
U.S.C. 1692e(ll), which exempted legal pleadings from the FDCPA's
requirement that initial communications from debt collectors must disclose their
potential consequences. Azzam v. Echehoyen, 2010 Md. Cir. Ct. LEXIS 2, at *6-7
(Md. App. Mar. 15, 2010) (cited by court below at A9). The lower court concluded
that the 1996 amendment to Section 1692e(11) of the FDCPA "superseded" the
U.S. Supreme Court's holding in Heintz v. Jenkins, 514 U.S. 291, 292 (1995) that
"the term 'debt collector' in [the FDCPA] applies to a lawyer who 'regularly,'
through litigation, tries to collect consumer debts." (emphasis in original). The
1996 amendment did not change application of Heintz in any context beyond
Section 1692e(ll). See Rosenau v. Unifund Corp., 539 F.3d 218, 223 (3d. Cir.
2008).
23
"operational differences" between the bankruptcy code and FDCP A do not "add up
to irreconcilable conflict," but they are instead overlapping statutes that can be
simultaneously enforced. Randolph v. IMBS, Inc., 368 F.3d 726, 730-33 (7th Cir.
2004).
13
As the court below noted, "there is no Third Circuit precedent involving
exactly the same factual scenario that exists herein." A13.
Courts following the approach taken by the Ninth Circuit have concluded
that "[t]he FDCP A is designed to protect defenseless debtors and to give them
remedies against abuse by creditors. There is no need to protect debtors who are
already under the protection of the bankruptcy court ... " Simmons, 622 F .3d at 95-
96 (and cases cited therein). These courts also say that preclusion is necessary to
dissuade debtors from "bypassing" the bankruptcy court's proof of claim process,
which is described as a "simple" way to achieve "claim resolution" of "very
unimpressive amounts" through "reduced judicial labor." Williams v. Asset
Acceptance, LLC, 392 B.R. 882, 883-84 (Bankr. M.D. Fla. 2008); Walls, 276 F.3d
13
See also Bacelli v. St. Joseph's Hospital, Inc., 2010 U.S. Dist. LEXIS 75926, at
*19-22 (M.D. Fla. July 28, 2010); Clarke v. Brumbaugh & Quandahl, P.C., 2010
WL 3190587, at *3-5 (D. Neb. Aug. 12. 2010); Kline v. Mortgage Electronic
Security Systems, Inc., 2009 WL 3064660, at *15-16 (S.D. Ohio Sept. 21, 2009)
(citing Carcieri v Salazar, 129 S.Ct. 1058 (2009), Evans v. Midland Funding LLC,
574 F.Supp.2d 808 (S.D. Ohio 2008) and In re Gunter, 334 B.R. 900 (Bankr.
S.D.Ohio 2005)); Bagwell v. Portfolio Recovery Associates, LLC, 2009 WL
1708227, at *1-2 (June 5, 2009 E.D.Ark.); Price v. America's Servicing Co., 403
B.R. 775, 790 n.14 (Bankr. E.D.Ark. 2009)
24
at 510. The rationale of these courts is that debtors should not use the FDCP A to
"make a mountain out of a molehill" that can be more "efficiently" traversed
through ordinary bankruptcy procedures. Williams, 392 B.R. at 883
The systematic theft of sheriffs refund scheme alleged in the original
Complaint is not a "simple" matter involving an insignificant claim of a single
debtor, nor is there anything simple about the facts underlying the institutionalized
unlawful conduct alleged or the burden assumed by debtors in proving those facts.
See Hannon II, 2010 Bankr. LEXIS 3690, at *5-6 (proof demonstrating
institutionalized failure to maintain "procedures regarding amendment of claims"
containing inaccurate sheriffs deposits is a "burdensome" undertaking).
Appellant homeowners' FDCPA strict-liability cause of action
14
does not
involve the "unimpressive amounts" typically at issue in individual bankruptcy
cases. The homeowners' FDCP A claim in this proposed class action (if established
by evidence obtained through discovery that has been denied by the lower court
(A9)) would subject PHS to statutory damages in the lesser amount of $500,000 or
1% of PHS's net worth, plus attorneys' fees and litigation costs. 15 U.S. C.
1692k(a).
14
Unless a debt collector establishes a bona fide error defense, the FDCP A
"creates a strict-liability rule. Debt collectors may not make false claims, period."
Randolph, 368 F.3d at 730.
25
Ordinary bankruptcy procedures, designed to reduce "judicial labor" in the
administration of crowded bankruptcy dockets, cannot and do not provide an
"efficient" remedy for the same institutionalized pattern of "actual reprehensible
conduct" that so offended the court in Hannon that it took the unusual step of
referring CHL's perceived "failure to maintain a procedure for adequately
identifying and disclosing a credit to a proof of claim" to the Office of U.S.
Attorney for potential criminal prosecution. Hannon II, 2010 Bankr. LEXIS 3690,
at *4-5.
Despite the fact that the district court in Hannon went outside the
bankruptcy system in search of justice for the same misconduct alleged in the
original Complaint, the court below cited Hannon for the proposition that the "sole
remedies" available to appellant-homeowners for PHS's systematic misconduct are
provided by bankruptcy law, in particular Rule 9011 of the Federal Rules of
Bankruptcy Procedure (sanctions for bad faith conduct) and Section 105(a) of the
Bankruptcy Code (bankruptcy judges power to prevent abuse of process). A9.
However, as the court in Hannon observed, Rule 9011 may not be "'up to
the task' of providing sufficient authority to compel a claimant to keep their Proofs
of Claim updated." Hannon, 421 B.R. at 734. At the same time, it is established
jurisprudence in this Circuit that Section 1 05(a) "has a limited scope," "does not
'create substantive rights that would otherwise be unavailable under the
26
Bankruptcy Code''' and "does not afford debtors a private cause of action."
Joubert v. ABN AMRO Mortgage Group, Inc., 411 F.3d 452, 455 (3d Cir.2005).
Nor did the court below have a basis for concluding that appellant
homeowners tried to "bypass" the bankruptcy proof of claim process by filing this
proposed class action in district court. A1 0. The proof of claim process was used in
the homeowners' individual bankruptcy cases through the filing of appropriate
objections to PHS's false claims. A143-146; A57-A61. Only after such objections
were made and/or after this litigation was initiated did PHS belatedly withdraw
those false claims. In doing so, PHS recognized that its individual violations of the
FDCP A had been discovered and that its systematic violations of the FDCP A
would soon be exposed through prosecution of this action. The homeowners did
not bring their FDCP A claims in district court to obtain an adjustment of amounts
owed to their mortgagees, which is the purpose of the proof of claim process.
Instead, they commenced this lawsuit on behalf of a class to serve the different
purpose of asserting a statutory right to redress PHS's institutionalized debt
collection abuses.
As Judge Easterbrook held in Randolph, 368 F .3d at 730, the statutory
purposes of the FDCP A and the Bankruptcy Code can be easily reconciled because
"[i]t is easy to enforce both statutes, and any debt collector can comply with both
simultaneously."
27
For cases involving institutionalized violations of the FDCP A like this one,
the Bankruptcy Code does not provide an effective remedy. In the words of one
court, "debtors simply do not have the personal resources to demand much less
verify the production of a simple accounting for their loans through a (bankruptcy]
litigation process." In re Jones, 418 B.R. 687, 699 (Bankr. E.D.La. 2009). See also
Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87
Texas L. Rev. 121, 124 (2008) (empirical study, funded by the National
Conference of Bankruptcy Judges' Endowment for Education, documenting
"systemic failure of the [bankruptcy] claims process to ensure that mortgage
creditors are collecting only what they are legally owed").
The practical difficulties faced by bankruptcy courts m addressing
institutionalized misconduct are illustrated in McDermott v. Countrywide Home
Loans, Inc., Case No. 07-51027, Adv. No. 08-5031 (Banlc N.D. Ohio, Slip. Op.
dated July 31, 2009) (A341-A350), rev 'd, 426 B.R. 267 (N.D. Ohio 201 0).
15
There,
15
Those same problems and difficulties are echoed in In re Taylor, 407 B.R. 618,
623, 639, 649 and 651 (Bankr. E.D.Pa .. 2009), rev'd, 2010 U.S. Dist. LEXIS
16080 (E.D.Pa. Feb. 18, 2010), where the bankruptcy court held four evidentiary
hearings and wrote a 58-page opinion explaining why sanctions were needed to
deter misconduct of a high-volume foreclosure firm that, on a "systemic" basis,
misrepresented information about borrowers' accounts because of its "slavish
adherence" to its servicer clients' "computer driven models" in a manner that
"offends the integrity of our bankruptcy system." Although the district court noted
that the "frustrations of the Bankruptcy Court are understandable," it believed that
imposition of sanctions was inappropriate. 2010 U.S. Dist. LEXIS, at *8. The
decision is now on appeal to this Court at Docket No. 10-2154.
28
after conducting trials on liability and remedial issues, the bankruptcy court
sanctioned CI-ll- under Rule 9011 for demonstrating repeated "disregard for
diligence and accuracy" through the "filing proofs of claim . . . designed to allow
each actor in the process to act with indifference to the truth." A348.
On appeal, the district court reversed the bankruptcy court's sanction order
because, while the bankruptcy court was "genuinely frustrated with what [it]
perceives as a systemic problem in the entire mortgage servicing industry," the
district court found insufficient evidence to support findings about CHL' s
institutionalized misconduct. 426 B.R at 281. Three months later, however, in an
action filed in the District Court for the Central District of California rather than
bankruptcy court, CHL agreed to a Consent Judgment resolving the FTC's charges
that CHL on an institutionalized basis improperly misused the bankruptcy system
to assert fraudulent claims against bankrupt homeowners (see above at 12-14).
Far from undermining the Bankruptcy Code, the FDCP A provides a vital
complement to it. Some courts say that because one of the FDCPA's goals is to
help consumers "avoid bankruptcy," it follows that the Bankruptcy Code precludes
FDCPA claims. See above at 24-25. However, the more overarching legislative
purposes of the FDCP A suggest the opposite conclusion.
The FDCPA's was enacted to "eliminate abusive debt collection practices,
to ensure that debt collectors who abstain from such practices are not competitively
29
disadvantaged, and to promote consistent state action to protect consumers. 15
U.S.C. 1692(e)." Jerman v. Carlisle, McNellie, Tini, Kramer & Urlich LPA, 130
S. Ct. 1605, 1608 (2010). This law is enforced through private lawsuits. Jerman,
130 S. Ct. at 1609. The "FDCPA is a remedial statute, and courts are to construe its
language broadly to effect its purposes." Holmes v. Mann Bracken LLC, 2009 U.S.
Dist. LEXIS 119940, at *25 (E.D. Pa. Dec. 22, 2009), citing, Brown v. Card
Service Center, 464 F.3d 450, 453 (3d Cir. 2006).
Given the unsuitability of bankruptcy procedures, preclusion of FDCP A
claims in this limited context would deny debtors harmed by institutionalized
misconduct their statutory right to vindicate the public policy of eliminating debt
/ collection abuses. Nothing in the Bankruptcy Code compels this result.
CONCLUSION
For all of the above reasons, appellant homeowners respectfully request this
Court to reverse the lower court's Order dated July 14, 2010 in its entirety.
Dated: December 6, 2010
30
Respectfully submitted,
BHNLAWFIRM
By: Is/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
CERTIFICATE REGARDING BAR MEMBERSIDP
The undersigned attorney is a member of the bar of the Third Circuit of
Appeals.
Dated: December 6, 20 1 0
31
Is/John G. Narkin
John G. Narkin
CERTIFICATE OF COMPLIANCE
The undersigned attorney respectfully certifies that his brief complies with
the type-volume limitation of Fed. R. App. P. 32(a)(7)(A) because this brief
contains 30 pages.
Dated: December 6, 2010
32
Is/John G. Narlcin
John G. Narkin
CERTIFICATE IDENTICALNESS
The undersigned attorney respectfully certifies that the PDF file and the hard
copies of the OPENING BRIEF OF APPELLANT are identical.
Dated: December 6, 20 1 0
33
Is/John G. Narkin
John G. Narkin
CERTIFICATE OF VIRUS CHECK
The undersigned attorney respectfully certifies that a v1rus check was
performed upon this document on December 6, 2010, with TREND MICRO Office
Scan software.
Dated: December 6, 20 1 0
34
Is/John G. Narkin
John G. Narkin
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No.l0-3134
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 December
6, 2010, I caused to be filed (electronically,
electronic_briefs@ca3.uscourts.gov and 10 copies by Federal Express) and
served the foregoing
APPELLANT'S OPENING 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, P A 19102
35
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No.l0-3134
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' APPENDIX VOLUME I
JOHN G. NARKIN
BHNLAWFIRM
951 Rohrerstown Road, Suite 102
Lancaster, Pennsylvania 17601
(717) 756-0835
Attorneys for Plain tiffs-Appellants
TABLE OF CONTENTS
VOLUME I
Table of Contents ............................................................................. .i
Notice of Appeal. ............................................................................ Al
Order ........................................................................................... A4
Memorandum ................................................................................ A6
VOLUME II
Table of Contents ............................................................................. .i
Amended Complaint ...................................................................... Al4
VOLUME III
Table of Contents ............................................................................. .i
Amended Complaint (con'td) .......................................................... Al85
Case 5:09-cv-01302-CDJ Document 17 Filed 08/12/1 0 Page 1 of 5
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
DENNIS A. RHODES,
GERALD A. BENDER and
EDWARD H. WOLFERD, JR.,
individually and on behalf of all
others similarly situated,
Plaintiffs,
v.
ROSEMARY DIAMOND, FRANCIS S.
HALLINAN, DANIEL G. SCHMIEG,
LAWRENCE T. PHELAN, JUDITH T.
ROMANO, FRANCIS FEDERMAN,
THOMAS M. FEDERMAN,
PHELAN HALLINAN & SCHMIEG, LLP,
and FEDERMAN & PHELAN, LLP,
Defendants.
Civil Action No. 09-cv-01302-CDJ
JURY TRIAL DEMANDED
NOTICE OF APPEAL TO THE UNITED STATES
COURT OF APPEALS FOR THE THIRD CIRCUIT
Notice is hereby given that plaintiffs Dennis A. Rhodes, Gerald A. Bender and Edward
H. Wolferd, Jr. ("Plaintiffs"), on behalf of themselves and all others similarly situated,
hereby appeal to the United States Court of Appeals for the Third Circuit from the final
order of the District Court for the Eastern District of Pennsylvania, entered on the docket
on July 14, 2010, which (a) dismissed with prejudice Plaintiffs' Complaint filed on
March 25, 2009 (Docket Item No. 1) and (b) denied Plaintiffs' Motion for Leave to
Amend the Complaint filed on January 15, 2010 (Docket Item No. 8). A copy of the
Order appealed from by this Notice (Docket Item No. 16) is attached as Exhibit A.
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Case 5:09-cv-01302-CDJ Document 17 Filed 08/12/1 0 Page 2 of 5
Dated: August 12.2010
Respectfully submitted,
BURKE&HESS
By: lsi Michael D. Hess
Michael D. Hess
951 Rohrerstown Road, Suite 102
Lancaster, Pennsylvania 17601
Telephone: (717) 391-2911
Facsimile: (717) 391-5808
-and-
BHNLAWFIRM
By: JGNS884
John G. Narlcin
951 Rohrerstown Road, Suite 102
Lancaster, Pennsylvania 17601
Telephone; (717) 756-0835
Facsimile: (717) 391-5808
Attorneys for Plaintiffs and the Proposed Classes
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Case 5:09-cv-01302-CDJ Document 17 Filed 08/12/10 Page 3 of 5
EXHIBIT A
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Case Document 17 Filed 08/12/10 Page 4 of 5
Case Document 16 Filed 07/14/10 Page 1 of 1
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
DENNIS A. RHODES; GERALD A.
BENDER; and, EDWARD H. WOLFERD,
JR., individually and on behalf of all others
similarly situated
Plain tiffs,
v.
ROSEMARY DIAMOND; FRANCIS S.
HALLINAN; DANIEL G. SCHMIEG;
LAWRENCE T. PHELAN; JUDITH T.
ROMANO; FRANCIS FEDERMAN;
THOMAS M. FEDERMAN; PHELAN
HALLINAN & SCHMIEG, LLP;
FEDERMAN & PHELAN, LLP
Defendants.
CIVIL NO. 09-1302
ORDER
AND NOW, this 14
11
day of July, 2010, upon consideration of Defendants' Motion to Dismiss (Doc.
No.2), Plaintiffs' Opposition thereto (Doc. No.3), Defendants' Reply (Doc. No.5), Plaintiffs' Notice of
Consent Judgment and Order in the matter of Federal Trade Commission v. Countrywide Home Loans, Inc ..
No. 10-4193(C.D. CaL June 7, 2010) (Doc. No. 12), and Defendants' Supplemental Memorandum ofLaw in
Response thereto (Doc. No. 14), it is hereby ORDERED and DECREED that Defendants' Motion is
GRANTED and Plaintiffs' Complaint is DISMISSED WITH PREJUDICE.
It is further ORDERED and DECREED that Plaintiffs' Motion for Leave to File Amended Complaint
(Doc. No.8) is hereby DENIED AS MOOT.'
BY THE COURT:
/s/ C. Darnell Jones, II J.
1
Subsequent to the conclusion of briefing regarding Defendants' Motion to Dismiss, Plaintiffs filed a
Motion for Leave to File Amended Complaint (Doc. No. 8) and Defendants filed an Opposition thereto (Doc. No.
9). This Court has reviewed same and is of the opinion that in light of the reasons for granting Defendants'
Motion to Dismiss, amendment would be futile.
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Case 5:09-cv-01302-COJ Document 17 Filed 08/12110 Page 5 of 5
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on this 12th day of August 2010, a true and
correct copy of Plaintiffs' Notice of Appeal was served upon all counsel of record via the
Court's ECF system.
lsi Michael D. Hess
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Case 5:09-cv-01302-CDJ Document 15 Filed 07/14/10 Page 1 of 8
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
DENNIS A. RHODES; GERALD A.
BENDER; and, EDWARD H. WOLFERD,
JR., individually and on behalf of all others
similarly situated
Plaintiffs,
v.
ROSEMARY DIAMOND; FRANCIS S.
HALLINAN; DANIEL G. SCHMIEG;
LAWRENCE T. PHELAN; WDITH T.
ROMANO; FRANCIS FEDERMAN;
THOMAS M. FEDERMAN; PHELAN
HALLINAN & SCHMIEG, LLP;
FEDERMAN & PHELAN, LLP
Defendants.
CIVIL NO. 09-1302
MEMORANDUM
Jones, J.
I. Introduction
July 14, 2010
Plaintiffs in the above-captioned matter are homeowners who defaulted on their
mortgages and subsequently filed Petitions for relief under Chapter 13 of the Bankruptcy Code.
Defendants herein are individual attorneys and their law firms, who represent the lenders and are
accused of filing inflated Proofs of Claims in Bankruptcy Court. Plaintiffs allege that said Proofs
of Claims did not reflect refunds of fees paid for Sheriff's Sales on the foreclosed properties that
were postponed by reason of the bankruptcy filings. As such, Plaintiffs - individually and on
behalf of all others similarly situated - have filed a Complaint in this court, asserting violations of
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Case 5:09-cv-01302-CDJ Document 15 Filed 07/14/10 Page 2 of 8
the Fair Debt Collection Practices Act (''FDCPA"), 15 U.S.C. 1692 et seq.; Pennsylvania's Fair
Credit Extension Uniformity Act (''FCEUA''), 73 P.S. 2270 et seq.; (3) Pennsylvania's Unfair
Trade Practices and Consumer Protection Law ("UTPCPL''), 73 P.S. 201 et seq.; and, (4)
common law claims of Tortious Interference with Contractual Relations.
In response to said Complaint, Defendants have filed the instant Motion to Dismiss
pursuant to Fed.RCiv.P. 12(b)(6)(Doc. No.2), asserting in pertinent part that any issues
Plaintiffs may have with the Proofs of Claims that were filed, are issues that must be pursued in
Bankruptcy Court by means of Objections to said Proofs, or Motions for Sanctions. Plaintiffs
oppose said Motion (Doc. No. 3), maintaining that they have pled sufficient facts to sustain their
cause of action in this court.
1
For the reasons set forth hereinbelow, Defendants' Motion will be
granted.
II. Standard of Review
In deciding a motion to dismiss pursuant to Rule 12(b)(6), courts must "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 v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (internal quotation
and citation omitted). After the Supreme Court's decision in Bell Atl. Corp. v. Twombly,
"[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory
statements, do not suffice." Ashcroft v. Iqbal,- U.S.-, 129 S.Ct. 1937, 1949 (2009) (citing
1
Leave was also granted for Defendants to file a Reply Brief (Doc. No. 5). Additionally,
on June 9, 2010, Plaintiffs provided this Court with a Notice of Consent Judgment and Order
filed on June 7, 2010 in the matter of Federal Trade Commission v. Countrywide Home Loans,
Inc., No. 10-4193(C.D. Cal. June 7, 2010) (Doc. No. 12) and pursuant to Order of this Court,
Defendants filed a Supplemental Memorandum of Law in Response (Doc. No. 14).
2
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Case 5:09-cv-01302-CDJ Document 15 Filed 07/14/10 Page 3 of 8
Twombly, 550 U.S. 544, 555 (2007)). "A claim has facial plausibility when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged." Iqbal, 129 S.Ct. at 1949 (citing Twombly, 550 U.S. at 556). This
standard, which applies to all civil cases, "asks for more than a sheer possibility that a defendant
has acted unlawfully." Id. Accord Fowler v. UPMC Shadyside, 578 F.3d 203, 210-211 (3d Cir.
2009) ("All civil complaints must contain more than an unadorned, the - defendant - unlawfully -
harmed- me accusation.") (internal quotation omitted).
Although Plaintiffs herein have provided this Court with an extensive dissertation
regarding their perceived victimization of mortgagees throughout the economic downturn ofthe
past several years, their allegations cannot entitle them to relief in this court.
ill. Discussion
As Defendants properly point out in their Motion to Dismiss, creditors are only required
to file a Proof of Claim which states the amount owed "as of the date of the filing of the
petition." (Defs. Mot. Dismiss 8-11, citing 11 U.S.C. 501(b).) Plaintiffs do not dispute this
statement of bankruptcy law. (Pls. Opp'n Mem. 12.) Plaintiffs' Complaint fails to allege that
Defendants did not file the Proofs of Claims using totals known as of the date of the filing of the
petition - which included initial Sheriff's fees - or that pertinent bankruptcy law required
Defendants to amend the Proofs of Claims. Instead, Plaintiffs claim in pertinent part that
Defendants' failure to timely amend the Proofs in accordance with a representation that they
would do so, was unlawful and entitles Plaintiffs to relief. (Pls. Compl. W59-60.) Despite
Plaintiffs' arguments to the contrary, it is this failure to promptly amend that forms the basis for
all of their claims.
3
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Case 5:09-cv-01302-CDJ Document 15 Filed 07/14/10 Page 4 of 8
Plaintiffs expend much time and energy focusing not only their Complaint, but their
Opposition to Defendants' Motion to Dismiss, on the premise that homeowners all over the
country are being victimized by attorneys such as Defendants, in a systematic scheme to
overcharge debts in bankruptcy proceedings.
2
However, Plaintiffs fail to provide any legal basis
for the one critical component necessary to sustain the particular claims alleged in their
Complaint: the existence of a duty to amend a Proof of Claim. Although Plaintiffs note that
discovery would be helpful regarding the merits of their claims, discovery cannot provide a duty
that does not exist by law. Plaintiffs argue that the authority cited in support of Defendants'
contention that no such duty exists is inapposite to the case at bar, inasmuch as it involves post-
petition payments by a debtor, as opposed to a creditor's claim for debt incurred pre-petition.
2
Plaintiffs cite to the case of Heintz v. Jenkins, 514 U.S. 291, 299 (1995) for the
proposition that the Fair Debt Collection Practices Act "applies to attorneys who 'regularly'
engage in consumer-debt collection activity." (Pls. Compl. ,63.) The Heintz case dealt with the
nature of specific written communications by counsel engaged in debt collections and was
subsequently superseded to the following extent:
In Heintz v. Jenkins, the U.S. Supreme Court held that the term "debt collector"
within the FDCP A applies to lawyers who regularly collect consumer debts
through litigation. One year later, Congress amended FDCPA 1692e(11) to
provide protection to attorneys by exempting any "formal pleading made in
connection with a legal action." 15 U.S.C. 1692e(ll), as amended Pub. L.
104-208, 2305(a), 110 Stat. 3009, 3009-425 (1996). Upon amendment, the
FDCPA now states: The failure to disclose in the initial written communication
with the consumer and, in addition, if the initial communication with the
consumer is oral, that initial oral communication, that the debt collector is
attempting to collect a debt and that any information obtained will be used for that
purpose, and the failure to disclose in subsequent communications that the
communication is from a debt collector, except that this paragraph shall not apply
to a formal pleading made in connection with a legal action (emphasis added).
Azzam v. Echehoyen, 2010 Md. Cir. Ct LEXIS 2, at **6-7 (Md. Cir. Ct. 2010).
4
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Case 5:09-cv-01302-CDJ Document 15 Filed 07/14/10 Page 5 of 8
(Pls. Opp'n Mem. 13 n. 12.) However, Plaintiffs provide no authority in support of their claim.
The Bankruptcy Court for the District of Massachusetts has effectively summarized the
law regarding amendment of a Proof of Claim as it existed in 2002 and still exists today ...
Neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure
address amendments to proofs of claim. Clamp-All Corp. v. Foresta (In re
Clamp-All Corp.), 235 B.R. 137, 140 (BAP 1st Cir. 1999), citing 9 Lawrence P.
King, et al., Collier on Bankruptcy P 3001.01(1] (15th ed. rev. 1999). Prior to the
bar date, amendments to filed proofs of claim are permissible. !d. Amendments to
timely filed defective proofs of claim may be made after the bar date has expired.
Hutchinson v. Otis, Wilcox & Co., 190 U.S. 552, 47 L. Ed. 1179, 23 S. Ct. 778
(1903); In re Stylerite, Inc., 120 F. Supp. 485 (D.N.H. 1954). However, post-bar
date amendments should not be allowed if it is in actuality a new claim against the
estate. In re Clamp-All Corp., 235 B.R. at 140, citing In re Int'l Horizons, 751
F.2d 1213, 1216 (11th Cir. 1985).
In re Callery, 274 B.R. 51, 56 (Bankr. D. Mass. 2002).
Amendment of a Proof of Claim is not mandatory, therefore Defendants' failure to do so -
timely or otherwise - cannot constitute a basis for wrongdoing that would afford Plaintiffs relief
under the FDCRA or any of the other statutory/common law provisions
3
they contend Defendants
have violated. Plaintiffs had an opportunity to object to the disputed Proofs of Claims and their
assertion that doing so would impose an undue burden on them that the filing and litigation of the
instant lawsuit would not, is unfounded.
Even in the event Plaintiffs did not wish to utilize the objection procedure, other options
existed within the appropriate jurisdiction of the Bankruptcy Court which could have served to
remedy their allegations of "inflated" Proofs of Claims. In fact, one such option was discussed in
a decision issued by the United States Bankruptcy Court for the Middle District of Pennsylvania,
3
Plaintiffs' note that "Defendants recognize the interdependence of Plaintiffs' state law
claims with Plaintiffs' claims under the FDCPA." (Pls. Opp'n Mem. 14 n.14.)
5
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Case 5:09-cv-01302-CDJ Document 15 Filed 07/14/10 Page 6 of 8
which Plaintiffs submitted to this Court on March 22, 2010 when they filed a Notice ofRelevant
Authority (Doc. No. 11 ). Similar to the case at bar, In re: Hannon, No. 06-51870 (Bankr. M.D.
Pa. Dec. 18, 2009) involved allegations of an allegedly inflated Proof of Claim which had not
been timely amended to reflect a refund of Sheriffs refunds. Said debtor sought sanctions
against the mortgagee pursuant to Ru1e 9011 of the Federal Rules of Bankruptcy Procedure.
Accordingly, the Bankruptcy Court issued a Rule to Show Cause upon the mortgagee and noted
that in the event Rule 9011 ...
Hannon at9.
. . . [i]s not ''up to the task" of providing sufficient authority to compel a claimant
to keep their Proofs of Claim updated so as to allow the Trustee, or Debtor-in-
Possession, to fairly allocate distributions to those filing proofs ... [Section]
1 05( a) provides the judicial authority to compel a claimant to timely amend a
claim that ought, in good conscience, be reduced because of circumstances such
as the refund at hand.'"'
In this instant matter, Plaintiffs' inclusion of claims under the FDCPA, FCEUA,
UTPCPL, and for Tortious Interference with Contractual Relations, cannot serve to convert this
bankruptcy matter into one that would be proper before this Court:
One of the fundamental purposes of the bankruptcy system is to adjudicate and
conciliate all competing claims to a debtor's property in one forum. Gray-Mapp v.
Sherman, 100 F.Supp. 2d 810, 813 (N.D. lll. 1999); Holloway v. Household
Automotive Finance Corp., 227 B.R. 501, 507-08 (N.D. TIL 1998); Brandt v ..
4
Section 105(a) reads as follows:
The court may issue any order, process, or judgment that is necessary or
appropriate to carry out the provisions of this title. No provision of this title
providing for the raising of an issue by a party in interest shall be construed to
preclude the court from, sua sponte, taking any action or making any
determination necessary or appropriate to enforce or implement court orders or
rules, or to prevent an abuse of process.
11 U.S.C.S. 105(a).
6
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Case 5:09-cv-01302-CDJ Document 15 Filed 07/14/10 Page 7 of 8
Swisstronics, Inc., 135 B.R 707,708 (Bank:r. D. Me. 1992).
We agree with the numerous courts that have concluded that, once a debtor is in
bankruptcy court, the debtor's remedies to attack an allegedly inflated proof of
claim are limited to those provided for in the Bankruptcy Code. Baldwin, 1999
U.S. Dist. LEXIS 6933, 1999 WL 284788 at 4; Gray-Mapp, 100 F.Supp. 2d at
813-14; Holloway, 227 B.R. at 507-08; In re Sims, 278 B.R 457 (Bankr. B.D.
Tenn. 2002); In re Cooper, 253 B.R. 286 (Bankr. N.D. Fla. 2000). Accordingly,
we find that the within Complaint seeking damages under the FDCP A and
Consumer Protection Law must be dismissed.
In re: Abramson, 313 B.R. 195, at** 6-7 (U.S. Bankr. Ct., W. Dist. Pa. 2004).
5
See also,
Angulo v. Emigrant Mortg. Co., 2010 Bankr. LEXIS 1402, at **30-32 (Bankr. E.D. Pa. Apr. 23,
5
In support of their Motion to Dismiss, Defendants have relied in part on the holding set
forth in Williams v. Asset Acceptance, LLC (In re Williams), 392 B.R. 882 (Bankr. M.D. Fla.
2008), which provided another insightful analysis regarding disputed Proofs of Claims:
[T]he facts of this case can be distinguished from cases involving the
applicability of the FDCPA to violations of the automatic stay and
dischargeability issues. In the cases of Turner, Hyman, and Randolph, the
collection agencies sent letters that violated both the Bankruptcy Code and the
FDCP A. Here, Asset did not engage in any wrongful conduct by filing a proof of
claim. To hold otherwise would undermine the rights of creditors in the
bankruptcy process. The creditor's right to file a claim is not impacted by whether
the statute of limitations had run, as the debtor must raise the statute of limitations
issue as an affinnative defense, and even then the court still must determine
whether it has tolled and run. The debtor does not need the FDCP A to protect
itself from improper claims, as the Bankruptcy Code allows the debtor to fde
an objection. If this Court was to apply the FDCP A in this instance, debtors
would be encouraged to file adversary proceedings instead of simply an
objection to the creditor's claim, which is incredibly inefficient and undermines
the process provided by the Bankruptcy Code.
Based on the overwhelming authorities supporting Asset's contentions, that
FDCP A claims are precluded by the Bankruptcy Code, this Court is satisfied that
Asset's request for dismissal with respect to the claims asserted in Counts I
[violation of the FDCPA, 15 U.S.C. 1692()(1)] and II [violation of the FDCPA,
15 U.S.C. 1692(d)] of the Amended Complaint is well taken and, therefore,
should be granted.
I d. at 886 (emphasis added).
7
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Case 5:09-cv-01302-CDJ Document 15 Filed 07/14/10 Page 8 of 8
201 O)(recognizing the fact that an "an FDCP A claim 'cannot be based on the filing of a proof of
claim, regardless of the ultimate validity of the underlying claim. '")(internal citation omitted).
Inasmuch as there is no Third Circuit precedent involving exactly the same factual
scenario that exists herein, the holdings in Abramson and Williams provide constructive guidance
in this Court's determination that redress for Plaintiffs' allegations of "systematic" violations by
Defendants for filing allegedly inflated Proofs of Claims lie solely within the Bankruptcy
Court.
6

7
IV. Conclusion
For the reasons set forth hereinabove, Plaintiffs' Complaint is hereby dismissed.
An appropriate Order follows.
BY THE COURT:
Is! C. Darnell Jones, II J.
6
With specific regard to Plaintiffs' common law claim of Tortious Interference with
Contractual Relations (Compl. ~ 7 8 - 8 2 ) , said claim is essentially based upon the alleged conduct
discussed hereinabove: Defendants' purported filing of sworn Proofs of Claims containing
"inflated" sums ofSheritrs fees owed. Inasmuch as the amounts provided on the forms were
derived from information known at the time of filing and because Defendants did not have a duty
to amend said Proofs, there can be no "purposeful action" as required by the doctrine.
Accordingly, this claim similarly fails.
7
As referenced in note 1 hereinabove, this Court has reviewed the Notice of Consent
Judgment and Order filed on June 7, 2010 in the matter ofF ederal Trade Commission v.
Countrywide Home Loans, Inc., No. 10-4193(C.D. Cal. June 7, 2010) (Doc. No. 12), as well as
the Supplemental Memorandum of Law (Doc. No. 14) filed by Defendants in response to this
Court's Order dated June 11,2010 (Doc. No. 13). Upon doing so, this Court has determined that
the contents of said Consent Order and Judgment do not affect the findings set forth herein
regarding Defendants' Motion to Dismiss.
8
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