Plain tiffs-Appellants, Defendants-Appellees. - PRWebww1.prweb.com/prfiles/2010/12/12/4327534/PHS3rdCirBrief12.6.10.pdfDENNIS A. RHODES et al, ... Plain tiffs-Appellants, -v.-ROSEMARY

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 action14 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.


33


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.


34



No.l0-3134


Plaintiffs-Appellants,



CERTIFICATE OF SERVICE

I, John G. Narkin, hereby certify under penalty of perjury that on December 6, 2010, I caused to be filed (electronically, [email protected] 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


No.l0-3134


Plaintiffs-Appellants,



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


Amended Complaint ...................................................................... Al4

VOLUME III


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.

A-1

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

A-2

Case 5:09-cv-01302-CDJ Document 17 Filed 08/12/10 Page 3 of 5

EXHIBIT A

A-3

Case 5:09~cv-01302-CDJ Document 17 Filed 08/12/10 Page 4 of 5

Case 5:09-cv-01302~COJ Document 16 Filed 07/14/10 Page 1 of 1


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 1411 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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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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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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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.

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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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(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 provisions3 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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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-inPossession, 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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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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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. ~78-82), 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.

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Documents

Plain tiffs-Appellants, Defendants-Appellees. - PRWebww1.prweb.com/prfiles/2010/12/12/4327534/PHS3rdCirBrief12.6.10.pdfDENNIS A. RHODES et al, ... Plain tiffs-Appellants, -v.-ROSEMARY