third circuit appeal-and the amended complaint-class action foreclosure

8/3/2019 THIRD CIRCUIT APPEAL-AND THE AMENDED COMPLAINT-CLASS ACTION FORECLOSURE

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UNITED STATES COURT OF APPEALSFOR THE THIRD CIRCUIT

No. 10-3431DENNIS A. RHODES et al, on behalf of themselves and all otherssimilarly situated,

Plain tiffs-Appellants,- v.-ROSEMARY DIAMOND et al,

Defendants-Appellees.

APPEAL FROM AN ORDER OF THE UNITED STATES DISTRICTCOURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA,09-cv-1302APPELLANTS' OPENING BRIEF

AND APPENDIX VOLUME I (Pages A1-A13)JOHN G. NARKINBHNLAWFIRM951 Rohrerstown Road, Suite 102Lancaster, Pennsylvania 17601(717) 756-0835

Attorneys for Plaintiffs-Appellants


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TABLE OF CONTENTS

STATEMENT OF JURISDICTION...................................................... 1STATEMENT OF ISSUES ....................................................................................... 1STATEMENT OF THE CASE ............................................................ 2STATEMENTOFFACTS ............................................................... 4

Appellees' Foreclosure Practices ...................................................................... .4Facts Alleged in the PAC ................................................................................... 8Independent Confirmation ofAbusive Foreclosure Practices .........................11

SUMMARY OF THE ARGUMENT..................................................... 15ARGUMENT ................................................................................ 17I. THE COURT BELOW ABUSED ITS DISCRETION BY DENYINGTHE HOMEOWNERS' MOTION FOR LEAVE TO FILE THE PAC ............ 17II. THE COURT BELOW ERRONEOUSLY DISMISSED

THE HOMEOWNERS' ORIGINAL COMPLAINT .........................................21A. Bankruptcy Creditors Have A Duty to Amend Inaccurate Claims ..........21

B. The U.S. Bankruptcy Code Does Not Preclude FDCPA LawsuitsBrought to Remedy Institutionalized Debt Collection Abuses ...............21

CONCLUSION ..............................................................................30CERTIFICATION REGARDING BARMEMBERSHIP ............................. 31CERTIFICATE OF COMPLIANCE .....................................................32CERTIFICATE OF IDENTICALNESS .................................................. 33CERTIFICATE OF VIRUS CHECK ....................................................34


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TABLE OF CITATIONS

CASES

Adams v. Gould, Inc.,739 F.2d 858 (3d Cir. 1984) ...................................................................................18Azzam v. Echehoyen,2010 Md. Cir. Ct. LEXIS 2 (Md. App. Mar. 15, 2010) ..........................................23Bacelli 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) ........................................................... 24Bechtel v. Robinson,886 F .2d 644 (3d Cir.1989) .....................................................................................18Brown v. Card Service Center,464 F.3d 450, 453 (3d Cir. 2006) ............................................................................ 30Carcieri v Salazar,129 S.Ct. 1058 (2009) ............................................................................................. 24Clark v. Brumbaugh & Quandahl, P.C.,2010 WL 3190587 (D. Neb. Aug. 12. 201 0) .......................................................... 24Del 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

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Evans v. Midland Funding LLC,574 F.Supp.2d 808 (S.D. Ohio 2008) ..................................................................... 24Foman v. Davis,371 U.S. 178 (1962) ......................................................................................... 15, 19

Franks v. Food Ingredients International, Inc.2010 WL 3046416 (E.D.Pa., July 30, 2010) ..........................................................19Hannon v. Countrywide,2010 Bankr. LEXIS 3690 (Bankr. M.D. Pa. Oct. 18, 2010) ................ 16, 21, 25, 26Hannon 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) ...........................................................23Hey! & Patterson Int'l, Inc. v. F.D. Rich Housing,663 F.2d 419 (3d Cir.1981) ....................................................................................18Hoffmann-La Roche Inc. v. Cobalt Pharmaceuticals, Inc.,2010 U.S. Dist. LEXIS 79114 (D.N.J. Aug. 5, 2010) ............................................ 18Holmes v. Mann Bracken LLC,2009 U.S. Dist. LEXIS 119940 (E.D. Pa. Dec. 22, 2009) ...................................... 30In re Burlington Coat Factory Sec. Litig.,114 F.3d 1410 (3d Cir. 1997) ..................................................................... 15, 19, 20In re Callery,274 B.R. 51 (Bankr. D. Mass. 2002) ...................................................................... 22

In re Gunter,334 B.R. 900 (Bankr. S.D.Ohio 2005)) ................................................................. 24

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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, 16,28In re Stewart,2008 Bankr. LEXIS 3226 (Bankr.E.D.La. Oct. 14 2008) ...................................... 22In re Stewart,2009 U.S. Dist. LEXIS 76851 (E.D. La., Aug. 7, 2009) .......................................... 6In 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, 16,28Jerman v. Carlisle, McNellie, Tini, Kramer & Urlich LPA,130 S. Ct. 1605 (2010) ..................................................................................... 17,30Joubert v. ABNAMRO Mortgage Group, Inc.,411 F .3d 452 (3d Cir.2005) .................................................................................... 26Kline 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, 28Ndubizu 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, 27Romero v. Allstate Insurance Co.,2010 WL 2996963 (E.D. Pa. July 28, 2010) ................................................... 19, 20Rosenau v. Unifund Corp.,539 F.3d 218 (3d Cir. 2008) ...................................................................................23

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Simmons v. Roundup Funding, LLC,622 F.3d 93 (2d Cir. 2010) .............................................................................. 23, 24Walls v. Wells Fargo Bank, N.A.,276 F.3d 502 (9th Cir. 2002) ........................................................................... 23, 24Williams v. Asset Acceptance, LLC,392 B.R. 882 (Bankr. M.D. Fla. 2008); .......................................................... 16, 24Young v. Wells Fargo,2009 U.S. Dist. LEXIS 100419 (S.D. Iowa Oct. 27, 2009) ...................................21Zen Investments, LLC v. Unbreakable Lock Co.,276 Fed.Appx. 200 (3d Cir. 2008) ..........................................................................19STATUTES

11 U.S.C 105(a)............................................................................ 2615 U.S.C. 1692(e) ................................................................................................. 3015 U.S.C. 1692e(11) .............................................................................................2315 U.S.C. 1692k(a) ...............................................................................................2515 U.S.C. 1692(e)(2)(A) and (B), 1692f(l), and 1692(g)(2) ............................2, 318 U.S.C. _152(4) ................................................................................................... 2218 U.S.C. 1962(c) .................................................................................................... 228 U.S.C. 1291 ........................................................................................................ 173 P.S. 201 et seq . ...................................................................................................3

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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) ............................................................................................. 4Fed. R. Civ. P. 15(a) ....................................................................................... 1, 4, 17Fed. R. Evid. 201(f) .................................................................................................14Fed. R. Bankr. P. 9011 ...................................................................................... 26, 28

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STATEMENT OF SUBJECT MATTERAND 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 noticeof appeal from a final judgment entered on July 14, 2010, this Court hasjurisdiction pursuant to 28 U.S.C. 1291.

STATEMENT OF ISSUESI. 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 amendedclass action complaint alleging that a high-volume mortgage foreclosure law firmand two of its mortgage servicer clients violated the Racketeer Influenced andCorruption Act and other laws by inflating or fabricating foreclosure costs and byfiling and prosecuting uninvestigated foreclosure lawsuits on behalf of entities thathave no standing to bring suit.

II. Whether the court below erred as a matter of law by dismissingAppellants' original complaint with prejudice on the grounds that a creditors' law

firm has no duty to amend inaccurate bankruptcy proofs of claim and that bankrupthomeowners are precluded from obtaining relief under the Fair Debt CollectionPractices Act even though they, like other non-bankrupt homeowners, have beenharmed by identical institutionalized collection abuses by the creditors' law firm.


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STATEMENT OF THE CASEAppellants 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 HomeLoans, 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 andWFB in systematic schemes to:

(1) inflate or fabricate foreclosure costs, including misappropriatedsheriffs' deposit refunds; unearned attorneys' fees; and unjustifiablefees for title searches, appraisals, litigation "support" services, andproperty inspection and maintenance services -- often generatedthrough related-party transactions with affiliates controlled bydefendants themselves (A19-A21; A55-A68); and

(2) file and prosecute uninvestigated foreclosure lawsuits on behalf ofentities 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) theFair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. 1692(e)(2)(A) and

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(B), 1692f(l), and 1692(g)(2)1; (3) Pennsylvania's Unfair Trade Practices andConsumer Protection Law, 73 P.S. 201 et seq. and (4) common law remedies forfraud, breach of contract, breach of good faith and fair dealing, money had andreceived, and negligent misrepresentation.

In addition to damages, the homeowners seek equitable and injunctiverelief, including appointment of an auditor or special master to (1) recommendbusiness management and accounting procedures that PHS, WFB and CHL mustadopt and implement to avoid future mortgage foreclosure abuses and (2) monitorcompliance by PHS, WFB and CHL with business management or accountingprocedures directed by the court. A21; A93; A124-A125.

This action was initially filed on March 25, 2009, based on more narrowlycircumscribed grounds that were supplemented and essentially superseded by theexpanded allegations of the PAC. Appellants' original complaint (1) restricted itsclaims to PHS only, (2) invoked the FDCPA and its state law counterparts as thehomeowners' exclusive remedy for damages and (3) was brought on behalf ofbankrupt homeowners based on PHS's filing of false bankruptcy proofs of claim,which is but one component of PHS's broader institutionalized practice ofmisappropriating sheriffs' deposit refunds from defrauded borrowers. A115-A162.

1 FDCPA claims are asserted against PHS only. A115.3


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By Order dated July 14, 2010 (A4n.l), the court below denied thehomeowners' motion under Fed. R. Civ. P. 15(a) for leave to file the PAC. In atwo-line footnote reference to unspecified "reasons" for its dismissal of thehomeowners' original (and fundamentally different) Complaint, the court belowconcluded without explanation that the PAC was "moot" and "futile."

The court below also held that the original Complaint failed to state a claimfor relief under Fed. R. Civ. P. 12(b )( 6) based on purely legal grounds havingnothing to do with the many non-bankruptcy-related claims in the PAC. 2 The courtbelow concluded that (1) PHS had "no duty" to amend bankruptcy proofs of claim(A8-All) and (2) "redress for Plaintiffs' allegations of 'systematic' violations byDefendants for filing allegedly inflated Proofs of Claim lie solely within theBankruptcy Court." A10-Al3.

STATEMENT OF FACTS

Appellees' Foreclosure PracticesPHS is a "premier foreclosure operation" in Pennsylvania and New Jersey

(A54). With a staff of"17 lawyers and 250 support personnel" (ASS), PHS handledan estimated 24,000 to 26,000 foreclosure cases in Pennsylvania and New Jersey in2008 alone. A55-A56. This law firm, which is "both Fannie Mae and Freddie Mac2 Three of the five homeowners named as proposed class representatives in thePAC, Charles and Diane Giles and Edward H. Wolferd, Jr., assert claims that areunrelated to the bankruptcy process. A59-A63; A73-A78.

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designated counsel," has been retained by "almost every maJor lender andservicer" 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 invoicereporting syste[m]" used in the foreclosure industry. ASS. PHS also stresses itsownership and control of the "majority of its vendors to ensure a turnaround timeas 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 andmaintained by Lender Processing Services, Inc. A84-A89, ASS n.1S8. Theseprograms make initial case referrals to PHS and similar high-volume foreclosurelaw firms, which are monitored for their compliance with strict timelinebenchmarks from "referral to resolution" (id. ); acceptable time management"report cards" generated by these programs are the principal determinant of theselaw firms' ability to obtain further business from the servicers (id. ).

Speed is of such paramount concern to servicers and their foreclosure lawfirms that, given their compulsory use of "default management" programs,"outside" lawyers have been discouraged or prohibited from initiating verbal

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communication with employees of the servicers. A87-A88. Some judges familiarwith practices in this industry believe that lenders and servicers, together with theirhigh-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 fewlawyers but have a staggering number of foreclosure cases to prosecute as quicklyas "humanly possible." A55. Loan information provided to PHS comes directlyfrom its servicer clients via these mandatory "default management" programs. Inthe case of CHL and WFB, several federal courts have criticized and sanctionedPHS's servicer clients for maintaining accounting systems that systematicallyproduce unreliable and inaccurate information about homeowners' mortgageaccounts, which result in overcharges that "potentially signal billions in improperlyearned 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

3See In re Taylor, 407 B.R. 618, 641 (Bankr. E.D.Pa. 2009), rev'd on othergrounds, 2010 U.S. Dist. LEXIS 16080 (E.D.Pa. Feb. 18, 2010), quoting, In reParsley, 384 B.R. 138, 183 (Bankr. S.D.Tex. 2008). The district court's order isnow 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); Inre 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

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Motivated by their desire to obtain such revenue through "default service"fee overcharges, WFB, CHL and their foreclosure law firms also systematicallyfile and prosecute mortgage foreclosure actions in the absence of any entity withlegal 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 todetermine ownership of borrowers' mortgages; because these mortgages arefrequently bought and sold to investors as collateralized debt obligations("CDOs"),6 even a diligent investigation may be insufficient to demonstrate aproper chain of title to a mortgage from a loan originator to a trustee acting onbehalf of CDO investors.7 Seizing their chance to make fast profits fromforeclosure 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 MISC38675517; 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 (1stCir, 2010).7 Navarro Sav. Ass'n v. Lee, 446 U.S. 458, 461 (1980) (real party in interest istrustee).

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Expanding upon their initial circumscribed Complaint (A127-A169), thehomeowners named as plaintiffs in the PAC detail the fraudulent scheme in whichPHS and/or its clients systematically misappropriate sheriffs' deposit refunds thatare wrongfully included in arrearages charged to bankrupt and non-bankrupthomeowners alike. The PAC itemizes the precise dates in which PHS obtainedsheriffs' refunds, the exact amount of the refunds improperly withheld from thehomeowners' accounts, and the results of an empirical investigation undertaken bythe homeowners' counsel that demonstrates the existence of an institutionalizedcourse ofunlawful conduct undertaken by PHS and/or its clients. A55-A63.

None of these allegations involving non-bankrupt homeowners wereaddressed by the court below.

The PAC also details the manner in which PHS uses owned and controlledaffiliates - misleadingly termed "vendors" - as a vehicle for inflating andfabricating charges relating to title searches, appraisals, litigation "support"services, and property inspection and maintenance services. A63-A68. The PACfurther documents how PHS and its clients conceal their piled-on overcharges

through arrearage statements that are, by calculated design, so uninformative andcryptic they cannot be understood. A66. The PAC also documents the amount andsimilar manner in which these overcharges are reflected in appellant-homeowners'own arrearage statements. A67.

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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 andputative class representatives Charles and Diane Giles in New Jersey in theabsence of any entity with legal standing to sue. A69-A79. The PAC alleges thatthe foreclosure complaints against these homeowners were accompanied bycertifications by PHS lawyers, who swore falsely under oath that Wachovia Bankwas the proper party to these cases, which were brought by PHS almost two yearsafter Wachovia divested itself of any interest in the homeowners' mortgages. A69-A70; A74-A78. To cover up its misrepresentations to the courts, PHS procured andfiled with county land recording agencies bogus mortgage assignments purportingto show that W achovia was the record owner of the mortgages during the pendencyof the foreclosure proceedings. A71-A72; A75-A76. Even after PHS was informedby a vice president and assistant general counsel of Wachovia that Wachovia hadno ownership interest in the Giles' mortgage (A77-A78; A335), PHS continued torepresent itself as Wachovia's counsel in subsequent legal proceedings involvingthe same pool of mortgages comprising a CDO investment in which Wachovia hadyears 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

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notary" for a company owned and controlled by PHS "testified during depositionthat over the previous three years, he falsely acknowledged tens of thousands ofmortgage assignments for [PHS]" (A81-A82); (2) the New Jersey state court judgeadjudicating that litigation called for a "plenary hearing" to "get to the bottom ofwhat it viewed as a possible systemic problem involving the alleged falsenotarization of assignments in which a [PHS] lawyer played a central role in theprocess" (A83); and (3) after the state judge alerted other members of the NewJersey judiciary about falsified mortgage assignments associated with PHSforeclosure cases, PHS's senior partner sent an ex parte letter to the judge notifyinghim that PHS had at its own expense re-executed and re-recorded 2,921 mortgageassignments notarized by the employee who testified about his employer's falsenotarization practices. A83.

None of the foregoing matters were addressed by the court below. In theirmotion for leave to file the PAC, the homeowners invited the court below toreview a compendium of 36 exhibits that substantiated their allegations. Al70. Thecourt 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 thePAC, the identical pattern of foreclosure abuses identified in the PAC began toreceive overdue national attention.

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On June 7, 2010, the Federal Trade Commission ("FTC") announced that itfiled a Complaint against CHL and entered into a Consent Judgment under whichCHL agreed to pay $108 million to resolve charges that it systematicallyimposed false and excessive "default-related fees" upon distressed homeowners, inpart through a "so-called 'vertical integration' strategy" in which CHL used itsown "default services subsidiaries" that "exist[ ed] solely to generate revenue" forCHL.8 Al75-A215. (This same "strategy" was used by PHS for the same improperrevenue generation purpose (A63-A66); at least one affiliated company controlledby PHS functioned as a "vendor" to one of the CHL subsidiaries identified by theFTC. A66 n.lll. Default-related fees charged to thousands of class memberhomeowners were thus unlawfully multiplied by both CHL and PHS).

In a public statement announcing his agency's Consent Judgment, FTCChairman Jon Leibowitz characterized CHL s institutionalized misbehavior as

8 As part of the FTC's Consent Judgment, CHL agreed to make changes to itsflawed accounting systems and to submit to independent oversight of its efforts toremedy the improprieties identified by the FTC. Al88-Al89. This equitable reliefparallels what the homeowners sought previously in the PAC. A215-A216. Uponannouncement of the FTC settlement, the U.S. Department of Justice's Office ofthe United States Trustee discontinued numerous bankruptcy court proceedingsagainst 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 remainabout the limitations of that settlement and extent to which defrauded homeownersare compensated for losses caused by CHL' s wrongful conduct.

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"callous conduct [that] took advantage of consumers already at the end of theirfinancial rope" (A219). The Chairman explained (A220):

Countrywide took advantage of homeowners in . . . utterlyunprincipled ways. First, when homeowners fell behind in theirpayments, Countrywide overcharged them for default-relatedservices, like property inspections, dramatically marking up theactual cost of those services. It did this by creating affiliatedcompanies, companies that it controlled, which in tum hiredthird-party vendors to perform the services, and the affiliatesadded a big markup, 100%, 200%, 400%, sometimes even moreto what the services cost. Countrywide, of course, passed onthose marked-up fees to borrowers. . .. All of this was part ofwhat Countrywide called its "counter-cyclical diversificationstrategy," which really is just a euphemism for a business modelbased on deceit, designed to ensure a steady stream of fees overthe entire lifetime of a loan and illegally extract the last dollarout of the pockets of the most desperate consumers ....During chapter 13 bankruptcy cases, Countrywide madeinaccurate claims about amounts that homeowners allegedlyowed. Countrywide's outdated computer systems have made therecords incredibly difficult to sort out, but we believe thousandsof consumers in bankruptcy, and maybe more, ended upoverpaying . . . That is not only wrong, it is unacceptable."

On June 9, 2010, the homeowners brought the FTC/CHL Complaint andConsent Judgment and Order to the attention of the court below through the filingof a Notice (1) asserting that the Consent Judgment and Order are "relevant" bothto the pending motion for leave to amend and to the substantive allegations of thePAC (which included specific allegations against CHL necessitating its joinder as adefendant in this litigation) (A171-A172) and (2) invited the court below to

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compare the allegations in the FTC's Complaint with specifically enumeratedallegations 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 theirpending Motion to Dismiss.'' A235. On July 14, 2010, the court below entered theOrder 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 forthherein regarding Defendants' Motion to Dismiss." A13 n.7.

The court below did not address the homeowners' request for considerationof the direct relevance of the Consent Judgment and Order to their motion for leaveto 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 systematicallysubmitted false affidavits and other documents signed by persons withoutknowledge of the facts, law enforcement agencies throughout the United Stateshave begun investigations into fraudulent practices in the foreclosure industry.Investigations are now being conducted by (1) a coordinated group of 50 stateattorneys general and regulators (A236-A238); (2) the Financial FraudEnforcement Task Force and 20 federal agencies led by the U.S. JusticeDepartment, including the Federal Housing Administration, the Federal Housing

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Finance Agency and the Office of the Comptroller of the Currency (A239-240);and (3) the Federal Reserve System and the Federal Deposit InsuranceCorporation. A241-A242.

In the words of Shaun Donovan, U.S. Secretary for Housing and UrbanDevelopment, "shameful" foreclosure practices that have "rightly outraged theAmerican people" are "issue priority number one" to "the broadest coalition of lawenforcement, investigatory and regulatory agencies ever assembled to combatfraud." A239.

SUMMARY OF ARGUMENTThe 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 byignoring the more pervasive unlawful conduct alleged the PAC), the lower courtfailed to provide any 'justifying reason" supporting its denial, as was required byFarnan 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 courtbelow also erred as a matter of law in concluding that PHS has no legal duty toamend bankruptcy proofs of claim to ensure that claims against mortgageborrowers are accurately reported. The lower court failed to recognize, much less

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consider, legal authority that confirms explicitly that such a duty exists. SeeHannon 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.); Inre Stewart, 2008 Bankr. LEXIS 3226, at *9-10, 11 (Bankr.E.D.La. October 142008).

The court below also erred as a matter of law in concluding that theBankruptcy Code precludes consideration of FDCP A lawsuits by bankruptindividuals alleging institutionalized debt collection abuses. While there is a splitof authority concerning Bankruptcy Code "preclusion" of FDCP A claimsgenerally, this Court should adopt the reasoning of the Seventh Circuit in Randolphv. 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 andFDCP A do not "add up to irreconcilable conflict," but they are instead overlappingstatutes that can be simultaneously enforced.

The Seventh Circuit's reasoning is particularly sound in cases like thisinvolving systematic debt collection abuses that are not addressed effectively by abankruptcy system designed to provide a "simple" way to achieve "claimresolution" of "very unimpressive amounts" through "reduced judicial labor."Williams v. Asset Acceptance, LLC, 392 B.R. 882, 883-84 (Bankr. M.D. Fla.

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2008).9 Preclusion of such FDCPA claims by the Bankruptcy Code wouldundermine the purposes of the FDCPA to "eliminate abusive debt collectionpractices, to ensure that debt collectors who abstain from such practices are notcompetitively disadvantaged, and to promote consistent state action to protectconsumers." Jerman v. Carlisle, McNellie, Tini, Kramer & Urlich LPA, 130 S. Ct.1605, 1608 (2010).

ARGUMENTI. THE COURT BELOWABUSED ITS DISCRETION BY DENYING

THE HOMEOWNERS' MOTION FOR LEAVE TO FILE THE PAC

In denying the homeowners' motion for leave to amend without addressingthe allegations in the PAC, the court below abused its discretion and abdicated itsjudicial responsibilities.

Leave of the court to file amended pleadings must be freely given whenjustice requires. Fed. R. Civ. P. 15(a). While district courts have discretion inconsidering Rule 15(a) motions, that discretion is limited by an "amendmentphilosophy" that is so "liberal" that a "district court may deny leave to amend onlyif a plaintiffs delay in seeking amendment is undue, motivated by bad faith, or9 See, e.g., In re Jones, 418 B.R. 687, 698-99 (Bankr. E.D. La. 2009); McDermottv. 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); KatherinePorter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Texas L.Rev. 121, 124 (2008).

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prejudicial to the opposing party" or if the proposed amendment "fails to state acause of action." Adams v. Gould, Inc., 739 F.2d 858, 864 (3d Cir. 1984) (andcases 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. AreaChemical 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. CobaltPharmaceuticals, 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 itspleadings").

In denying appellant homeowners leave to file the PAC, the court belowoffered no coherent explanation of its decision, stating instead cryptically (A4):

Subsequent to the conclusion of briefing regardingDefendants' Motion to Dismiss, Plaintiffs filed a Motionfor Leave to File Amended Complaint (Doc. No. 8) andDefendants filed an Opposition thereto (Doc. No.9). ThisCourt has reviewed same and is of the opinion that inlight of the reasons for granting Defendants' Motion toDismiss, 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 PHS18


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in its 27-page opposition to the filing of the PAC, including charges that thehomeowners' 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 thedenial is not an exercise of discretion; it is merely abuse of that discretion andinconsistent 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 BurlingtonCoat 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 tofile the PAC, the lower court described the same controlling legal standards that itignored in this litigation. In Franks v. Food Ingredients International, Inc. 2010WL 3046416, at *7, *8 (E.D.Pa., July 30, 2010) (Jones, J.), citing, In re BurlingtonCoat 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 andprocedures, the homeowners filed a motion requesting permission to file theproposed 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 motionto dismiss. A338.

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Third Circuit's "mandate" to "clearly articulate its grounds for denying leave toamend" because of "the need to avoid dismissing a possibly meritorious claimbased 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 themotion 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 whichrelief could be granted, an assessment that requires a district court to apply thesame standard of legal sufficiency as applies under Rule 12(b )( 6). In re BurlingtonCoat Factory, 114 F.3d at 1434.

Given the liberal standard for the amendment of pleadings, "courts place aheavy 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 isimproper." Romero v. Allstate Insurance Co., 2010 WL 2996963, at *4 (emphasisin original; citations omitted). Before a district court can deny a motion to amend acomplaint on futility grounds, it must "determine whether the newly assertedclaims 'appear to be sufficiently well grounded in fact or law that it is not afrivolous pursuit.'" Ndubizu v. Drexel University, 2009 U.S. Dist. LEXIS 99966,

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at * 0 (E.D. Pa. Oct. 26, 2009), quoting, Harrison Beverage Co. v. DribeckImporters, Inc., 133 F.R.D. 463, 468-69 (D. N.J. 1990).

The court below failed to make any determination necessary to a finding offutility. Because the PAC is not remotely frivolous, ll the lower court should havegranted the homeowners' motion to amend.

II. THE COURT BELOW ERRONEOUSLY DISMISSEDTHE HOMEOWNERS' ORIGINAL COMPLAINTA. Bankruptcy Creditors Have A Duty to Amend Inaccurate Claims

In dismissing the homeowners' original Complaint with prejudice, thedistrict court erred as a matter of law in concluding that PHS has no legal duty toamend bankruptcy proofs of claim to ensure that claims against mortgageborrowers 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 holdingof that case: A mortgagee does have an affirmative duty to amend a bankruptcyproof 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 localUnited 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.I I See above at 12-15. See also Young v. Wells Fargo, 2009 U.S. Dist. LEXIS100419 (S.D. Iowa Oct. 27, 2009).

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Countrywide, 2010 Bankr. LEXIS 3690, at* 5-6 (Bankr. M.D. Pa. Oct. 18, 2010)("Hannon II) (permitting CHL to withdraw allegedly "unauthorized" stipulation byoutside counsel who, "for reasons unknown," admitted that CHL "had noprocedure to amend proofs of claim after credits were received" -- an admissionthat the bankruptcy court deemed to be a concession of "actual reprehensibleconduct" that could be "devastating" to CHL given the potential criminalconsequences of a violation of 18 U.S.C. 152(4)).

While the court below stated that the homeowners "fail[ed] to provide anylegal basis" in support of their contention that PHS had a duty to amend its proofof claim (A9-A10), the homeowners not only brought the Hannon decision to thelower court's attention (A339-A340), but both the PAC and their proposed replybrief 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 dohave 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 incumbentupon Wells Fargo to correct its error for all affected debtors. To do otherwise is toignore 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 anamended proof of claim that increased a debtors' tax obligation after expiration ofthe bar date. In re Callery, 274 B.R. at 55-56. The issue in Callery was narrow and22


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B. The U. S. Bankruptcy Code Does Not Preclude FDCPA LawsuitsBrought to Remedy Institutionalized Debt Collection AbusesA split of authority exists among the circuits concerning whether the

Bankruptcy Code precludes judicial consideration of FDCP A claims asserted bybankrupt individuals. Dougherty v. Wells Fargo Home Loans, Inc., 425 F.Supp 2d599, 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, 622F.3d 93, 95-96 (2d Cir. 2010).

The Seventh Circuit holds that the Bankruptcy Code has no preclusiveeffect on claims asserted by bankrupt debtors under the FDCP A because

precise; the bankruptcy court there did not purport to "effectively summarize[e] thelaw regarding amendment of a Proof ofClaim" in any universal sense. A10.The court below also misunderstood the significance of a 1996 amendment to 15U.S.C. 1692e(ll), which exempted legal pleadings from the FDCPA'srequirement that initial communications from debt collectors must disclose theirpotential 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 concludedthat the 1996 amendment to Section 1692e(11) of the FDCPA "superseded" theU.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). The1996 amendment did not change application of Heintz in any context beyondSection 1692e(ll). See Rosenau v. Unifund Corp., 539 F.3d 218, 223 (3d. Cir.2008).

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"operational differences" between the bankruptcy code and FDCPA do not "add upto irreconcilable conflict," but they are instead overlapping statutes that can besimultaneously 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 involvingexactly the same factual scenario that exists herein." A13.

Courts following the approach taken by the Ninth Circuit have concludedthat "[t]he FDCP A is designed to protect defenseless debtors and to give themremedies against abuse by creditors. There is no need to protect debtors who arealready 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 todissuade debtors from "bypassing" the bankruptcy court's proof of claim process,which is described as a "simple" way to achieve "claim resolution" of "veryunimpressive amounts" through "reduced judicial labor." Williams v. AssetAcceptance, 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., 2010WL 3190587, at *3-5 (D. Neb. Aug. 12. 2010); Kline v. Mortgage ElectronicSecurity 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 WL1708227, at *1-2 (June 5, 2009 E.D.Ark.); Price v. America's Servicing Co., 403B.R. 775, 790 n.14 (Bankr. E.D.Ark. 2009)

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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" traversedthrough ordinary bankruptcy procedures. Williams, 392 B.R. at 883

The systematic theft of sheriffs refund scheme alleged in the originalComplaint is not a "simple" matter involving an insignificant claim of a singledebtor, nor is there anything simple about the facts underlying the institutionalizedunlawful conduct alleged or the burden assumed by debtors in proving those facts.See Hannon II, 2010 Bankr. LEXIS 3690, at *5-6 (proof demonstratinginstitutionalized 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 notinvolve the "unimpressive amounts" typically at issue in individual bankruptcycases. The homeowners' FDCP A claim in this proposed class action (if establishedby 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 or1% 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


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Ordinary bankruptcy procedures, designed to reduce "judicial labor" in theadministration of crowded bankruptcy dockets, cannot and do not provide an"efficient" remedy for the same institutionalized pattern of "actual reprehensibleconduct" that so offended the court in Hannon that it took the unusual step ofreferring CHL's perceived "failure to maintain a procedure for adequatelyidentifying 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 thebankruptcy system in search of justice for the same misconduct alleged in theoriginal Complaint, the court below cited Hannon for the proposition that the "soleremedies" available to appellant-homeowners for PHS's systematic misconduct areprovided by bankruptcy law, in particular Rule 9011 of the Federal Rules ofBankruptcy Procedure (sanctions for bad faith conduct) and Section 105(a) of theBankruptcy Code (bankruptcy judges power to prevent abuse of process). A9.

However, as the court in Hannon observed, Rule 9011 may not be "'up tothe task' of providing sufficient authority to compel a claimant to keep their Proofsof Claim updated." Hannon, 421 B.R. at 734. At the same time, it is establishedjurisprudence in this Circuit that Section 105(a) "has a limited scope," "does not'create substantive rights that would otherwise be unavailable under the

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Bankruptcy Code''' and "does not afford debtors a private cause of action."Joubert v. ABNAMRO Mortgage Group, Inc., 411 F.3d 452, 455 (3d Cir.2005).

Nor did the court below have a basis for concluding that appellanthomeowners tried to "bypass" the bankruptcy proof of claim process by filing thisproposed class action in district court. A1 0. The proofof claim process was used inthe homeowners' individual bankruptcy cases through the filing of appropriateobjections to PHS's false claims. A143-146; A57-A61. Only after such objectionswere made and/or after this litigation was initiated did PHS belatedly withdrawthose false claims. In doing so, PHS recognized that its individual violations of theFDCPA had been discovered and that its systematic violations of the FDCP Awould soon be exposed through prosecution of this action. The homeowners didnot bring their FDCP A claims in district court to obtain an adjustment of amountsowed 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 differentpurpose of asserting a statutory right to redress PHS's institutionalized debtcollection abuses.

As Judge Easterbrook held in Randolph, 368 F .3d at 730, the statutorypurposes 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 bothsimultaneously."

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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 onecourt, "debtors simply do not have the personal resources to demand much lessverify 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 alsoKatherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87Texas L. Rev. 121, 124 (2008) (empirical study, funded by the NationalConference of Bankruptcy Judges' Endowment for Education, documenting"systemic failure of the [bankruptcy] claims process to ensure that mortgagecreditors are collecting only what they are legally owed").

The practical difficulties faced by bankruptcy courts m addressinginstitutionalized misconduct are illustrated in McDermott v. Countrywide HomeLoans, 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. LEXIS16080 (E.D.Pa. Feb. 18, 2010), where the bankruptcy court held four evidentiaryhearings and wrote a 58-page opinion explaining why sanctions were needed todeter misconduct of a high-volume foreclosure firm that, on a "systemic" basis,misrepresented information about borrowers' accounts because of its "slavishadherence" to its servicer clients' "computer driven models" in a manner that"offends the integrity of our bankruptcy system." Although the district court notedthat the "frustrations of the Bankruptcy Court are understandable," it believed thatimposition of sanctions was inappropriate. 2010 U.S. Dist. LEXIS, at *8. Thedecision is now on appeal to this Court at Docket No. 10-2154.

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after conducting trials on liability and remedial issues, the bankruptcy courtsanctioned CI-ll- under Rule 9011 for demonstrating repeated "disregard fordiligence and accuracy" through the "filing proofs of claim . . . designed to alloweach actor in the process to act with indifference to the truth." A348.

On appeal, the district court reversed the bankruptcy court's sanction orderbecause, while the bankruptcy court was "genuinely frustrated with what [it]perceives as a systemic problem in the entire mortgage servicing industry," thedistrict court found insufficient evidence to support findings about CHL' sinstitutionalized misconduct. 426 B.R at 281. Three months later, however, in anaction filed in the District Court for the Central District of California rather thanbankruptcy court, CHL agreed to a Consent Judgment resolving the FTC's chargesthat CHL on an institutionalized basis improperly misused the bankruptcy systemto assert fraudulent claims against bankrupt homeowners (see above at 12-14).

Far from undermining the Bankruptcy Code, the FDCP A provides a vitalcomplement to it. Some courts say that because one of the FDCPA's goals is tohelp consumers "avoid bankruptcy," it follows that the Bankruptcy Code precludesFDCPA claims. See above at 24-25. However, the more overarching legislativepurposes 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

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disadvantaged, and to promote consistent state action to protect consumers. 15U.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 itslanguage 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. CardService Center, 464 F.3d 450, 453 (3d Cir. 2006).

Given the unsuitability of bankruptcy procedures, preclusion of FDCP Aclaims in this limited context would deny debtors harmed by institutionalizedmisconduct 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 thisCourt 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. NarkinJohn G. NarkinPA Bar No. 36301951 Rohrerstown Road, Suite 102Lancaster, Pennsylvania 19601Telephone: (717) 756-0835www.bhn-law.com


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CERTIFICATE REGARDING BAR MEMBERSIDP

The undersigned attorney is a member of the bar of the Third Circuit ofAppeals.

Dated: December 6, 20 10

31

Is/John G. NarkinJohn G. Narkin


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CERTIFICATE OF COMPLIANCEThe undersigned attorney respectfully certifies that his brief complies with

the type-volume limitation of Fed. R. App. P. 32(a)(7)(A) because this briefcontains 30 pages.

Dated: December 6, 2010

32

Is/John G. NarlcinJohn G. Narkin


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CERTIFICATE IDENTICALNESSThe undersigned attorney respectfully certifies that the PDF file and the hard

copies of the OPENING BRIEF OF APPELLANT are identical.


33



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CERTIFICATE OF VIRUS CHECKThe undersigned attorney respectfully certifies that a v1rus check was

performed upon this document on December 6, 2010, with TREND MICRO OfficeScan software.


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No.l0-3134DENNIS A. RHODES et al, on behalf of themselves and all otherssimilarly situated,

Plaintiffs-Appellants,- v.-ROSEMARY DIAMOND et al,


CERTIFICATE OF SERVICEI, John G. Narkin, hereby certify under penalty of perjury that on December6, 2010, I caused to be filed (electronically,[email protected] and 10 copies by Federal Express) andserved the foregoing

APPELLANT'S OPENING BRIEFBy causing two (2) copies of said document to be mailed, via U.S. Mail, firstclass, postage prepaid to:Daniel S. Bernheim, 3dJonathan J. BartWILENTZ, GOLDMAN & SPITZER, P.A.Two Penn Center, Suite 910Philadelphia, P A 19102

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No.l0-3134DENNIS A. RHODES et al, on behalf of themselves and all otherssimilarly situated,

Plaintiffs-Appellants,- v.-ROSEMARY DIAMOND et al,


APPEAL FROM AN ORDER OF THE UNITED STATES DISTRICTCOURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA,09-cv-1302

APPELLANTS' APPENDIX VOLUME IJOHN G. NARKINBHNLAWFIRM951 Rohrerstown Road, Suite 102Lancaster, Pennsylvania 17601(717) 756-0835

Attorneys for Plain tiffs-Appellants


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TABLE OF CONTENTS

VOLUME ITable ofContents ............................................................................. .iNotice ofAppeal. ............................................................................AlOrder ...........................................................................................A4Memorandum ................................................................................ A6

VOLUME IITable ofContents ............................................................................. iAmended Complaint ......................................................................Al4

VOLUME IIITable ofContents ............................................................................. iAmended Complaint (con'td) ..........................................................Al85


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Case 5:09-cv-01302-CDJ Document 17 Filed 08/12/1 0 Page 1 of 5

IN THE UNITED STATES DISTRICT COURTFOR THE EASTERN DISTRICT OF PENNSYLVANIA

DENNIS A. RHODES,GERALD A. BENDER andEDWARD H. WOLFERD, JR.,individually and on behalf of allothers 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 STATESCOURT OF APPEALS FOR THE THIRD CIRCUIT

Notice is hereby given that plaintiffs Dennis A. Rhodes, Gerald A. Bender and EdwardH. 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 finalorder of the District Court for the Eastern District of Pennsylvania, entered on the docketon July 14, 2010, which (a) dismissed with prejudice Plaintiffs' Complaint filed onMarch 25, 2009 (Docket Item No. 1) and (b) denied Plaintiffs' Motion for Leave toAmend the Complaint filed on January 15, 2010 (Docket Item No. 8). A copy of theOrder appealed from by this Notice (Docket Item No. 16) is attached as Exhibit A.

A-1


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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: ls iMichael D. HessMichael D. Hess951 Rohrerstown Road, Suite 102Lancaster, Pennsylvania 17601Telephone: (717) 391-2911Facsimile: (717) 391-5808

-and-BHNLAWFIRM

By: JGNS884John G. Narlcin951 Rohrerstown Road, Suite 102Lancaster, Pennsylvania 17601Telephone; (717) 756-0835Facsimile: (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

A-3


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Case 5 : 0 9 ~ c v - 0 1 3 0 2 - C D J Document 17 Filed 08/12/10 Page 4 of 5Case 5 : 0 9 - c v - 0 1 3 0 2 ~ C O J 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 otherssimilarly situatedPlaintiffs,

v.ROSEMARY DIAMOND; FRANCIS S.HALLINAN; DANIEL G. SCHMIEG;LAWRENCE T. PHELAN; JUDITH T.ROMANO; FRANCIS FEDERMAN;THOMAS M. FEDERMAN; PHELANHALLINAN & SCHMIEG, LLP;FEDERMAN & PHELAN, LLPDefendants.

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 ofConsent 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 inResponse thereto (Doc. No. 14), it is hereby ORDERED and DECREED that Defendants' Motion isGRANTED 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 aMotion 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 andcorrect copy of Plaintiffs' Notice of Appeal was served upon all counsel of record via theCourt's ECF system.

lsi Michael D. Hess

A-5


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DENNIS A. RHODES; GERALD A.BENDER; and, EDWARD H. WOLFERD,JR., individually and on behalfof all otherssimilarly situated

Plaintiffs,v.

ROSEMARY DIAMOND; FRANCIS S.HALLINAN; DANIEL G. SCHMIEG;LAWRENCE T. PHELAN; WDITH T.ROMANO; FRANCIS FEDERMAN;THOMAS M. FEDERMAN; PHELANHALLINAN & SCHMIEG, LLP;FEDERMAN & PHELAN, LLP

Defendants.

CIVIL NO. 09-1302

MEMORANDUMJones, J.

I. Introduction

July 14, 2010

Plaintiffs in the above-captioned matter are homeowners who defaulted on theirmortgages and subsequently filed Petitions for reliefunder Chapter 13 of the Bankruptcy Code.Defendants herein are individual attorneys and their law firms, who represent the lenders and areaccused 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 thatwere postponed by reason of the bankruptcy filings. As such, Plaintiffs - individually and onbehalfof 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 FairCredit Extension Uniformity Act (''FCEUA''), 73 P.S. 2270 et seq.; (3) Pennsylvania's UnfairTrade Practices and Consumer Protection Law ("UTPCPL''), 73 P.S. 201 et seq.; and, (4)common law claims ofTortious Interference with Contractual Relations.

In response to said Complaint, Defendants have filed the instant Motion to Dismisspursuant to Fed.RCiv.P. 12(b)(6)(Doc. No.2), asserting in pertinent part that any issuesPlaintiffs may have with the Proofs ofClaims that were filed, are issues that must be pursued inBankruptcy Court by means ofObjections to said Proofs, or Motions for Sanctions. Plaintiffsoppose said Motion (Doc. No. 3), maintaining that they have pled sufficient facts to sustain theircause of action in this court. 1 For the reasons set forth hereinbelow, Defendants' Motion will begranted.II. Standard of Review

In deciding a motion to dismiss pursuant to Rule 12(b)(6), courts must "accept all factualallegations as true, construe the complaint in the light most favorable to the plaintiff, anddetermine whether, under any reasonable reading of the complaint, the plaintif f may be entitledto relief." Phillips v. County ofAllegheny, 515 F.3d 224, 233 (3d Cir. 2008) (internal quotationand 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 conclusorystatements, 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 ofConsent Judgment and Orderfiled on June 7, 2010 in the matter ofFederal 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 ofLaw in Response (Doc. No. 14).

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Twombly, 550 U.S. 544, 555 (2007)). "A claim has facial plausibility when the plaint iff pleadsfactual content that allows the court to draw the reasonable inference that the defendant is liablefor the misconduct alleged." Iqbal, 129 S.Ct. at 1949 (citing Twombly, 550 U.S. at 556). Thisstandard, which applies to all civil cases, "asks for more than a sheer possibility that a defendanthas 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 dissertationregarding their perceived victimization ofmortgagees throughout the economic downturn ofthepast several years, their allegations cannot entitle them to relief in this court.i l l . Discussion

As Defendants properly point out in their Motion to Dismiss, creditors are only requiredto file a ProofofClaim which states the amount owed "as of the date of the filing of thepetition." (Defs. Mot. Dismiss 8-11, citing 11 U.S.C. 501(b).) Plaintiffs do not dispute thisstatement of bankruptcy law. (Pls. Opp'n Mem. 12.) Plaintiffs ' Complaint fails to allege thatDefendants did not file the Proofs ofClaims using totals known as of the date of the filing of thepetition - which included initial Sheriff's fees - or that pertinent bankruptcy law requiredDefendants to amend the Proofs ofClaims. Instead, Plaintiffs claim in pertinent part thatDefendants' 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.) DespitePlaintiffs' arguments to the contrary, it is this failure to promptly amend that forms the basis forall of their claims.

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Plaintiffs expend much time and energy focusing not only their Complaint, but theirOpposition to Defendants' Motion to Dismiss, on the premise tha t homeowners all over thecountry are being victimized by attorneys such as Defendants, in a systematic scheme toovercharge debts in bankruptcy proceedings.2 However, Plaintiffs fail to provide any legal basisfor the one critical component necessary to sustain the particular claims alleged in theirComplaint: the existence of a duty to amend a Proofof Claim. Although Plaintiffs note thatdiscovery would be helpful regarding the merits of thei r claims, discovery cannot provide a dutythat 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 credito r's claim for debt incurred pre-petition.

2 Plaintiffs cite to the case ofHeintz v. Jenkins, 514 U.S. 291, 299 (1995) for theproposition 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 thenature of specific written communications by counsel engaged in debt collections and wassubsequently superseded to the following extent:

In Heintz v. Jenkins, the U.S. Supreme Court held that the term "debt collector"within the FDCPA applies to lawyers who regularly collect consumer debtsthrough litigation. One year later, Congress amended FDCPA 1692e(11) toprovide protection to attorneys by exempting any "formal pleading made inconnection 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, theFDCPA now states: The failure to disclose in the initial written communicationwith the consumer and, in addition, if the initial communication with theconsumer is oral, that initial oral communication, that the debt collector isattempting to collect a debt and that any information obtained will be used for thatpurpose , and the failure to disclose in subsequent communications that thecommunication is from a debt collector, except that this paragraph shall not applyto 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).

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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 ofMassachusetts has effectively summarized the

law regarding amendment of a ProofofClaim as it existed in 2002 and still exists today . . .Neither the Bankruptcy Code nor the Federal Rules ofBankruptcy Procedureaddress amendments to proofs ofclaim. Clamp-All Corp. v. Foresta (In reClamp-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 thebar date, amendments to filed proofs of claim are permissible. !d. Amendments totimely filed defective proofs ofclaim may bemade 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-bardate amendments should not be allowed if it is in actuality a new claim against theestate. In re Clamp-All Corp., 235 B.R. at 140, citing In re Int'l Horizons, 751F.2d 1213, 1216 (11th Cir. 1985).

In re Callery, 274 B.R. 51, 56 (Bankr. D. Mass. 2002).Amendment of a ProofofClaim is not mandatory, therefore Defendants' failure to do so -

timely or otherwise - cannot constitute a basis for wrongdoing that would afford Plaintiffs relie funder the FDCRA or any of the other statutory/common law provisions3 they contend Defendantshave violated. Plaintiffs had an opportunity to object to the disputed Proofs of Claims and theirassertion that doing so would impose an undue burden on them that the filing and litigation of theinstant lawsuit would not, is unfounded.

Even in the event Plaintiffs did not wish to utilize the object ion procedure, other optionsexisted within the appropriate jurisdiction of the Bankruptcy Court which could have served toremedy their allegations of "inflated" Proofs ofClaims. 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 ofPlaintiffs' state lawclaims with Plaintiffs' claims under the FDCPA." (Pls. Opp'n Mem. 14 n.14.)

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which Plaintiffs submitted to this Court on March 22, 2010 when they filed a Notice ofRelevantAuthority (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 ProofofClaim which had notbeen timely amended to reflect a refund ofSheriffs refunds. Said debtor sought sanctionsagainst the mortgagee pursuant to Ru1e 9011 of the Federal Rules ofBankruptcy Procedure.Accordingly, the Bankruptcy Court issued a Rule to Show Cause upon the mortgagee and notedthat in the event Rule 9011 . . .

Hannon at9.

. . . [i]s not ''up to the task" of providing sufficient authority to compel a claimantto keep their Proofs of Claim updated so as to allow the Trustee, or Debtor-inPossession, to fairly allocate distributions to those filing proofs . . . [Section]105(a) provides the judicial authority to compel a claimant to timely amend aclaim that ought, in good conscience, be reduced because of circumstances suchas 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 thisbankruptcy matter into one that would be proper before this Court:

One of the fundamental purposes of the bankruptcy system is to adjudicate andconciliate 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. HouseholdAutomotive 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 orappropriate to carry out the provisions of this title. No provision of this titleproviding for the raising of an issue by a party in interest shall be construed topreclude the court from, sua sponte, taking any action or making anydetermination necessary or appropriate to enforce or implement court orders orrules, or to prevent an abuse ofprocess.

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 inbankruptcy court, the debtor's remedies to attack an allegedly inflated proofofclaim are limited to those provided for in the Bankruptcy Code. Baldwin, 1999U.S. Dist. LEXIS 6933, 1999 WL 284788 at 4; Gray-Mapp, 100 F.Supp. 2d at813-14; 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 FDCPA andConsumer 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 heir Motion to Dismiss, Defendants have relied in part on the holding setforth 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 ofClaims:[T]he facts of this case can be distinguished from cases involving theapplicabilityof the FDCPA to violations of the automatic stay anddischargeability issues. In the cases ofTurner, Hyman, and Randolph, thecollection agencies sent letters that violated both the Bankruptcy Code and the

FDCPA. Here, Asset did not engage in any wrongful conduct by filing a proofofclaim. To hold otherwise would undermine the rights of creditors in thebankruptcy process. The creditor's right to file a claim is not impacted by whetherthe statute of limitations had run, as the debtor must raise the statute of limitationsissue as an affinnative defense, and even then the court still must determinewhether it has tolled and run. The debtor does not need the FDCPA to protectitself rom improper claims, as the Bankruptcy Code allows the debtor to fdean objection. If his Court was to apply the FDCPA in this instance, debtorswould be encouraged to file adversary proceedings instead ofsimply anobjection to the creditor's claim, which is incredibly inefficient and underminesthe process provided by the Bankruptcy Code.Based on the overwhelming authorities supporting Asset's contentions, thatFDCPA claims are precluded by the Bankruptcy Code, this Court is satisfied thatAsset'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.

Id. at 886 (emphasis added).7

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201 O)(recognizing the fact that an "an FDCPA claim 'cannot be based on the filing of a proofofclaim, regardless of he ultimate validity of the underlying claim. ")(internal citation omitted).

Inasmuch as there is no Third Circuit precedent involving exactly the same factualscenario that exists herein, the holdings in Abramson and Williams provide constructive guidancein this Court's determination that redress for Plaintiffs' allegations of "systematic" violations byDefendants for filing allegedly inflated Proofs ofClaims lie solely within the BankruptcyCourt.67IV. 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 ofTortious Interference withContractual Relations (Compl. ~ 7 8 - 8 2 ) , said claim is essentially based upon the alleged conductdiscussed hereinabove: Defendants' purported filing of sworn Proofs ofClaims containing"inflated" sums ofSheritrs fees owed. Inasmuch as the amounts provided on the forms werederived from information known at the time of filing and because Defendants did not have a dutyto 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 ofConsentJudgment and Order filed on June 7, 2010 in the matter ofF deral Trade Commission v.Countrywide Home Loans, Inc., No. 10-4193(C.D. Cal. June 7, 2010) (Doc. No. 12), as well asthe Supplemental Memorandum ofLaw (Doc. No. 14) filed by Defendants in response to thisCourt' s Order dated June 11,2010 (Doc. No. 13). Upon doing so, this Court has determined thatthe contents of said Consent Order and Judgment do not affect the findings set forth hereinregarding Defendants' Motion to Dismiss.

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IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

DENNIS A. RHODES, :

GERALD A. BENDER , :EDWARD H. WOLFERD, JR., :

and DIANE and CHARLES J. GILES, :

individually and on behalf of all :

others similarly situated, : Civil Action No. 5:09-cv-01302-CDJ

:

Plaintiffs, :

v. : JURY TRIAL DEMANDED

:

ROSEMARIE DIAMOND, FRANCIS S. :

HALLINAN, DANIEL G. SCHMIEG, :

LAWRENCE T. PHELAN, JUDITH :T. ROMANO, PHELAN HALLINAN & :

SCHMIEG, LLP, PHELAN HALLINAN & :

SCHMIEG, P.C., WELLS FARGO & :

COMPANY, WELLS FARGO BANK, N.A., :

COUNTRYWIDE HOME LOANS :

SERVICING LP and COUNTRYWIDE :

HOME LOANS, INC. (both now owned by :

BANK OFAMERICA), :Defendants. :

AMENDED COMPLAINT - CLASS ACTION

BURKE HESS & NARKIN BURKE & HESS John G. Narkin Michael D. Hess3000 Atrium Way, Suite 234 951 Rohrerstown RoadMount Laurel, NJ 08054 Suite 102

Tel: (856) 222-2913 Lancaster, PA 17601Fax: (856) 222-2912 Tel: (717) 391-2911Fax: (717) 391-5808

Attorneys for Plaintiffs and the Proposed Classes


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TABLE OF CONTENTS

Page

I. INTRODUCTION AND OVERVIEW. 1

II. JURISDICTION AND VENUE. 4

III. THE PARTIES 5

A. Plaintiffs.. 5

B. Defendants 6

IV. FACTUAL ALLEGATIONS. 10

A. Pervasive Abuse In The Mortgage Foreclosure Industry. 10

1. Record Numbers of Homeowners are at Riskof Losing Their Homes. 10

2. Governments Response to the Foreclosure Crisis 13

3. Unscrupulous Mortgage Servicers and Their AttorneysSystematically Exploit and Profit From theMortgage Foreclosure Crisis 19

a. Egregious Mortgage-Related SchemesAre Known Problems in the Foreclosure Industry19

b. Countrywides Documented Historyof Mortgage Servicing Abuse 23

c. Wells Fargos Documented Historyof Mortgage Servicing Abuse 26

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B. PHS Systematically Abuses Distressed Homeownersand the Legal System.. 36

1. PHS Inflates Foreclosure Costson an Institutionalized Basis 37

a. PHS Systematically MisappropriatesSheriffs Deposit Refunds. 37

b. PHS Systematically Uses Wholly-OwnedVendorsto Inflate Foreclosure Costs .... 45

2. PHS Systematically Prosecutes Foreclosure Actionsin the Names of Parties Without Legal Standing to Sue51

3. PHSs Wrongful Conduct Is FacilitatedBy Its Thoughtless, Mechanical Applicationof Client-Mandated Computer Programs. 67

V. CLASS ACTION ALLEGATIONS.73

VI. CLAIMS FOR RELIEF 77

COUNT I: VIOLATIONS OF 18 U.S.C. 1962(c) (RICO)... 77

A. The Phelan Hallihan & SchmeigMortgage Foreclosure and Bankruptcy Enterprise78

B. Defendants Use of the U.S. Mailsand Interstate Wire Facilities83

C. Conduct of the RICO Enterprises Affairs. 91

D. Defendants Pattern of Racketeering Activity 96

E. Damages Caused by the Defendants Scheme 96

COUNT II: VIOLATIONS OF 15 U.S.C. 162 et seq. (FDCPA)...97

COUNT III: VIOLATIONS OF 73 P.S. 201-1(UTPCPL) 99

COUNT IV: COMMON LAW FRAUD...101

COUNT V: BREACH OF CONTRACT 102

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COUNT VI: BREACH OF DUTY OF GOOD FAITHAND FAIR DEALING..103

COUNT VII: MONEY HAD AND RECEIVED..104

COUNT VIII: NEGLIGENT MISREPRESENTATION.105

VII. JURY TRIAL DEMAND.106

VIII. PRAYER FOR RELIEF .106

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On behalf of themselves and all others similiarly situated, Plaintiffs Dennis A.

Rhodes, Gerald A. Bender, Edward H. Wolferd, Jr., and Diane and Charles J. Giles

(Plaintiffs) bring this action against Defendants for damages and injunctive relief.

Except for allegations concerning their own acts and the wrongful acts of

Defendants that damaged Plaintiffs interests, Plaintiffs allegations are based on

information and belief. Plaintiffs information and belief are derived from an investigation

undertaken by their attorneys, which includes, among other things (1) interviews of

witnesses; (2) review and analysis of court and other public records; and (3) revie

third circuit appeal-and the amended complaint-class action foreclosure

Documents