Antitrust Law Daily Wrap Up, RICO—DNJ: Foreclosure Action Naming Wrong Plaintiff Did Not Proximately Cause Homeowners’ Injuries, (Jun 6, 2013)

By Jody Coultas, J.D.

The federal district court in Camden, New Jersey has held that the New Jersey litigation privilege did not bar federal RICO claims, but the Noerr-Pennington doctrine did bar RICO claims brought by homeowners against a mortgage foreclosure law firm and mortgage servicer. The court also held that the RICO claims failed because the homeowners did not pled that the companies’ actions were the proximate cause of the alleged injuries (Giles v. Phelan, Hallinan & Schmieg, L.L.P., June 4, 2013, Simandle, J.).

The law firm filed a foreclosure complaint in the name of Wachovia Bank against the homeowners, but did not contest the action because Wachovia was not the proper plaintiff in the foreclosure action, as it had sold its mortgage trust business over a year before the foreclosure complaint was filed. The court entered a default judgment against the homeowners and authorized a sale of the home. The homeowners accepted a “far-below-market-value” offer to buy their house.

In their RICO complaint, the homeowners alleged that the law firm and mortgage servicer comprised an enterprise with the purpose of defrauding homeowners by obtaining property through false representations, including fraudulent court filings. The law firm and servicer allegedly used the name of Wachovia or U.S. Bank in foreclosure proceedings because they were “unable to ascertain the identity of the party that owned the Homeowners’ mortgages” and thus “acted with willful and reckless indifference to the identity of the bona fide owner of the Homeowners’ mortgages.”

The New Jersey litigation privilege did not bar the RICO claims, according to the court. There was significant authority holding that a common law state litigation privilege cannot bar a federal statutory claim.

The Noerr-Pennington doctrine barred the RICO claims arising out of the law firm’s and mortgage servicer’s prosecution of the foreclosure action. The Noerr-Pennington doctrine grants immunity to those who petition any department of the government for redress from statutory liability for their petitioning conduct, and applies to RICO claims. Although the doctrine does not apply to sham litigation, the homeowners were unable to show that the foreclosure action was not objectively baseless. Although the foreclosure action was voluntary dismissal in light of the sale of the home and payment of the principal and interest due, the law firm and servicer were succeeding in the litigation. Even if the companies deliberately filed fraudulent documents in foreclosure court, the court’s denial of the motion to dismiss showed that the alleged misrepresentations were not significant to the ultimate outcome or continuation of the foreclosure proceeding.

There was no evidence that the law firm or mortgage servicer proximately caused the homeowners to incur attorney’s fees or lose property value of their home, according to the court. To state a RICO claim, the homeowners needed to show that the companies’ actions proximately caused the alleged injuries. Using Wachovia’s name in the foreclosure action did not directly cause the foreclosure proceedings, and all of the alleged injuries—the need for attorneys and to sell their home—stemmed from those proceedings. Rather, the direct cause of the proceedings was the homeowner’s default on the mortgage, and the homeowners did not challenge the validity of the underlying mortgage or the default.

Naming the wrong plaintiff’s name in the foreclosure action did not void the foreclosure proceedings. The homeowners did not hire an attorney to fight the use of the wrong plaintiff’s name. The homeowners did not allege that the alleged wrongful conduct in naming the incorrect bank in the original pleadings caused harm that the naming of the correct bank, by substitution, would not have caused. Therefore, the court dismissed the RICO claims.

The case is No. 11-6239 (JBS/KMW).

Attorneys: John G. Narkin (Narkin LLC) for Charles Giles. Kenneth Goodkind (Flaster Greenberg, PC) for Phelan, Hallinan & Schmieg, L.L.P.

Companies: Phelan, Hallinan & Schmieg, L.L.P.

Cases: RICO NewJerseyNews