GILES et al v. PHELAN HALLINAN & SCHMIEG, LLP et al

Filing 100

MEMORANDUM OPINION. Signed by Chief Judge Jerome B. Simandle on 8/14/2013. (TH, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

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

Civil Action
No. 11-6239 (JBS/KMW)
MEMORANDUM OPINION

SIMANDLE, Chief Judge:
Plaintiffs Charles J. and Diane Giles brought this proposed
class action alleging that Defendants engaged in a scheme to
prosecute fraudulent mortgage foreclosure lawsuits, including an
allegedly fraudulent foreclosure action against the Giles in New
Jersey state court. The Court dismissed all of Plaintiffs’
claims. This matter now comes before the Court on the motion of
Defendants Phelan Hallinan & Schmieg P.C., Lawrence T. Phelan,
Francis S. Hallinan, Daniel G. Schmieg, Rosemarie Diamond, Full
Spectrum Services Inc., and Land Title Services of New Jersey
Inc. (collectively, the “Phelan Parties”) for sanctions against
Plaintiffs’ counsel pursuant to Fed. R. Civ. P. 11, 28 U.S.C. §
1927, and the Court’s inherent powers. [Docket Item 88.] In
Opposition [Docket Item 98], Plaintiffs also requested sanctions
against the Phelan Parties pursuant to Rule 11. The Court will
deny both requests for sanctions because neither the parties nor

their attorneys have engaged in sanctionable conduct. The Court
finds as follows:
1.

At oral argument for a preliminary injunction [Docket

Item 5], the Court encouraged Plaintiffs to shorten their
Complaint [Docket Item 1], which was 105 pages long, excluding
exhibits. In response, Plaintiffs filed a 90-page, 277-paragraph
Amended Complaint [Docket Item 16]. After hearing oral argument,
the Court addressed three motions to dismiss [Docket Items 20,
26, & 27] the Amended Complaint in Giles v. Phelan, Hallinan &
Schmieg, L.L.P., 901 F. Supp. 2d 509 (D.N.J. 2012) (“Giles I”).
The Court dismissed all of Plaintiffs’ claims with prejudice
except for the Racketeering Influenced and Corrupt Organizations
Act (“RICO”) claim, which the Court struck without prejudice
because it was unnecessarily and confusingly prolix and
contained immaterial allegations.1 The Court’s Order specified

1

The Court’s key holdings were: “(1) Count IV (breach of
contract), Count V (money had and received), and Count VI
(negligence) are dismissed with prejudice pursuant to
Plaintiffs' voluntary dismissal; (2) claims against Defendant
Wells Fargo & Company are dismissed with prejudice pursuant to
Plaintiffs' voluntary dismissal; (3) all of Plaintiff [Laurine]
Spivey's [another putative class representative’s] claims in
Counts I, II, and III are dismissed with prejudice because she
cannot challenge bankruptcy proofs of claims in this forum; (4)
Count II (New Jersey Consumer Fraud Act) is dismissed with
prejudice as to all Defendants because the New Jersey litigation
privilege bars the Giles' NJCFA claims; (5) the Giles' RICO
claims under Count I are stricken without prejudice to
repleading because the Amended Complaint is unnecessarily and
confusingly prolix, contains immaterial allegations, and lacks
2

that the Giles had leave to file a Second Amended Complaint with
regard to the RICO claim only. [Docket Item 64 at 2.]
2.

Plaintiffs then filed a Second Amended Complaint

[Docket Item 65], which the Phelan parties argued via letter
brief [Docket Item 71] did not comply with the length
requirements in the Court’s September 28, 2012 Order [Docket
Item 64]. After conferencing with counsel, the Court ordered
[Docket Item 73] Plaintiffs to file the Third Amended Complaint
(“TAC”) [Docket Item 74] in accordance with specific length
requirements.
3.

Defendants Wells Fargo Bank N.A. and the Phelan

Parties filed two motions to dismiss [Docket Items 75 & 78] the
TAC. After hearing oral argument, the Court dismissed
Plaintiffs’ RICO claims, which were the only remaining claims
after Giles I, with prejudice in Giles v. Phelan, Hallinan &
Schmieg, L.L.P., Civ. 11-6239 (JBS/KMW), 2013 WL 2444036 (D.N.J.
June 4, 2013) (“Giles II”). In Giles II, the Court noted: “This
case present[ed] several novel issues in this Circuit, including
whether the New Jersey litigation privilege bars federal RICO
claims against lawyers, parties, and their representatives
particularity with respect to each Defendant's individual fraudbased liability; (6) any claims involving assignments to which
Plaintiffs were not parties are dismissed with prejudice; and
(7) Defendants' Motion to Strike Plaintiffs' Notice of Relevant
Federal Court Filings is granted.” Giles, 901 F. Supp. 2d at
533.
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arising from litigation practices and whether the NoerrPennington doctrine bars federal RICO claims based on state
foreclosure litigation.” Id. at *1. The Court’s principal
holdings were:
the New Jersey litigation privilege does not apply to
RICO claims; (2) the Noerr-Pennington doctrine bars
this action; (3) the RICO statute of limitations, res
judicata,
collateral
estoppel,
and
the
entire
controversy doctrine do not bar this action; and (4)
even if not barred by Noerr-Pennington, the Giles’
RICO claim will be dismissed with prejudice because
the Giles have not shown that Defendants’ actions were
the proximate cause of their injuries.
Giles II, 2013 WL 2444036 at *11.
4.

The Phelan Parties now move for sanctions against

Plaintiffs’ counsel John G. Narkin, Narkin LLC, James Flynn,
Robert Harwood, Harwood Feffer LLP, Lisa J. Rodriguez, and the
law firm of Trujillo Rodriguez & Richards LLP based on their
filing and prosecution of the TAC. The Phelan Parties request
costs, attorneys’ fees, and dismissal of the TAC with prejudice.2
They argue that “they have been forced to incur significant
expenses to defend against numerous frivolous and unfounded
complaints . . . .” (Phelan Parties’ Mem. Supp. Mot. Sanctions,
at 1.) They claim that sanctions are warranted because
Plaintiffs’ counsel filed legally baseless claims; sought to re2

The Phelan Parties filed the motion for sanctions before the
Court decided Giles II. As the Court dismissed the TAC with
prejudice, this aspect of the Phelan Parties’ motion is moot.
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litigate issues resolved in state foreclosure litigation; filed
claims barred by the entire controversy doctrine, res judicata,
and the Rooker-Feldman abstention doctrine; falsely alleged that
the Phelan parties submitted false certifications to the
foreclosure court; and filed multiple, excessively wordy
complaints.
5.

In Opposition, Plaintiffs argue that Giles II rejected

the Phelan Parties’ arguments regarding claim preclusion; the
Phelan Parties misrepresented the outcome of the state court
foreclosure proceedings; sanctions are not proper simply because
they lost; the Phelan Parties cannot challenge any of the
earlier pleadings because the TAC supersedes them; and there was
no bad faith or egregious conduct. Plaintiffs also requested
sanctions for their expenses in defending the Phelan Parties’
motion for sanctions.
6.

In their Reply [Docket Item 99], the Phelan Parties

argue that “[t]he Giles’ opposition to this Sanctions Motion
utterly fails to demonstrate that the Giles . . . had any
affirmative support for their RICO claim.” (Def. Reply at 1.)
The Phelan Parties emphasize that they are entitled to sanctions
because Plaintiffs’ counsel did not investigate the claims
before initiating this action, did not connect any damages to
Defendants’ conduct, and filed an action precluded by the Noerr5

Pennington doctrine. The Phelan Parties argue that sanctions are
warranted when “four complaints are filed and repeatedly pursued
with no legitimate basis, with no reasonable investigation, and
with no other purpose than to harass . . . .” (Def. Reply at 3.)
The Phelan Parties also argue that “bad faith can be inferred by
multiple amendments of a frivolous complaint and the nonexhaustive examples of counsel’s failings . . . .” (Def. Reply
at 11.) And finally, the Phelan Parties argue that the
Plaintiffs’ request for Rule 11 sanctions should be denied
because the Phelan Parties’ actions involved plausible legal
arguments, diligence, and meritorious state court litigation.
The Court will now turn to its analysis.
7.

The Court has multiple avenues for addressing improper

or bad-faith conduct: Fed. R. Civ. P. 11, 28 U.S.C. § 1927, and
the Court’s inherent power.
8.

Fed. R. Civ. P. 11(b) provides that “[b]y presenting

to the court a pleading, written motion, or other paper . . . an
attorney . . . certifies that to the best of the person's
knowledge, information, and belief, formed after an inquiry
reasonable under the circumstances: (1) it is not being
presented for any improper purpose . . . ; (2) the claims,
defenses, and other legal contentions are warranted by existing
law or by a nonfrivolous argument for extending, modifying, or
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reversing existing law or for establishing new law; (3) the
factual contentions have evidentiary support . . . .” If Rule
11(b) is violated, then Rule 11(c) permits the Court to impose
sanctions, including reasonable expenses or nonmonetary
directives.
9.

Rule 11 sanctions should be issued “only in the

‘exceptional circumstance’, where a claim or motion is patently
unmeritorious or frivolous.” Doering v. Union Cnty. Bd. of
Chosen Freeholders, 857 F.2d 191, 194 (3d Cir. 1988) (quoting
Gaiardo v. Ethyl Corp., 835 F.2d 479, 483 (3d Cir. 1987)). “Rule
11 sanctions should not be viewed as a general fee shifting
device.” Gaiardo, 835 F.2d at 483. The Rule’s purpose “is not
wholesale fee shifting but correction of litigation abuse,” and
sanctions “do not automatically or usually follow an adverse
judgment or ruling. Substantially more is required.” Id. The
advisory committee note to the 1983 Amendment to Rule 11
explains that “[t]he rule is not intended to chill an attorney's
enthusiasm or creativity in pursuing factual or legal theories.”
10.

Imposition of Rule 11 sanctions is discretionary. The

advisory committee note to the 1993 Amendments to Rule 11
stated, “The court has significant discretion in determining
what sanctions, if any, should be imposed for a violation . . .
.”; see also Grider v. Keystone Health Plan Cent., Inc., 580
7

F.3d 119, 146 n.28 (3d Cir. 2009) (“the imposition of sanctions
for a Rule 11 violation is discretionary rather than mandatory”)
(quoting Knipe v. Skinner, 19 F.3d 72, 78 (2d Cir. 1994)).
11.

In addition to Rule 11 sanctions, Congress has also

mandated that “[a]ny attorney . . . who so multiplies the
proceedings in any case unreasonably and vexatiously may be
required by the court to satisfy personally the excess costs,
expenses, and attorneys' fees reasonably incurred because of
such conduct.” 28 U.S.C. § 1927. This statute “requires a
finding of counsel's bad faith as a precondition to the
imposition of fees.” Gaiardo, 835 F.2d at 484.
12.

And, lastly, another tool available to the Court is

“the inherent power of a federal court to sanction a litigant
for bad-faith conduct.” Chambers v. NASCO, Inc., 501 U.S. 32, 35
(1991).
13.

Sanctions are unwarranted under Fed. R. Civ. P. 11, 28

U.S.C. § 1927, or the Court’s inherent powers. The Court will
deny both requests for sanctions because the parties and their
attorneys have not exhibited bad faith or unreasonable conduct.
14.

The Phelan Parties argue that this action was

obviously meritless. The Court disagrees. As the Court stated in
Giles II, “This case present[ed] several novel issues . . . .”
Giles II, 2013 WL 2444036 at *1. The Court held that the Noerr8

Pennington doctrine barred Plaintiffs’ RICO claims, but that
holding was an extension of the Noerr-Pennington doctrine. Prior
case law did not dictate that outcome so definitely that
Plaintiffs’ bringing of this lawsuit could be considered
objectively baseless. Similarly, the Court’s holding that
Plaintiffs failed to allege that Defendants’ actions were the
proximate cause of their injuries was not so obvious that this
lawsuit could be considered litigation abuse. The Phelan Parties
also argued that collateral estoppel, res judicata, the entire
controversy doctrine, and the Rooker-Feldman doctrine barred
Plaintiffs’ claims, but the Court rejected all of those
arguments.
15.

In both Giles I and Giles II, the Court addressed

challenging questions of law that had not been directly answered
before in this Circuit. Plaintiffs presented creative and cogent
arguments; their arguments were not plainly and resolutely
meritless. Sanctions are not intended to chill creative and
vigorous advocacy. See Advisory Committee Note to 1983 Amendment
of Fed. R. Civ. P. 11.
16.

The Court dismissed all of Plaintiffs’ claims, but

that outcome does not dictate that sanctions are warranted. The
Third Circuit has specifically held that Rule 11’s purpose “is
not wholesale fee shifting but correction of litigation abuse,”
9

and sanctions “do not automatically or usually follow an adverse
judgment or ruling. Substantially more is required.” Gaiardo,
835 F.2d at 483. In this case, there is only an adverse
judgment; “substantially more” is absent.
17.

The Phelan Parties repeatedly assert that sanctions

are warranted because Plaintiffs filed four complaints. The
Court encouraged Plaintiffs to file the First Amended Complaint,
gave Plaintiffs leave to file the Second Amended Complaint, and
ordered Plaintiffs to file the Third Amended Complaint. Those
amendments were permitted because it did not appear at the time
to be futile to do so. The Court cannot now impose sanctions for
or infer bad faith from Plaintiffs’ filing of amended complaints
at the Court’s direction.
18.

The Phelan Parties also argue that sanctions are

warranted because the TAC improperly alleges that “the Phelan
Parties failed to conduct proper foreclosure searches and
submitted false certifications to the Foreclosure Court.”
(Phelan Parties’ Mem. Supp. Mot. Sanctions, at 4.) The Phelan
Parties cite paragraphs 48-54 of the TAC, in which Plaintiffs
asserted that the Phelan Parties filed a foreclosure lawsuit
against the Giles in the name of Wachovia Bank and that “[t]his
allegation was false and misleading because . . . Wachovia had
already sold its entire corporate trust and institutional
10

custody business over a year before the Foreclosure Complaint
was filed.” (TAC ¶ 50.) The Court will not re-adjudicate the
parties’ arguments from the motion to dismiss briefing and will
not summarize the extensive factual allegations described in
Giles I and Giles II, which are incorporated herein by
reference. For present purposes, it suffices to note that the
TAC alleges that the Phelan Parties filed a mortgage foreclosure
action against the Giles in Wachovia’s name and that Phelan P.C.
subsequently filed a motion to amend the pleadings to reflect
that U.S. Bank, not Wachovia, was the proper plaintiff. Giles
II, 2013 WL 2444036 at *1-2. Defendants have acknowledged that
Wachovia was not the proper Plaintiff. The Court does not find
that the TAC’s allegations merit sanctions.
19.

Imposition of sanctions under Fed. R. Civ. P. 11 is

discretionary. The Court will not exercise its discretion in
this case because the circumstances do not warrant sanctions. In
addition, Plaintiffs have not exhibited bad faith and,
therefore, imposition of costs under 28 U.S.C. § 1927 is
unwarranted. Because the Court has not found bad faith or
sanctionable conduct, it need not exercise its inherent powers.
The Phelan Parties’ motion for sanctions will be denied.
20.

Plaintiffs’ request for sanctions against the Phelan

Defendants under Rule 11 will also be denied. The Phelan
11

Parties’ counsel advocated vigorously on behalf of their clients
in filing their motion for sanctions. Their motion for sanctions
does not exhibit bad faith or litigation abuse. It was not
unreasonable for the Phelan Parties to argue that their burdens
in defending this case were needlessly increased by Plaintiffs’
repeated failures to file short, plain statements of their
claims, as required by Fed. R. Civ. P. 8(a). While it is true
that Plaintiffs’ counsel advocated claims that were not tied to
any compensable harm suffered by their clients, it cannot be
concluded that counsel knowingly presented empty claims. But it
is undoubtedly true that this litigation took longer and
required more of the Phelan Defendants than it otherwise would
have if Plaintiffs had filed properly concise pleadings, and the
Phelan Defendants did not violate Rule 11 by advocating for
sanctions, even though unsuccessful.
21.

The Phelan Parties’ motion for sanctions is denied.

Plaintiffs’ request for sanctions is also denied. The
accompanying Order will be entered.
August 14, 2013

s/ Jerome B. Simandle
JEROME B. SIMANDLE
Chief U.S. District Judge

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