A putative class action for civil racketeering against a law firm and bank over allegedly improper foreclosure practices was thrown out of federal court on Tuesday.

Chief U.S. District Judge Jerome Simandle said Phelan Hallinan & Schmieg and Wells Fargo Bank were shielded by the Noerr-Pennington doctrine, which protects the First Amendment right to petition the government for redress of grievances.

But New Jersey’s litigation privilege did not shield the defendants, he held in Giles v. Phelan Hallinan & Schmieg, 11-cv-6239.

Whether the state privilege and the federal doctrine applied were novel questions within the Third Circuit, noted Simandle, who sits in Camden.

Charles and Diane Giles of Barnegat claim they fell behind on their mortgage because John, an emergency medical technician, became disabled as a result of search and rescue efforts at Ground Zero and ran up more than $200,000 in medical bills.

In February 2007, Phelan Hallinan of Mount Laurel filed a foreclosure suit against them in Ocean County on behalf of Wachovia Bank.

After it obtained a default judgment authorizing the sale of their home in June of that year, the couple hired an attorney and sought to stay the sheriff’s sale so they could privately sell their home.

They allegedly learned at that point that Wachovia had sold its mortgage trust business to U.S. Bank, before the foreclosure was filed and thus lacked standing.

In January 2008, the state court granted leave to amend the foreclosure pleadings to name U.S. Bank as the plaintiff, confirmed the voluntary dismissal of the foreclosure and expressly preserved the couple’s right to their affirmative claims.

In the interim, the couple had sold their house for a sum they claim was far below market value because they ran out of money to fight the foreclosure.

The suit seeks treble damages and fees under RICO for the reduced price received for their home and for legal fees they incurred in the foreclosure.

Although they never paid additional fees and costs demanded by Phelan Hallinan for the foreclosure, they sought to recover such payments on behalf of other members of the proposed class.

They also sued the firm’s partners — Lawrence Phelan, Francis Hallinan, Daniel Schmieg, and Rosemarie Diamond — and two companies they allegedly controlled that assisted with foreclosures, Full Spectrum Services Inc. and Land Title Services of New Jersey.

Wells Fargo acquired Wachovia in 2008.

The Gileses alleged that not only did the foreclosure complaint name the wrong plaintiff but that certifications falsely stated all necessary parties had been joined and a title search had been done to identify all entities with an interest in the property.

They claim they relied on those representations when they initially opted not to contest the foreclosure.

Their complaint says Phelan Hallinan pursued the case against them, even after Wachovia vice president and general counsel Mark Farmer informed it that it stopped being the trustee of the pooling and servicing agreement that covered the Giles mortgage at the end of 2005, and continued to file foreclosure actions in the name of Wachovia and U.S. Bank despite lack of title.

They claim the defendants were part of a racketeering enterprise whose purpose was to defraud homeowners by deceiving them and the courts.

The Gileses accused Phelan Hallinan of a "low-overhead business model" approach to foreclosures "in which most of the work done on their large inventory of ‘fill-in-the-blanks’ cases can be performed by nonlawyers operating a lawsuit-processing assembly line that is seldom interrupted or slowed down by real litigation."

Phelan Hallinan and Wells Fargo "file as many foreclosure cases as they can, without proper investigation and by any means possible, even if their overstretched support staffs cannot process them adequately, and even when there is no evidence of ownership of homeowners’ mortgages," they alleged.

The firm was mentioned in a December 2010 New Jersey court order that required the top mortgage servicers to prove to a special master that they used proper foreclosure procedures in an attempt to crack down on robosigning and other abuses.

The order referred to Bank of New York v. Ukpe, 09-cv-1710, a fraud case in which the firm had to redo about 3,000 assignments notarized by Full Spectrum employee Thomas Strain, who admitted that he notarized foreclosure documents outside the signer’s presence and falsely acknowledged tens of thousands of mortgage assignments for Phelan Hallinan during a three-year period.

The Noerr-Pennington doctrine on which Simandle relied in dismissing the Giles case originated in a 1961 U.S. Supreme Court opinion involving antitrust but has since been extended to other contexts.

"Because the doctrine applies to petitioning activity in all governmental departments, including the courts, and because the doctrine has expanded beyond its antitrust origins … the Noerr-Pennington doctrine bars Plaintiffs’ RICO claims arising out of Defendants’ prosecution of the Ocean County Superior Court foreclosure action," Simandle wrote.

The sham litigation exception to the doctrine did not apply because the foreclosure suit was not objectively baseless, he further found.

An additional ground for dismissal was the lack of proximate cause between suing in the name of the wrong bank and the Gileses’ alleged loss on their home and their legal fees, which Simandle said was the result of their mortgage default.

Simandle rejected the litigation privilege defense on the ground that it does not apply to federal claims.

The New Jersey Supreme Court ruled in Loigman v. Middletown, 185 N.J. 566 (2006), that the privilege applied to a federal civil rights claim, but Simandle said he had to follow federal law.

The Gileses have until June 18 to respond to Phelan Hallinan’s request for frivolous litigation sanctions.

John Narkin, of Boise, Idaho, one of their lawyers, says "there is absolutely no basis in law or in logic for sanctions" and "we will respond accordingly."

Trujillo Rodriguez & Richards in Haddonfield and Harwood Feffer in New York also represent the couple.

Kenneth Goodkind of Flaster/Greenberg in Cherry Hill, counsel for the Phelan Hallinan defendants, calls the case one “that never should have seen the light of day” and cost his clients “quite a bit of money to defend.”

See related letter to the editor.

Wells Fargo’s lawyer, Bradley Mitchell of Stevens & Lee in Lawrenceville, deferred to the bank, which said the decision “confirms that [it] promptly and correctly addressed the issues that arose in the Gileses’ foreclosure action before the right court.”