Rinaldi v. HSBC Bank USA, N.A. (In re Rinaldi)

• Decision Date: 22 February 2013
• Docket Number: Bankruptcy No. 11–35689–svk.,Adversary No. 12–2412.
• Citation: 487 B.R. 516
• Parties: In re Roger Peter RINALDI and Desa Lilly Rinaldi, Debtors. Roger Peter Rinaldi, et al., Plaintiffs, v. HSBC Bank USA, N.A., as Trustee, et al., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

487 B.R. 516

In re Roger Peter RINALDI and Desa Lilly Rinaldi, Debtors.

Roger Peter Rinaldi, et al., Plaintiffs,

v.HSBC Bank USA, N.A., as Trustee, et al., Defendants.

Bankruptcy No. 11–35689–svk.

Adversary No. 12–2412.

United States Bankruptcy Court,

E.D. Wisconsin.

Feb. 22, 2013.

Wendy Alison Nora, Access Legal Services, Minneapolis, MN, for Plaintiffs.

Stephanie L. Dykeman, Litchfield Cavo LLP, Brookfield, WI, Brett B. Larsen, David J. Hanus, Noah D. Fiedler, Hinshaw & Culbertson LLP, Milwaukee, WI, for Defendants.

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW AND MEMORANDUM DECISION ON DEFENDANTS' MOTIONS TO DISMISS COMPLAINT AND AMENDED COMPLAINT

SUSAN V. KELLEY, Bankruptcy Judge.

Roger Rinaldi (“Mr. Rinaldi”) and Desa Rinaldi (with Mr. Rinaldi, the “Debtors”) filed this adversary proceeding contending that certain mortgage lenders and their lawyers engaged in a “criminogenic scheme” to defraud investors in a securitized trust and seize the Debtors' residence. (Complaint, ¶ 77). The defendants moved to dismiss the Debtors' complaint and amended complaint, and the parties filed briefs. After considering the arguments presented, the motions to dismiss are granted. This Memorandum Decision constitutes the Court's findings of fact and conclusions of law. The Court lacks authority to enter a final order on some of the claims, and, accordingly, this decision constitutes proposed findings and conclusions for consideration by the district court on those claims.

I. THE LOAN TRANSACTION AND STATE COURT LITIGATION

Mr. Rinaldi signed an Adjustable Rate Note dated June 10, 2005 (the “Note”) in favor of Wells Fargo Bank, N.A. ( Id., Exhibit A). Mr. Rinaldi acknowledged that Wells Fargo could transfer the Note, and he agreed to pay the Note Holder. ( Id.). To secure the Note, the Debtors executed a mortgage dated June 10, 2005 (the “Mortgage”), on their residence located in Bristol, Wisconsin (the “property”). ( Id., Exhibit B). The mortgagee is Wells Fargo Bank, N.A. The copy of the Note filed in the bankruptcy case is stamped with an undated endorsement signed by Joan M. Mills, as Vice President of Wells Fargo Bank, N.A.: “Without Recourse Pay to the Order of (blank).” ( Id., Exhibit G).

The Debtors defaulted on the Note, and on February 3, 2009, HSBC Bank USA, National Association (“HSBC”), as Trustee for Wells Fargo Asset Securities Corporation Home Equity Asset–Backed Certificates, Series 2005–2, started an action against the Debtors in the Circuit Court for Kenosha County to foreclose the property. (Affidavit of Stephanie L. Dykeman in support of HSBC's motion to dismiss, Docket No. 41 (“Dykeman Aff.”), Exhibit J). In their answer to the foreclosure complaint, among other defenses, the Debtors disputed HSBC's standing to enforce or collect on the Note, “unless it can be proved that the proper assignments and allonges are present with the original note....” ( Id., Exhibit E, ¶ 1). The Debtors also claimed that there were irregularities in the initiation of the Mortgage transaction, including alteration of the Debtors' loan application. ( Id., Exhibit E, ¶¶ 17–20). After considering the Debtors' claims and defenses, the state court granted HSBC's motion for summary judgment and entered a foreclosure judgment in HSBC's favor on January 26, 2010. ( Id., Exhibit B). The Debtors did not appeal the judgment of foreclosure. On November 12, 2010, the Debtors filed a motion to obtain relief from the foreclosure judgment, and on November 22, 2010, they filed a brief in support of their motion to vacate the judgment. ( Id., Exhibit G). On January 6, 2011, the Circuit Court for Kenosha County denied the Debtors' motion to vacate the foreclosure judgment, specifically finding that the affidavits in support of summary judgment were not fraudulent. ( Id., Exhibit D).

Despite the contentious proceedings in the Kenosha County Circuit Court, HSBC and the Debtors negotiated and agreed upon a loan modification. As a result, on January 18, 2011, the state court granted HSBC's petition for dismissal of the foreclosure action and vacated the foreclosure judgment. ( Id., Exhibit G). The litigation honeymoon was short-lived. On June 10, 2011, the Debtors filed suit in the Circuit Court for Kenosha County against Wells Fargo Bank, HSBC and their lawyers, Gray & Associates, LLP. The Debtors' claims mirrored the claims and counterclaims that the Circuit Court had dismissed in the foreclosure action. ( Id., Exhibit H.)

II. BANKRUPTCY PROCEEDINGS

On October 14, 2011, the Debtors filed a Chapter 7 petition in this Court. On March 21, 2012, on the Debtors' motion, the Court converted the Debtors' case to Chapter 13. On June 14, 2012, the Debtors filed an objection to HSBC's proof of claim, and on June 17, 2012, the Debtors filed this adversary proceeding against HSBC, as Trustee, Wells Fargo Bank, N.A., Wells Fargo Asset Securities Corporation, Wells Fargo Bank, N.A. d/b/a America's Servicing Company, Litchfield Cavo, LLP, Brad A. Markvart (collectively the “Wells Defendants”), Gray & Associates, LLP, William N. Foshag, Duncan C. Delhey, Jay Pitner and Brian D. Perhach (collectively, the “Gray Defendants”).

On June 28, 2012, HSBC filed a motion for relief from stay, and on August 9, 2012, HSBC filed an objection to confirmation of the Debtors' Chapter 13 plan, which proposed to treat HSBC's claim as unsecured. On July 12, 2012, the Debtors filed a motion to disqualify Gray & Associates, LLP and Litchfield Cavo, LLP and any of their attorneys from representing their clients in the bankruptcy proceeding. The Court denied the motion as to Litchfield Cavo, but reserved ruling on the motion as to Gray & Associates.

For purposes of scheduling and disposition, given the identity of the disputes, the Court combined the proof of claim objection, HSBC's motion for relief from stay and objection to confirmation, this adversary proceeding, and all related motions involving the Debtors, the Wells Defendants and the Gray Defendants. As a result, this Memorandum Decision will resolve all disputes among these parties pending in the bankruptcy court.

On August 1, 2012, the Gray Defendants filed a motion to dismiss the complaint. On August 21, 2012, the Wells Defendants filed a motion to dismiss the complaint. On August 23, 2012, the Debtors filed a motion to amend the complaint. The Court denied the motion as untimely as to the Gray Defendants, but granted it as to the Wells Defendants. After two unsuccessful motions for reconsideration of the denial of the motion to amend the complaint, the Debtors appealed. The Gray Defendants filed a motion to dismiss the appeal, but the district court has not issued a decision. No stay pending appeal has been sought, and Bankruptcy Rule 8005 permits this Court to proceed with the merits of this adversary proceeding.

On October 1, 2012, the Wells Defendants filed a supplemental motion to dismiss the amended complaint. The Debtors responded to the motions to dismiss, and the defendants replied. The Debtors also filed motions to strike certain exhibits attached to the defendants' briefs. The defendants replied to those motions. One of the cases cited by the Gray Defendants was reversed on appeal after the Gray Defendants' brief was filed, and the Court has considered the parties' arguments regarding that case.

III. RELIEF SOUGHT IN THE COMPLAINT AND AMENDED COMPLAINT

Initially, the Debtors ask the Court to determine the validity and enforceability of HSBC's proof of claim. The Debtors' objections to the claim include that the Note lacks consideration; two mortgage assignments are null and void; another mortgage assignment is a forgery or unenforceable because it was not recorded or perfected prior to bankruptcy; HSBC is not the owner or holder of the Note; and the Note image attached to the claim was fabricated to deceive the Court. Along with disallowance of the claim and the security represented by the Mortgage, the Debtors seek a determination that the proof of claim is false, fraudulent and unlawful. The Debtors ask the Court to determine that none of the Wells Defendants has standing or the status of real party in interest to maintain a claim for relief from stay.

The Debtors also accuse the Gray Defendants of common law fraud, abuse of legal process and violations of the Fair Debt Collections Practices Act (“FDCPA”). The Debtors accuse the Wells Defendants of the same, and the amended complaint added a claim for damages for violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Specifically against Wells Fargo Bank, N. A., the Debtors assert claims for breach of contract and tortious interference with prospective economic opportunity.

IV. JURISDICTION

A. General Bankruptcy Jurisdiction

Jurisdiction over bankruptcy cases as well as proceedings arising under the Bankruptcy Code and arising in or related to bankruptcy cases resides in the district court. 28 U.S.C. § 1334(b). Pursuant to 28 U.S.C. § 157(a), the district court may refer these cases and proceedings to the bankruptcy judges for the district, and the District Court for Eastern District Wisconsin entered a standing order of reference dated July 10, 1984 to accomplish this referral. Under 28 U.S.C. § 157(b)(1), bankruptcy judges may hear, determine and enter final orders in all “core proceedings” arising in a bankruptcy case or arising under the Bankruptcy Code. If a matter is not a core proceeding, but is related to a bankruptcy case, the bankruptcy judge may hear the proceeding, but must submit proposed findings of fact and conclusions of law to the district court for entry of the final order. 28 U.S.C. § 157(c)(1). A list of core proceedings is found in 28 U.S.C. § 157(b)(2). In Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), the Supreme Court held that even though a proceeding (a counterclaim to a proof of claim) appeared on the list of core proceedings, the bankruptcy judge lacked...