US Bank NA et al v. Pulsifer et al

Filing 10

ORDER signed by Judge Rudolph T. Randa on 1/8/2014. MOTION to Dismiss (Dkt. No. 8 in Bankruptcy Case 13-2176) GRANTED IN PART and DENIED IN PART. 6 MOTION to Amend/Correct Complaint GRANTED; Amended Complaint to be filed within 5 days of the date of this Order. Telephonic Scheduling Conference set for 3/11/2014 at 10:30 AM (Central Time) before Judge Rudolph T. Randa; the Court will initiate the call. (cc: all counsel)(cb)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
Lee H. Pulsifer and Laura L. Pulsifer,
Debtors.

Bankruptcy Case No. 12-36562-svk

LEE H. PULSIFER and LAURA L. PULSIFER,
Plaintiffs,
-vs-

Adv. Proc. No. 13-02176-svk
Case Nos. 13-C-648, 13-C-835

U.S. BANK, NATIONAL ASSOCIATION,
as Trustee for Citigroup Mortgage Pass-Through
Certificates Series 2007-AR4, and WELLS FARGO
HOME MORTGAGE,
Defendants.

MARY B. GROSSMAN, Standing Chapter 13 Trustee,
Additional Party.

DECISION AND ORDER

The Court withdrew the reference from the bankruptcy court and then
consolidated these two cases, which relate to Lee and Laura Pulsifer‟s attempts to
obtain a loan modification pursuant to the Home Affordable Modification Program
(“HAMP”). The defendants, U.S. Bank, N.A., as Trustee for Citigroup Mortgage
Pass-Through Certificates Series 2007-AR4, and Wells Fargo Home Mortgage, move

to dismiss the Pulisfers‟ complaint, which alleges claims for promissory estoppel,
negligent misrepresentation, and breach of the covenant of good faith and fair dealing,
in addition to asserting that U.S. Bank lacks standing to pursue claims in the Pulsifers‟
bankruptcy proceeding. The Pulsifers also move for leave to file a second amended
complaint.
To survive a Rule 12(b)(6) motion, a complaint must “contain sufficient factual
matter, accepted as true, to „state a claim to relief that is plausible on its face.‟”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007)). Obviously, leave to amend should be denied if the proposed
amendment fails to state a claim. Gen. Elec. Capital Corp. v. Lease Resolution Corp.,
128 F.3d 1074, 1085 (7th Cir. 1997) (“The opportunity to amend a complaint is futile
if the complaint, as amended, would fail to state a claim upon which relief could be
granted”).
In 2005, the Pulsifers refinanced their home with a $470,250.00 construction
bridge loan. Thereafter, the Pulsifers began to experience financial difficulties. In
2007, Lee Pulsifer was unemployed or underemployed. In 2008, he took a job making
less money than his previous full time employment.

Accordingly, the Pulsifers

discussed the possibility of loan modification with their loan servicer, Wells Fargo
Home Mortgage.
In 2008 and 2009, the Pulsifers contacted Wells Fargo several times regarding
their request for loan modification.

In October 2009, Wells Fargo provided the
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Pulsifers with information regarding the Home Affordable Modification Program.,
along with a Trial Period Plan (TPP or the Plan), which called for the Debtors to make
three payments in the amount of $2,108 in the months of November 2009, December
2009, and January 2010. Amended Complaint, Exhibit 1. The Plan states that it is
“Step One of Two-Step Documentation Process.” The Plan further states that it “will
not take effect unless and until both I and the Lender sign it and Lender provides me
with a copy of this Plan with the Lender‟s signature.” The Plan also states that it “is
not a modification of the Loan Documents” and that the “Loan Documents will not be
modified unless and until (i) I meet all of the conditions required for modification, (ii)
I receive a fully executed copy of a Modification Agreement, and (iii) the Modification
Effective Date has passed.” In signing the Plan, the Pulsifers acknowledged that “all
terms and provisions of the Loan Documents remain in full force and effect,” and that
Lender and the Pulsifers “will be bound by, and will comply with, all of the terms and
provisions of the Loan Documents.”
The Pulsifers made three payments of $2,108 pursuant to the Plan, and they
continued to make payments of $2,108 thereafter until November 2010. During the
calendar year 2010, the Pulsifers continuously contacted Wells Fargo, asking when the
process would be completed. Wells Fargo responded that it was processing their
request, but ultimately “failed and refused to provide” the Pulsifers “with a written
HAMP modification and also failed and refused to provide them with any declination
of the loan modification.” Amended Complaint, ¶ 21.
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In February 2011, U.S. Bank, the assignee of the Pulsifers‟ mortgage, filed a
foreclosure action against the Pulsifers in Wisconsin state court. U.S. Bank, N.A. v.
Pulsifer, et al., Waukesha County Case No. 11-CV-461.

The Pulsifers filed for

bankruptcy protection under chapter 13 on November 20, 2012, just one day prior to
the hearing on U.S. Bank‟s motion for summary judgment. At that point, the Pulsifers
were nearly three years and over $130,000 behind on their mortgage payments.
However, the Pulsifers proposed to pay no arrearage to U.S. Bank through their
chapter 13 plan. U.S. Bank objected to confirmation of the Pulsifers‟ plan and filed a
proof of claim in the amount of $621,696.40.

On March 4, 2013, the Pulsifers

objected to U.S. Bank‟s claim on the alternate grounds that U.S. Bank lacks standing
to file a claim and that U.S. Bank should be estopped from claiming an arrearage due
to its delay in processing their modification application.

On the same day, the

Pulsifers commenced this adversary proceeding against U.S. Bank and Wells Fargo.
Therein, the Pulsifers allege that Wells Fargo breached the duty of good faith
and fair dealing by representing to the Pulsifers that they could qualify for a loan
modification under HAMP, then failing and/or refusing to process the Pulsifers‟
modification. The Pulsifers rely on Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547
(7th Cir. 2012), which held that HAMP and its enabling statute do not preempt
“otherwise viable state-law claims.”

Obviously, this holding does not help the

Pulsifers if their claims are not “otherwise viable.” Id. at 555.
In Wigod, the Seventh Circuit considered whether a TPP under HAMP was an
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offer which, if accepted, could form the basis for an enforceable contract under Illinois
law. It could, but only if the loan servicer actually executed the TPP. The court
explained:
Wigod signed two copies of the Plan on May 29, 2009, and returned
them along with additional financial documentation to Wells Fargo.
Under the terms of the TPP Agreement, then, that moment was Wells
Fargo‟s opportunity to determine whether Wigod qualified. If she did
not, it could have and should have denied her a modification on that
basis. Instead, Wells Fargo countersigned on June 4, 2009 and mailed
a copy to Wigod with a letter congratulating her on her approval for a
trial modification. In so doing, Wells Fargo communicated to Wigod
that she qualified for HAMP and would receive a permanent “Loan
Modification Agreement” after the trial period, provided she was “in
compliance with this Loan Trial Period and [her] representations . . .
continue[d] to be true in all material respects.”
673 F. 3d at 562 (emphasis added). Unlike in Wigod, Wells Fargo did not execute the
Pulsifers‟ TPP. Amended Complaint, ¶ 19 (Wells Fargo “never sent the debtors a
copy of the [Plan] with a signature of [Wells Fargo]”). Thus, there was no “unilateral
offer to modify” the Pulsifers‟ loan “conditioned on [their] compliance with the stated
terms of the bargain.” Wigod at 562. Other courts have recognized this distinction.
See, e.g., McGann v. PNC Bank, N.A., No. 11-cv-06894, 2013 WL 1337204, at *6
(N.D. Ill. March 29, 2013) (“Unlike Wigod, PNC never executed and returned the TPP
Agreement to McGann and instead it requested additional documentation from
McGann. Pursuant to the TPP Agreement‟s own terms, PNC‟s failure to sign the
agreement evidences that it had no obligation to offer McGann a HAMP loan
modification”) (collecting cases). Without a valid offer, there can be no underlying
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contract, and without an underlying contract, the Pulsifers‟ claim for breach of the duty
of good faith and fair dealing necessarily fails. See Tabatabai v. West Coast Life Ins.
Co., 664 F.3d 663, 668 (7th Cir. 2011) (“Established Wisconsin law states, „If there is
no contract, the implied duty of good faith and fair dealing does not come into play‟”).
However, the absence of a contract does not impact the Pulsifers‟ claim for
promissory estoppel. Such a claim consists of three elements: (1) a promise that the
promisor reasonably should expect to induce action or forbearance of a definite and
substantial character on the part of the promisee; (2) the promise induced such action
or forbearance; and (3) injustice can be avoided only by enforcing the promise.
Hoffman v. Red Owl Stores, Inc., 133 N.W. 2d 267, 275 (Wis. 1965). The Pulsifers
allege that Wells Fargo represented that it “would approve the Loan Modification
based upon the Debtors‟ compliance with the [TPP].” Proposed Second Amended
Complaint,1 ¶ 23. See Wigod at 566 (“Wigod asserts that Wells Fargo made an
unambiguous promise that if she made timely payments and accurate representations
during the trial period, she would receive an offer for a permanent loan modification . .
.”) More generally, the Pulsifers allege that Wells Fargo “negligently or intentionally
failed to process their application for a loan modification . . .” Second Amended
1

The defendants argue that the Pulsifers should not be allowed to file a second amended
complaint because of undue delay, but at least some of this delay can be attributed to the procedural
issues that arose when the defendants moved to withdraw the reference from the bankruptcy court.
Moreover, the first amended complaint was filed as a matter of course shortly after the adversary
proceeding was initiated. Fed. R. Civ. P. 15(a)(1). The Court finds no further justification to deny
leave to amend. Stanard v. Nygren, 658 F.3d 792, 797 (7th Cir. 2011) (“[D]istrict courts have broad
discretion to deny leave to amend where there is undue delay, bad faith, dilatory motive, repeated
failure to cure deficiencies, undue prejudice to the defendants, or where the amendment would be
futile”).

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Complaint, ¶ 38. See Fletcher v. OneWest Bank, FSB, 798 F. Supp. 2d 925, 932-33
(N.D. Ill. 2001) (plaintiff stated an actionable promissory estoppel claim by asserting
“reliance on OneWest‟s promise to consider her application and give her a response”).
Finally, the Pulsifers allege that they “did not undertake any other potential loss
mitigation options or seek or attempt to file a Chapter 13 bankruptcy in 2009 based
upon the representations of [Wells Fargo] for the potential to apply for and obtain a
loan modification under HAMP.” Second Amended Complaint, ¶ 19. The defendants
argue that it is implausible to suggest that the Pulsifers would have taken immediate
steps in 2009 to initiate a short sale or cure the arrearage when they waited so long to
take any action after learning that they would not be able to obtain a permanent loan
modification. Unlikely, perhaps, but not implausible. At this stage, the Court must
draw all reasonable inferences in favor of the Pulsifers. Craig v. Rich Twp. High Sch.
Dist. 227, 736 F.3d 1110, 1115 (7th Cir. 2013). They have stated an actionable claim.
See, e.g., McGann at *7 (plaintiff “continued to make those payments in lieu of other
options, such as bankruptcy, refinancing her home, or a short sale, because she
believed that doing so would make her eligible for a loan modification”).
The Pulsifers‟ negligent misrepresentation claim survives for similar reasons.
Defendants cite an unpublished Fifth Circuit case which dismissed a negligent
misrepresentation claim because the plaintiffs could not establish that they were
injured as a result of the alleged misrepresentation. Pennington v. HSBC Bank USA,
N.A., 493 F. App‟x 548, 556 (5th Cir. 2012); compare Hatleberg v. Norwest Bank
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Wis., 700 N.W.2d 15, 26 (Wis. 2005) and Malzewski v. Rapkin, 723 N.W.2d 156, 163
(Wis. Ct. App. 2006) (listing elements of negligent misrepresentation claim under
Wisconsin law). But unlike in Pennington, the Pulsifers plausibly allege that they
were injured by relying on the defendants‟ misrepresentations.
Finally, the Court agrees with the defendants that this is not the proper forum
to adjudicate the Pulsifers‟ claims with respect to U.S. Bank‟s alleged lack of standing
or interest in the underlying Chapter 13 proceedings. Standing is typically a threshold
issue, but the focal point of the Pulisfers‟ adversary complaint is Wells Fargo‟s alleged
actions or inactions as the loan servicer. Despite the assignment to U.S. Bank, the
parties appear to agree that Wells Fargo was the loan servicer at all relevant times.
Second Amended Complaint, ¶ 7.

Once the Pulsifers‟ claims are resolved, the

bankruptcy court can make a ruling on U.S. Bank‟s standing, if necessary.
NOW, THEREFORE, BASED ON THE FOREGOING, IT IS HEREBY
ORDERED THAT:
1.

The defendants‟ motion to dismiss [Docket Number 8 in Bankruptcy

Case Number 13-2176] is GRANTED-IN-PART and DENIED-IN-PART;
2.

The Pulsifers‟ motion for leave to file a second amended complaint

[ECF No. 6] is GRANTED. Said complaint should be filed by the Pulsifers within
five (5) days of the date of this Order;
3.

Pursuant to Federal Rule of Civil Procedure 16(b), a telephonic

scheduling conference is scheduled for March 11, 2014 at 10:30 a.m. (Central Time).
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Please be available at that time. The Court will initiate the call.
4.

The purpose of the conference call is to establish a scheduling order

which will limit the time: (a) to join other parties and to amend the pleadings; (b) to
file motions; (c) to complete discovery;
5.

The scheduling order may also: (a) modify the timing for disclosure

under Rules 26(a) and 26(e)(1) and of the extent of discovery to be permitted; (b)
provide for the disclosure or discovery of electronically stored information; (c) include
any agreements the parties reach for asserting claims of privilege or protection as trial
preparation material after information is produced; (d) the date or dates for conferences
before trial, a final pretrial conference, and trial; and (e) any other matters appropriate
in the circumstances of the case;
6.

The time limitations set forth in the scheduling order may only be

modified for good cause and with the Court‟s consent. Fed. R. Civ. P. 16(b)(4);
7.

The parties should be prepared to discuss the matters listed in Civil

Local Rule 16(a)(1). Please refer to Attachment A. Special attention should also be
given to Rule 26(f)(1), which requires the parties to conduct a settlement/discovery
conference at least twenty-one (21) days prior to the initial scheduling conference
described above. The Rule 26(f) conference may be conducted by telephone. Rules
26(f)(2) and (3) mandate that the parties, within fourteen (14) days of their conference:
(a) file a written report outlining the proposed discovery plan they have developed at
their Rule 26(f) conference; and (b) make the required initial disclosures under Rule
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26(a) regarding witnesses and documents. In addition to the matters specified in Rules
26(f)(2) and (3), the Court requests that the proposed discovery plan submitted by the
parties include one or two sentences stating the nature of the case;
8.

The written report must include the telephone numbers where the parties

can be reached for this call;
9.

In addition, Judge Randa is participating in the Seventh Circuit

Electronic Discovery Pilot Program and has adopted the Principles Relating to the
Discovery of Electronically Stored Information. Counsel should be fully prepared to
discuss methods and techniques to accomplish cooperative fact-finding in their case at
the initial status conference. Before the initial status conference, counsel must also
meet and discuss the Principles Relating to the Discovery of Electronically Stored
Information. At the initial status conference, counsel must be prepared to discuss
what agreements they have reached regarding discovery of Electronically Stored
Information (“ESI”) and what area of disagreement they have with regard to discovery
of ESI. After discussing the matter with counsel, the Court will determine whether to
enter the Standing Order Relating to the Discovery of Electronically Stored
Information in their particular case. (Please refer to Attachments B & C).
Dated at Milwaukee, Wisconsin, this 8th day of January, 2014.
BY THE COURT:
__________________________
HON. RUDOLPH T. RANDA
U.S. District Judge
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