Scruggs v. Wauwatosa Savings Bank et al

Filing 42

DECISION AND ORDER granting 26 Motion to Dismiss by All Defendants; granting 28 Motion for Sanctions by All Defendants; denying 34 Motion to Amend/Correct Complaint by Larry Scruggs, Jr. This case is DISMISSED WITH PREJUDICE as frivolous and for lack of jurisdiction. Clerk of Court shall enter final judgment. See Order. Signed by Judge Lynn Adelman on 9/28/2017. (cc: all counsel, plaintiff) (gc)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
LARRY SCRUGGS, JR.,
Plaintiff,
v.

Case No. 17-C-0157

WAUWATOSA SAVINGS BANK,
et al.,
Defendants.
______________________________________________________________________
DECISION AND ORDER
Larry Scruggs, Jr., proceeding pro se, filed a complaint in this court against
WaterStone Bank (formerly known as Wauwatosa Savings Bank), one of its employees,
and several attorneys and law firms that represented WaterStone in a foreclosure
proceeding that was pending in Wisconsin state court.

The defendants moved to

dismiss the complaint on various grounds, and also filed a motion to sanction the
plaintiff under Federal Rule of Civil Procedure 11. In response to these motions, the
plaintiff filed a motion for leave to file an amended complaint. The defendants oppose
the motion to amend. However, for purposes of evaluating the motion to dismiss, I will
consider the amended complaint since, if the amended complaint corrects any defects
in the original complaint, I would grant the plaintiff leave to file it.1

1

Arguably, the plaintiff is entitled to amend his complaint as a matter of course under
Federal Rule of Civil Procedure 15(a)(1)(B). He dated his motion to amend on April 27,
2016, which was within 21 days of service of the motion to dismiss. But the court did
not receive the motion until May 3, 2017, which was after the 21-day period expired. I
need not decide what date controls because both the complaint and the amended
complaint assert the same frivolous claims.

The plaintiff’s complaint against the defendants arises out of a mortgage
foreclosure action that WaterStone—while it was known as Wauwatosa Savings Bank—
filed in Milwaukee County Circuit Court.2

The foreclosure action involved seven

properties that were owned by Advanced Properties and Investments LLC
(“Advanced”).

Scruggs was the sole member of Advanced.

The bank filed the

foreclosure action on June 22, 2007, and the complaint named Advanced and Scruggs
as defendants, along with other parties that may have had liens on the properties. (The
foreclosure complaint is attached as an exhibit to the plaintiff’s amended complaint in
this action.)

The foreclosure complaint attached both the promissory note and the

mortgage as exhibits. The plaintiff alleges that, when he and Advanced were served
with process in the foreclosure action, the version of the complaint that he received also
attached a document known as an “Affidavit of Correction” as an exhibit. The Affidavit
of Correction is a document that Wauwatosa Bank completed and recorded with the
register of deeds just prior to the time it commenced the foreclosure action. Scruggs
alleges that the Affidavit of Correction purports to add three properties to the mortgage,
which itself only mentions four properties, to bring the total number of properties subject
to the mortgage to seven. The plaintiff contends that although he was served with a
complaint that contained the Affidavit of Correction as an exhibit, the version of the
complaint that Wauwatosa Bank filed with the Milwaukee County Clerk of Court did not
contain the Affidavit of Correction as an exhibit. See Original Compl. pp. 2–3.

2

The facts recited in this opinion are taken from the original complaint, the amended
complaint, and the opinions of the Wisconsin Court of Appeals described below.
2

Neither Advanced nor Scruggs filed a timely response to the foreclosure
complaint. In September 2007, the court found them in default and granted Wauwatosa
Bank a default judgment of foreclosure on all seven properties. In November 2007,
Advanced filed a bankruptcy petition in the Bankruptcy Court for the Eastern District of
Wisconsin.

At that point, the automatic stay prevented Wauwatosa Bank from

immediately proceeding with the sheriff’s sale for the seven properties. However, in
December 2008, the bankruptcy court granted the bank relief from the automatic stay,
and thereafter a foreclosure sale was held.
Around this time, Wauwatosa moved to have Scruggs dismissed as a defendant
in the foreclosure action. Wauwatosa had determined that Advanced was the sole
owner of the properties, and that therefore Scruggs was not a necessary party. The
court granted that motion in March 2009, leaving Advanced as the only party to the
foreclosure action.

At the same time, the court confirmed the sheriff’s sale of the

properties.
In November 2009, Scruggs, proceeding pro se, moved to have the foreclosure
judgment (which at that point applied only to Advanced) set aside on the ground that
Wauwatosa had not properly served him with process.

Scruggs believed that the

discrepancy between the complaint as filed (which did not include the Affidavit of
Correction) and the complaint as served (which did include the Affidavit of Correction)
invalidated service and rendered the default judgment void. (Scruggs does not explain
why he believes his being served with the copy of the complaint that included the
Affidavit of Correction rendered service invalid, and I cannot think of any reason why it

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would have.) The trial court held a hearing on this motion in March 2010 and then
denied it.
Scruggs appealed the trial court’s denial of his motion to reopen, purporting to
represent both himself and Advanced pro se.

The court of appeals dismissed the

appeal because Scruggs had been dismissed from the case, leaving Advanced as the
only party to the judgment, and thus Scruggs had no standing to challenge the
judgment. Moreover, the court held, Scruggs could not prosecute the appeal on behalf
of Advanced because he was not a licensed attorney and could not represent Advanced
pro se. The court of appeals dismissed the appeal in an order dated September 27,
2011.
In November 2013, Scruggs filed a second motion to reopen the foreclosure
judgment in the trial court, raising the exact same service issue that he had previously
raised in both the trial and appellate courts. The trial court denied the motion, and
Scruggs appealed. The court of appeals found that its previous opinion controlled and
dismissed the appeal because Scruggs lacked standing and could not represent
Advanced pro se. The court of appeals also sanctioned Scruggs for filing a frivolous
appeal, and remanded the case to the trial court to calculate and impose the sanction,
which was to consist of the costs and attorneys’ fees Wauwatosa Bank incurred in
defending the appeal. The trial court determined that such costs and fees amounted to
$19,071.21.
Scruggs appealed the trial court’s computation of the sanction award, and the
court of appeals again affirmed. The court of appeals also imposed additional sanctions
on Scruggs for filing a second frivolous appeal. These sanctions included an order
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barring Scruggs from filing any further motion or appeal involving Wauwatosa Savings
Bank.
Having been barred from state court, Scruggs turned to federal court, filing the
present action against Wauwatosa Savings Bank, its employee, and its lawyers. The
amended complaint recites the procedural history of the foreclosure action, Advanced’s
bankruptcy, and the appeals to the Wisconsin Court of Appeals. The complaint then
contains various “counts,” some of which purport to be based on federal law. In these
counts, Scruggs accuses the defendants of making misrepresentations during the
course of the foreclosure and the bankruptcy, but he does not clearly identify these
alleged misrepresentations. As best I can tell, Scruggs believes the defendants falsely
told the trial court, during the hearing on the plaintiff’s motion to reopen the default
judgment, that they had attached the Affidavit of Correction to the original complaint that
they had filed with the clerk of court. But it impossible to see how this could have
amounted to a fraud, as the original complaint was on file with the court and the court
could have examined its contents. Scruggs also seems to allege that the defendants
misrepresented to the bankruptcy court that they had completed a valid foreclosure prior
to Advanced’s filing for bankruptcy, but this was not a misrepresentation, as at the time
the defendants filed their motion for relief from the automatic stay Wauwatosa Bank had
been granted a judgment of foreclosure. Scruggs also seems to contend that the bank
committed fraud by filing the Affidavit of Correction with the register of deeds. However,
Scruggs does not allege that the contents of the affidavit were false—he does not
dispute that the parties intended for the mortgage to apply to all seven properties and
that three properties were omitted from the mortgage document by mistake—so it is
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impossible to see how the bank’s filing the affidavit could be thought to have been
fraudulent. Finally, Scruggs seems to allege that the defendants deprived him of due
process or access to the courts when they dismissed him from the foreclosure action,
thereby depriving him of standing to appeal the state-court judgment. But of course
Scruggs had no right to appeal the judgment once it no longer applied to him, and
anyway the defendants were not government actors responsible for providing him with
due process or access to the courts. Thus, the complaint asserts only frivolous claims,
but there are other problems, as explained below.
The defendants move to dismiss the complaint based on the Rooker-Feldman
doctrine.

That doctrine prohibits district courts from exercising subject-matter

jurisdiction over “cases brought by state-court losers complaining of injuries caused by
state-court judgments rendered before the district court proceedings commenced and
inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v.
Saudi Basic Industries Corp., 544 U.S. 280, 284 (2005).

An initial question under

Rooker-Feldman is whether Scruggs is complaining of an injury caused by a state-court
judgment. But this gives rise to a more fundamental question: exactly what is the injury
that Scruggs complains of? The complaint alleges that the defendants made various
missteps and misrepresentations in the state-court foreclosure action and the federal
bankruptcy case, but the complaint does not identify any way in which Scruggs was
personally harmed by these missteps or misrepresentations. Scruggs does not, for
example, allege that he held title to the seven properties involved in the foreclosure in
his own name and was injured when the court allowed Wauwatosa Bank to foreclose on

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them.3 And because Scruggs was not a party to the bankruptcy, he was not injured
when the defendants obtained relief from the automatic stay. Certainly Advanced, as
the owner of the seven properties, was harmed by the foreclosure and the order
granting relief from the automatic stay, but Scruggs cannot bring a federal claim on
behalf of Advanced because he is not a licensed attorney and therefore cannot
represent Advanced in federal court. See Gen. Local Rule 83(e) (E.D. Wis. 2010);
Georgakis v. Ill. State Univ., 722 F.3d 1075, 1077 (7th Cir. 2013). Scruggs seems to
believe that any injury to Advanced was an injury to him as the sole member of
Advanced. But a limited liability company like Advanced is a separate legal entity from
its members, just like a corporation is a separate legal entity from its shareholders. See
Spitz v. Proven Winners N. Am., LLC, 759 F.3d 724, 730 (7th Cir. 2014). Although an
injury to Advanced might, in turn, affect Scruggs financially as a member of the limited
liability company, this indirect financial injury is not an injury for which Scruggs has
standing to seek redress in federal court. See, e.g., Rawoof v. Texor Petroleum Co.,
Inc., 521 F.3d 750, 757 (7th Cir. 2008) (“a shareholder generally cannot sue for indirect
harm he suffers as a result of an injury to the corporation”).
Scruggs also alleges that the defendants denied him due process and access to
the courts by having him dismissed from the foreclosure action. As I have mentioned,
none of the defendants are government officials, and therefore they were not
responsible for providing him with due process or access to the courts. But another
problem is that the plaintiff does not allege that his being dismissed from the foreclosure
3

Scruggs was harmed by the sanctions orders entered against him by the state court,
but I do not understand him to be seeking relief from those orders. If he were, that
claim would be barred by Rooker-Feldman.
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action caused him any harm. Again, the plaintiff did not own the properties that were
foreclosed on—Advanced did—so the loss of the properties was not an injury to him.
Moreover, the plaintiff does not allege that any relief was obtained against him
personally, such as a deficiency judgment. The plaintiff could have hired a lawyer to
defend Advanced against the foreclosure, but he chose not to do so.

So the

defendant’s dismissing him from the foreclosure action caused him no injury. It was no
different than if they had not sued him in the first place.
Accordingly, this action must be dismissed because Scruggs lacks standing to
sue. See Metallgesellschaft AG v. Sumitomo Corp. of America, 325 F.3d 836, 842 (7th
Cir. 2003) (“a district court may dismiss a case sua sponte for lack of Article III standing
if it finds that the plaintiff has not suffered injury-in-fact”). Moreover, this suit must also
be dismissed because there is no basis for exercising subject-matter jurisdiction under
either 28 U.S.C. § 1331 or 28 U.S.C. § 1332. Section 1332 allows a court to exercise
jurisdiction when the parties are diverse and the amount in controversy exceeds
$75,000. Here, however, the complaint does not allege that the parties are diverse.
Section 1331 allows a court to exercise jurisdiction when the complaint raises a federal
claim. Here, although the plaintiff purports to bring several federal claims—violations of
the Fair Debt Collection Practices Act, 42 U.S.C. § 1983, and RICO—they are all
frivolous. The FDCPA claim is frivolous because, among other reasons, the debt at
issue in this case was not incurred for personal, family, or household purposes, but in
furtherance of Advanced’s business interests. See 15 U.S.C. § 1692a(5); Gulley v.
Markoff & Krasny, 664 F.3d 1073, 1074 (7th Cir. 2011). The § 1983 claim is frivolous
because, among other reasons, none of the defendants are state actors or were acting
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under color of state law. The RICO claim is frivolous because, among other reasons,
the complaint does not come close to alleging facts from which it could be inferred that
the defendants committed acts of mail fraud or any of the other federal crimes that could
make up a pattern of racketeering activity. See Jennings v. Auto Meter Products, Inc.,
495 F.3d 466, 472–73 (7th Cir. 2007). Therefore, these purported federal claims do not
engage the jurisdiction of the federal courts. See, e.g., Greater Chicago Combine and
Center, Inc. v. City of Chicago, 431 F.3d 1065, 1069 (7th Cir. 2005).
The grounds for dismissing this case mentioned in the previous paragraph
involve subject-matter jurisdiction. Ordinarily, when a suit is dismissed for lack of
subject-matter jurisdiction, the dismissal is without prejudice, allowing the plaintiff to refile the case in a court that has jurisdiction. Georgakis, 722 F.3d at 1077. However,
when a suit is frivolous, the court may dismiss the suit with prejudice to prevent the
plaintiff from burdening another court with the same frivolous suit. Id. at 1078. As I
have explained, this suit is frivolous. Scruggs has not been injured by the defendants’
conduct, he cannot assert claims on behalf of Advanced or represent Advanced pro se,
and the substantive causes of action he alleges would be frivolous even if Scruggs had
standing to pursue them. The Wisconsin Court of Appeals explained to Scruggs on
multiple occasions that he was pursuing frivolous legal arguments and sanctioned him
for continuing to do so. It appears that the only reason Scruggs filed a federal complaint
is that the Wisconsin Court of Appeals barred him from filing additional appeals and
motions in state court, so Scruggs needed to find a different forum in which to assert his
frivolous claims. Despite having no federal claim, Scruggs asserted that jurisdiction
exists under § 1331 and then cited several federal statutes that the defendants clearly
9

did not violate, solely for the purpose of manufacturing a basis for federal jurisdiction.
Accordingly, this suit will be dismissed with prejudice.
The remaining issue is the defendants’ motion for sanctions against Scruggs
under Federal Rule of Civil Procedure 11.4 A party may file a motion for sanctions
against a party—including a pro se litigant—for engaging in conduct that violates Rule
11(b). See Fed. R. Civ. P. 11(c)(2); Vukadinovich v. McCarthy, 901 F.2d 1439, 1445
(7th Cir. 1990). As is relevant here, Rule 11(b) prohibits a party from filing a pleading
“for any improper purpose, such as to harass, cause unnecessary delay, or needlessly
increase the cost of litigation,” and from filing pleadings containing claims and legal
contentions that are not “warranted by existing law or by a nonfrivolous argument for
extending, modifying, or reversing existing law or for establishing new law.” As I have
already explained, the plaintiff’s claims are frivolous, and thus they are not warranted by
existing law or by an nonfrivolous argument for modifying existing law.

Moreover,

because the claims are so clearly frivolous, and because the Wisconsin Court of
Appeals already sanctioned Scruggs for pursuing nearly identical claims in state court, I
can infer that the plaintiff brought the present suit to harass the defendants rather than
to obtain a favorable judgment. Click v. Koenig, 766 F.2d 265, 270 (7th Cir. 1985).
Thus, I conclude that Rule 11 sanctions should be imposed.
A sanction under Rule 11 “must be limited to what suffices to deter repetition of
the conduct or comparable conduct by others similarly situated.” Rule 11(c)(4). The
sanction may include “nonmonetary directives; an order to pay a penalty into court; or, if
4

The defendants gave the plaintiff 21 days’ notice of its motion before filing it, as
required by Rule 11(c)(2), but the plaintiff did not withdraw his complaint within that
time.
10

imposed on motion and warranted for effective deterrence, an order directing payment
to the movant of part of all of the reasonable attorney’s fees and other expenses directly
resulting from the violation.” Id. The defendants have requested that the sanctions
award require Scruggs to pay the attorneys’ fees and other expenses they incurred in
defending this action, among other things. I find that an award consisting of fees and
expenses is warranted. The Wisconsin Court of Appeals twice sanctioned Scruggs by
imposing fee-shifting awards, and that proved to be insufficient to deter him from
continuing to pursue frivolous litigation against WaterStone Bank and its employees and
attorneys. At the very least, then, another award of attorneys’ fees and expenses is
warranted.

If that proves insufficient to deter Scruggs from continuing to pursue

litigation in this court against the defendants, I will consider imposing additional
sanctions, including an order to pay a penalty into court and an order barring Scruggs
from filling other papers in federal court. But for now, I will leave the award of attorneys’
fees and expenses as the only sanction. The award of attorneys’ fees and expenses
shall include the fees and expenses the defendants incurred in defending against this
action and in filing the Rule 11 motion. See Rule 11(c)(2) (court may award the party
who prevails on a Rule 11 motion the fees and expenses incurred for the motion).
For the reasons stated, IT IS ORDERED that the defendants’ motion to dismiss
is GRANTED, and this case is DISMISSED WITH PREJUDICE as frivolous and for lack
of jurisdiction.
IT IS FURTHER ORDERED that the plaintiff’s motion to amend his complaint is
DENIED.

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IT IS FURTHER ORDERED that the defendant’s motion for Rule 11 sanctions is
GRANTED. The plaintiff will be required to pay the defendants’ reasonable attorneys’
fees and expenses incurred in defending this action and in filing their Rule 11 motion.
The defendants shall file a separate motion itemizing these fees and expenses within 14
days of the date of this order.
FINALLY, IT IS ORDERED that the Clerk of Court shall enter final judgment.
Dated at Milwaukee, Wisconsin, this 28th day of September, 2017.

/s Lynn Adelman
LYNN ADELMAN
United States District Judge

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