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holding that plaintiff could not maintain claims pursuant to the FDCPA when the claims were “based directly on the premise that defendant violated the Bankruptcy Code by seeking payment from her on a debt discharged in bankruptcy”
Summary of this case from In re AtwoodOpinion
00-CV-1065.
September 27, 2001.
Mark F. Viencek, Esq., SELBACH VIENCEK, L.L.P. Syracuse, New York, and Christopher M. Lefebvre, Esq., LAW OFFICES OF CLAUDE LEFEBVRE SONS, Pawtucket, Rhode Island, and Daniel A. Edelman, Esq., EDELMAN COMBS LATTURNER, Chicago, Illinois, Attorneys for Plaintiff
Douglas M. Fisher, Esq., Albany, New York, for SOLOMON AND SOLOMON, P.C.
MEMORANDUM-DECISION AND ORDER
I. INTRODUCTION
Presently before the Court is a motion by defendant to dismiss the amended class action complaint for failure to state a cause of action pursuant to Fed.R.Civ.P. 12(b)(6) and to award attorneys' fees against plaintiff. Because defense counsel made factual averments and described the procedural "background" of the present litigation in his affidavit filed in support of defendant's motion to dismiss, plaintiff made a motion requesting that the Court either strike the affidavit or treat defendant's motion as one for summary judgment pursuant to Fed.R.Civ.P. 56 and afford her additional time to complete discovery. Also pending is plaintiff's motion for class certification and a motion by defendant to stay determination of plaintiff's class certification motion pending the Court's decision on defendant's motion to dismiss.
II. FACTUAL AND PROCEDURAL BACKGROUND
The facts as set forth in the amended class action complaint are as follows: Plaintiff, Katherine A. Desgrosiellier, filed a petition in the United States Bankruptcy Court for the Northern District of New York pursuant to Chapter 7 of the Bankruptcy Code on December 29, 1998. Among the debts included in the bankruptcy case was a credit card debt to Sears Roebuck Company and/or Sears National Bank ("Sears") secured by household merchandise purchased with the card — a "table mixer" and "brush cutter." On May 4, 1999, the Bankruptcy Court issued to plaintiff a Discharge of Debts, thereby extinguishing any personal liability she faced in connection with her Sears credit card debt.
On or about May 5, 2000, defendant Solomon and Solomon, P.C. ("Solomon"), a law firm which provides legal and debt collection services to Sears, mailed a letter to plaintiff and copied it to her bankruptcy counsel. The letter, attached to the amended class action complaint, reads as follows:
May 5, 2000
Katherine A. Desgrosiellier Box 54 Oswego, New York 13126
Re: Sears, Roebuck and Company Account No. 03 59344 77264 5
Dear Sir/Madame:
I am writing to advise you that we have been retained as counsel by Sears, Roebuck and Company (hereinafter "Sears"). It is to my understanding that you are in possession of personal property secured on under your Sears credit card. Your discharge in bankruptcy has no legal effect on the validity of Sears's security interest in the personal property as it was never voided. Please contact our office to arrange for voluntary pick up of the collateral. Sears is entitled to the return of the personal property. Clearly, it appears you have affirmative obligation to return the personal property.
Absent return of the personal property, we will seek a Court Order to recover the property. If you move the personal property or otherwise hide the personal property such our client would be unable to pick it up at that point, we will take additional action.
I look forward to resolving this matter without the need for any legal proceedings. If you desire to discuss the same, please contact either myself directly at extension 274 or my paralegal, Arthur Chuang at extension 250.
This communication is from a debt collector.
Sincerely,
SOLOMON AND SOLOMON, P.C. Douglas M. Fisher
cc: James F. Selbach[, Esq.] 108 W. Fayette Street, Suite 720 Syracuse, New York 13202
VALIDATION NOTICE
Unless you notify this office within 30 days after receiving this notice that you dispute the validity of the debt or any portion thereof, this office will assume this debt to be valid. If you notify this office in writing within 30 days from receiving this notice this office will: obtain verification of the debt or obtain a copy of the judgment and mail you a copy of such verification or judgment and provide you with the name and address of the original creditor, if different from the current creditor.
On May 13, 1999, plaintiff's bankruptcy case was closed. Although plaintiff does not reference a date in her amended complaint, she alleges she called Solomon by telephone in response to this letter and "was told by a representative of Solomon that she could either return the table mixer and brush cutter or keep the same if she paid Sears $273." Plaintiff sent a check for $ 273.00 to Solomon and received a letter in return dated May 22, 2000, which acknowledged receipt of her "redemption check."
Plaintiff alleges that the above actions are violative of § 1692k of the Fair Debt Collection Practices Act ("FDCPA"), codified at 15 U.S.C. § 1692 et seq. which prohibits debt collectors from engaging in abusive, deceptive and unfair debt collection practices. To wit, plaintiff alleges that by sending the above-referenced letter, Solomon induced her to pay money on a discharged debt and enter into a redemption agreement without seeking approval from the bankruptcy court. According to plaintiff, these actions on the part of Solomon were part of a larger scheme by Sears, which is not named as a defendant, to unlawfully obtain money for "over-valued" personal household property from Sears credit card holders who had sought protection from debt in bankruptcy.
Although a discharge in bankruptcy relieves a debtor of all "personal liability" for pre-petition debts, 11 U.S.C. § 524(a)(1), (2), the discharge does not extinguish any valid security interest a creditor may hold by way of collateral pledged to secure those debts. See Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) ("[A] bankruptcy discharge extinguishes only one mode of enforcing a claim — namely, an action against the debtor in personam — while leaving intact another — namely, an action against the debtor in rem"). However, a debtor may protect his or her property by agreeing while the bankruptcy case is still pending to "reaffirm" the secured portion of the underlying debt, see 11 U.S.C. § 524(c), and pay the debt over time after receipt of a discharge. In the alternative, a debtor may "redeem" the property from the secured creditor's lien by making a single lump sum payment either during or after closure of the bankruptcy case. See 11 U.S.C. § 722.
Indeed, the bulk of plaintiff's amended complaint is devoted to detailing alleged past and present unlawful activity on the part of Sears which is not a party to the action. Plaintiff asserts that Sears has in the past been charged criminally with bankruptcy fraud. Further, plaintiff alleges that various courts have already found that Sears has consistently engaged in a pattern of failing to comply with filing and hearing requirements of the Bankruptcy Code in connection with redemption and reaffirmation agreements while using "unfiled" and "unapproved" redemption and reaffirmation agreements to collect debts discharged in bankruptcy. Finally, plaintiff contends that the "collateral valuation tables" used by Sears as a basis for these bankruptcy redemptions have previously been deemed to be "bogus" and "inflated" by a court which examined them.
III. DISCUSSION
A. Applicable Legal Standard
Because the Court declines to consider any factual averments contained in defense counsel's supporting affidavit in connection with the present application, it is not necessary to either strike portions of the affidavit and/or convert defendant's motion to one for summary judgment as plaintiff requests. In addressing defendant's motion for dismissal pursuant to Fed.R.Civ.P. 12(b)(6), the Court accepts as true all factual allegations in the amended complaint and draws all inferences from those allegations in the light most favorable to Niagara. See Albright v. Oliver, 510 U.S. 266, 268 (1994); McEvoy v. Spencer, 124 F.3d 92, 95 (2d Cir. 1997). Dismissal is proper only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957), accord Valmonte v. Bane, 18 F.3d 992, 998 (2d Cir. 1994). It is with these considerations in mind that the Court addresses defendant's motion.
B. FDCPA
The FDCPA provides in relevant part:
A debt collector may not use any false . . . or misleading . . . means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:
. . .
(10) The use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.
5 U.S.C. § 1692e. The FDCPA applies only in instances where a debt collector attempts to collect a "debt" within the meaning of the Act, see 11 U.S.C. § 1692(c)-(j), which defines a debt as an "obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property . . . or services which are the subject of the transaction are primarily for personal, family or household purposes." 15 U.S.C. § 1692a(5).
Defendant first argues that there is no "debt" here because plaintiff's obligation to pay money to Sears was discharged by the bankruptcy court. Indeed, defense counsel argues that there was nothing in his letter to plaintiff which suggested she was obligated to pay money on the discharged debt. However, as noted by the court in Perovich v. Humphrey, 1997 WL 674975 (N.D.Ill. 1997), "this argument only describes the characteristic of the defendant[']s collection activities, not the underlying obligation upon which defendant[']s acts were based." Id. at *2. Moreover, defendant's claim is belied by the language of the letter itself which concluded with the statement: "This communication is from a debt collector." The letter stated further that defendant would assume the "debt" to be valid unless plaintiff advised defendant within 30 days after receiving the notice of her intent to "dispute the validity of the debt or any portion thereof" in which case defendant would "obtain verification of the debt." When determining whether the FDCPA has been violated, courts use "an objective standard, measured by how the least sophisticated consumer would interpret the notice received from the debt collector." Russell v. Equifax A.R.S., 74 F.3d 30, 34 (2d Cir. 1996) (citations omitted). Accepting the truth of plaintiff's allegations and making all reasonable inferences in her favor for purposes of this motion, on its face the complaint describes a "debt" sufficient to state a claim under the FDCPA. See id.
By the same analysis, defendant's alternative argument — that because nothing in Solomon's letter was untrue, plaintiff could not have been misled or deceived by the letter within the meaning of the FDCPA — is equally unpersuasive.
C. Effect of Bankruptcy Code on Plaintiff's FDCPA Claims
Defendant's primary argument in support of dismissing the complaint is its contention that even if there was a "debt" in this case within the meaning of the FDCPA and even if it misled plaintiff about her obligation to pay it, the Bankruptcy Code precludes litigation of FDCPA claims premised upon violations of the injunction plaintiff obtained at the time of her bankruptcy discharge. This injunction prohibits creditors from attempting to collect debts discharged in bankruptcy. In fact, plaintiff does premise her FDCPA claim on four specific violations by defendant, all of which are — in essence — based on defendant's alleged or attempted violation of the discharge injunction. According to the amended class action complaint:
11 U.S.C. § 524(a)(2) provides in pertinent part that "[a] discharge under this title . . . operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived."
(1) [Solomon's May 5, 2000 letter] gives least sophisticated consumers the impression that their debts to Sears were not discharged in their bankruptcy cases in violation of 1692e, 1692e(2)(A), 1692e(10),1692f;
(2) By attempting to collect and/or collecting debts discharged in bankruptcy pursuant to the conduct complained of in paragraphs 26 through 33 herein, Solomon violated sections 1692e, 1692e(2)(A), 1692e(10),1692f, and 1692f(1);
(3) By "valuing" collateral pursuant to Sears' bogus "valuation schedule" Solomon violated 1692e,1692e(10), and 1692f. Each occasion on which Solomon communicated to a debtor a valuation based on said "valuation schedule" constitutes a separate violation of said provisions of the FDCPA;
(4) By representing to New York debtors that said debtors have an affirmative obligation to return personal property when no such affirmative obligation existed, and using said misrepresentation as leverage to gain unfair advantage in the course of attempting to collect and/or collecting debts discharged in bankruptcy, Solomon violated sections 1692e, 1692e(10), and 1692f.
Amended Complaint ¶ 51. The Amended Complaint also contends that: (5) Solomon failed to advise debtors such as plaintiff of their rights insofar as Sears' remaining security interest in collateral merchandise and their options with respect to redeeming the property; (6) and Solomon conducted the above-referenced activities without obtaining approval from the bankruptcy court.
With respect to the first claim, the Court finds it fails for reasons not advanced by defendant. Plaintiff alleges that the May 5, 2000, letter from Solomon would give the "least sophisticated consumer" the false impression that his or her debts had not been discharged in bankruptcy. Whether or not this is true, the Court agrees, as referenced above, that this allegation is sufficient to trigger application of the FDCPA. It is not, however, sufficient to trigger liability under the Act since it only applies to a "false, deceptive, or misleading representation or means [used] in connection with the collection of any debt." 15 U.S.C. § 1692e (emphasis added). False or misleading information given to a debtor, standing alone, is not prohibited by the FDCPA unless such activity occurs in the context of collecting a debt. Thus, plaintiff's first claim of the manner in which defendant violated the FDCPA is insufficient as a matter of law. Even if this were not true, however, the claim would still fail since by definition, the acts complained of occurred in the context of collecting a debt discharged in bankruptcy. The only possible implication of such a claim is that defendant thereby violated the discharge injunction granted by the bankruptcy court at the conclusion of plaintiff's case pursuant to 11 U.S.C. § 524. As discussed below, this premise of liability under the FDCPA has been rejected by nearly every court which has addressed the issue.
Indeed, a court of this District, in another case in which Solomon was sued as a defendant, very recently issued a decision in which it noted that "courts that have addressed the issue of whether the Bankruptcy Code precludes claims brought pursuant to the FDCPA, which are based upon a defendant's violation of the Bankruptcy Code, are divided." Diamante v. Solomon Solomon, No. 1:99-CV-1339, at 6 (Sept. 18, 2001 N.D.N.Y.) (Scullin, J.) (citing Walls v. Wells Fargo Bank, N.A., 255 B.R. 38 (E.D.Cal. 2000) (finding preclusion); Kibler v. WFS Fin., Inc., No. CV-00-5217, 2000 WL 1470655 (C.D.Cal. Sept. 13, 2000) (same); Gray- Mapp v. Sherman, 100 F. Supp.2d 810 (N.D.Ill. 1999) (same); Baldwin v. McCalla, Raymer, Padrick, Cobb, Nichols Clark, L.L.C., No. 98 C 4280, 1999 WL 284788 (N.D.Ill. Aug. 26, 1999) (same). But see Peeples v. Blatt, No. 00 C 7028, 2001 WL 921731 (N.D.Ill. Aug. 15, 2001) (finding no preclusion); Molloy v. Primus Auto. Fin. Servs., 247 B.R. 804 (C.D.Cal. 2000) (same); Wagner v. Ocwen Fed. Bank, FSB, No. 99 C 5404, 2000 WL 139222 (N.D.Ill. Aug. 28, 2000) (same)).
After reviewing each of the above-cited cases, Judge Scullin concluded "that the reasoning of those cases holding that the Bankruptcy Code precludes claims under the FDCPA when those claims are based upon violations of the Bankruptcy Code is more persuasive." Id. at 11-12. Indeed, Judge Scullin noted that the "court in Kibler . . . relied upon the Supreme Court's decision in Kokoszka v. Belford, 417 U.S. 642 (1974), to further support its view that the FDCPA was not applicable in these circumstances. In Kokoszka, the Supreme Court stated that `the Consumer Credit Protection Act [of which the FDCPA is a part] sought to prevent consumers from entering bankruptcy in the first place. However, if despite its protection, bankruptcy did occur, the debtor's protection and remedy remained under the Bankruptcy Act [the predecessor of the Bankruptcy Code].'" Diamante, No. 1:99-CV-1339, at 8 (citing Kibler, 2000 WL 1470655, at 9 (quoting Kokoszka, 417 U.S. at 650)). "If Congress did not intend to interfere with the bankruptcy scheme through the Consumer Credit Protection Act, it follows that [the p]laintiff cannot assert a claim for damages under the FDCPA when the Bankruptcy Code does not provide for it." Id. (citation and internal quotation omitted). "To hold otherwise would defeat Congress' intent of providing only a contempt remedy for violations of Section 524." Id.
This Court agrees with Judge Scullin as well as the majority of other courts which have addressed the issue, that plaintiff is precluded from asserting any claims for money damages pursuant to the FDCPA which are premised on conduct otherwise remedied or governed by provisions of the Bankruptcy Code. Based thereupon, even if plaintiff's first claim is deemed sufficient to state a claim pursuant to the FDCPA, neither it nor plaintiff's second claim can survive since they are based directly on the premise that defendant violated the Bankruptcy Code by seeking payment from her on a debt discharged in bankruptcy. Likewise, plaintiff's fourth claim — that Solomon misrepresented plaintiff's affirmative obligation to return the secured collateral "in the course of attempting to collect and/or collecting debts discharged in bankruptcy" — also fails.
To the extent that Peeples, a case with facts remarkably similar to those at bar, holds otherwise, the Court does not find its reasoning persuasive. In Peeples, the plaintiff sued when, after she obtained a discharge in bankruptcy of personal liability for her Sears credit card debt, the defendant law firm demanded return of merchandise in which Sears still held a valid security interest. See 2001 WL 92173, at *1. Like plaintiff in this case, the plaintiff in Peeples opted to redeem the merchandise with a lump sum payment via a post-bankruptcy redemption agreement. See id.
In deciding that plaintiff's FDCPA claim was not precluded by the Bankruptcy Code, the Court in Peeples relied on Wagner, another Northern District of Illinois case. :
In Wagner, Judge Kennelly, who previously authored the Gray-Mapp opinion, pointed out the inapplicability of the Gray-Mapp and Baldwin reasoning to cases where the collection actions complained of did not occur until after the bankruptcy proceedings had closed:
`[The FDCPA] claim can be determined without doing violence to the Bankruptcy Code's purpose of adjudicating all claims in a single proceeding. Unlike Ms. Gray-Mapp, Wagner has not attempted to bypass any remedies provided to her under the Code while her bankruptcy petition was pending; indeed she could not have raised these issues there, because all of [defendant's] activities post-dated the conclusion of her bankruptcy case. [Defendant] did not [sic] become a "creditor" of Wagner until after the bankruptcy case was over, which means Wagner had no real way of bringing [defendant] into the bankruptcy case when it was pending.Peeples, 2001 WL 921731, at *4 (quoting Wagner, 2000 WL 1382222, at *2). Based thereupon, the court held that the plaintiff's FDCPA claim, premised on an alleged violation of the Bankruptcy Code's discharge injunction, was not precluded. See id.
Wagner's holding is questionable since it allowed the plaintiff's state law causes of action against the creditor-defendant based on unjust enrichment and the Illinois Consumer Fraud Act to stand in addition to her FDCPA claim. Noting precedent in other courts which held that state law claims based on a creditor's alleged violation of the discharge injunction were precluded by the bankruptcy code, see Cox v. Zale Delaware, Inc., 242 B.R. 444, 448 n. 1 (N.D.Ill. 1999); Bessette v. AVCO Fin. Servs., 240 B.R. 147, 155 (D.R.I. 1999), the court in Wagner stated that these cases "relied on the fact that `there would be no cause of action absent the [Bankruptcy] Code.' The same is not true here." Wagner, 2000 WL 1382222, at *3 (emphasis added) (quoting Cox, 242 B.R. at 450)).
In fact, this premise is incorrect. The court in Wagner sought to exempt the plaintiff's claim from the exclusive reach of the bankruptcy court by stating "Wagner's FDCPA claim, at its foundation, is no different from that of any other debtor who is dunned by a creditor who in fact is not owed any money; the fact that her debt was discharged in bankruptcy does not logically differentiate her case from that of a debtor whose debt was discharged in some other way." Id., at *2. However, because the plaintiff's debt in Wagner was discharged in bankruptcy and this presumably was the only basis on which she could allege the creditor- defendant had attempted to "collect on a debt that no longer exist[ed]," neither the plaintiff's FDCPA claim nor her state law claims could exist independent of the Bankruptcy Code. Id., at *1.
Indeed, in Diamante, Judge Scullin declined to follow's Wagner's reasoning and agreed with those courts which had "concluded that because the Bankruptcy Code provides a remedial scheme for addressing violations of the Bankruptcy Code it preempts state law claims based upon such violations." Diamante, No. 1:99-CV-1339, at 5 (citing In re Shape, Inc., 135 B.R. 707, 708 (D.Me. 1992) ("Since the [Bankruptcy Code] is applicable here, and has its own enforcement scheme and separate adjudicative framework, it must supercede any state law remedies.")). Based on the foregoing, the Court questions the reliability and rationale of Wagner as well as Peeples which relied entirely on Wagner in reaching its conclusion. See Peeples, 2001 WL 921731, at 4. Even assuming the validity of Peeples and Wagner, however, the Court simply disagrees with these non-binding decisions from another district.
Plaintiff's third claim alleges that "by `valuing' collateral pursuant to Sears' bogus `valuation schedule,'" defendant violated the FDCPA in its communications with debtors. In the first instance, since the Amended Complaint does not allege that Solomon created the "bogus valuation tables" or that it knew they were inflated, the claim fails to allege any misrepresentation on the part of Solomon under the FDCPA. Furthermore, even assuming the truth of this allegation, that such conduct occurred is not sufficient, standing alone, to sustain a cause of action under the FDCPA. Even if the Court gives plaintiff the benefit of the chargeimplicit in this allegation — that defendant used inflated valuation tables in connection with convincing debtors to redeem their property post-bankruptcy — the allegation is still inadequate as matter of law. Such an allegation is simply another variation of the claim that defendant attempted to collect a debt in violation of plaintiff's bankruptcy discharge which is precluded by the availability of a remedy for such conduct in the Bankruptcy Code.
Plaintiff's fifth claim is that defendant violated the FDCPA by failing to advise plaintiff that she had rights in connection with Sears' ability to repossess her property. However, the FDCPA, which is a prohibitive statute, requires no such affirmative action on the part of debt collectors. As a further matter, the type of advice and information which plaintiff alleges defendant failed to offer is exactly the type of information which her counsel should have provided to her in the context of the bankruptcy case, see In re Melendez, 235 B.R. 173, 182 (D.Mass. 1998) ("Sears' valuation of the subject collateral, the likelihood of replevin, the interest rate on the reaffirmed debt, and the value of and ability to repay any additional line of credit offered to the debtor in excess of the reaffirmed debt, were factors that should have been necessary to the debtor's attorney's determination of whether the reaffirmed obligation would impose an undue hardship on the debtor."). Moreover, the objectionable letter Solomon sent to plaintiff was copied to plaintiff's counsel who was clearly in a position to advise of her rights prior to her taking any action to redeem the property.
Finally, amongst the allegations underlying plaintiff's FDCPA claim against Solomon is that it used Sears' "bogus valuation tables" and thereby forced plaintiff to pay more to redeem her property than she might have otherwise been required to pay had the bankruptcy court "scrutinize[d] the `value' assigned to the collateral by Sears." Amended Complaint 66 21-25, 27-28. First of all, the Court fails to discern how this allegation, even if true, states a claim under the FDCPA since the unlawfulness of the conduct complained of is based entirely on the claim that the Bankruptcy Code, not the FDCPA, requires court approval of redemption agreements. As such, the claim is again one bootstrapped to the FDCPA based on an alleged violation of the Bankruptcy Code. Secondly, the premise of the claim is undermined in any event by the recent decision of Sears, Roebuck Co. v. Spivey, 2001 WL 902548, at *4 (E.D.N.Y. Aug. 8, 2001) where the court soundly rejected the notion that parties must seek court approval of redemption agreements. Indeed, the court held that "a debtor and creditor may cement a consensual redemption agreement pursuant to the requirements of § 722 [of the Bankruptcy Code] without having to resort to Court action." Id.
IV. CONCLUSION
Based on the foregoing is it hereby
ORDERED that defendant's motion to dismiss the complaint is hereby GRANTED but defendant's motion for an award of attorneys' fees is DENIED based on the absence of proof that plaintiff commenced this action in bad faith or for the purpose of harassment. As a further matter, plaintiff's motions to strike portions of defense counsel's supporting affidavit or in the alternative to convert defendant's motion to one for summary judgment and her motion for class certification as well as defendant's motion to stay determination of the class certification motion are DENIED as moot.
IT IS SO ORDERED.