Rebecca B. Connelly, U.S. Bankruptcy Judge.
Three consumer debtors filed complaints in this Court against Midland Funding, LLC, and Midland Credit Management, Inc. (collectively, "Midland"). Karen Thomas filed adversary proceeding 17-05010. Gary Brooks Jr. and Mary Gillespie-Brooks filed adversary proceeding 17-05009. The two complaints have been consolidated for administrative convenience.
In the complaint, the plaintiffs initially request that the Court certify a class for this action. Next, the plaintiffs assert two counts. In Count I, the plaintiffs allege Midland violated the Fair Debt Collection Practices Act ("FDCPA"),
Midland moves to dismiss the complaints in their entirety. Setting aside the question of whether a class action is appropriate, the Court will address the sufficiency of the complaints and will decide whether to dismiss the actions under Federal Rule of Civil Procedure 12(b)(6), made applicable to this proceeding under Federal Rule of Bankruptcy Procedure 7012(b).
The plaintiffs are debtors in pending chapter 13 bankruptcy cases. Midland filed proofs of claim in each of the bankruptcy cases. Midland did not itemize interest, fees, or costs when it originally filed the proofs of claim.
At hearing, the Court considered a request pursuant to Rule 42 of the Federal Rules of Civil Procedure to combine the two adversary proceedings for administrative convenience. The Court granted the request. The Court heard arguments from the parties on the motion to dismiss. At the conclusion of the hearing, the Court took the matter under advisement.
Karen Thomas, Gary Brooks, and Mary Gillespie-Brooks are debtors in this Court. Midland is a creditor in each of the bankruptcy cases.
A motion under Rule 12(b)(6) looks into the legal sufficiency of a complaint. RTC Mortg. Tr. v. McMahon, 225 B.R. 604, 607 (E.D. Va. 1997). The merits of the claims or the defenses are not relevant. The question is whether the plaintiff has pleaded "a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). More than that, the claim must have crossed "the line from conceivable to plausible." Id. The mere recital of elements of a cause of action, supported only by conclusory statements, is not sufficient to survive a Rule 12(b)(6) motion. Walters v. McMahen, 684 F.3d 435, 439 (4th Cir. 2012) (internal citations omitted).
A plaintiff must plead three elements to state a claim that a defendant has violated the Fair Debt Collection Practices Act ("FDCPA"). The first two elements address identity: (1) the plaintiff must be a "consumer," and (2) the defendant collecting the debt must be a "debt collector" as defined by the FDCPA. Creighton v. Emporia Credit Serv., Inc., 981 F.Supp. 411, 414 (E.D. Va. 1997). The third element requires the plaintiff to plead the act or omission by which the defendant has violated the FDCPA. Id. When the plaintiff has sufficiently pleaded facts to support these three elements, she has made a prima facie case for a violation of the FDCPA.
The debtors cite two sections of the FDCPA. The Court will address the sufficiency of the complaint for each of these allegations.
The complaint includes the following facts: (1) the plaintiffs each owed Synchrony Bank for debts arising from open end credit; (2) the plaintiffs filed bankruptcy cases; (3) Synchrony Bank received notice of the bankruptcy and subsequently transferred to Midland information about the debts owed by the plaintiffs in bankruptcy; (4) Midland filed proofs of claim in the bankruptcy cases of the plaintiffs for the debts which it acquired from Synchrony Bank; (5) Midland reported on the proofs of claim the amount of the claim as greater than the amount the plaintiffs scheduled for each of the debts to Synchrony Bank; (6) Midland answered "No" to the question on the proof of claim asking whether the claim included interest or other charges; (7) Midland had a reasonable belief that the amount reported overstated the principal amount of the claim as of the debtors' petition date; (8) Midland had a reasonable belief that the amount of the claim reported on the proofs of claim did include interest and fees but directed its employees to answer falsely that the claims did not; (9) Midland failed to comply with certain provisions of the Federal Rules of Bankruptcy Procedure concerning filing proofs of claim; (10) Midland was advised its practice of failing to itemize interest and fees on its proofs of claim and falsely denying that the claim amount included interest was a violation of Rule 3001 yet Midland "continue[d] to file Proofs of Claim in the Western District of Virginia" using this practice; and (11) the debtors "suffered a concrete injury by not receiving accurate information in the Proof of Claim about the interest and fees included in the claim amount."
The FDCPA provides that "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." 15 U.S.C. § 1692e.
The debtors assert that Midland violated § 1692e because of "the false assertion that no interest or fees were included in the amount of each Proof of Claim, and that Defendants had a reasonable belief in the accuracy of the information." Compl. ¶ 67. As analogues of statutory support, plaintiffs point to two types of prohibited practices enumerated in § 1692e: "(2) The false representation of — (A) the character, amount, or legal status of any debt" and "(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." 15 U.S.C. § 1692e(2), (10).
The complaint describes how Midland filed proofs of claim for debts owed to Synchrony Bank, but reported on the proofs of claim amounts greater than the amounts the plaintiffs admitted that they owed to Synchrony Bank.
The Court agrees with Midland that materiality is a necessary element for a FDCPA complaint. "[T]o plead a claim of false representation under the FDCPA, the party must show that the representations are material." Lembach v. Bierman, 528 Fed.Appx. 297, 303 (4th Cir. 2013); Powell v. Palisades Acquisition XVI, LLC, 782 F.3d 119, 126 (4th Cir. 2014) ("A logical corollary of the least sophisticated consumer test is that false, deceptive, and misleading statements must be material to be actionable.").
On the other hand, the Court disagrees with Midland's conclusion that the plaintiffs have failed to plead material misrepresentations. Midland asserts a definition for materiality that is overly narrow. Midland suggests that materiality is limited to facts which would affect a party's response in the context of a two-party dispute. Certainly, Midland is correct that a false representation which would influence a party's response in a lawsuit is a material false representation. That said the mere fact that a false representation may not concern litigation between the debt collector and the consumer does not render the false representation immaterial, especially when the false representation is made in a bankruptcy case.
In the context of a bankruptcy case, Midland is seeking to participate in an asset pool; that is, the collector will share collectively with other creditors of the debtor. In this way, Midland's false representations may trigger action from a bankruptcy trustee or another creditor which impacts the debtor even if the false representations may not trigger a direct response
Midland relies on Hahn v. Triumph Partnerships LLC, 557 F.3d 755 (7th Cir. 2009), to argue that mischaracterizing interest as principal may not be material for purposes of a violation of the FDCPA. Yet, the Court in Hahn addressed litigation between a debt collector and a consumer in a non-bankruptcy context. Unlike the bankruptcy context, in Hahn, the consumer did not contest the accrual of interest on the unsecured debt, or that interest would continue to accrue until the underlying debt was paid. By contrast, in the bankruptcy case, the consumer debtor or the trustee, or even another creditor, could contest the post-petition accrual of interest. If post-petition interest on the unsecured debt is claimed in the bankruptcy case it may support a challenge. On the other hand, if post-petition interest is charged but not reported and instead mischaracterized as principal, it may appear as if no post-petition interest was charged even if it had been. In another way, if the proofs of claim had reported interest which accrued pre-petition, but which had been calculated using a rate greater than the contractual rate or exceeded an applicable statutory rate, and hence claimed a total amount for the claim greater than legally permissible, it could trigger a challenge from the debtor or the trustee. Without correctly reporting the interest, it is impossible to determine if the amount calculated was appropriate. Midland appears to suggest that because in this case the trustee did not object to the claims, the failure to report interest must not have been material. Yet, when the claim did not reveal interest, the trustee may have been deprived of the information about whether interest was charged, and if so, for what period and under what rate. Without this information, the trustee would not have been able to evaluate whether to assert a legal challenge to the claim.
At bottom, dismissal of the complaint for pleading insufficiency turns on whether Midland's practice of simply reporting lump total amounts on a proof of claim for an unsecured creditor, specifically incorrectly reporting interest as principal, would make a difference to a debtor. That is, would any debtor care whether an unsecured creditor failed to itemize interest and principal on a proof of claim? Would a debtor be misled by a mischaracterization or lack of itemization? The answer is yes, a debtor would be misled if interest was reported as principal on proofs of claim because it could make a difference in a debtor's bankruptcy case. The question before the Court at this stage is pleading sufficiency, not the merits of the complaint.
Unlike some procedural rules, Rule 3001 requires substantive information: the amount of interest and fees must be disclosed. The information may inform the debtor, trustee, or other creditors if a legal challenge is appropriate. The complaint alleges that Midland deprived the plaintiff of this information and knowingly violated the rule. Because Rule 3001 requires a proof of claim to disclose details regarding interest and fees, and this information could inform the plaintiff along with other parties in interest whether a legal challenge is appropriate, the complaint has alleged actions which demonstrate a plausible risk of harm and as such may prove material and not just a technical violation of the rule.
Midland also suggests that the violation is not actionable because the plaintiffs did not plead the specific harm Midland's actions caused. Plaintiffs simply stated "concrete harm" without describing what or how. Unlike other civil actions requiring a demonstration of harm, the FDCPA requires only a showing that a debt collector "use[d] any false, deceptive, or misleading representation or means in connection with the collection of any debt." The plaintiffs have alleged a strictly statutory violation of the FDCPA. All the same, a plaintiff would need to have an actual controversy to seek recovery in the federal courts. For this reason, courts have imposed requisite materiality for a justiciable cause of action. In this context (violation of FDCPA), although the plaintiff is not required to plead an actual injury, she must at least plead a plausible risk of injury. This is captured by the materiality requirement. It is best explained by the Court in Spokeo, Inc. v. Robins:
___ U.S. ___, 136 S.Ct. 1540, 1549, 194 L.Ed.2d 635 (2016).
Thus, the plaintiff must plead a connection between the statutory breach and a risk of harm. The plaintiffs allege that: (1) Midland filed proofs of claim in amounts greater than the plaintiffs admitted they owed; (2) Midland deprived the plaintiffs accurate information about whether the
The FDCPA prohibits debt collectors from using "unfair or unconscionable means to collect or attempt to collect any debt." 15 U.S.C. § 1692f. Similarly to § 1692e, the statute provides specific examples of violations "[w]ithout limiting the general application" of the prohibition on unfair and unconscionable collection means. Id. "[T]he section allows the court to punish any other unfair or unconscionable conduct not covered by the FDCPA." Lembach v. Bierman, 528 Fed.Appx. 297, 303 (4th Cir. 2013).
The complaint asserts that Midland violated 15 U.S.C. § 1692f because it used unfair and unconscionable means to collect a debt, including but not limited to "a standard practice of filing Proofs of Claim without complying with Federal Rule of Bankruptcy Procedure 3001(c)(2)(A) and without having the ability to comply with Federal Rule of Bankruptcy Procedure 3001(c)(3)(B)." Compl. ¶ 68. The complaint alleges that Midland had sufficient information to file claims that comply with Rule 3001. Compl. ¶¶ 25, 27. The complaint alleges Midland filed claims that did not comply with Rule 3001. Compl. ¶¶ 26, 28. The complaint alleges that Midland learned its practice violated Rule 3001 and knowingly filed claims which did not comply with Rule 3001 anyway. Compl. ¶¶ 31-35. The complaint alleges Ms. Thomas (one of the named plaintiffs) requested the writing underlying Proof of Claim 8 filed by Midland and received no response. Compl. ¶ 42. The complaint alleges that Midland knew or should have known that it would need to provide documentation to a debtor upon request. Compl. ¶¶ 38-40. The complaint alleges that Midland has a "normal practice ... not to provide the contract." Compl. ¶ 41.
Rule 3001(c)(2)(A) provides that "[i]f ... a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim." Fed. R. Bankr. P. 3001(c)(2)(A).
Rule 3001(c)(1) requires the claimant to file a copy of the writing with the proof of claim "[e]xcept for a claim governed by paragraph (3)," which governs the claims at issue in the complaint. Rule
Midland asks this Court to dismiss the complaint as not stating an actionable claim under § 1692f because, according to Midland, a technical violation of Rule 3001 does not render a violation of the FDCPA. More specifically, Midland argues, failing to accurately report principal and interest is not "unconscionable" or "unfair" conduct. What is more, Midland asserts it did provide sufficient documentation to comply with Rule 3001(c)(3)(B) and the complaint does not identify facts to show otherwise or to show "unconscionable" or "unfair" conduct.
At this stage, taking the facts as plead as true, the complaint does allege violations of Rule 3001, a practice of knowingly violating the Rule, and a practice of hindering a debtor's ability to readily obtain information regarding the claim. The complaint alleges that Midland (1) knowingly failed to itemize interest and fees on a proof of claim; (2) knowingly reported a total principal which does not accurately reflect the total principal; (3) failed to provide access to a contract; (4) refused to respond timely to a request for the written contract; and (5) intentionally acquired debt in bankruptcy cases but knowingly ignored bankruptcy rules requiring that Midland itemize interest and principal when filing a claim amount for collection in a bankruptcy case. The plaintiffs allege these actions violate § 1692f of the FDCPA as "unconscionable" and "unfair" means to collect a debt.
Assuming the facts are true, the complaint raises a legal question unresolved to date. The complaint alleges Midland had a practice of filing claims to seek recovery from a bankruptcy estate, knew that its practice of reporting amounts on its claims was inconsistent with applicable rules for filing these proofs of claim in a bankruptcy case, and yet did it anyway. The plaintiffs allege this conduct is an unfair means to collect a debt, or an unconscionable means to collect a debt. Midland argues that a Rule 3001 violation does not violate the FDCPA. Midland relies upon cases which address whether the FDCPA is breached by different types of Rule 3001 violations rather than the particular allegations described in this complaint. The plaintiffs have alleged conduct which, if true, describes a debt collection model in bankruptcy cases which could be unfair as that term is used under the FDCPA because it appears to obtain an advantage vis-à-vis other creditors or to potentially collect more than the creditor would have otherwise had it complied with Rule 3001.
For the above reasons, this Court denies the motion to dismiss Count I.
In Count II, plaintiffs allege that Midland violated Federal Rule of Bankruptcy Procedure 3001. Specifically, plaintiffs
Additionally, plaintiffs complain that Midland violated Rule 3001(c)(2) "by failing to file with its proof of claim an itemized statement of the interest, fees, expenses, or other charges that were incurred before the bankruptcy petition was filed and which were included in the claim amount." Compl. ¶ 72. The plaintiffs plead that "Defendants should be subject to an appropriate remedy as determined by this Court, and are liable to the Plaintiffs ... for costs and attorneys' fees." Compl. ¶ 73. Finally, in the Demand for Relief, plaintiffs clarify that the relief sought includes: "[a]n award of the appropriate remedy as determined by this Court for the violations of Federal Rule of Bankruptcy Procedure 3001"; "[a]n award of attorneys' fees"; "[a]n award of litigation costs"; "a Declaration that Defendants violated the law and an injunction against them filing any further Proofs of Claim that violate Federal Rule of Bankruptcy Procedure 3001(a) and 3001(c)(1) and requiring them to have the ability to respond properly to a request for the writing underlying a claim before filing a Proof of Claim"; and "[s]uch other declaratory or injunctive relief as the Court may deem fair and equitable."
Rule 3001(a) provides that "[a] proof of claim is a written statement setting forth a creditor's claim. A proof of claim shall conform substantially to the appropriate Official Form." Fed. R. Bankr. P. 3001(a). Midland filed its proofs of claim on the Official Form but with incorrect information. Rule 3001(c)(1) requires that if a claim "is based on a writing, a copy of the writing shall be filed with the proof of claim." Fed. R. Bankr. P. 3001(c)(1). Subsection (c)(2) provides for additional requirements in an individual debtor case. Salient to the present action, Rule 3001(c)(2)(A) provides that "[i]f ... a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim." Id. at 3001(c)(2)(A).
Assuming the facts as alleged in the complaint are true, the complaint pleads that Midland failed to comply with Rule 3001. The question remains, however, whether the plaintiff nonetheless has pleaded grounds for relief for failure to comply with Rule 3001.
Rule 3001 provides for sanctions for failure to comply with Rule 3001(c)(2). After notice and a hearing, the Rule permits the Court to take one or both of two explicit actions. First, the Court may "preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless." Id. at 3001(c)(2)(D)(i). Second, the Court may "award other appropriate relief, including reasonable expenses and attorney's fees caused by the failure." Id. at 3001(c)(2)(D)(ii).
The plaintiffs have not alleged sufficient facts in the complaint that demonstrate any amounts of expenses or attorney's fees resulting from the failure of Midland to comply with Rule 3001. Plaintiffs focus their request for relief on the second alternative, particularly on the "other appropriate relief" language. Specifically, the plaintiffs request an injunction against Midland "filing any further proofs of claim that violate Federal Rule of Bankruptcy Procedure 3001(a) and 3001(c)(1) and requiring
For this Court to issue a permanent injunction, plaintiffs must satisfy a four-factor test. "A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction." eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391, 126 S.Ct. 1837, 164 L.Ed.2d 641 (2006). The facts as alleged do not show how an injunction is warranted. Because the complaint does not provide sufficient details of the grounds for an injunction, Midland has not been provided appropriate notice of the grounds justifying an injunction in order to adequately respond. Likewise, Midland has not been provided sufficient notice of the extent of the "attorney's fees" "caused by the failure" to comply with Rule 3001 or "litigation costs." For these reasons, the Court determines Count II as currently drafted is insufficient because it fails to detail the relief requested and plead sufficient facts that would authorize the injunctive relief requested. Accordingly, the Court grants the motion to dismiss Count II.
In the Fourth Circuit, "leave to amend a pleading should be denied only when the amendment would be prejudicial to the opposing party, there has been bad faith on the part of the moving party, or the amendment would be futile." Johnson v. Oroweat Foods Co., 785 F.2d 503, 509 (4th Cir. 1986) (quoting Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)). When the aforementioned factors are absent, a court should "freely give leave [to amend] when justice so requires." Fed. R. Civ. P. 15(a)(2); see also Foman, 371 U.S. at 182, 83 S.Ct. 227 ("[O]utright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion; it is merely abuse of that discretion and inconsistent with the spirit of the Federal Rules."). The plaintiffs responded to Midland's motion to dismiss by requesting leave to amend. At this point, the parties have not yet conducted discovery, and the Court has not set any trial dates. Midland therefore should not be prejudiced by allowing the plaintiff to amend the complaint.
The complaint describes the actions purporting to violate Rule 3001 but stops short of sufficiently describing the requested relief or showing grounds for some of the requested relief. Because the complaint provides enough detail to show that Rule 3001 may have been breached, it is not futile to permit the plaintiff to amend the complaint to describe what if any appropriate relief is permitted or required. No suggestion has been made nor has the Court identified any signs of bad faith on the part of the plaintiffs in connection with the pleading deficiencies in Count II. For these reasons, the Court finds it appropriate to grant leave to amend.
The Court will contemporaneously issue an Order consistent with the findings and ruling of this Memorandum Decision.
