United States District Court, E.D. New York
August 5, 2004.
CHRISTIE LIMPERT and VIVIAN FONEBOA, individually and on behalf of others similarly situated, Plaintiffs,
CAMBRIDGE CREDIT COUNSELING CORPORATION, et al. Defendants.
The opinion of the court was delivered by: THOMAS PLATT, JR., Senior District Judge
MEMORANDUM AND ORDER
Defendants the Cambridge Credit Counseling Corporation, et
al., move under Federal Rules of Civil Procedure 12(b)(1) and
(6) for dismissal of the claims brought against them by class
action Plaintiffs Christie Limpert and Vivian Fonteboa.
Plaintiffs sued Defendants under the Fair Debt Collection
Practices Act, 15 U.S.C. § 1692 et seq., ["FDCPA"]; the Credit
Repair Organization Act, 15 U.S.C. § 1679 et seq., ["CROA"];
and the Racketeering Influenced and Corrupt Organization Act,
18 U.S.C. § 1961 et seq., ["RICO"]. Oral argument was heard on
July 15, 2004.
For the following reasons, Defendants' Rule 12(b)(1) motion is
DENIED. Defendants' motion is GRANTED, pursuant to
Rule 12(b)(6), as to Plaintiffs' FDCPA claims, and these claims are
dismissed WITH PREJUDICE. Defendants' Rule 12(b)(6) motion is
GRANTED as to Plaintiffs' CROA claims against Cambridge
Brighton and Cambridge Credit Counseling, and these claims are
also dismissed WITH PREJUDICE, but Defendants' motion is
DENIED as to Plaintiffs' CROA claims against the remaining
eight Defendants. Defendants' motion is GRANTED, under
Rule 12(b)(6), as to Plaintiffs' RICO claims, yet these are dismissed
WITHOUT PREJUDICE and with LEAVE TO RE-FILE.
The class action Plaintiffs in this case are consumers alleged
to be enrolled in debt management plans ["DMPs"]. These plans are
alleged to have been "created and administered by . . .
Defendants through unlawful, false, misleading, deceptive and
unfair trading practices" in violation of the FDCPA, CROA and
RICO. Defendants are eight credit counseling corporations and
partnerships owned by individually-named Defendants Robert Henle
and John and Richard Puccio. They offer indebted consumers DMPs
in which "consumers agree to pay their unsecured debts to
Defendants, who then disburse the payments to consumers'
creditors." These payments are purportedly disbursed in exchange
for sub rosa fees collected from both debtors and creditors,
and with chimerical promises offered to debtors of, inter alia,
lower credit card balances and interest rates, fewer late fees,
and improved credit ratings. Plaintiffs' Memorandum of Law in
Opposition to Defendants' Motion to Dismiss at 1-2.
Plaintiffs offer evidence that the credit counseling industry
is rife with abuse. They cite the records of congressional
hearings held by the Senate's Governmental Affairs and the House
of Representatives' Ways and Means Committees, testimony given to
these bodies by Federal Trade Commission and Internal Revenue
Service officials, and legal action taken by the Attorney General
of the Commonwealth of Massachusetts, as illustrative of the
problem. Indeed, Congress is presently considering legislation to
deal with these problems specifically, the Debt Counseling,
Debt Consolidation, and Debt Settlement Practices Improvement Act
of 2003. See id. at 5-6; see also Defendants's Memorandum
of Law in Support of their Motion to Dismiss at 6 (citing H.R.
3331, 108th Congress, 1st Sess., available at
Defendants argue in response to Plaintiffs' 42-page Complaint
that two of the three statutes sued upon by Plaintiffs, the FDCPA
and CROA, do not apply to credit counselors, as they themselves
are neither debt collectors nor credit repairers, and that the
predicates of the third statute, RICO, are insufficiently
pleaded. See Defendants' Memorandum, passim.
Defendants are mostly correct. Plaintiffs' citation of evidence
that legislators and regulators are perhaps justifiably concerned
with claimed abuses in the credit counseling industry shows that
existing statutory remedies and administrative oversight are
insufficient, and that current laws the laws, such as the FDCPA
and CROA, upon which Plaintiffs sue do not offer relief for
the alleged wrongs perpetrated against Plaintiffs by all of the
named Defendants. The democratic process may soon provide
Plaintiffs with mechanisms through which to address their
possibly legitimate grievances against the credit counseling
industry. Unless and until the Executive and the Legislature do
so, however, Plaintiffs may not shoe-horn the facts of their
Complaint into the FDCPA, which deals with debt collection.
Plaintiffs may or may not be able to fit their claims against
some Defendants within the parameters of the CROA, which deals
with debt repair, if Defendants are in fact representing that
they offer debt repair services and not solely credit counseling
services. Plaintiffs may rely upon the RICO statute, but they
must first allege its statutory predicates with sufficient
Standard of Review
On their motion to dismiss Plaintiffs' Complaint under
Rule 12(b)(6), for failure to state a claim upon which relief may be
granted, Defendants bear the burden of showing that even if the
Complaint's allegations are accepted as true, and all reasonable
inferences are drawn in Plaintiffs' favor, Plaintiffs are still
not entitled to the relief they seek. Dismissal is proper only if
no relief could be granted under any set of facts consistent with
A. Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et
seq., addresses abusive dunning conduct. The FDCPA defines a
debt collector as any person who collects debts owed to another.
See 15 U.S.C. § 1692(a)(6). The FDCPA does not apply to "any
nonprofit organization which, at the request of consumers,
performs bona fide consumer credit counseling and assists
consumers in the liquidation of their debts by receiving payments
from such consumers and distributing such amounts to creditors."
The FDCPA intends to restrain collection practices including:
obscene or profane language, threats of violence,
telephone calls at unreasonable hours,
misrepresentation of a consumer's legal rights,
disclosing a consumer's personal affairs to friends
neighbors or an employer, obtaining information about
a consumer through false pretenses, impersonating
public officials and attorneys, and simulating legal
S. Rep. No. 95-382, 95th Cong., 1st Sess. at 2, reprinted
in 1977 U.S.C.C.A.N. 1965, 1696; cited in Defendants's
Memorandum at 4-5.
Defendants argue that they are credit counselors, and not debt
collectors, and that Plaintiffs' representations to the contrary
are "conclusory statements, lacking any factual underpinning."
Defendants emphasize that they are not retained by creditors,
they are instead retained by debtors. Defendants' Memorandum at
17-18; see also Defendants' Reply Memorandum at 4-5.
Plaintiffs respond that Defendants are, in fact, debt
collectors within the meaning of the FDCPA. They point to Section
1692(a)(6)'s definition of a debt collector as any person who
collects debts owed to another. Plaintiffs suggest that under the
plain language of the statute, Defendants qualify as debt
collectors, because they assume the debts of others, and then
satisfy their creditors. See Plaintiffs' Memorandum at 14-15.
The available case law regarding this issue is quite thin. Two
cases helpfully brought to the Court's attention by both parties
Goldstein v. Hutton, et al., 2004 U.S. App. LEXIS 13629 (2d
Cir. July 1, 2004); and Zimmerman v. Cambridge Credit Counseling
Corp, et al., 2004 U.S. Dist. LEXIS 11848 (D. Mass. June 24,
2004) are instructive, but not decisive.
In Goldstein, the United States Court of Appeals for the
Second Circuit considered whether a law firm admittedly involved
in debt collection was "regularly" engaged in debt collection
within the meaning of Section 1692(a)(6). Id. at *15. Here, the
question is whether Defendants were engaged in debt collection at
In Zimmerman, the United States District Court for
Massachusetts, in a case involving the same lead Defendant as in
the case sub judice, dismissed the plaintiff's FDCPA claim, but
on the grounds of the expiration of the statute of limitations.
See id. at *6-8; c.f. n. 1, supra.
The Court finds that while the distinction between credit
counseling and debt collection is finely cut, it is nonetheless
controlling. No debtor ever retained a debt collector to collect
a debt from himself. In the case at bar, Plaintiffs, whether
wisely or unwisely, voluntarily retained Defendants to obtain
their credit counseling services. While these "counseling"
services involve Defendants assuming Plaintiffs' debts, and while
Defendants do receive fees from Plaintiffs' creditors, there is
no allegation that Defendants unilaterally seek out Plaintiffs to
unlawfully harass them into paying their debts, which is the
unfortunate practice that the FDCPA seeks to control.
Plaintiffs may well argue upon appeal that the Court is
elevating form over substance in its interpretation of Section
1692(a)(6). But Defendants' industry here seems to have stumbled
upon a lacuna in the law, one which Congress, recognizing the
problem, is contemporaneously working to close. Defendants are
not debt collectors as they do not collect debts owed to others;
rather, they assume such debts as part of their method, whatever
its merits, of credit counseling.
If Defendants subsequently engaged in abusive practices against
clients who retained then but then defaulted upon their
obligations to Defendants, then, despite their status as credit
counselors, they might run afoul the FDCPA. Such facts are,
however, dehors the record.
Defendants' Rule 12(b)(6) motion is GRANTED as to Plaintiffs'
FDCPA claims. These claims are dismissed WITH
B. Credit Repair Organization Act
The Credit Repair Organization Act, 15 U.S.C. § 1679 et
seq., defines credit repair organizations as those engaged in
interstate commerce which promise, in return for consideration,
to "improv[e] any consumer's credit record."
15 U.S.C. § 1679a(3)(A). The CROA intends to prohibit such organizations from
misleading clients into believing that adverse, yet accurate,
information might be cleansed from their credit reports, sooner
than it might otherwise be, through the intercession of a credit
repair organization. See H.R. Rep. No. 103-486 (1994), cited
in Defendants' Memorandum at 5.
In contrast to the parties' dispute over the applicability of
the FDCPA, the parties agree that a credit counseling
organization qua a credit counseling organization may not be
sued under the CROA. See Defendants' Memorandum at 20-21;
Plaintiffs' Memorandum at 8-12. Legitimate credit counseling,
which endeavors to gradually improve clients' credit by
encouraging creditworthy behavior going forward, is distinct from
illegitimate forms of credit repair in which clients are given
false hopes of absolution for confessed past credit sins. Yet
there is a fine line, in advertising and soliciting for credit
counseling services to an unsophisticated audience of
lower-income debtors, between promising future rewards for
creditworthiness, and implying that existing bad credit records
may be prematurely expunged.
Therein lies a factual dispute between the parties. Plaintiffs
argue that some sections of the CROA apply to persons, not simply
organizations, that in any event persons or organizations who
represent that they perform credit repair services may be liable
under the CROA, and that certain Defendants have made such
representations specifically that they will "re-establish" a
client's credit. Plaintiff's Memorandum at 8-11.
Defendants admit that this language appeared on the web sites
of two individual defendants, Cambridge/Brighton and Brighton
Credit Management Corporation, but aver that "[v]iewed accurately
and in context, the statements upon which Plaintiffs base their
CROA claims establish that Defendants do not offer to repair
credit histories or records; instead, Defendants accurately state
that consumers who improve their payment histories are viewed
more favorably by creditors and lenders." Defendants' Memorandum
at 21-22. Further, written agreements entered into by the clients
of Cambridge/Brighton and Robert Henle, P.C., state that a
client's "credit rating is outside the scope" of the services
provided. Defendants' Reply Memorandum at 2.
A handful of other federal courts have considered the question
of what defendants might come within the jurisdictional
definition of Section 1679a(3)(a). Their decisions, none of which
are binding within this jurisdiction, are again instructive, but
not decisive in finding whether a credit counseling agency may be
held liable under the CROA.*fn3 The question is, then, one
of first impression within this jurisdiction. The Court finds
that, drawing reasonable inferences in Plaintiffs' favor on this
motion to dismiss, if it may be proven that certain of the
Defendants represented that they would re-establish their
clients' spotty credit reports, and if abuses forbidden by the
CROA then took place, Plaintiffs may be able to recover under
this statute. Blanket dismissal is therefore not appropriate at
this stage of the litigation.
One issue regarding the CROA claims remains. Similar to the
FDCPA, the CROA specifically does not apply to Section 501(c)(3)
organizations. See 15 U.S.C. § 1679a(3)(B)(i); see also n.
2 supra. Defendants' papers state that the following individual
Defendants are 501(c)(3) organizations: Cambridge Brighton, and
also Cambridge Credit Counseling Corporation. See Defendants'
Memorandum at 13. It is not clear from Defendants' submissions
whether the remaining five corporations are similarly tax-exempt
(the three named individuals and Mr. Henle's eponymous
professional corporation, of course, are not). But the Court will
accept these two Defendants' statuses as 501(c)(3) organizations
exempt from both taxes and the CROA, at face value, and dismiss
the CROA claims against them. See similarly Zimmerman, 2004
U.S. Dist. LEXIS 11848 at *8-14 (dismissing CROA claims against
Cambridge Credit Counseling as a tax-exempt organization).
Accordingly, Defendants' Rule 12(b)(6) motion is GRANTED as
to Plaintiffs' CROA claims against Cambridge Brighton and
Cambridge Credit Counseling, and these claims are dismissed WITH
PREJUDICE. Defendants' motion is DENIED as to Plaintiffs' CROA
claims against the remaining eight Defendants. Further discovery
may continue regarding whether these Defendants in fact offer and
perform for consideration credit repair as well as credit
counseling services. The caveat is added that legitimate credit
counseling services, as such, may not be equated with the
illegitimate credit repair services prohibited by the CROA. If no
evidence is presented suggesting that illegal credit repair
services have been offered by Defendants, Plaintiffs' remaining
claims under the CROA might be amendable to resolution in
Defendants' favor by a Rule 56(c) motion for summary judgment.
C. Racketeering Influenced and Corrupt Organization Act
Finally, Defendants argue that Plaintiffs' claims made under
the Racketeering Influenced and Corrupt Organization Act,
18 U.S.C. § 1961 et seq., are defective, as they do not allege
predicate acts under the RICO statute in this case, mail and
wire fraud with sufficiently particular pleadings, as called
for in averments of fraud by Federal Rule of Civil Procedure
9(b). See Defendants' Memorandum at 22-29. Plaintiffs in
response rely upon In re: Sumitomo Copper Litig., 104 F. Supp.2d 314,
320 (S.D.N.Y. 2000), for the proposition that where "a
plaintiff asserts a detailed conspiracy by the defendants, it is
reasonable to infer that mail and/or telephone communications
were used in furtherance of the defendants' scheme." Plaintiffs'
Memorandum at 27.
A review of the communications found sufficiently particular to
establish the mail and wire fraud predicates and to satisfy the
heightened pleading standards of Rule 9(b) in Sumitomo
demonstrates that these communications included content-, date-,
sender- and recipient-specific facsimile messages and wire
transfers. See id. at 320 (e.g., "Hamanaka sent a fax to
Threlkeld at his office in Vermont, asking him to verify
fictitious trades which supposedly had occurred through DLT and
CLR on September 17 and September 28, 1990, involving 127,505 MT
of copper and more than $560 million"). The Complaint in the
instant case is not nearly as particular or specific.
While it is reasonable to infer that the mails or wires might
be used to further the kind of conspiracy alleged by Plaintiffs
here, as observed in Sumitomo, Plaintiffs must begin by
alleging that at least some individually-identified
communications were substantively fraudulent in nature and were
also transmitted through mail or wire communication, in violation
of 18 U.S.C. § 1341 and/or 1343.*fn4 Plaintiffs have not
yet done so.
At oral argument, however, Plaintiffs represented to the Court
that they might yet be able to identify such fraudulent
communications. Accordingly, Defendants' motion to dismiss
Plaintiffs' RICO claims is GRANTED, WITHOUT PREJUDICE and with
LEAVE TO RE-FILE a First Amended Complaint.
The Court is not unsympathetic to the alleged exploitation of
and predation upon the vulnerable poor set forth in Plaintiffs'
Complaint and opposition papers. In a constitutional system of
separated powers, however, it is up to the elected and
accountable political branches, and not the unelected and
unaccountable Judicial Branch, to fashion wise regulatory and
statutory schemes to provide debtors with recourse against
claimed wrongs perpetrated by the newly emerging credit
counseling industry. Principles of judicial restraint prevent the
Court from expanding, sua sponte, the ambit of the FDCPA to
encompass abuses in credit counseling as well as debt collection,
and so too is the Court constrained from ignoring the provisions
of the CROA that exempt Section 501(c)(3) organizations from that
statute's reach. No such broad authority is suggested by either
the plain language of the statutes or, assuming arguendo that
such language was ambiguous, even the legislative history or
intent behind these laws.
For the foregoing reasons, Defendants' motion to dismiss is
DENIED pursuant to Rule 12(b)(1). Defendants' motion to dismiss
is GRANTED as to Plaintiffs' FDCPA claims, and these claims are
dismissed WITH PREJUDICE. Defendants' Rule 12(b)(6) motion is
GRANTED as to Plaintiffs' CROA claims against Cambridge
Brighton and Cambridge Credit Counseling, and these claims are
also dismissed WITH PREJUDICE, but it is DENIED as to
Plaintiffs' CROA claims against the remaining eight Defendants.
Lastly, Defendants' motion is GRANTED as to Plaintiffs' RICO
claims, but these claims are dismissed WITHOUT PREJUDICE and
with LEAVE TO RE-FILE.