Morgan v. HSBC Mortgage Services, Inc.

Filing 15

MEMORANDUM OPINION & ORDER: The Court hereby ORDERS: 1. HSBC's motion to dismiss R. 10 is GRANTED; 2. HSBC's motion to strike R. 14 is GRANTED, and Morgan's Response R. 11 is STRICKEN from the record; 3. The Court will enter an appropriate JUDGMENT; and 4. This matter is STRICKEN from the active docket of this Court. Signed by Judge Gregory F. VanTatenhove on 03/12/2013.(KJA)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
LONDON

CALEB MORGAN,
Plaintiff,
V.
HSBC MORTGAGE SERVICES, INC.,
Defendants.

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Civil No. 11-204-GFVT

MEMORANDUM OPINION
&
ORDER

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Caleb Morgan alleges that the HSBC, mortgagee of his personal residence, harmed his
credit rating and his personal reputation when it misapplied his mortgage payments and
inappropriately reported a deficiency to the credit rating agencies. [R. 1-1]. Morgan claims that
HSBC’s actions give rise to liability under the Equal Credit Opportunity Act and Fair Credit
Reporting Act, as well as the state law torts of negligence and outrage. HSBC moved for
dismissal under Federal Rule of Civil Procedure 12(b)(6) [R. 4], but because of the complaint’s
vagueness, the Court denied HSBC’s motion and instead ordered Morgan to amend his
complaint to provide a more definite statement. [R. 8]. Morgan has filed an amended complaint
[R. 9], and it is now sufficiently clear that dismissal of each claim is appropriate. As such,
HSBC’s renewed motion to dismiss [R. 10] is granted.
I
Caleb Morgan borrowed money from HSBC. The loan was secured by a mortgage on his
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home requiring payments of $506.09. In 2009, HSBC began collecting an additional escrow
amount of $142.54 per month from Morgan to cover a deficiency in his escrow account, which
occurred when HSBC made property tax payments on behalf of Morgan. Morgan alleges that
after he paid the deficiency, HSBC continued to apply his $506.09 monthly payment first to the
additional escrow amount of $142.54 and then applied the remaining $353.55 to his monthly
mortgage obligation amount, causing his payments to be insufficient. As a result, Morgan says
he incurred inappropriate late fees, but more relevant to his complaint, he claims that HSBC
reported his account as delinquent to the three major credit reporting agencies. Morgan claims
that HSBC did this despite the fact that he had disputed the deficiencies with HSBC.
Morgan filed suit in state court on June 22, 2011. HSBC removed the action to this Court
on July 21, 2011. [R. 1]. On July 28, HSBC filed its first motion to dismiss [R. 4]. It was not
until October 24 that Morgan filed a response, which the Court struck pursuant to Local Rule
7.1(c). However, the Court did not at that time dismiss the complaint, but invoked Federal Rule
of Civil Procedure 12(e), requiring a more definite statement when the pleading is “so vague or
ambiguous that the party cannot reasonably prepare a response.” Fed.R.Civ.P. 12(e).
In an attempt to more clearly articulate his claims, Morgan filed his amended complaint
on March 14, 2012. [R. 9]. In this complaint Morgan claims HSBC’s errant reporting of his
payment delinquency to the credit reporting agencies gives rise to federal claims under the Equal
Credit Opportunity Act and Fair Credit Reporting Act as well as the state claims for negligence
and outrage. HSBC countered by raising afresh its motion to dismiss each of these claims. [R.
10]. On October 22, 2012, over six months after the motion to dismiss was filed, Morgan filed
his response. [R. 11]. HSBC submitted its reply, but also filed a motion to strike Morgan’s
response pursuant to Local Rule 7.1(c).
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As a preliminary matter it should be noted that “[a] party opposing a motion must file a
response memorandum within twenty-one (21) days of service of the motion. Failure to timely
respond to a motion may be grounds for granting the motion.” LR 7.1(c). The Court previously
struck Morgan’s prior late response, and as the response to this renewed motion is substantially
later, and Morgan again failed to seek an extension nor proffered an explanation for his tardiness,
the Court shall once again grant HSBC’s motion to strike Morgan’s response. [R. 14].
Accordingly, any arguments raised in Morgan’s response [R. 11], as well as those arguments
raised in HSBC’s reply [R. 13] will not be considered by the Court in ruling on HSBC’s motion
for dismissal, which is now ripe for review by this Court.
II
A
HSBC argues, pursuant to Federal Rule of Civil Procedure 12(b)(6), that each of the
theories for relief contained in the amended complaint fails to state a claim upon which relief
may be granted and must be dismissed. [R. 10].
In reviewing a Rule 12(b)(6) motion, the Court “construe[s] the complaint in the light
most favorable to the plaintiff, accept[s] its allegations as true, and draw[s] all inferences in favor
of the plaintiff.” DirecTV, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007) (citation omitted).
The Court, however, “need not accept as true legal conclusions or unwarranted factual
inferences.” Id. (quoting Gregory v. Shelby County, 220 F.3d 433, 446 (6th Cir. 2000)).
Recently, the Supreme Court explained that in order “[t]o survive a motion to dismiss, 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, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). See also Courier v. Alcoa Wheel & Forged
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Products, 577 F.3d 625, 629 (6th Cir. 2009).
Stated otherwise, it is not enough for a claim to be merely possible; it must also be
“plausible.” See Courier, 577 F.3d at 630. According to the Court, “A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S.
at 556). “Plausibility” then, is the benchmark the factual allegations contained in Plaintiffs’ first
amended complaint must meet in order to defeat HSBC’s motion to dismiss.
As recognized in the previous Order, the new plausibility standard announced in
Twombly and Iqbal is not in disagreement with the longstanding practice of notice pleading. As
Douglas Smith argued, “[t]he plausibility test is also consistent with the idea of notice pleading.
Absent logically coherent allegations, it is difficult to see how a defendant can be put on ‘notice’
regarding the substance of a plaintiff’s claims.” Smith, Douglas G., The Evolution of a New
Pleading Standard: Ashcroft v. Iqbal, 88 Or. L. Rev. 1053, 1073 (2009). The plausibility
standard is “merely a logical extension of the notice requirement.” Id. Therefore, one issue a
court should consider when scrutinizing a complaint is “whether [a defendant] ha[s] adequate
notice of the charges it [is] defending.” Carter v. Ford Motor Co., 561 F.3d 562, 568 (6th Cir.
2009).
B
Morgan first purports to make a federal claim under the Equal Credit Opportunity Act
(“ECOA”), 15 U.S.C. § 1961, et seq., The ECOA prohibits creditors from discriminating against
any credit applicant “with respect to any aspect of a credit transaction…on the basis of race,
color, religion, national origin, sex, or marital status.” 15 U.S.C. § 1691(a)(1). “The purpose of
the ECOA is to eradicate credit discrimination waged against women, especially married women
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whom creditors have traditionally refused to consider for individual credit.” Mays v. Buckeye
Rural Elec. Co-op., Inc., 277 F.3d 873, 876 (6th Cir. 2002) (citing Anderson v. United Fin. Co.,
666 F.2d 1274, 1277 (9th Cir. 1982).
Aside from twice mentioning its name, Morgan’s complaint has no relationship to the
Equal Credit Opportunity Act. Morgan does not cite a particular statutory section under which
he is bringing his claim, and he alleges no facts that he was discriminated against in any way by
HSBC. Even if the facts are as Morgan suggests and HSBC has improperly reported inaccurate
account deficiencies to credit rating agencies, thereby adversely impacting his credit rating,
Morgan would still not have a claim under the ECOA. Essentially, Morgan makes the bare claim
that “HSBC, its Agents, Assigns and employees have violated the Equal Credit Opportunity
Act,” [R. 9 at 4], which gives HSBC no notice of the charges it is defending against and
constitutes nothing more than an unsupported legal conclusion that the Court need not, and does
not, accept as true. As a result, Morgan’s ECOA claim is properly dismissed.
C
The facts of Morgan’s amended complaint are more applicable to the Fair Credit
Reporting Act (“FCRA”), 15 U.S.C. § 1681 et seq., which Morgan also specifically cites in his
complaint. Congress enacted the FCRA in 1968 in order to promote, “efficiency in the Nation’s
banking system and to protect consumer privacy.” 15 U.S.C. § 1681. More specifically, the
Sixth Circuit has noted that “the FCRA is aimed at protecting consumers from inaccurate
information in consumer reports and at the establishment for credit reporting procedures that
utilize correct, relevant and up-to-date information in a confidential and responsible manner.”
Jones v. Federated Financial Reserve Corp., 144 F.3d 961, 965 (6th Cir. 1998).
Morgan’s claim against HSBC is evaluated under 15 U.S.C. § 1681s-2, which sets forth
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the obligations of a furnisher to a consumer. There are essentially two components to this
provision. First, subsection (a) of this statutory section sets forth a “duty of furnishers of
information to provide accurate information.” §1681s-2(a). However, the statute expressly
states that the requirements of subsection (a) are only enforceable by government officials.
§1681s-2(d). As such, courts have readily recognized that no private cause of action exists under
§1681s-2(a) for parties like Morgan to raise a claim against a furnisher such as HSBC. Stafford
v. Cross Country Bank, 262 F.Supp. 2d 766, 783 (W.D.Ky 2003) (collecting cases); see also
Purcell v. Bank of America, 659 F.3d 622, 623 (7th Cir. 2011).
The second component is subsection (b), which sets forth the “duties of furnishers of
information upon notice of dispute.” §1681s-2(b). Subsection (b) is not similarly limited to
enforcement by government agencies, a difference which suggests that Congress did intend a
private right of action under this component. See Stafford, 262 F.Supp. at 783. However, the
duties under this section are contingent upon the furnisher of information “receiving notice
pursuant to section 1681i(a)(2) of this title of a dispute with regard to the completeness or
accuracy of any information provided by a person to a consumer reporting agency.” §1681s2(b)(emphasis added). “This means that a furnisher of credit information…has no responsibility
to investigate a credit dispute until after it receives notice of a dispute from a consumer reporting
agency.” Stafford, 262 F.Supp. at 784 (emphasis added)(citing §1681i(a)(2)). Morgan’s
complaint alleges that HSBC was “advised by the Plaintiff that it was improperly applying the
mortgage payment…and that such application was in error and should cease and that the
Defendant should stop reporting inaccurate information to credit reporting agencies and that such
inaccuracies should be corrected so as not to damage the Plaintiff credit history/score.” [R. 9].
However, as numerous courts, including district courts within this circuit, have recognized,
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“Under the statutory language, notification from the consumer is not enough.” Id. (collecting
cases); see also Yaldu v. Bank of America Corp., 700 F.Supp.2d 832, 843 (E.D.Mich 2012).
Accepting the facts of Morgan’s complaint as true, the duties imposed on HSBC as a
furnisher were never triggered. Though Morgan might have alerted HSBC of his dispute, no
facts are alleged that the furnisher ever received notice of the dispute from a credit reporting
agency, which is a necessary prerequisite under §1681s-2(b). Moreover, his pleadings in this
court suggest these facts are not alleged because Morgan did not alert the credit reporting
agencies of the dispute, but contacted HSBC directly.1 Therefore, Morgan is unable to raise a
claim under §1681s-2 for which relief can be granted, and his Fair Credit Reporting Act claim is
therefore rightfully dismissed.
D
Morgan also raises two state law claims for negligence and outrage. HSBC argues that
these claims are preempted by the Fair Credit Reporting Act 15 U.S.C. § 1698t(b)(1)(F). The
Court agrees.
It has been well documented that the FCRA contains two overlapping and potentially
contradictory preemption provisions. “The tension between these two provisions…results from
the fact that §1681(h)(e) permits state law tort claims, but requires a higher standard of proof for
those in the nature of defamation, slander, or invasion of privacy, while §1698t(b)(1)(F) prohibits
all state law claims covered by §1681s-2.” Yaldu, 700 F.Supp.2d at 843 (quoting Stafford, 262
F.Supp. at 785).

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Though HSBC has moved to strike Morgan’s very late response [R. 11], and the Court has not relied
upon it in its holding, it should be noted that in this filing, consistent with his complaint, Morgan does not dispute
that he contacted HSBC directly rather than the credit rating agencies. Instead he argues, without authority, that this
should be acceptable under the statute. The Court will not consider that argument, but notes the additional
confirmation that Morgan failed to satisfy the dictates of §1681s-2(b).

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While these two provisions might seem contradictory on the face of the statute, Judge
Easterbook of the Seventh Circuit Court of Appeals recently clarified how the two provisions
operate together.
[W]e do not perceive any inconsistency between the two statutes. Section
1681h(e) preempts some state claims that could arise out of reports to credit
agencies; § 1681t(b)(1)(F) preempts more of these claims. Section 1681h(e) does
not create a right to recover for wilfully false reports; it just says that a particular
paragraph does not preempt claims of that stripe. Section 1681h(e) was enacted in
1970. Twenty-six years later, in 1996, Congress added § 1681t(b)(1)(F) to the
United States Code. The same legislation also added § 1681s–2. The extra federal
remedy in § 1681s–2 was accompanied by extra preemption in § 1681t(b)(1)(F),
in order to implement the new plan under which reporting to credit agencies
would be supervised by state and federal administrative agencies rather than
judges. Reading the earlier statute, § 1681h(e), to defeat the later-enacted system
in § 1681s–2 and § 1681t(b)(1)(F), would contradict fundamental norms of
statutory interpretation.
Our point is not that § 1681t(b)(1)(F) repeals § 1681h(e) by implication. It
is that the statutes are compatible: the first-enacted statute preempts some state
regulation of reports to credit agencies, and the second-enacted statute preempts
more. There is no more conflict between these laws than there would be between
a 1970 statute setting a speed limit of 60 for all roads in national parks and a 1996
statute setting a speed limit of 55. It is easy to comply with both: don't drive more
than 55 miles per hour. Just as the later statute lowers the speed limit without
repealing the first (which means that, if the second statute should be repealed, the
speed limit would rise to 60 rather than vanishing), so § 1681t(b)(1)(F) reduces
the scope of state regulation without repealing any other law. This understanding
does not vitiate the final words of § 1681h(e), because there are exceptions to §
1681t(b)(1)(F). When it drops out, § 1681h(e) remains. But, even if our
understanding creates some surplusage, courts must do what is essential if the
more recent enactment is to operate as designed.

Purcell, 659 F. 3d at 625. At least one district court in this circuit that has considered this issue
has reached a similar conclusion. See Stafford, 262 F.Supp. at 785-786. Therefore, the Court
must first consider whether Morgan’s claims are preempted by §1698t(b)(1)(F), with the
secondary provision of §1681(h)(e) only factoring in the decision if the former does not apply.
Section 1698t(b)(1)(F) states that, “No requirement or prohibition may be imposed under

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the laws of any State (1) with respect to any subject matter regulated under…(F) section 1681s-2
of this title, relating to the responsibilities of persons who furnish information to consumer
reporting agencies.” §1698t(b)(1)(F). According to the amended complaint, Morgan’s
negligence claim is based on the fact that “after the Defendant deducted the $142.54 from the
mortgage payment, the mortgage payment appeared deficient and unpaid and was reported as
such by the Defendant to the three major credit reporting agencies.” [R. 9 at 3]. It was this
conduct by HSBC that Morgan claims was negligent. The outrage claim, though plead
insufficiently, seems to be based on the same conduct. In the words of Morgan, the Fair Credit
Reporting Act “prohibits the Defendant, as lender and furnisher of information from reporting
inaccurate information to the credit reporting agencies and that the inaccuracies should be
corrected so as not to damage the plaintiff credit history/score.” [R. 9 at 3]. Therefore, it is clear
from the amended complaint that Morgan’s state law claims for negligence and outrage are based
on the allegedly inaccurate reporting of the furnisher, HSBC, which is the exact type of conduct
regulated under §1681s-2. As a result, both of Morgan’s claims are preempted by
§1698t(b)(1)(F), making dismissal appropriate.
Even if not preempted, it is likely that Morgan’s state law claims would still meet the
same fate. To recover for negligence in Kentucky, a plaintiff must show that the defendant owed
the plaintiff a duty; that the defendant breached that duty; and that the breach caused an injury to
the plaintiff. Illinois Cent. R.R. v . Vincent, 412 S.W.2d 874, 875-876 (Ky. 1967). Whether a
defendant had a duty to the plaintiff is a question of law for the court, and without a duty there is
no negligence. Pathways, Inc. v. Hammons, 113 S.W.3d 85, 89 (Ky. 2003). Kentucky courts
have suggested that, “the failure to perform a contractual obligation typically does not give rise
to a cause of action in tort,” unless the plaintiff can show that the defendant had an independent
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legal duty to act. Mims v. Western-Southern Agency, Inc., 226 S.W.3d 833, 836 (Ky. Ct. App.
2007) (citing Jones v. Hartford Life and Accident Ins. Co., 443 F.Supp.2d 3, 5 (D.D.C. 2006)).
As the relationship between HSBC and Morgan was contractual, the sustainability of
Morgan’s negligence claim against HSBC turns on whether a lender owes an independent duty
of care to its borrower. Jones, 443 F.Supp.2d at 5. Kentucky law is clear that “except in special
circumstances, a bank does not have a fiduciary relationship with its borrowers.” Layne v. Bank
One Kentucky, N.A, 395 F.3d 271, 281 (6th Cir. 2005) (citing Sallee v. Fort Knox Nat’l Bank,
N.A., 286 F.3d 878, 893). Further, as previously discussed, Morgan has not met the necessary
perquisites to give rise to a duty under FCRA. Without an independent duty, Morgan would be
unable to raise his state law negligence claim even if it were not preempted.
It is even more evident that Morgan’s outrage claim would be dismissed if it were not
preempted. In Kentucky, a prima facie case of outrage requires “1) the wrongdoer’s conduct
must be intentional or reckless; 2) the conduct must be outrageous and intolerable in that it
offends against the generally accepted standards of decency and morality; 3) there must be a
causal connection between the wrongdoer’s conduct and the emotional distress; and 4) the
emotional distress must be severe.” Stringer v. Wal-Mart Stores, Inc., 151 S.W.3d 781, 788 (Ky.
2010) (citing Humana of Kentucky Inc. v. Seitz, 796 S.W.2d 1, 2-3 (Ky. 1990). It is for the court
to determine whether the defendant’s conduct can be regarded as outrageous. Id. (citing
RESTATEMENT (SECOND) OF TORTS § 46(1) cmt.d (1965). Kentucky courts have, “set a
high threshold for IIED/outrage claims” and the conduct at issue must be, “a deviation from all
reasonable bounds of decency.” Id. (citing Whittington v. Whittington, Ky.App., 766 S.W.2d 73,
74 (Ky. Ct. App. 1969)).
First, it should be noted that the pleading of the outrage claim was insufficient in the first
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complaint, and was left unimproved in the amended complaint. Morgan merely recites the
elements of the outrage claim, which gives HSBC no notice of the charges it is defending against
and constitutes nothing more than an unsupported legal conclusion that the Court need not, and
does not, accept as true. Further, if the Court were to give Morgan it’s most favorable inference
as to the conduct that made up the outrage claim, it could only be that HSBC inaccurately
reported his delinquency, adversely effecting his credit score. Accepting this as true, such
conduct is certainly not desirable, but it does not deviate from all reasonable bounds of decency,
and is a far cry for outrage. Thus, Morgan’s claim for outrage is preempted, but even if it were
not, it is insufficiently plead and is not plausible on its face.
V
Accordingly, the Court hereby ORDERS:
1.

HSBC’s motion to dismiss [R. 10] is GRANTED;

2.

HSBC’s motion to strike [R. 14] is GRANTED, and Morgan’s Response [R. 11]

is STRICKEN from the record;
3.

The Court will enter an appropriate JUDGMENT; and

4.

This matter is STRICKEN from the active docket of this Court;

This 12th day of March, 2013.

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