Tyler v. DH Capital Management, Inc.
Filing
10
MEMORANDUM OPINION by Judge Charles R. Simpson, III on 12/20/12; The court will grant DHCs motion to dismiss because Tyler is not the proper party ininteresthis claims belong to his bankruptcy trustee. A separate order will be entered this date in accordance with this opinion.cc:counsel (DAK)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
DIONTE TYLER
PLAINTIFF
v.
3:12-CV-00129-CRS
DH CAPITAL MANAGEMENT, INC.
DEFENDANT
MEMORANDUM OPINION
This case is before the court on the Defendant, DH Capital Management, Inc.’s (“DHC”),
Motion to Dismiss the Plaintiff, Dionte Tyler’s (“Tyler”), Complaint pursuant to Federal Rules
of Civil Procedure 12(b)(6) and 13(a) (DN 4). Tyler’s Complaint alleges that DHC violated the
Fair Debt Collection Practices Act (“FDCPA”) 15 U.S.C. § 1692, and alleges usury under KRS
360.020 (DN 1). The court will grant DHC’s motion to dismiss for the reasons stated herein.
BACKGROUND
The following facts are undisputed (DNs 4-1, 9):
(1) On March 23, 2011, DHC, a debt collection company, filed an action to collect
$1,041.89 in credit card debt from Tyler in Jefferson County District Court.1
(2) On June 28, 2011, Tyler filed for Chapter 7 Bankruptcy relief from the Western
District of Kentucky’s Bankruptcy Court.
1
Tyler’s credit card debt at issue changed title prior to this action: (1) Tyler’s debt originated with Chase Bank
USA, N.A. (“Chase”) on December 3, 2009; (2) Chase sold the debt to Turtle Creek Assets, LTD (“Turtle Creek”) on
October 12, 2010; (3) Turtle Creek sold the debt to DHC on October 26, 2010. DHC ultimately filed suit to collect
Tyler’s debt on March 23, 2011 and demanded 21% interest on Tyler’s debt for the period of February 27, 2009 through
the date of judgment in addition to attorneys’ fees (DN 1).
(3) On October 4, 2011, Tyler received discharge in bankruptcy. However, Tyler
listed neither the debt owed to DHC nor Tyler’s cause of action against DHC for
alleged FDCPA violations and usury in his original bankruptcy schedules or any
amendments thereto.
(4) On October 12, 2011, DHC served Tyler with process regarding DHC’s state court
debt collection action.
(5) On October 18, 2011, DHC became aware of Tyler’s bankruptcy and filed a Notice to
Dismiss its debt collection action in Jefferson County District Court prior to the filing
of Tyler’s Answer.
(6) On October 20, 2011, Tyler filed his Answer to DHC’s debt collection action. Tyler
never disputed that DHC was entitled to collect his debt. However, Tyler’s Answer
did not plead the filing of the bankruptcy action or the discharge of the debt as
required by Kentucky Rule of Civil Procedure 8.03.2 Nor did Tyler assert a
counterclaim or otherwise present or preserve the claims that he alleges in the action
at issue here.
(7) On October 26, 2011, DHC’s Notice of Dismissal was entered by the Jefferson
County District Court, dismissing DHC’s Complaint without prejudice. Tyler neither
contested DHC’s dismissal nor took steps to present his claims to the court.
(8) On March 9, 2012, Tyler filed the Complaint at issue, which alleges that DHC
violated the FDCPA and that the interest rate DHC asserted against Tyler was
usurious under KRS 360.020.
2
Under Ky. R. Civ. P. 8.03: “In pleading to a preceding pleading, a party shall set forth affirmatively . . .
discharge in bankruptcy.”
-2-
(9) On July 12, 2012, DHC filed a motion to dismiss Tyler’s Complaint.
I
Tyler’s Complaint against DHC argues (1) that DHC’s demand for 21% interest violates
Kentucky’s usury law, KRS §§ 360.010, 360.020, which place a 19% cap on interest for loans
less than $15,000.00; and (2) that DHC violated the FDCPA, §§ 1692(f)(1), 1692(e)(5),
1962(e)(2)(A), by both attempting to collect an allegedly usurious 21% rate of interest and
attorneys’ fees, and by attempting to collect interest on a debt prior to purchasing the debt.3
In response, DHC’s motion to dismiss, pursuant to Fed. R. C. P. 12(b)(6), argues (1) that
Tyler’s claims against DHC are barred due to Tyler’s failure to file a compulsory counterclaim
in his Answer to DHC’s state court debt collection action; and (2) that Tyler lacks ownership of
his credit card account after filing bankruptcy and thus lacks standing to bring FDCPA and usury
violation claims because the claims are an asset of the bankruptcy estate (DN 4-1).
Under Fed. R. Civ. P. 12(b)(6), if the well-pleaded facts do not permit the court to infer
more than the mere possibility of misconduct, the complaint has not shown the pleader is entitled
to relief. Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2008). To withstand a Rule 12(b)(6) motion to
dismiss for failure to state a claim, it is not enough that the complaint contains “facts that are
‘merely consistent with’ a defendant’s liability,” rather, a plaintiff must allege facts supporting a
‘plausible’ claim for relief.” Id. at 687 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557
(1955)). A complaint that offers legal conclusions or a recitation of the elements of a cause of
action will not meet this pleading standard. See id. at 687. “[C]onclusory allegations or legal
3
Tyler also asserts a class action for usury and FDCPA violations “on behalf of all the persons in the
Commonwealth of Kentucky similarly situated.” (DN 1). However, the court need not address the class allegation as the
complaint will be dismissed on other grounds.
-3-
conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss.”
Mezibov v. Allen, 411 F.3d 712, 716 (6th Cir. 2005).4
DHC also requests that the court dismiss Tyler’s Complaint under Fed. R. Civ. P. 13
because Tyler failed to present the claims in his Complaint as counterclaims (DN 4-1). Under
Rule 13 for compulsory counterclaims:
A pleading must state as a counterclaim any claim that—at the time of its
service—the pleader has against an opposing party if the claim:
(A) arises out of the same transaction or occurrence that is the subject matter of
the opposing party’s claim; and
(B) does not require adding another party over whom the court cannot acquire
jurisdiction.5
Fed. R. Civ. P. 13
A.
DHC argues that Tyler’s claims against it are procedurally barred by res judicata—claim
preclusion under both Fed. R. Civ. P. 13 and Kentucky’s Compulsory Counterclaim Rule, Ky. R.
Civ. P. 13.01 (DN 4-1). DHC contends that Tyler’s claims arise from the “same transaction or
occurrence” as DHC’s prior state court debt collection proceeding (DN 4-1). Thus, DHC argues
4
Courts must treat motions under 12(b)(6) that rely on evidence outside of the pleadings as motions for
summary judgment. However, there is an exception for documents that a defendant attaches to a motion to dismiss, which
are considered part of the pleadings “if they are referred to in the plaintiff’s complaint and are central to [the] claim.”
Amini v. Oberlin Coll., 259 F.3d 493, 502 (6th Cir. 2001) (quoting Venture Assoc. Corp. v. Zenith Data Sys. Corp., 987
F.2d 429, 431 (7th Cir. 1993)). Here, DHC’s motion to dismiss included Tyler’s: (1) Answer to DHC’s state court
Complaint, (2) Notice of Bankruptcy, (3) Bankruptcy Docket Report, and (4) Notice of Discharge in Bankruptcy (DN
4-1). Here, DHC relies on evidence which we consider part of the pleadings. See id. Thus, DHC’s motion to dismiss will
be addressed as such, and not treated as a motion for summary judgment pursuant to Federal Rule of Civil Procedure
12(d).
5
The Federal Rule mirrors Kentucky Rule 13.01 for compulsory counterclaims. In Kentucky, a counterclaim
is compulsory “if is arises out of the same transaction or occurrence that is the subject matter of the opposing party’s
claim and does not require . . . the presence of third parties of whom the court cannot acquire jurisdiction.” Ky. R. Civ.
P. 13.01.
-4-
that Tyler’s failure to assert compulsory counterclaims in his answer to DHC’s debt collection
action bars his claims (DNs 4-1, 9).
Tyler responds and argues that his claims are not barred by res judicata because DHC
voluntarily dismissed its state court debt collection action (DN 5). Tyler contends that DHC’s
voluntary dismissal was without prejudice, which has no res judicata effect (DN 5). Tyler argues
that by filing a notice of dismissal under Ky. R. Civ. P. 41, instead of moving for leave of the
court to dismiss the action, DHC deprived Tyler of his opportunity to oppose the dismissal and
amend his Answer (DN 5). In sum, Tyler argues that under Kentucky law, a voluntary dismissal
without prejudice does not trigger res judicata to bar his claims (DN 5).
Here, the issue is whether Tyler’s claims against DHC are procedurally barred by res
judicata under Rule 13 of the Federal Rules of Civil Procedure due to Tyler’s failure to assert his
claims in his responsive pleading to DHC’s prior lawsuit.
DHC supports its argument that res judicata bars Tyler’s claims by noting that the
Supreme Court interpreted Rule 13 as being “designed to prevent multiplicity of actions and to
achieve resolution in a single lawsuit of all disputes arising out of common matters.” S. Constr.
Co. v. Pickard, 371 U.S. 57, 59-60 (1962). The Court also stated that the Rule is “particularly
directed against one who failed to assert a counterclaim in one action and then instituted a
second action in which that counterclaim became the basis of the complaint.” Id. (citing United
States v. Eastport S.S. Corp., 255 F.2d 795, 801-02 (2nd Cir. 1958)).
The Sixth Circuit has held that failure to plead a compulsory counterclaim under Rule 13
bars the claim under res judicata. Sanders v. First Nat. Bank & Trust Co., 936 F.2d 273, 277
(6th Cir. 1991). “It is well established that an apposing party’s failure to plead a compulsory
-5-
counterclaim forever bars that party from raising the claim in another action.” Id. Further, in
federal court the preclusive effect of a prior state court action requires considering Kentucky’s
res judicata law. Holbrook v. Shelter Ins. Co., 186 F. App’x 618, 620-21 (Ky. Ct. App. 2006).
“It is now settled that a federal court must give a state-court judgment the same preclusive effect
as would be given that judgment under the law of the State in which the judgment was
rendered.” Id. (citing Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984)).
DHC argues that it placed ownership of Tyler’s credit card debt and related contractual
rights directly in issue when it filed suit in state court to collect Tyler’s debt (DN 4-1). DHC
contends that its right to enforce Tyler’s credit card agreement, to collect interest, to collect the
interest rate applicable to Tyler’s credit card, and to collect attorney’s fees triggers res judicata
because determining whether DHC can enforce those rights involves primarily legal, factual and
evidentiary questions to be decided in its state court action against Tyler (DN 4-1).6 DHC argues
that res judicata bars Tyler’s claims here because Tyler presents the same legal, factual and
evidentiary questions that should have been brought as compulsory counterclaims and decided in
the state court action under Rule 13 (DN 4-1).
Tyler responds and argues that under Kentucky law, the state court’s dismissal of DHC’s
debt collection action was without prejudice such that the dismissal has no res judicata effects
(DN 5). Thus, Tyler argues that a dismissal without prejudice does not bar his action against
6
The court need not address whether Tyler’s claims against DHC are compulsory counterclaims as it is
undisputed that Tyler’s claims “arise out of the same transaction or occurrence,” which could bar his claims under res
judicata. Tyler does not dispute that his claims against DHC meet the Sixth Circuit’s “logical relationship test” to
determine whether claims are compulsory counterclaims. Sanders, 936 F.2d at 277. This test requires that the claims (1)
involve similar legal and factual questions, and (2) rely on substantially similar evidence. Id. Under Sanders, if a debtor
alleges that a creditor “wrongfully took action” to collect a debt in a prior legal preceding, then both the elements of the
“logical relationship test” are satisfied for res judicata claim preclusion. Id.
-6-
DHC. However, Tyler’s argument is weakened because he relies on case law that predates the
Rule 13 of the Federal Rules of Civil Procedure,7 and the modern case law that he cites is not
applicable here.8 Also, DHC argues, and the court agrees, that the exceptions for filing a
compulsory counterclaim do not apply here as Tyler’s claims do not require the addition of
parties. Fed. R. Civ. P. 13; Ky. R. Civ. P 13.01.9
B.
Tyler also argues that his claim is not barred because he filed his answer to DHC’s state
court complaint before the court dismissed DHC’s complaint (DN 5). Tyler contends that under
Ky. R. Civ. P. 41.01, a plaintiff may dismiss a claim by filing a notice of dismissal without order
of the court only before the adverse party files an answer or motion for summary judgment.
Thus, Tyler argues that because he filed an answer to DHC’s action before the court entered the
notice of dismissal that Tyler was denied the opportunity to oppose the dismissal and amend his
answer to assert his claims against DHC as counterclaims (DN 5).
7
Federal Rule of Civil Procedure 13 was adopted in 1937. Fed. R. Civ. P. 13 advisory committee’s note.
However, Tyler cites Magill v. Mercantile Trust Co., 81 Ky. 129, 132 (1883) and Stephenson Lumber Co. v. Hurst, 83
S.W.2d 48, 50 (Ky. 1934) both of which predate the Federal Rule’s adoption.
8
Tyler cites two contemporary cases, first Yocum v. Hayden, 566 S.W.2d 566, 778 (Ky. 1978), which held that
an employee’s worker’s compensation claim was not barred by res judicata. Although the employee’s prior claim was
dismissed without prejudice, the court found that the second claim was not based on the same facts—the prior claim
involved a different exposure to the injuring machine—which resulted in a new cause of action; also a new party was
added to the second action, which is an exception to claim preclusion under Federal Rule of Civil Procedure 13. Second,
Hardwick v. Boyd Cnty. Fiscal Ct., 219 S.W.3d 198, 200 n.4 (Ky. Ct. App. 2007), which held that the dismissal of a prior
action in federal court for lack of subject matter jurisdiction did not trigger res judicata because it was not adjudication
on the merits. These cases are not persuasive here (DN 9).
9
The exceptions to a compulsory counterclaim are triggered if the claim (1) was the subject of another pending
action; or (2) the opposing party brought the action by attachment or other process that did not establish personal
jurisdiction over the pleader on that claim. Fed. R. Civ. P. 13; Ky. R. Civ. P. 13.01. Thus, neither of these exceptions
apply here.
-7-
However, DHC argues that the timing of Tyler’s responsive pleading is immaterial (DN
9). First, DHC argues that Tyler received notice of DHC’s state court debt collection action
when he was served with process on October 12, 2011, such that Tyler had an opportunity to
present his claims in his answer on October 20, 2011 (DN 9). DHC contends that Tyler elected
to ignore opportunities to present his claims at any relevant time—not only in his responsive
pleading, but also in any amendments to his bankruptcy schedule (DN 9). Second, DHC argues
that under Ky. R. Civ. P. 13.09, the timing of Tyler’s responsive pleading is immaterial because
“[i]f the court orders separate trials as provided in Rule 42.02, judgment on a counterclaim or
cross-claim may be rendered in accordance with the terms of Rule 54.02 even if the claims of the
opposing party have been dismissed or otherwise disposed of.” Ky. R. Civ. P. 13.09. Thus, DHC
argues that Tyler’s compulsory counterclaim could have survived the dismissal of DHC’s
complaint whether the dismissal was entered with or without prejudice, and that Tyler could
have received a trial or other disposition of his claims in state court regardless of the dismissal of
DHC’s claim (DN 9).
Here, Tyler elected to forego filing compulsory counterclaims in his responsive pleading
to DHC’s state court debt collection action and his financial affairs schedule. Thus, for the
reasons stated above, Tyler’s claims for FDCPA and usury violations are procedurally barred
under Federal Rule of Civil Procedure 13.
II
Regarding whether Tyler has standing to assert usury and FDCPA claims, Tyler argues
that he has standing to bring the FDCPA claim because the FDCPA cause of action did not
accrue when DHC filed its debt collection claim, but instead accrued when Tyler was served
-8-
with DHC’s complaint (DN 5). Tyler relies on a Tenth Circuit FDCPA case which states that
when an FDCPA claim arises from a debt collection suit, the FDCPA violation does not occur
“until the plaintiff has been served.” Johnson v. Riddle, 305 F.3d 1107, 1113-14 (10th Cir.
2002).
In response, DHC argues that Tyler’s reliance on Johnson is misplaced because The
Federal Rules of Bankruptcy Procedure and the Bankruptcy Code control here (DN 9). DHC
contends that where bankruptcy law and the law on FDCPA claim accrual diverge, disclosure
rules under bankruptcy law controls (DN 9). DHC contends that Tyler lacks standing because the
bankruptcy trustee is the proper plaintiff in this case. DHC argues that bankruptcy law requires
Tyler to disclose DHC’s state court action and alleged FDCPA and usury claims in his
bankruptcy proceedings. In sum, DHC argues that the date Tyler’s alleged FDCPA claims
accrued is immaterial and that Tyler had a duty to amend his financial affairs statement under the
Federal Rules of Bankruptcy Procedure when he became aware of DHC’s collection suit (DN 9).
Under 11 U.S.C. § 521 and the Federal Rules of Bankruptcy Procedure, a bankruptcy
petitioner must list “all suits and administrative proceedings to which the debtor is or was a party
within one year immediately preceding the filing of the bankruptcy case.” Official Bankruptcy
Form 7 (bold in the original).10
Also, 11 U.S.C. § 541(a), clarifies what is considered property of the estate for
bankruptcy purposes. “The commencement of a case . . . creates an estate. Such estate is
10
DHC outlines the Federal Rules of Bankruptcy Procedure applicable here: (1) that 11 U.S.C. § 521(a)(1)(iii)
requires a bankruptcy petitioner to file a statement of the debtor’s financial affairs; (2) that Fed. R. Bankr. P. §§ 1007(b),
9009 require that the statement of affairs be prescribed on an Official Bankruptcy Form—Form 7; and (3) that Form 7
paragraph 4(a) requires that the bankruptcy petitioner list “all suits and administrative proceedings to which the debtor
is or was a part within one year immediately preceding the filing of the bankruptcy case.” Official Bankruptcy Form
7: Suits and administrative proceedings, execution, garnishments and attachments (bold in the original).
-9-
comprised of all the following property, wherever located and by whomever held . . . all legal or
equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. §
54: Property of the Estate. Also, under Kentucky law, a person is a “party” to an action once he
is named in a civil proceeding that has been “commenced.” Ky. R. Civ. P. 3.01.11
Accordingly, DHC argues that it commenced its action to collect Tyler’s debt by filing a
complaint and causing service of process to be issued to Tyler (DN 9). Thus, when Tyler became
aware of DHC’s suit by service of process on October 12, 2011—not even five months after
Tyler commenced his bankruptcy proceeding on June 28, 2011—that Tyler had a duty to amend
the statement of financial affairs under the Bankruptcy Rules (DN 9).
The court finds a case from the United States Bankruptcy Appellate Panel for the Sixth
Circuit instructive here. In Mueller v. Hall (In re Parker), 386 B.R. 86 (B.A.P. 6th Cir. 2007), a
debtor asserted that under Kentucky law, when a civil claim accrues after a debtor’s bankruptcy
petition is filed, that the post-petition claim is not the property of the bankruptcy trustee. In other
words, the debtor argued that the bankruptcy trustee had no interest in the debtor’s post-petition
claim because the claim was never property of the bankruptcy estate. Id. The Bankruptcy
Appellate Panel rejected the debtor’s argument, noting that under 11 U.S.C. § 541(a), the
definition of “property of the estate” is broad, and the Panel further held that:
By including all legal interests without exception, Congress indicated its intention
to include all legally recognizable interests although they may be contingent and not
subject to possession until some future time. Consequently, the question in this case
is not whether the [claim] accrued, based on the moment the last element of the cause
of action accrued, prior to [] filing bankruptcy, but whether the [claim] is sufficiently
rooted in [the debtor’s] prebankruptcy past to constitute property of the estate.
11
“A civil action is commenced by the filing of a complaint with the court and the issuance of a summons or
warning order thereon in good faith.” Ky. R. Civ. P. 3.01.
- 10 -
Mueller, 386 B.R. at *7-8.
The Mueller case further states that although the Sixth Circuit Court of Appeals has not
yet addressed this issue, other courts have held that “legal claims sufficiently rooted in a debtor’s
prepetition past are property of that debtor’s bankruptcy estate.” Id. at *8; see, e.g., In re
Richards, 249 B.R. 859, 861 (Bankr. E.D. Mich. 2000) (holding that “in determining whether a
claim is property of the bankruptcy estate, the test is not the date the claim accrues under state
law.”); In re Tomaiolo, 504 B.R. 10 (Bankr. D. Mass. 1997) aff’d, 90-40350, 2002 WL 226133
(D. Mass. Feb. 6, 2002) (holding that claims are property of the bankruptcy estate despite not
having accrued by the time of the bankruptcy filing); In re Strada Design Assoc., Inc., 326 B.R.
229, 236 (Bankr. S.D.N.Y. 2007) (holding that “Section 541(a) is not restricted by state law
concepts such as when a cause of action ripens . . . and ‘property of the estate’ may include
claims that were inchoate on the [bankruptcy] petition date.”); see also In re Simmerman, 463
B.R. 47, 55 (Bankr. S.D. Ohio 2011) (holding that the debtor would not have standing to pursue
a cause of action for an unfiled FDCPA claim because the claim would be property of the
bankruptcy estate under 11 U.S.C. § 1306).12
Here, Tyler’s alleged cause of action against DHC for violations of FDCPA and usury are
property of the bankruptcy estate. DHC filed its complaint on March 23, 2011, before Tyler filed
his bankruptcy petition. Tyler was a party to the civil debt collection action for purposes of res
judicata and his claims are rooted in the allegations in DHC’s state court complaint. Thus,
12
Simmerman also notes that the Sixth Circuit “has concluded that judicial estoppel may apply in bankruptcy
to bar a debtor from pursuing a cause of action for his own benefit after the debtor intentionally failed to disclose the
cause of action, which was properly part of the bankruptcy estate.” 463 B.R. at 56.
- 11 -
Tyler’s claims against DHC are a direct derivative of DHC’s debt collection action and as such
are property of Tyler’s bankruptcy estate.
Even if Tyler’s claims against DHC did not accrue under the FDCPA until he was issued
service on October 12, 2011, Tyler nonetheless had a duty to amend his statement of financial
affairs to include “all suits and administrative proceedings” which the debtor is or was a part
within one year preceding the filing of the bankruptcy case. Fed. R. Bankr. P. §§ 1007(b), 9009;
Official Bankruptcy Form 7. Accordingly, the date that Tyler’s alleged FDCPA claim accrued is
irrelevant here and Tyler lacks standing to assert his alleged claims for FDCPA violations and
usury. Id. The court will grant DHC’s motion to dismiss because Tyler is not the proper party in
interest—his claims belong to his bankruptcy trustee.
A separate order will be entered this date in accordance with this opinion.
December 20, 2012
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