Swanson v. LVNV Funding LLC et al

Filing 50

ORDER that the plaintiffs' objections to the R & R 47 will be SUSTAINED, the Magistrate Judge's R & R will be AFFIRMED and ADOPTED in part and REVERSED in part, and the motions to dismiss 5 will be DENIED in full. Signed by District Judge J Ronnie Greer on 9/7/12. (KDO)

UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF TENNESSEE
AT GREENEVILLE

LORINDA SMITH
JOAN LEPAGE
GREG SWANSON
ALFRED HICKMAN
SAMUEL VOORHESS
ALICE SMITH
ROBERT BRADFORD
MARY SMITH
CARL SELLS
ANGELA FITCH
MILDRED DANIELS
PEGGY ROBERSON
KATHERYN CONNER
v.
LVNV FUNDING, LLC., ET AL. and
WILLIAM MELVIN
v.
PYOD, ET AL.

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

NO. 2:11-CV-379
NO. 2:12-CV-1
NO. 2:12-CV-2
NO. 2:12-CV-45
NO. 2:12-CV-77
NO. 3:11-CV-510
NO. 2:11-CV-291
NO. 2:11-CV-356
NO. 2:11-CV-355
NO. 2:12-CV-56
NO. 2:12-CV-155
NO. 2:12-CV-168
NO. 2:12-CV-184

NO: 2:11-CV-288

ORDER ON OBJECTIONS TO MAGISTRATE JUDGE’S REPORT AND
RECOMMENDATION
_________________________________________________________________________________

Each of these cases alleges that the defendants have violated the Fair Debt Collection Practices
Act (“FDCPA”), 15 U.S.C. § 1692 et seq., and in each case defendants have filed either a motion to
dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) or a motion for judgment on the pleadings
pursuant to Federal Rule of Civil Procedure 12(c).1

These motions were previously referred to the

Magistrate Judge for a report and recommendation (“R&R”) which was filed on July 14, 2012, [Doc.
57].2 The matter is currently before the Court on plaintiffs’ objections to the R&R, [Doc. 58].
Defendants have responded to plaintiffs’ objections, [Doc. 59]. Defendants have filed no objections to
the R&R. The matter is now ripe for disposition.
Plaintiffs object to only two of the Magistrate Judge’s recommendations: (1) to dismiss plaintiffs’
claims against five individual defendants – Tobie Griffin in Nos. 2:12-CV-45; 3:11-CV-510; 2:11-CV291; 2:12-CV-56; 2:12-CV-168; and 2:11-CV-288; Steve Hawkins in Nos. 2:11-CV-379; 2:11-CV-356;
and 2:11-CV-355; Nikki Foster in Nos. 2:12-CV-01; 2:12-CV-02; and 2:12-CV-77; Scott Batson in No.
2:12-CV-155; and Matt Sowell in No. 2:12-CV-184; and (2) to dismiss plaintiffs’ claim that LVNV’s
failure to obtain a collection service license prior to the filing of its debt collection lawsuits constitutes
a violation of the FDCPA. For the reasons which follow, plaintiffs’ objections to the R&R will be
SUSTAINED, the Magistrate Judge’s R&R will be AFFIRMED and ADOPTED in part and REVERSED
in part, and the motions to dismiss will be DENIED in full.
I. The Individual Defendants

1

The Magistrate Judge referred to the motions to dismiss and motions for judgment on the pleadings
simply as motions to dismiss. This Court will do the same throughout this order.
2

The references to docket numbers in this order are to the docket in Smith v. LVNV Funding, LLC,
et al, No. 2:11-CV-379. The R&R, objections and response to objections has been filed in all cases under
various docket numbers.

2

Each of the five individual defendants signed “Affidavits of Sworn Account” which were attached
to the civil warrants filed by the defendants in an effort to collect the credit card debt allegedly owed by
plaintiffs. The affidavits asserted that each plaintiff (defendant in the general sessions court action) owed
a specific amount of money on the credit card account and that the debt had been assigned to LVNV.
Noting that none of the motions to dismiss argue that LVNV is not a “debt collector” covered by and
subject to the FDCPA, the Magistrate Judge found that LVNV was both a debt collector and a creditor
under the FDCPA. Notwithstanding the individual defendants’ failure to raise the issue, the Magistrate
Judge opined that each of the five individual defendants, as employees of LVNV who “collected debts”
for his or her employer, were specifically excluded from the definition of “debt collector” in 15 U.S.C.
§ 1692(a)(6), and thus the FDCPA has no application to them.
As an initial matter, plaintiffs commit roughly one-third of their brief in support of their
objections to the irrelevant argument that there is an alternative basis for the Magistrate Judge’s finding
that LVNV is a “debt collector” subject to the FDCPA. Since LVNV never argued that it was not subject
to the FDCPA, the Court agrees with defendants that plaintiffs’ exercise “is wasted ink” and a waste of
the Court’s time. The Magistrate Judge has already admonished plaintiffs’ counsel about the repetitive
and redundant nature of their pleadings and the inclusion of largely “inconsequential details.” Plaintiffs’
attorneys would be well advised in the future to heed the Magistrate Judge’s advice and to focus their
argument squarely on the matters at hand without irrelevant and unnecessary arguments.
The Magistrate Judge specifically found, as noted above, that LVNV is both a “debt collector”
and a “creditor” subject to the terms of the FDCPA.3 The Magistrate Judge thus concluded, therefore,
3

The Sixth Circuit has recently noted that “as to a specific debt, one cannot be both a ‘creditor’ and
a ‘debt collector,’ as defined in the FDCPA because those terms are mutually exclusive.” Bridge v. Ocwen
Federal Bank, 681 F.3d 355, 359 (2012) (quoting FTC v. Check Investors, Inc., 502 F.3d 159, 173 (3d Cir.
2007)). The distinction between a creditor and a debt collector depends upon the default status of the debt

3

that the five individual defendants, as employees of LVNV, were specifically excluded from coverage
under the FDCPA by the plain language of 15 U.S.C. § 1692a(6) which excludes from the definition of
“debt collector” (and thus from coverage under the FDCPA) “any . . . employee of a creditor while ...
collecting debts for such creditor.” Plaintiffs argue that the Magistrate Judge “reasonably assumed that
[ ] the individual defendants were employees of LVNV” but that such assumption is either erroneous or
premature.
Plaintiffs’ complaints allege that each of the individual defendants is a “person who is employed
by Defendant LVNV or as an agent of Defendant LVNV as a collection agent . . .,” and contend that the
exact nature of the relationship between LVNV and the individual defendants cannot be determined
absent discovery. They do point, however, to defendants’ own motions to dismiss which refer to the
individual defendants as “employees of one or more of [LVNV’s] subsidiaries” and testimony from a
Rule 30(b)(6) witness for LVNV in another lawsuit to the effect that LVNV did not have any employees.4
Defendants concede in their response to the objections that the individual defendants “are not
technically employees of LVNV” but are “authorized representatives of LVNV” acting pursuant to a
Limited Power of Attorney.
Had plaintiffs alleged that the individual defendants were employees of LVNV (i.e. without the
alternative allegation that the individual defendants were authorized representative), the Court might be
inclined to overrule plaintiffs’ objections and affirm the Magistrate Judge on this issue and simply

at the time it is acquired. Bridge, 681 F.3d at 359.
4

Plaintiffs urge the Court to consider these deposition excerpts and other documents attached to
their objections, which present matters outside the pleadings, without converting the motions to motions for
summary judgment, relying on Judge Mattice’s decision in Stonecypher v. Finklestein, Kern, Steinberg &
Cunningham, Attorneys, 2011 WL 3489685 (E.D. Tenn. Aug. 9, 2011). Given the defendants’ concession
that the five individual defendants are “not technically employees of LVNV,” it will not be necessary for the
Court to address the issue.

4

disregard the material outside the pleadings, given the limited nature of the plaintiffs’ objection. Given
defendants’ concession, however, that the individual defendants are not employees of LVNV, the factual
finding made by the Magistrate Judge to the contrary is clearly erroneous. In retrospect, it is likely that
the individual defendants did not seek dismissal on the basis employed by the Magistrate Judge for the
very reason that the individual defendants are not employees of LVNV. Although defendants suggest
that the objections could be overruled and the Magistrate Judge’s recommendation accepted on the basis
that the individuals did not “communicate” with plaintiffs for purposes of the FDCPA when their
affidavits were transmitted to plaintiffs as part of a pleading in a collection lawsuit, that is not an
argument raised in the motion to dismiss or argued or developed before the Magistrate Judge and thus
not a suitable ground for upholding the Magistrate Judge’s ruling on this issue.
II. LVNV’s Lack of Collection Service License
The Tennessee Collection Service Act (“TCSA”), Tenn. Code Ann. § 62-20-101 et seq., requires
a “collection service business” to hold a license issued by the Tennessee Collection Service Board, Tenn.
Code Ann. § 62-20-105(a). A “collection service” is defined as:
. . . any person that engages in, or attempts to engage in, the collection
of delinquent accounts, bills or other forms of indebtedness irrespective
of whether the person engaging in or attempting to engage in collection
activity has received the indebtedness by assignment or whether the
indebtedness was purchased by the person engaging in, or attempting to
engage in, the collection activity.
Tenn. Code Ann. § 62-20-102(3).
The Magistrate Judge first considered the question of whether the TCSA requires an entity such
as LVNV which purchases unpaid indebtedness from the original creditor for subsequent collection to
obtain a license before undertaking collection activity. Without deciding the question, the Magistrate
Judge found that the answer was likely “yes.” Neither plaintiffs nor defendants object to that conclusion.
5

Instead, plaintiffs object to the Magistrate Judge’s conclusion that, even if a license is required, the
failure to obtain the license was not “‘unfair or deceptive,’ or unconscionable, or any of the other
proscribed activities” under the FDCPA.5 Plaintiffs argue that LVNV’s collection activities and filing
of a collection lawsuit without being properly licensed under the TCSA is a violation of § 1692e(5)
because LVNV threatened to take, or took, action to collect the indebtedness it could not legally take
without a proper license. LVNV, not surprisingly, disagrees, arguing that simply alleging a violation of
state law “cannot state a claim under the FDCPA.”
Courts have split over whether a debt collector who has not been properly licensed by the state
violates § 1692e by attempting to collect a debt. So far as this Court can tell, the Sixth Circuit has not
addressed the issue and only three other circuits have done so. In Wade v. Regional Credit Assn., 87 F.3d
1098, 1100 (9th Cir. 1996), relied upon by LVNV, the Ninth Circuit held that debt collection efforts in
violation of state law are not per se violations of the FDCPA. Although the defendant in that case may
have pursued collection efforts in violation of state law, the telephone call made and the letter sent by
the defendant was not, according to the Ninth Circuit, a “threat to take action that could not legally be
taken in violation of Section 1692e(5).” The collection efforts, according to the Ninth Circuit, were
“innocuous” and would be construed by the “least sophisticated debtor” as “a prudential reminder, not
as a threat to take action” (i.e. sue). Id. (internal quotation marks omitted). Likewise, the Eighth Circuit
has found that an alleged violation of a state licensing statute did not amount to an FDCPA violation.
Carlson v. First Revenue Assurance, 359 F.3d 1015, 1018 (8th Cir. 2004) (holding that collection

5

Since neither party objects to this part of the Magistrate Judge’s R&R, the Court need not decide
whether the TCSA does indeed require entities like LVNV to obtain a “collection service” license. The Court
would note, however, that it has held recently that the TCSA does require that an entity “which purchases due
accounts and then attempts to collect on those accounts” falls within the requirement of the statute for
licensure.

6

agency’s use of Seattle Bank for collection of payments did not violate a Minnesota statute requiring
every location of a collection agency to be licensed because no collection activity took place in Seattle.
Even if a license were required, the violation of state law would not constitute a violation of the FDCPA
because the violation did not constitute a false and misleading representation).
On the other hand, plaintiff relies largely on LeBlanc v. Unifund CCR Partners, 601 F.3d 1185
(11th Cir. 2010). In LeBlanc, the plaintiff stopped making payments towards a credit card account with
Bank One. Unifund purchased LeBlanc’s charged off debt from Bank One and notified LeBlanc by letter
of the alleged balance on the account, advised him of his right to dispute the debt and warned that, if not
resolved within 35 days, the claim might be referred to an attorney “for legal consideration.” LeBlanc
resided in Tampa, Florida and Unifund failed to register as “an out-of-state consumer collection agency”
as required by Florida law. Id. at 1188-89. The Eleventh Circuit framed the issue as “whether a federal
cause of action pursuant to Section 1692e of the FDCPA for threatening to take an action that cannot
legally be taken is cognizable when premised upon failure to register as a consumer collection agency
as required by state law . . .” Id. at 1189-90.
The Eleventh Circuit used a two-fold framework for its analysis – first, whether the language of
the defendant’s collection letter constitutes a threat for the purposes of 1692e(5) and, second, if so,
whether the action threatened could be legally taken. Id. at 1193. Finding a genuine issue of material
fact as to whether Unifund’s dunning letter constituted a threat that precluded summary judgment, the
Eleventh Circuit remanded the case to the district court for trial on that issue. Id. With respect to the
second part of the analysis, however, the Court found that Unifund’s activities subjected it to the Florida
licensing requirements, making acquisition of the Florida license before filing a lawsuit “a reasonable
condition precedent to filing a claim.” Id. at 1198. Thus, the Eleventh Circuit determined that, without

7

the required license, Unifund could not legally take the step of filing, or threatening to file, a collection
lawsuit.
District courts have likewise split on the issue. Compare Fiorenzano v. LVNV Funding, LLC,
2012 WL 2562415 (D. R.I. June 29, 2012); Grant-Fletcher v. The Brachfeld Law Group, 2012 WL
2523094 (D. Md. June 28, 2012); Bradshaw v. Hilco Receivables, LLC, 765 F.Supp.2d 719, 2011 WL
652476, at *10 (D. Md. Feb. 23, 2011); Hauk v. LVNV Funding, LLC, 749 F.Supp.2d 358, 2010 WL
4395395 (D. Md. Nov. 5, 2010); St. Denis v. New Horizon Credit, Inc., 2006 WL 1965779 (D. Conn.
July 12, 2006); Sibley v. Firstcollect, Inc., 913 F.Supp. 469, 471 (M.D. La. 1995); Russey v. Rankin, 911
F.Supp. 1449, 1459 (D. N.M. July 17, 1995); Kuhn v. Account Control Tech., 865 F.Supp. 1443, 1452
(D. Nev Oct. 7, 1994); Gaetano v. Payco of Wis., Inc., 774 F.Supp. 1404, 1414 (D. Conn. June 20, 1990);
with Pescatrice v. Elite Recovery Ser., Inc. , 2007 WL 1192441, at *4 (S.D. Fla. Apr. 23, 2007); Niemiec
v. NCO Fin. Sys., 2006 WL 1763643, at *9 (N.D. Ind. June 27, 2006); Richardson v. AllianceOne
Receivables Mgt., Inc., 2004 WL 867732, at * 3 (S.D. N.Y. Apr. 23, 2004); Wehrheim v. Secrest, 2002
WL 31242783, at *4 (S.D. Ind. Aug. 16, 2002); Ferguson v. Credit Mgt. Control, Inc., 140 F.Supp.2d
1293, 1302 (M.D. Fla. Mar. 23, 2001) and Clark v. Pollard, 2000 WL 1902183, at *3 (S.D. Ind. Dec. 28,
2000).
Although most courts have rejected an argument that collection activity by an entity without a
required state license establishes a per se violation of the FDCPA, a review of the above referenced cases
establishes a fairly generally accepted rule – because the FDCPA forbids a debt collector from
threatening an action that cannot legally be taken, 15 U.S.C. § 1692e(5), the threat to take (or the taking)
of an action an entity could not legally take without being properly licensed may support a federal cause
of action under the FDCPA. Applying the two-fold analysis of the Eleventh Circuit in LeBlanc, which

8

the Court finds persuasive and appropriate, plaintiffs state a cause of action against LVNV under §
1692e(5) on the basis that LVNV was not licensed under the TCSA and not only threatened to take, but
took, legal action in the filing of its collection lawsuits, which it was not authorized to do under
Tennessee law. This Court agrees with plaintiffs, furthermore, that the actual filing of a lawsuit without
being properly licensed, not just the threatening of such a collection lawsuit, is prohibited by § 1692e(5)
because, to rule otherwise “would provide more protection to debt collectors who violate the law than
those who merely threaten or pretend to do so.” Sprinkle v. SB&C Ltd., 472 F.Supp.2d 1235, 1247 (W.D.
Wash. 2006). There is simply no meaningful difference in this context between action threatened and
action taken.
III.Conclusion
For the reasons set forth herein, the motions to dismiss and/or for judgment on the pleadings;
[Docs. 3, 7 in No. 2:11-CV-379; Doc. 4 in No. 2:12-CV-01; Doc. 5 in No. 2:12-CV-02; Doc. 8 in No.
2:12-CV-45; Doc. 10 in No. 2:12-CV-77; Docs. 14, 16 in No. 3:11-CV-510; Doc. 9 in No. 2:11-CV-291;
Docs. 14, 17 in No. 2:11-CV-356; Docs. 13, 16 in No. 2:11-CV-355; Doc. 11 in No. 2:12-CV-56; Doc.
3 in No. 2:12-CV-155; Doc. 4 in No. 2:12-CV-168; Doc. 8 in No. 2:12-CV-184; Doc. 6 in No. 2:11-CV288], will be DENIED IN FULL.
So ordered.
ENTER:
s/J. RONNIE GREER
UNITED STATES DISTRICT JUDGE

9