Valhalla Investment Properties, LLC v. 502, LLC et al

Filing 62

MEMORANDUM ORDER: Valhalla's motion for leave to file a second amended complaint ( 34 ) is GRANTED. The Clerk of Court is DIRECTED to file the second amended complaint (Doc. No. 34-1) and accompanying exhibits (Doc. Nos. 34-234-12) as a separate docket entry. Signed by Magistrate Judge Alistair Newbern on 3/2/2020. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(gb)

UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION

VALHALLA INVESTMENT PROPERTIES,
LLC,
Case No. 3:19-cv-00318
Plaintiff,
Chief Judge Waverly D. Crenshaw, Jr.
Magistrate Judge Alistair E. Newbern

v.
502, LLC, et al.,
Defendants.

MEMORANDUM ORDER
Before the Court in this action brought under the Fair Debt Collection Practices Act
(FDCPA), 15 U.S.C. §§ 1692–1692p, is Plaintiff Valhalla Investment Properties, LLC’s motion
for leave to file a second amended complaint. (Doc. No. 34.) Defendants 502, LLC, William E.
Kantz, Jr., and John Bradfield Scarbrough oppose Valhalla’s motion. (Doc. No. 39.) Their primary
argument in opposition is that the proposed amendments are futile for the same reasons argued in
their pending motion to dismiss—that Valhalla fails to state a claim for violation of the FDCPA
because the loan at the heart of this case does not qualify as a “consumer debt” under that statute
and, therefore, the FDCPA is inapplicable. (Id.) Because the defendants’ futility arguments are
better resolved in the context of a dispositive motion, and for the reasons below, Valhalla’s motion
for leave to file a second amended complaint will be granted.
I.

Relevant Background
This action arises out of a dispute over a condominium in Nashville, Tennessee, owned by

Flex Yield Investments, LLC (FYI), which is an entity comprised of members Valhalla, Kantz,
and Henry S. Hood; a loan that FYI received from First Bank; and several business relationships

gone wrong. Valhalla initiated this action on April 19, 2019 (Doc. No. 1), and filed an amended
complaint as a matter of course on April 29, 2019 (Doc. No. 8). The amended complaint alleges
claims for breach of contract against Kantz; violation of the FDCPA against Scarbrough;
interference with business relations against Kantz, Scarbrough, and 502, LLC; fraud,
misrepresentation, and fraudulent conveyance against Kantz; and civil conspiracy against Kantz,
Scarbrough, and 502, LLC. (Id.) Valhalla seeks equitable and injunctive relief, an accounting of
FYI’s finances, and monetary damages. (Id.)
On June 13, 2019, the defendants file a motion to dismiss Valhalla’s amended complaint
under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. (Doc. No. 11.) They
argue, among other things, that Valhalla cannot state a claim under the FDCPA because that statute
only applies to consumer debts and the debts alleged in the amended complaint are commercial or
business debts. (Doc. No. 12.) They further argue that Scarbrough cannot be held liable under the
FDCPA because he does not qualify as a “debt collector” under the statute. (Id.) The defendants
therefore ask the Court to dismiss Valhalla’s FDCPA claim and decline to exercise jurisdiction
over the remaining claims in the amended complaint which are brought under state law. (Id.)
On August 12, 2019, shortly after the defendants’ motion to dismiss was fully briefed,
Valhalla moved for leave to amend under Federal Rule of Civil Procedure 15(a)(2) (Doc. No. 34),
and attached a proposed second amended complaint to its motion (Doc. No. 34-1). The proposed
second amended complaint adds FDCPA and fraud claims against 502, LLC, and includes
additional factual details. (Doc. No. 34-1.) The defendants oppose these amendments, arguing that
they are futile because they “could not withstand a motion to dismiss for the very same reasons
that the operative Amended Complaint cannot withstand the currently pending Motion to
Dismiss.” (Doc. No. 39, PageID# 774 (citations omitted).) Indeed, the defendants’ brief in

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opposition to the motion to amend incorporates by reference their motion to dismiss briefing. (Id.
at PageID# 776.)
II.

Legal Standard
Federal Rule of Civil Procedure 15(a)(2) provides that district courts should “freely” grant
a motion for leave to amend a pleading “when justice so requires.” Fed. R. Civ. P. 15(a)(2). This
“mandate” flows from the principle that a plaintiff “ought to be afforded an opportunity to test
[their] claim on the merits” where “the underlying facts or circumstances relied upon . . . may be
a proper subject of relief . . . .” Foman v. Davis, 371 U.S. 178, 182 (1962). Thus, absent “any
apparent or declared reason—such as undue delay, bad faith or dilatory motive on the part of the

movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice
to the opposing party by virtue of allowance of the amendment, futility of the amendment, etc.—
the leave sought should, as the rules require, be ‘freely given.’” Leary v. Daeschner, 349 F.3d 888,
905 (6th Cir. 2003) (quoting Foman, 371 U.S. at 182). A proposed amendment is futile when it
would not survive a motion to dismiss under Rule 12(b)(6). Miller v. Calhoun Cty., 408 F.3d 803,
817 (6th Cir. 2005); Rose v. Hartford Underwriters Ins. Co., 203 F.3d 417, 420 (6th Cir. 2000).
Although the Sixth Circuit “reviews denials of leave to amend only for abuse of discretion,” its
case law “manifests ‘liberality in allowing amendments to a complaint.’” Newberry v. Silverman,
789 F.3d 636, 645 (6th Cir. 2015) (quoting Janikowski v. Bendix Corp., 823 F.2d 945, 951 (6th
Cir. 1987)).
III.

Analysis
Futility is the central ground on which the defendants oppose Valhalla’s proposed second
amended complaint. (Doc. No. 39.) Because futility arguments in this context are functionally
dispositive, courts in this circuit recognize that they present something of a “conceptual difficulty”
when raised before a magistrate judge who, by statute, cannot ordinarily rule on dispositive
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motions. Durthaler v. Accounts Receivable Mgmt., Inc., No. 2:10-cv-1068, 2011 WL 5008552, at
*4 (S.D. Ohio Oct. 20, 2011) (citing 28 U.S.C. § 636(b)(1)(A)); see also Wischermann Partners,
Inc. v. Nashville Hosp. Capital LLC, No. 3:17-0849, 2018 WL 2684641, at *2 (M.D. Tenn. June
5, 2018) (quoting Durthaler, 2011 WL 5008552, at *4). This is particularly true where, as here,
the parties have raised the same legal issues in a dispositive motion that is concurrently pending
before the district judge. Under these circumstances, at least where the proposed amended “claim
is arguably sufficient, it is usually a sound exercise of discretion to permit the claim to be pleaded
and to allow the merits of the claim to be tested before the District Judge by way of a motion to
dismiss.” Durthaler, 2011 WL 5008552, at *4.
The defendants’ arguments in favor of dismissal and in opposition to the proposed
amendments turn on whether or not the FDCPA applies to the facts of this case. The Court finds
that the defendants will not be unduly prejudiced by allowing an amended pleading under these
circumstances. Further, allowing the defendants’ substantive legal arguments to be addressed in a
single decision is the most efficient course of action and will guard against inconsistent results in
different procedural contexts.
IV.

Conclusion
For these reasons, Valhalla’s motion for leave to file a second amended complaint (Doc.
No. 34) is GRANTED. The Clerk of Court is DIRECTED to file the second amended complaint
(Doc. No. 34-1) and accompanying exhibits (Doc. Nos. 34-2–34-12) as a separate docket entry.
It is so ORDERED.

____________________________________
ALISTAIR E. NEWBERN
United States Magistrate Judge

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