Hall et al v. Phenix Investigations Inc et al

Filing 64

Memorandum Opinion and Order. (Ordered by Judge Sidney A Fitzwater on 5/5/2015) (ykp)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
KELLY HALL, et al.,
Plaintiffs,
VS.
PHENIX INVESTIGATIONS, INC., et al.,
Defendants.

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§ Civil Action No. 3:14-CV-0665-D
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MEMORANDUM OPINION
AND ORDER
In the court’s prior memorandum opinion and order in this case, it concluded that
plaintiffs had failed to state plausible federal-law claims against defendants on which relief
could be granted, dismissed those claims pursuant to Fed. R. Civ. P. 12(b)(6), declined to
reach plaintiffs’ state-law claims, and granted plaintiffs leave to replead. See Hall v. Phenix
Investigations, Inc., 2014 WL 5697856, at *7-10 (N.D. Tex. Nov. 5, 2014) (Fitzwater, C.J.)
(“Hall I”). Plaintiffs have filed a second amended complaint, and the defendants who remain
and have been served1 move anew to dismiss. Concluding that plaintiffs have not cured the
defects in pleading their federal-law claims, the court dismisses these claims with prejudice,
dismisses plaintiffs’ state-law claims without prejudice by Rule 54(b) judgment as to the
defendants who have appeared in the case, and directs that plaintiffs demonstrate good cause

1

Carroll Family Investments, Ltd. was originally a defendant and joined one of the
motions to dismiss that the court addressed in Hall I. It has been dropped as a party in
plaintiffs’ second amended complaint and is not a moving party. Two other
defendants—Jared Zenth and Carl Mason—do not appear to have been served. See infra
§ V.

for failing to serve two defendants.
I
Because the background facts and procedural history are set out in Hall I, see id. at
*1, the court will focus on what is pertinent to the present decision.2
Plaintiffs Kelly Hall (“Hall”) and John Crowder, Jr. (“Crowder”) sue defendant
Phenix Investigations, Inc. (“Phenix”) and defendants Wood, Thacker & Weatherly, P.C.
(“Wood, Thacker”), and Samuel B. Burke, R. William Wood, C. Jane Thacker (the latter four
defendants referred to collectively as “WTW”). Plaintiffs also sue Jared Zentz (“Zentz”)3
and Carl Mason (“Mason”), but these two defendants do not appear to have been served. In
addition to state-law claims (which the court does not reach), Hall and Crowder sue under
federal law to recover for willful and negligent violations of the Fair Credit Reporting Act
(“FCRA”), 15 U.S.C. § 1681 et seq., and for a violation of the Fair Debt Collection Practices
Act (“FDCPA”), 15 U.S.C. § 1692 et seq.4
2

In deciding defendants’ Rule 12(b)(6) motions, the court construes plaintiffs’ second
amended complaint in the light most favorable to them, accepts as true all well-pleaded
factual allegations, and draws all reasonable inferences in plaintiffs’ favor. See, e.g., Lovick
v. Ritemoney Ltd., 378 F.3d 433, 437 (5th Cir. 2004). “The court’s review [of a Rule
12(b)(6) motion] is limited to the complaint, any documents attached to the complaint, and
any documents attached to the motion to dismiss that are central to the claim and referenced
by the complaint.” Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 387
(5th Cir. 2010).
3

In Hall I this defendant’s surname was spelled “Zenth.” Hall I, 2014 WL 5697856,
at *1. In the second amended complaint, plaintiffs have corrected the spelling of his surname
to read “Zentz.” E.g., 2d Am. Compl. ¶ 11.
4

In their first amended complaint, plaintiffs asserted a claim under the Gramm-LeachBliley Act (“GLBA”), 15 U.S.C. § 6801 et seq. In Hall I the court dismissed this claim on
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The instant lawsuit arises from two prior suits. Plaintiffs allege that Christopher S.
Carroll No. 1, Ltd. (“CSC1”) obtained a judgment against TWI, Inc. and TWI XVIII, Inc. in
Texas state court. Carroll Family Investments, Ltd. (“Carroll”) then filed suit in Texas state
court against TWI, Inc., TWI XVIII, Inc., Hall, and Crowder, among others (the “Transfer
Lawsuit”), alleging that Hall and Crowder had received fraudulent transfers from TWI, Inc.,
and TWI XVIII, Inc., and that Hall and Crowder were attempting to hinder Carroll’s efforts
to enforce CSC1’s judgment. During the Transfer Lawsuit, Carroll (represented by Wood,
Thacker) moved to compel the production of Hall’s and Crowder’s financial records, and the
state court ordered them to produce the records.
Hall and Crowder allege that, after they produced their financial records in the
Transfer Lawsuit, unidentified individuals placed telephone calls to two banks at which Hall
and Crowder maintain accounts, and impersonated them in order to obtain their private
financial information. Hall and Crowder also assert that Carroll and WTW hired Phenix to
investigate their financial holdings; that Phenix made these calls on behalf of Carroll and
WTW; and that, shortly after the fraudulent telephone calls occurred, Phenix produced three
investigative reports (the “Reports”) detailing its findings.
Based on the alleged participation of Carroll, WTW, and Phenix in a scheme to
fraudulently obtain and improperly use plaintiffs’ financial records, Hall and Crowder bring

the ground that GLBA does not provide a private right of action. Hall I, 2014 WL 5697856,
at *9-10. Although plaintiffs assert in their second amended complaint that defendants
violated GLBA, see 2d Am. Compl. ¶ 83, they neither allege a separate claim under GLBA
nor contest the contention that they are no longer asserting a GLBA claim.
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this lawsuit alleging that defendants violated FCRA and FDCPA. In Hall I the court held
that plaintiffs had not stated claims under FCRA or FDCPA on which relief could be granted,
and it dismissed these claims with leave to replead. Plaintiffs have filed a second amended
complaint. In separate motions, Phenix and WTW move anew to dismiss under Rule
12(b)(6) for failure to state a claim on which relief can be granted. Hall and Crowder oppose
the motions.5
II
The court turns first to defendants’ motions to dismiss plaintiffs’ FCRA claims.6
Although defendants rely on several grounds, the court need only address whether in
plaintiffs’ second amended complaint they have plausibly pleaded that the Reports are
“consumer reports” under FCRA.7

5

Plaintiffs oppose Phenix’s motion, and contend that it should be denied, for the sole
reason that Phenix’s brief numbers 28 countable pages, when the local civil rules limit this
type of brief to 25 countable pages. The court declines to deny Phenix’s motion on this basis.
Although the court does not approve of violating the local rules, Phenix’s brief, without the
signature block and certificate of service, numbers about 26½ countable pages. Additionally,
its side margins are somewhat wider than normal, and its footnotes use the same font as is
used in the body of the brief. Phenix has therefore included far less in its 28-page brief than
the court periodically sees crammed into 25 pages in briefs filed in other cases.
6

The standard that the court follows in deciding defendants’ Rule 12(b)(6) motions
is set out in Hall I, 2014 WL 5697856, at *6.
7

Phenix requests that the court take judicial notice of pleadings and orders issued in
the Transfer Lawsuit. Plaintiffs object to Phenix’s evidence appendix. Because the court is
not relying on any documents contained in Phenix’s appendix, Phenix’s request that the court
take judicial notice, and plaintiffs’ objections to Phenix’s appendix, are denied as moot.
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A
In Hall I the court explained that, to state a claim under § 1681b or § 1681d, plaintiffs
were required to allege that defendants had created, used, or obtained a “consumer report,”
as that term is defined by FCRA. Hall I, 2014 WL 5697856, at *7. The court quoted the
FCRA definition of “consumer report”:
any written, oral, or other communication of any information by
a consumer reporting agency bearing on a consumer’s credit
worthiness, credit standing, credit capacity, character, general
reputation, personal characteristics, or mode of living which is
used or expected to be used or collected in whole or in part for
the purpose of serving as a factor in establishing the consumer’s
eligibility for (A) credit or insurance to be used primarily for
personal, family, or household purposes; (B) employment
purposes; or (C) any other purpose authorized under section
1681b of this title.
Id. (quoting 15 U.S.C. § 1681a(d)(1)). The court noted that § 1681b includes such purposes
as employment purposes, underwriting insurance involving the consumer, using the
information to determine a consumer’s eligibility for a license, etc., and that a report
containing credit information about an individual is treated as a “consumer report” only when
it is collected for one of the purposes described in § 1681a(d). Id. The court held that Hall
and Crowder had alleged that defendants either created or commissioned the creation of the
Reports for “litigation support purposes”; that this was not one of the purposes outlined in
§ 1681a(d) or § 1681b; and that plaintiffs had not alleged that the Reports were created for
any of the purposes outlined in § 1681a or § 1681b. The court thus dismissed plaintiffs’
claims under FCRA, concluding that they failed as a matter of law. Id.

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B
In response to Hall I, Hall and Crowder have repleaded. The dispositive question
presented by defendants’ motions to dismiss is whether plaintiffs’ second amended complaint
plausibly pleads that the Reports are “consumer reports” under FCRA, that is, whether the
Reports were created for any of the purposes in § 1681a or § 1681b.8
Plaintiffs attempt to remedy the pleading deficiency identified in Hall I by relying on
an inference drawn from two factual predicates. They first allege that Phenix advertises on
its website that it provides “litigation support” services, and that the website specifies what
services are part of “litigation support”; they next allege that the Reports state that their
purpose is “litigation support”; and on these two factual premises they argue that it can be
inferred that, when as part of “litigation support” Phenix prepared the Reports, it was
collecting information that was used or expected to be used or collected in whole or in part
for the purpose of establishing a consumer’s eligibility for review or collection of an account,
and/or one or more purposes under 15 U.S.C. § 1681b. See, e.g., 2d Am. Compl. ¶ 40; see
also id. ¶ 41 (“Therefore, because the Consumer Reports state that they were prepared for
Litigation Support purposes, and Phenix defines litigation support to include debt collection
and other activities that bears upon Plaintiffs’ eligibility for review or collection of any

8

Phenix and WTW both make this argument in support of their motions to dismiss.
See Phenix 2/10/15 Br. 7-11; WTW 1/16/15 Br. 10. In plaintiffs’ response to WTW’s
motion, they appear to contend that WTW relies on two grounds, neither of which is this one.
See Ps. 2/6/15 Br. 5. The court disagrees with plaintiffs’ characterization of WTW’s
contentions and concludes that WTW has made this argument.
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account, among other reasons, the Consumer Reports are consumer reports under the
FCRA.”).
The fallacy with plaintiffs’ syllogistic argument is that they are relying on conclusory
assertions in an attempt to plead a plausible claim.

But conclusory statements are

insufficient. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007)) (“Threadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, do not suffice”; although “the pleading
standard Rule 8 announces does not require ‘detailed factual allegations,’” it demands more
than “labels and conclusions.”). Plaintiffs cannot rely on what is, in effect, a conclusory
allegation that because “litigation support” services can include consumer reports, as defined
under FCRA, it is reasonable to infer that the Reports that Phenix provided are consumer
reports. The scope of what are included in “litigation support” services is simply too broad
to permit this inference reasonably to be drawn. This is especially true because the second
amended complaint specifically alleges that Phenix prepared the Reports for ongoing
litigation, thereby undermining the contention that it is reasonable to infer that the Reports
were prepared for a purpose that qualifies them as “consumer reports” under FCRA. Phenix
is correct when it argues that “[n]owhere do Plaintiffs allege that the [R]eports’ purpose was
any of the purposes itemized in [FCRA], and they were not.” Phenix 2/10/15 Br. 10.
The court therefore dismisses plaintiffs’ FCRA claims against defendants under Rule
12(b)(6).

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III
Defendants also move to dismiss plaintiffs’ FDCPA claim. Although they rely on
several grounds, the court need only consider whether plaintiffs have plausibly pleaded that
the debt being collected is a “consumer debt.”
A
In Hall I the court dismissed plaintiffs’ FDCPA claim because plaintiffs had failed to
allege the existence of a consumer debt. Hall I, 2014 WL 5697856, at *9. The court
explained that
[t]o prevail on [their] FDCPA claim, [plaintiffs] must prove the
following: (1) [they have] been the object of collection activity
arising from a consumer debt; (2) the defendant is a debt
collector defined by the FDCPA; and (3) the defendant has
engaged in an act or omission prohibited by the FDCPA.
Id. at *8 (quoting Hunsinger v. SKO Brenner Am., Inc., 2014 WL 1462443, at *3 (N.D. Tex.
Apr. 15, 2014) (Fitzwater, C.J.) (alterations omitted)). “FDCPA defines ‘debt’ or ‘consumer
debt’ as ‘any obligation or alleged obligation of a consumer to pay money arising out of a
transaction in which the money, property, insurance, or services which are the subject of the
transaction are primarily for personal, family, or household purposes[.]’” Id. at *9 (quoting
15 U.S.C. § 1692a(5)). “‘FCRA does not apply to reports used in a consumer’s business
transactions, even those involving the consumer’s personal credit information.’” Id. (quoting
Matise v. Trans Union Corp., 1998 WL 872511, at *2 (N.D. Tex. Nov. 30, 1998) (Fitzwater,
J.)). “Therefore, to state a claim under FDCPA, plaintiffs must allege that the debt at issue
arose out of a transaction primarily for personal, family, or household purposes.” Id. The
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court held that plaintiffs had not pleaded a plausible FDCPA claim because they had alleged
that WTW and Carroll violated FDCPA by falsely representing the character, amount, or
legal status of any alleged debts to secure a state-court temporary injunction precluding the
free transfer of plaintiffs’ personal funds, and they had averred that Phenix violated FDCPA
by making false representations or using deceptive means to collect or attempt to collect any
debt (namely, that Phenix impersonated plaintiffs in making telephone calls to obtain account
information from plaintiffs’ financial institutions). The alleged debt therefore arose from the
lawsuit filed by CSC1 against TWI, Inc. and TWI XVIII, Inc. The court explained that,
although the first amended complaint was not clear, plaintiffs appeared to allege that the first
state-court lawsuit dealt with some kind of business-related sale of assets. The first amended
complaint did not allege that the debt at issue arose from transactions related primarily to
personal, family, or household purposes, and the only reasonable inference that the court
could draw was that the debt at issue was not primarily for personal, family, or household
purposes.
B
Phenix and WTW move to dismiss, contending, in pertinent part, that plaintiffs have
failed to plead that the debt being collected is a “consumer debt.” Plaintiffs respond that the
question whether the debt is a “consumer debt” turns on a disputed issue of fact that cannot
be resolved on defendants’ motion. Stated summarily, plaintiffs maintain that, although the
judgments in question are commercial and the alleged indebtedness that the creditors are
attempting to collect is actually non-existent, the collection efforts relate to plaintiffs’
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personal investments in the entities involved in the judgment lawsuit or in affiliated entities,
and there are fact issues regarding whether the debt is personal or commercial in nature.
The court disagrees that there is a fact question regarding whether plaintiffs are basing
their FDCPA claim on the collection of a consumer debt. It holds that plaintiffs have failed
to make a plausible claim that the debt being collected arose out of a transaction that was
primarily for personal, family, or household purposes. The second amended complaint only
permits the court to draw the reasonable inference that the debt that is being collected is
commercial in nature. And this is true regardless whether plaintiffs allegedly owe the debt
personally. All the transactions in question are commercial.
Accordingly, plaintiffs’ FDCPA claim is dismissed with prejudice.
IV
Plaintiffs also assert pendent state-law claims. For the reasons explained in Hall I,
having dismissed plaintiffs’ federal-law claims, the court in its discretion declines to exercise
supplemental jurisdiction over their state-law claims, and it dismisses these claims without
prejudice as to Phenix and WTW.
V
It does not appear that defendants Zentz and Mason have been served. Accordingly,
pursuant to Rule 4(m) and 6(b), the court directs that, within 21 days of the date this
memorandum opinion and order is filed, plaintiffs demonstrate good cause for failing to
effect service on Zentz and Mason. If they fail to do so, the court will dismiss this action
against them without prejudice.
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*

*

*

For the reasons explained, defendants’ Rule 12(b)(6) motions are granted as to
plaintiffs’ federal-law claims, and these claims are dismissed with prejudice by Rule 54(b)
final judgment filed today. The court declines to exercise supplemental jurisdiction over
plaintiffs’ state-law claims, and these claims are dismissed without prejudice. Pursuant to
Rules 4(m) and 6(b), the court orders that plaintiffs demonstrate good cause for failing to
effect service on defendants Zentz and Mason.
SO ORDERED.
May 5, 2015.

_________________________________
SIDNEY A. FITZWATER
UNITED STATES DISTRICT JUDGE

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