409 F.3d 473 (1st Cir. 2005), 04-2039, Zimmerman v. Cambridge Credit Counseling Corp.

Docket Nº:04-2039.
Citation:409 F.3d 473
Party Name:Andrew ZIMMERMAN, Kelly Zimmerman On behalf of Themselves and All Others Similarly Situated, Plaintiffs, Appellants, v. CAMBRIDGE CREDIT COUNSELING CORP., Cambridge/Brighton Budget Planning Corp., Cambridge Credit Corp., Brighton Credit Corp., Brighton Credit Corp. of Massachusetts, John Puccio, Richard Puccio, Defendants, Appellees.
Case Date:May 31, 2005
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

Page 473

409 F.3d 473 (1st Cir. 2005)

Andrew ZIMMERMAN, Kelly Zimmerman On behalf of Themselves and All Others Similarly Situated, Plaintiffs, Appellants,


CAMBRIDGE CREDIT COUNSELING CORP., Cambridge/Brighton Budget Planning Corp., Cambridge Credit Corp., Brighton Credit Corp., Brighton Credit Corp. of Massachusetts, John Puccio, Richard Puccio, Defendants, Appellees.

No. 04-2039.

United States Court of Appeals, First Circuit

May 31, 2005

Heard March 8, 2005.

Rehearing and Rehearing En Banc Denied July 20, 2005.

David J. Vendler, with whom Richard H. Nakamura, Maureen M. Home, Morris Polich & Purdy, LLP, Stephen G. Hennessy, Garrett M. Smith, Gary W. Kendall, Michie, Hamlett, Lowry, Rasmussen & Tweel, PC, and Gregory S. Duncan, were on brief, for appellants.

Paul M. Kaplan, with whom Michael J. Tuteur, Lawrence M. Kraus, Stephen D. Riden and Epstein Becker & Green, P.C., were on brief for appellees.

Before HOWARD, Circuit Judge, CYR, and STAHL, Senior Circuit Judges.

HOWARD, Circuit Judge.

The Credit Repair Organizations Act (CROA or the Act) creates a cause of action for consumers harmed by the unscrupulous

Page 474

business and advertising practices on the part of credit repair organizations. See 15 U.S.C. § 1679 et seq. But the Act does not permit lawsuits against "any nonprofit organization which is exempt from taxation under section 501(c)(3)" of the Internal Revenue Code. See 15 U.S.C. § 1679a(3)(B)(i). The question we face is whether an Internal Revenue Service (IRS) determination that an entity is tax-exempt under section 501(c)(3) is sufficient to bring the entity within the statutory exclusion set forth in § 1679(a)(3)(B)(i).


Saddled with substantial debt, the plaintiffs, Andrew and Kelly Zimmerman, sought assistance from Cambridge Credit Counseling Corporation (Cambridge) near the end of 2001. 1 The plaintiffs had seen advertising from Cambridge claiming that it could help debtors obtain lower interest rates, eliminate fees, re-age debt, and otherwise assist in debt management efforts. The plaintiffs say that they were drawn to Cambridge because it identified itself as a nonprofit organization. This led the plaintiffs to believe that Cambridge would charge low fees for its services. Cambridge is organized as a charitable organization under Massachusetts law, see Mass. Gen. Laws ch. 180, and has obtained an IRS determination that it is tax-exempt under section 501(c)(3) of the Internal Revenue Code, see 26 U.S.C. § 501(c)(3). 2

In early 2002, the plaintiffs enrolled with Cambridge. For a fee of $948 per month, Cambridge developed a customized debt management program for them. Several months later, the plaintiffs cancelled their contract with Cambridge after they became dissatisfied with its services. At the time of cancellation, the plaintiffs owed more money and had worse credit scores than before contracting with Cambridge. Believing that they had been swindled, the plaintiffs sued Cambridge, its owners John and Richard Puccio, and several related entities for violations of the CROA. 3 They alleged that Cambridge was subject to suit under the Act because its claimed nonprofit status was a sham.

The defendants moved to dismiss the complaint on the ground that Cambridge was a section 501(c)(3) tax-exempt organization and therefore within the exclusion specified in 15 U.S.C. § 1679a(3)(B)(i). The district court agreed and dismissed the CROA claim. See Zimmerman, 322 F.Supp.2d at 99-101. The court found the CROA exclusion applicable because the IRS had determined that Cambridge qualified for section 501(c)(3) tax-exempt status. See id. The court based its interpretation principally on a policy rationale. It concluded that permitting courts to "go behind the IRS's designation and proceed to make their own independent determinations, on a case-by-case basis, of an entity's substantive classification according to section 501(c)(3)" would create excessive uncertainty concerning the validity of an

Page 475

entity's tax-exempt status, and that this uncertainty could destabilize the operation of the nonprofit sector. See id. at 100. The plaintiffs timely appealed.


Our review of the district court's grant of the motion to dismiss is de novo. 4 See Goldings v. Winn, 383 F.3d 17, 21 (1st Cir.2004). At issue is the reach of 15 U.S.C. § 1679a(3)(B)(i), which provides that "a credit repair organization does not include any nonprofit organization which is exempt from taxation under section 501(c)(3)" of the Internal Revenue Code. 15 U.S.C. § 1679a(3)(B)(i). The plaintiffs argue that the exclusion requires (1) that the credit repair organization actually operates as a nonprofit entity and (2) that the credit repair organization meets the eligibility requirements in in section 501(c)(3) of the tax code. The defendants respond that the phrase "exempt from taxation under section 501(c)(3)" defines "nonprofit organization." Therefore, the defendants contend that a credit repair organization must only have received section 501(c)(3) from the IRS to qualify for the exclusion.

"As in any case of statutory construction, our analysis begins with the language of the statute." Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999) (internal quotation marks and citation omitted). The Act qualifies a large group of entities for the exclusion--all nonprofit organizations--and then limits the excluded group to a smaller group of nonprofit organizations "which are tax-exempt under section 501(c)(3)...." 15 U.S.C. § 1679a(3)(B)(i). The most natural reading of the text is that it establishes two requirements. The nonprofit language excludes some entities from eligibility (namely, profit making entities), and the "tax-exempt" language distills the excluded group to the kinds of organizations identified in section 501(c)(3) (e.g., charitable or educational organizations) which are, in fact, tax-exempt. Read in this way, the Act does not define "nonprofit organization" as an entity with section 501(c)(3) status but rather establishes two independent criteria for the exclusion: nonprofit status and section 501(c)(3) status.

This plain reading of the exclusion is supported by the surrounding text. See Massachusetts v. Morash, 490 U.S. 107, 115, 109 S.Ct. 1668, 104 L.Ed.2d 98 (1989). In addition to excluding nonprofit organizations with section 501(c)(3) status, the CROA excludes creditors and depository institutions. But as to these latter exclusions, Congress defined the excluded entities by reference to another section of the United States Code. See 15 U.S.C. § 1679a(3)(B)(ii) (excluding "any creditor (as defined in section 1062 of this title)"); 15 U.S.C. § 1679a(3)(B)(iii) (excluding "any depository institution (as that term is defined in section 1813 of Title 12)"). Had the drafters of the CROA intended to define "nonprofit" simply by reference to section 501(c)(3) of the Internal Revenue Code, they had at their disposal a method for doing so unambiguously--a method they employed for other exclusions under the CROA. See King v. St. Vincent's Hosp., 502 U.S. 215, 220-21, 112 S.Ct. 570, 116 L.Ed.2d 578 (1991).

This drafting choice cannot be considered accidental because the United States

Page 476

Code is replete with statutes which clearly define a "nonprofit organization" as an entity that is tax-exempt under the Internal Revenue Code. Indeed, several statutes expressly define a nonprofit organization to mean an organization described under section 501(c) of the Internal Revenue Code. See, e.g., 5 U.S.C. § 3102(a)(3) (stating that " 'nonprofit organization' means an organization determined by the Secretary of the Treasury to be an organization described in section 501(c) of the Internal Revenue Code of 1986"); 16 U.S.C. § 1447a(5) (similar); 29 U.S.C. § 2703(4) (similar); 42 U.S.C. § 1485(w)(1)(B) (similar); 42 U.S.C. § 1760(d)(5) (similar); 42 U.S.C. § 5603(23) (similar). 5 This construction links the definitional term "nonprofit" directly to the organization's federal tax-exempt status. We may assume that, when drafting the CROA, Congress was aware of this archetypal language for equating nonprofit status with federal tax-exempt status. See S. Dakota v. Yankton Sioux Tribe, 522 U.S. 329, 351, 118 S.Ct. 789, 139 L.Ed.2d 773 (1998). Yet Congress chose a different formulation for the CROA. This is strong evidence that Congress did not intend to conflate nonprofit status with section 501(c)(3) tax-exempt status. 6

The plaintiffs' interpretation of the exclusion also honors the principle "that '[a]ll words and provisions of statutes are intended to have meaning and are to be given effect, and no construction should be adopted which would render statutory words or phrases meaningless, redundant, or superfluous.' " United States v. Ven-Fuel, Inc., 758 F.2d 741, 751-52 (1st Cir.1985). The defendants read the exclusion as if it said only that the CROA excludes any organization "which is tax-exempt under section 501(c)(3)..." They have ascribed no independent meaning to the term "nonprofit."

Additionally, the plaintiffs' reading is consonant with the rule favoring the narrow construction of exclusions in remedial statutes. See Hogar Agua y Vida en el Desierto, Inc. v. Suarez-Medina, 36 F.3d 177, 182 (1st Cir.1994). Congress enacted the CROA to remedy abuses in the credit repair industry. The Act includes a finding by Congress that "[c]ertain advertising and business practices of some...

To continue reading