Arruda v. Sears, Roebuck & Co.

• Decision Date: 30 October 2002
• Docket Number: No. 02-1198.,02-1198.
• Citation: 310 F.3d 13
• Parties: Dorothy ARRUDA et al., Plaintiffs, Appellants, v. SEARS, ROEBUCK & CO. ET AL., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

310 F.3d 13

Dorothy ARRUDA et al., Plaintiffs, Appellants, v. SEARS, ROEBUCK & CO. ET AL., Defendants, Appellees.

No. 02-1198.

United States Court of Appeals, First Circuit.

Heard September 9, 2002.

Decided October 30, 2002.

COPYRIGHT MATERIAL OMITTED

Christopher M. Lefebvre, with whom Law Offices of Claude Lefebvre & Sons, Daniel A. Edelman, Tara L. Goodwin, and Edelman, Combs & Latturner, LLC were on brief, for appellants.

Philip D. Anker, with whom Bruce M. Berman, Steven E. Hugie, Michael D. Leffel, Wilmer, Cutler & Pickering, Howard A. Merten, Jr., Vetter & White, David Grossbaum, Maura K. McKelvey, Cetrulo & Capone, LLP, James R. DeGiacomo, and Murtha Cullina Roche & DeGiacomo were on brief, for appellees.

Before SELYA, Circuit Judge, COFFIN, Senior Circuit Judge, and HOWARD, Circuit Judge.

SELYA, Circuit Judge.

A discharge in bankruptcy, simpliciter, ordinarily does not wipe out previously perfected security interests in tangible personal property. The lienholder retains a right of repossession, subject, however, to the bankrupt's possible right of redemption. If timely exercised, this right of redemption allows an individual Chapter 7 debtor to "redeem [certain] tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt" by paying the lienholder a sum equal to "the amount of the allowed secured claim." 11 U.S.C. § 722 (2000).

The cases that undergird this appeal present something of an anomaly. They involve a preserved security interest but no secured claim per se. Thus, they involve a right of repossession, and the parties, by instruments that they refer to as "redemption agreements" — we shall honor that characterization even though, technically, this may not be the type of redemption agreement that section 722 contemplates — have agreed to cancel that right of repossession on payment of an "agreed value" for the collateral. That value is not in issue; as we shall see, the parties agreed to specific dollar figures, and they are bound by those agreements. What is in issue are particular aspects of the negotiated transactions.

To be specific, the appellants — several former Chapter 7 debtors seeking to represent a putative class — maintain that the principal defendant, Sears, Roebuck & Company,¹ habitually violated the Bankruptcy Code by the manner in which it essayed to enforce security liens in household goods and other personal property. Their claim has two subparts. First, they allege that redemption agreements between lienholders and debtors, entered into after the granting of a discharge in bankruptcy, invariably violate the prohibitions of the bankruptcy discharge injunction, codified in 11 U.S.C. § 524. Second, they allege that, in all events, such agreements require bankruptcy court approval (which was never obtained).

In addition to these bankruptcy-related asseverations, the appellants also advance a claim under the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§ 1692-1692o (2000). This claim — that the individual defendants (lawyers representing Sears) transgressed the FDCPA while supposedly attempting to effect repossession — requires a determination of whether the FDCPA reaches the defendants' activities. That, in turn, requires us to consider the nature of a "debt" as that term is employed in the FDCPA.

The district court wrote a thoughtful opinion in which it answered both the bankruptcy and the FDCPA questions adversely to the appellants. Arruda v. Sears, Roebuck & Co., 273 B.R. 332 (D.R.I. 2002). It thereupon dismissed their complaints. Id. at 351. For the reasons that follow, we affirm the district court's order.

I. BACKGROUND

The district court has furnished an exegetic account of each appellant's situation and the litigation's procedural history. See id. at 340-42. Rather than repastinate that well-plowed soil, we present here only the background facts necessary to frame the issues on appeal. Because the district court acted under Fed.R.Civ.P. 12(b)(6), we derive these facts from the several complaints, purged, however, of empty rhetoric. See SEC v. SG Ltd., 265 F.3d 42, 44 (1st Cir.2001); Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir.1996).

The appellants are Rhode Island residents, all of whom had filed for personal bankruptcy under Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 701-784 (2000). Each had purchased consumer goods from Sears (e.g., refrigerators, sewing machines) prior to filing for bankruptcy. On the filing date, each owed money to Sears for the purchases and each listed the Sears debt as an unsecured, nonpriority claim on his/her bankruptcy schedules. The bankruptcy court granted each appellant a general discharge encompassing the Sears indebtedness.

Of course, the discharges did not erase Sears's prepetition security interest in the purchased property. See id. § 522(c) and (f); see also In re Brown, 73 B.R. 740, 745 (Bankr.W.D.Wis.1987) (discussing how section 522 operates in connection with purchase money security interests in household goods). Relying on this fact, Sears thereafter asserted its rights of repossession. Its correspondence with the appellant Dorothy Arruda was typical. Sears's letter asked Arruda to contact its office to arrange for turning over the collateral (in her case, a range hood, a lawn mower, and a sewing machine). Arruda no longer possessed two of the three items in which Sears claimed an interest. When she called to discuss the situation, she was told by a Sears representative that she could either surrender the goods or redeem them by paying their fair market value as determined by Sears.

Two other appellants, Melanie Velleco and Blanche Sroka, had similar experiences. In each instance, lawyers representing Sears insisted that the discharged debtor either surrender the affected property voluntarily, state an intention to redeem it, or forfeit it through state replevin proceedings in which "the Sheriff [would] go out with [a Sears representative] to take possession of the items in question."

Sears's interaction with the appellants Vincent and Kathleen Kowal was along the same lines. The Kowals allege that various individuals representing Sears sent them letters offering to allow them to retain the articles that were the subject of the replevin action (a bicycle, a gas range, a sofa, and some exercise equipment) in exchange for a payment equaling the merchandise's fair market value. These letters indicated that the Kowals had "requested payment terms to settle Sears' claim of repossession" and that "Sears will settle the claim[s] for a lump sum payment" (totaling $1,165.37 for the four items) that "Sears believe[d] ... represent[ed] the fair market value of the items."

In every case, the appellants eventually received documents which, for present purposes, were materially identical to the memorandum of redemption received by Velleco and reproduced in the appendix. Arruda, Velleco, and Sroka each signed the proffered redemption agreement and returned it to Sears with a check reflecting the "agreed value" specified therein. The Kowals signed a similar redemption agreement for the sofa and gas range, paying the amount established by Sears for those items. They did not attempt to redeem either the bicycle or the exercise equipment, and Sears subsequently repossessed those articles.

Without exception, Sears asserted its right of repossession only after an appellant's bankruptcy proceedings were completed. Once a discharged debtor signed a redemption agreement, Sears notified his/her attorney that it was unable to file the agreement because the bankruptcy case was closed. See generally 11 U.S.C. § 501 (permitting, but not requiring, secured creditor to file a proof of claim or interest during the pendency of bankruptcy proceedings). It stated, however, that it nonetheless intended to honor the agreement.

The appellants allege that the amounts Sears required in order to release its security liens on the goods bore no correlation to actual market values (and, in fact, exceeded market value). The appellants also allege that the cost of replevying the goods outweighed any residual value that Sears realistically could have hoped to realize from a resale of the merchandise. Conspicuously absent are allegations that the redemption values were in any way linked to the amount of the debt owed with respect to the purchase of the goods.

Against this backdrop, the appellants portray Sears's activities as part of an illicit scheme: they envision Sears as lying in wait until a debtor's bankruptcy case is closed and then — with the Bankruptcy Court's attention focused elsewhere — contacting the debtor and threatening to repossess useful household goods unless the debtor enters into a high-priced redemption agreement. This scheme, the appellants say, violates the bankruptcy discharge injunction, 11 U.S.C. § 524, as an attempt to collect discharged debt without judicial approval of either the redemption agreements or the valuations assigned to individual items of collateral. The Kowals add two further arguments: that Sears's use of inaccurate valuation tables and other scurrilous tactics constitute fraud and false pretenses, and that the debt collectors' actions violate the FDCPA.

Treating the several cases as an integrated whole, the district court dismissed the complaints insofar as they purported to allege federal claims. As to the bankruptcy issues, the court ruled that Sears's efforts anent repossession (and the ensuing redemption agreements) did not offend the Bankruptcy Code. Arruda, 273 B.R. at 348. As to the remaining federal issue, the court held that the FDCPA did not apply to the challenged activities. Id. at 349-51. Finally, the court declined to retain supplemental jurisdiction over the appellants' state-law claims, dismissing them without prejudice. Id. at 351 (citing 28 U.S.C. § 1367(a)). This appeal followed.

II. ANALYSIS

We revie...