Banks v. Freedom Debt Relief, LLC (In re Banks)

• Decision Date: 14 August 2020
• Docket Number: Adv. Proc. No. 20-00058,Case No. 19-27543-K
• Parties: In re JAMES BANKS and ELAINE HOWELL-BANKS, Debtors. James Banks and Elaine Howell-Banks for the Bankruptcy Estate, Plaintiffs, v. Freedom Debt Relief, LLC, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Tennessee

In re JAMES BANKS and ELAINE HOWELL-BANKS, Debtors.James Banks and Elaine Howell-Banks for the Bankruptcy Estate, Plaintiffs, v. Freedom Debt Relief, LLC, Defendant.

Case No. 19-27543-K

Adv. Proc. No. 20-00058

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF TENNESSEE WESTERN DIVISION

August 14, 2020

The following is ORDERED:

Chapter 13

OPINION

BEFORE THE COURT is Defendant Freedom Debt Relief LLC's Motion to Dismiss and Motion to Compel Arbitration, filed June 16, 2020 [Dkt. No. 17]. The Plaintiffs filed their response on July 6, 2020 [Dkt. No. 20], and the Defendant filed its reply on July 20, 2020 [Dkt. No. 27]. The court heard oral argument on August 4, 2020. The Motion seeks dismissal of Counts I, III, IV, and V of the Amended Complaint for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6) (made applicable to this proceeding pursuant to Bankruptcy Rule 7012(b)), and to compel arbitration of Count VI based on the arbitration clause in the parties' Debt Resolution Agreement. Based on the pleadings, the arguments of counsel and the entire record in this adversary proceeding, the Defendant's motions should be granted.

JURISDICTION, VENUE, AND AUTHORITY

Jurisdiction over a case under the Bankruptcy Code lies with the district court. 28 U.S.C. § 1334(a). Pursuant to authority granted to the district courts at 28 U.S.C. § 157(a), the district court for the Western District of Tennessee has referred to the bankruptcy judges of this district all cases arising under title 11 and all proceedings arising under title 11 or arising in or related to a case under title 11. In re Jurisdiction and Proceedings Under the Bankruptcy Amendments Act of 1984, Misc. No. 81-30 (W.D. Tenn. July 10, 1984). Counts I, II, III, IV, and V of the Amended Complaint arise under the Bankruptcy Code. Thus, they are core bankruptcy proceedings. 28 U.S.C. § 157(b)(1). The bankruptcy court has authority to consider these counts and enter orders upon them subject only to appellate review under section 158 of title 28. Count VI, however, arises under the Credit Repair Organizations Act ("CROA"), 15 U.S.C. § 1679, et seq. It is not a core bankruptcy matter, and this court would have no authority to hear it save for its having been raised as an ancillary count in this proceeding. The nature of this count is discussed more fully below.

BACKGROUND FACTS

Plaintiffs James Banks and Elaine Howell-Banks, Debtors in Chapter 13 Bankruptcy Case No. 19-27543, commenced this adversary proceeding on behalf of the Chapter 13 bankruptcyestate¹ seeking damages and other remedies arising from the Defendant's alleged misconduct and breach of the parties' Debt Resolution Agreement. The Amended Complaint alleges, among other things, that the Defendant's debt settlement program failed to improve the Debtors' financial situation as warranted and instead left the Debtors in a much worse financial position, forcing them to seek relief in bankruptcy court. Plaintiffs allege that, as a result of the Defendant's practices, the bankruptcy estate has been unjustly deprived of funds that could otherwise be distributed to creditors. Plaintiffs seek a return of the funds that the Debtors paid into Defendant's program for debt settlement and service fees, in addition to other remedies that the Court may allow. The Defendant responded to the Complaint with the pending motion to partially dismiss² pursuant to Fed. R. Civ. P. 12(b)(6) and to compel arbitration based on the arbitration clause in the parties' Debt Resolution Agreement.

RULE 12(b)(6) STANDARD

Federal Rule of Civil Procedure 12(b)(6) states that "[e]very defense to a claim for relief in any pleading must be asserted in the responsive pleading if one is required. But a party may assert the following defenses by motion:... (6) failure to state a claim upon which relief can begranted." When considering a motion to dismiss based on Rule 12(b)(6), "the court should 'construe the complaint in the light most favorable to the plaintiff, accept all the factual allegations as true, and determine whether the plaintiff can prove a set of facts in support of its claims that would entitle it to relief.'" French v. Am. Gen. Fin. Servs. (In re French), 401 B.R. 295, 302-03 (Bankr. E.D. Tenn. 2009) (quoting Bovee v. Coopers & Lybrand, C.P.A., 272 F.3d 356, 360 (6th Cir. 2001)). Even if all factual allegations are deemed to be true, however, "the court is not required to accept legal conclusions or unwarranted factual inferences as true." Id. at 303, citing Mich. Paytel Joint Venture v. City of Detroit, 287 F.3d 527, 533 (6th Cir. 2002). "[T]he relevant question is whether, assuming the factual allegations are true, the plaintiff has stated a ground for relief that is plausible." Ashcroft v. Iqbal, 556 U.S. 662, 696 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 564 n.8 (2007)); Malin v. JPMorgan, 860 F. Supp. 2d 574, 578 (E.D. Tenn. 2012) (citations omitted).

The purpose of a motion to dismiss under Rule 12(b)(6) is to "test the sufficiency of the complaint, not to decide the merits of the case." Abroms v. Kern (In re Kern), 289 B.R. 633, 637 (Bankr. S.D. Ohio 2003). The Court will consider the sufficiency of Counts I, III, IV, and V of the Amended Complaint pursuant to this standard.

Count I — Turnover of Property Not of the Estate

Count I of the Complaint seeks turnover of "any and all records (whether stored in electronic or hard copy format) related to any and all aspects of the promised services, including but not limited to, any and all records related to any and all individuals in Tennessee for whom Freedom performed or agreed to perform any aspect of the services" pursuant to section 542(e) of the Bankruptcy Code. [Amended Complaint ¶ 62; Dkt. No. 3]. Section 542(e) provides that theCourt may order "an attorney, accountant, or other person that holds recorded information ... relating to the debtor's property or financial affairs, to turn over or disclose such recorded information to the trustee." 11 U.S.C. § 542(e). The Defendant concedes that it may be compelled to turn over information concerning the Debtors' property and financial affairs, but objects that the Plaintiffs go too far in requesting turnover of information related to its other clients.

The Defendant is correct. While the Plaintiffs may request relevant information concerning the Defendant's other clients through the discovery process (and the court expresses no opinion about the propriety of its doing so), they may not obtain it by way of section 542(e). For this reason, the motion to dismiss Count I of the Amended Complaint is granted insofar as it seeks recovery of information related to the property or financial affairs of persons other than the Plaintiffs. Count I of the Amended Complaint should be limited to turnover of information related to the property and financial affairs of the Plaintiffs.

Count III — Accounting Related to Clients Other Than the Plaintiffs

Count III of the Amended Complaint seeks an accounting pursuant to the trustee's authority under section 542(a), including information concerning the Plaintiffs' transactions with the Defendant and "any and all records (whether stored in electronic or hard copy format) relating to any and all aspects of the promised services, including, but not limited to, any and all records relating to any and all individuals in Tennessee for whom Freedom performed or agreed to perform any aspect of the services." [Amended Complaint ¶ 69; Dkt. No. 3].

The Defendant has provided an accounting of its transactions with the Plaintiffs, but objects that the relief requested is beyond the scope of section 542(a), which permits the trustee to obtain an accounting of "property that the trustee may use, sell, or lease under section 363 of [title 11],or that the debtor may exempt under section 522 of [title 11]." This section does not permit a trustee to obtain an accounting of funds paid to a third party by persons other than the debtor because that is not property that the trustee could use, sell, or lease, or that the debtor could exempt. The Defendant provided a spreadsheet as Exhibit 3 to its reply memorandum, filed July 20, 2020, which purports to be an accounting of its transactions concerning the Plaintiffs. The Defendant says this renders Count III of the Amended Complaint moot. The Court is not prepared to say that the information provided by the Defendant in its spreadsheet fully responds to the request set forth in Count III of the Amended Complaint, but it is clear that the Plaintiffs are not entitled to obtain an accounting of information concerning the Defendant's other clients. Count III of the Amended Complaint should be dismissed insofar as it requests information concerning clients other than the Plaintiffs.

Count IV — 11 U.S.C. § 329

Count IV of the Amended Complaint asks that the Defendant be compelled to return all payments made to it by the Plaintiffs pursuant to section 329 of the Bankruptcy Code and Bankruptcy Rule 2017. The Defendant counters that this section and this rule are limited to transactions with attorneys. The Defendant is correct. Section 329 provides:

(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.

(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to -

(1) the estate, if the property transferred -

(A) would have been property of the estate;

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