Bessette v. Avco Financial Serv. Inc.

Citation230 F.3d 439
Decision Date08 June 2000
Docket NumberNo. 99-2291,99-2291
Parties(1st Cir. 2000) CHERYL BESSETTE, FOR HERSELF AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF, APPELLANT, v. AVCO FINANCIAL SERVICES, INC.; AVCO FINANCIAL SERVICES OF RHODE ISLAND, INC.; AVCO FINANCIAL SERVICES OF COLORADO, INC.; AVCO FINANCIAL SERVICES MANAGEMENT CO., DEFENDANTS, APPELLEES. Heard
CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND [Hon. Ronald R. Lagueux, U.S. District Judge] [Copyrighted Material Omitted] Cathleen M. Combs, with whom Daniel A. Edelman, Tara L. Goodwin, Edelman Combs & Latturner, Christopher M. Lefebvre and Law Offices of Claude Lefebvre & Sons were on brief, for appellant.

Gary Klein, John Rao and National Consumer Law Center on brief, for National Association of Consumer Bankruptcy Attorneys, amicus curiae.

Patricia A. Sullivan, with whom William P. Robinson III, Jon M. Anderson, Edwards & Angell, Llp, Mary Grace Diehl, A. William Loeffler and Troutman Sanders Llp were on brief, for appellees.

Robert E. McKew, George J. Wallace, Timi Nickerson Kenealy and Eckert Seamans Cherin & Mellott, Llc on brief, for American Financial Services Association, amicus curiae.

Michael E. Malamut on brief, for New England Legal Foundation, amicus curiae.

Before Torruella, Chief Judge, Campbell, Senior Circuit Judge, and Schwarzer,* Senior District Judge.

Torruella, Chief Judge.

This appeal involves the wrongful, and supposedly common, practice by certain creditors of coercing naive and inexperienced debtors into reaffirming debt that has been properly discharged in bankruptcy. Such a practice contravenes one of the primary purposes of federal bankruptcy law, that is, to "give the debtor a 'new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.'" Lines v. Frederick, 400 U.S. 18, 19 (1971) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244-45 (1934)). Nationwide, debtors have sought relief from both the federal bankruptcy courts and district courts attempting to put an end to this practice. The latest strategy for reform is to seek certification of a class of debtors against repeat offenders of the Bankruptcy Code - that is, creditors who as a matter of business practice procure improper reaffirmation agreements.

This action brings the trend to the attention of the First Circuit. Specifically at issue in this case is the alleged misconduct of the appellee, Avco Financial Services,1 in securing the reaffirmation agreement of the appellant's pre-petition debt that had been successfully discharged in bankruptcy. The appellant, Cheryl A. Bessette,2 fashioned a Complaint seeking relief under the Bankruptcy Code, 11 U.S.C. §§ 105, 362, 524, the Racketeer Influenced Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961, 1962, and state law, and she moved to certify a class of similarly situated debtors.

The district court properly found the appellant's RICO and state law claims untenable. However, operating under a misunderstanding that it was powerless to provide a remedy to the appellant under the Bankruptcy Code, the district court also dismissed the bankruptcy claims in their entirety. See Bessette v. Avco Fin. Servs., Inc., 240 B.R. 147 (D.R.I. 1999). Because we have determined that a remedy was available through the court's equitable powers under § 105 of the Code, we reverse in part, and remand for proceedings consistent with this opinion.

BACKGROUND
I. Bankruptcy Proceedings

Bessette filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in the federal bankruptcy court in Rhode Island. Her debt included sums due to Avco. The bankruptcy court entered orders discharging the appellant's debt, including the Avco obligation. However, prior to the discharge of her debt by the bankruptcy court, the appellant executed a reaffirmation agreement with Avco. The reaffirmation agreement was not filed with the bankruptcy court and did not satisfy other general requirements of 11 U.S.C. § 524, the statutory section that authorizes voluntary reaffirmation agreements.

II. District Court Proceedings

Bessette subsequently brought this action in the United States District Court for the district of Rhode Island seeking damages for alleged violations of the automatic stay and discharge injunction provided by §§ 362 and 524 of the Bankruptcy Code, respectively. The appellant's primary theory was that § 524 provides a private right of action. Alternatively, she contended that the district court is authorized to grant relief via 11 U.S.C. § 105(a), which provides in relevant part: "The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." Bessette also brought a state law claim for unjust enrichment. She later amended her Complaint to allege that the appellee used the mails to obtain revenues from reaffirmation agreements in violation of RICO. Avco then moved to dismiss the Second Amended Complaint.

The district court's decision to grant the motion to dismiss is the subject of the instant appeal.3 First, the district court concluded that the alleged facts, if true, did not support a violation of § 362.4 The court next held that § 524 did not provide the appellant with a private right of action. The court then narrowly construed its powers under § 105 and determined that it could not provide any form of relief. The court also concluded that the state law claim was preempted by the Bankruptcy Code. Finally, the court dismissed the RICO claim because the facts as alleged failed to support the existence of a person separate from the enterprise in order to satisfy the elements of the statute.

DISCUSSION

We review the grant of a motion to dismiss de novo, applying the same criteria as the district court. See LaChapelle v. Berkshire Life Ins. Co., 142 F.3d 507, 509 (1st Cir. 1998); Garita Hotel Ltd. Partnership v. Ponce Fed. Bank, 958 F.2d 15, 17 (1st Cir. 1992). Accordingly, we accept the facts alleged in the Complaint as true, drawing all reasonable inferences in favor of the appellant. See Garita, 958 F.2d at 17. The Court may affirm the dismissal for failure to state a claim only if, under the facts alleged, "'the plaintiff cannot recover on any viable theory.'" Id. (quoting Correa-Martnez v. Arrillaga-Belendez, 903 F.2d 49, 52 (1st Cir. 1990)). Although the pleadings should generally be construed liberally, see Rodrguez v. Doral Mortgage Corp., 57 F.3d 1168, 1171 (1st Cir. 1995), a greater level of specificity is required in RICO cases, see Garita, 958 F.2d at 17 & n.1 (citing Miranda v. Ponce Fed. Bank, 948 F.2d 41, 44 (1st Cir. 1991)).

I. Availability of Relief Under the Bankruptcy Code

The effect of a discharge in bankruptcy is explained in 11 U.S.C. § 524. Generally, a discharge in bankruptcy relieves a debtor from all pre-petition debt, and § 524(a) permanently enjoins creditor actions to collect discharged debts. See National Ins. Co. of North America v. NGC Settlement Trust & Asbestos Claims Management Corp. (In re National Gypsum Co.), 118 F.3d 1056, 1062 n.13 (5th Cir. 1997); Hardy v. United States (In re Hardy), 97 F.3d 1384, 1388-89 (11th Cir. 1996); In re Getzoff, 180 B.R. 572, 573 (B.A.P. 9th Cir. 1995). The debtor may, however, voluntarily enter into an enforceable agreement with a creditor to reaffirm an otherwise dischargeable debt. See § 524(c); see also In re Getzoff, 180 B.R. at 574. A reaffirmation agreement is only binding if made in compliance with the specific conditions set forth in § 524. See In re Getzoff, 180 B.R. at 574. For example, § 524 requires that the reaffirmation agreement be filed with the bankruptcy court and that it advise the debtor that the agreement may be rescinded within sixty days of the date of filing with the court. See § 524(c).

There is no dispute that the reaffirmation agreement involved in this case falls short of the § 524 criteria. However, § 524 is silent on the ramifications of that failing, and consequently the issue presented in this case is the proper remedy for a violation of § 524.

The appellant proposes that § 524 provides an implied right of action against Avco. She argues that a reaffirmation agreement that does not comply with § 524 is void and unenforceable and that, therefore, she is entitled to restitution. The appellee, however, disputes the existence of an implied right of action based upon the four-factor analysis used to determine Congress's intent, set out by the Supreme Court in Cort v. Ash, 422 U.S. 66, 78 (1975). The appellee proffers instead that the proper remedy for a § 524 violation is contempt.

Whether there exists a private right of action for damages or sanctions under § 524 is a question of first impression in the First Circuit. Courts that have considered this question are divided. Compare Malone v. Norwest Fin. California, Inc., 245 B.R. 389, 395-98 (E.D. Cal. 2000) (finding an implied right of action); Molloy v. Primus Automotive Fin. Servs., 247 B.R. 804, 819-20 (Bankr. C.D. Cal. 2000) (same), with Transamerica Fin. Servs. v. Danney, No. 99-228-P-H, 1999 WL 33117201, *3 (D. Me. Dec. 23, 1999) (recommendation of magistrate judge affirmed by the district court) (relying on the district court's opinion in Bessette); Cox v. Zale Delaware, Inc., No. 97 C 4464, 1998 WL 397841, at *2-*4 (N.D. Ill. July 13, 1998); Pereira v. First North Am. Nat'l Bank, 223 B.R. 28, 30 (N.D. Ga. 1998); Lenior v. GE Capital Corp. (In re Lenior), 231 B.R. 662, 673-74 (Bankr. N.D. Ill. 1999) (holding that § 524 does not create a private right of action). We see no reason to jump into the fray with the complex analysis required by Cort v. Ash when a remedy is readily and expressly available through another section of the Bankruptcy Code, namely, § 105(a).

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