Bessette v. Avco Financial Services, Inc., C.A. No. 97-487 L.

• Decision Date: 07 June 2002
• Docket Number: C.A. No. 97-487 L.
• Citation: 279 B.R. 442
• Parties: Cheryl BESSETTE, for herself and on behalf of all others similarly situated, Plaintiff, v. AVCO FINANCIAL SERVICES, INC.; Avco Financial Services of Rhode Island, Inc.; Avco Financial Services of Colorado, Inc.; Avco Financial Services Management Co., Defendants.
• Court: U.S. District Court — District of Rhode Island

Page 442

279 B.R. 442

Cheryl BESSETTE, for herself and on behalf of all others similarly situated, Plaintiff, v. AVCO FINANCIAL SERVICES, INC.; Avco Financial Services of Rhode Island, Inc.; Avco Financial Services of Colorado, Inc.; Avco Financial Services Management Co., Defendants.

C.A. No. 97-487 L.

United States District Court, D. Rhode Island.

June 7, 2002.

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Christopher M. Lefebvre, Law Offices of Claude Lefebvre, Pawtucket, RI, Daniel A. Edelman, Edelman, Combs & Latturner, Chicago, IL, for Plaintiff.

A. William Loeffler, Mary Grace Diehl, Troutman Sanders LLP, Atlanta, GA, Deming E. Sherman, Patricia A. Sullivan, Marc A. Crisafulli, Edwards & Angell, Providence, RI, for defendants.

OPINION AND ORDER

LAGUEUX, Senior District Judge.

This dispute concerns a debtor in bankruptcy who entered into a reaffirmation agreement with a creditor. That agreement was neither submitted to nor approved by the bankruptcy court as required by the Bankruptcy Code. 11 U.S.C. § 524. Plaintiff Bessette has filed a motion for leave to file a third amended complaint. Defendant Avco Financial Services, Inc. ("Avco") not only objects to plaintiff's motion, but also moves to dismiss plaintiff's complaint and also moves to strike plaintiff's class allegations. This Court concludes that any remedy available to plaintiff stems only from the bankruptcy court's contempt power. This Court denies defendant's motion to dismiss the complaint and to strike class allegations, but, for jurisdictional reasons, limits the class to debtors in bankruptcy in Rhode Island. Finally, the Court denies plaintiff leave to file a third amended complaint to reinstate a previously dismissed Racketeer Influenced and Corrupt Organization Act ("RICO") claim.

BACKGROUND

The background and procedural history of this case has been thoroughly detailed in both this Court's prior published decision relating to a motion to dismiss, Bessette v. AVCO Financial Serv., Inc., 240 B.R. 147 (D.R.I.1999), and the First Circuit Court of Appeals' subsequent decision, Bessette v. Avco Financial Serv. Inc., 230 F.3d 439 (1st Cir.2000), cert. denied, Textron Funding Corp. v. Bessette, 532 U.S. 1048, 121 S.Ct. 2016, 149 L.Ed.2d 1018 (2001). Plaintiff alleges the following facts. Plaintiff filed for bankruptcy under Chapter 7 of the Bankruptcy Code in August, 1995. As required under the Bankruptcy Code, plaintiff disclosed her debts and obligations, including a debt for furniture bought on credit. Defendant Avco was the creditor for this furniture debt. The following month, prior to a discharge of her bankruptcy, plaintiff entered into a reaffirmation agreement with Avco regarding the furniture debt. The agreement set forth the terms under which she would pay off the debt. In this way, she reaffirmed her obligation to pay Avco for the furniture despite her bankrupt status.¹ The reaffirmation agreement, however, was never filed with the bankruptcy court and did not satisfy the requirements of 11 U.S.C. § 524. Bessette, 230 F.3d at 443. Bessette's debts were discharged (including the furniture debt) in November 1995. Bessette made no payments to Avco on the reaffirmation agreement until May 1, 1996, six months after the bankruptcy discharge.

Plaintiff filed suit in 1997. In her second amended complaint, plaintiff alleged that defendant failed to follow the requirements for reaffirmation agreements and violated both the discharge injunction of the Bankruptcy Code and the automatic stay that issues when bankruptcy petitions are filed. Plaintiff also claimed violations of RICO and state law as a result of the same activity. Defendant filed a motion to dismiss arguing that plaintiff did not have a remedy through which she could gain relief for any violation of the Bankruptcy Code. Defendant also sought dismissal of the RICO and state law claims. This Court dismissed the second amended complaint. Bessette, 240 B.R. at 163. The First Circuit affirmed this Court's dismissal of the RICO and state law claims and the claims based on violation of the automatic stay, but held that this Court had jurisdiction to hear claims based on § 524. Bessette, 230 F.3d at 450.

REMEDY FOR § 524 VIOLATIONS

Both parties conceded at oral argument that the remedy for a § 524 violation is an action for contempt under 11 U.S.C. § 105(a), the statute that sets forth the bankruptcy court's contempt power.² Although the parties disagree on what remedies the Court can fashion using its contempt power, the Court need not address that issue to resolve these motions.

In Bessette v. AVCO, this Court analyzed whether Congress intended to create a right of action under the Bankruptcy Code. 240 B.R. at 153-57. After analyzing the statute using the factors laid out by the Supreme Court in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), this Court determined that § 524 did not create a private right of action. Id. at 155. This Court further determined that § 105(a), the bankruptcy court's contempt power, did not support an action of this type. This Court reasoned that plaintiff could not "bootstrap" a private right of action through the bankruptcy court's contempt power. Id. at 156. Furthermore, this Court concluded that because plaintiff had not brought a contempt action in bankruptcy court, this Court was unable to fashion a remedy. Id. at 157. Since the First Circuit's ruling, however, that analysis is old news.

This writer mentions this Court's original ruling on an implied right of action only for the purpose of clarifying the subsequent decision of the First Circuit. The First Circuit declined to answer the question of whether § 524 supported an implied right of action. Instead, the First Circuit concluded that "a bankruptcy court is authorized to invoke § 105 to enforce the discharge injunction imposed by § 524 and order damages for the appellant in this case if the merits so require." Bessette, 230 F.3d at 445. The First Circuit further concluded that a district court sitting in bankruptcy could invoke the bankruptcy court's contempt powers under § 105(a). See id. at 446. Although the First Circuit did not conclusively define the scope of a court's powers under § 105(a), it ruled that this Court could hear this case and fashion a remedy based on the equitable powers contained in § 105(a) or could refer the matter back to the bankruptcy court for further proceedings. See id. In accordance with the First Circuit's ruling, this Court will fashion a remedy, if any is appropriate, in light of the contempt powers of the bankruptcy court, as the First Circuit so directed.

An analysis of the rulings of the other circuits is not necessary to resolve the message emanating from the First Circuit. See, e.g., Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 507 (9th Cir.2002) ("[C]ontempt is the appropriate remedy and no further remedy is necessary."); Cox v. Zale Delaware, Inc., 239 F.3d 910, 917 (7th Cir.2001) ("[A] suit for violation of section 524(c) can be brought only as a contempt action under section 524(a)(2)."); Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 425 (6th Cir.2000) (holding that violations of § 524 cannot be remedied pursuant to § 105). This case was remanded to this Court for further proceedings under the § 105(a) contempt powers.

MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

As a corollary argument, defendant also counters that plaintiff has no injury because any payments made under the reaffirmation agreement were voluntary and, therefore, the claim is trivial and shows no violation of the law.

In reviewing a motion to dismiss for failure to state claim upon which relief can be granted, the Court must construe the complaint in the light most favorable to plaintiff, taking all well-pleaded allegations as true and giving plaintiff the benefit of all reasonable inferences. See Fed.R.Civ.P. 12(b)(6); Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 52 (1st Cir.1990). Dismissal under Rule 12(b)(6) is appropriate only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." See Judge v. City of Lowell, 160 F.3d 67, 72 (1st Cir.1998) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).

This Court holds that because this is an action to adjudge defendant in contempt, the Court need only consider if plaintiff has alleged the elements of contempt: a violation of an order of the court of which a party had knowledge. Here, there is an order, albeit a statutory order under § 524(c), and not an order issued by a judge. See Bessette, 230 F.3d at 445. Plaintiff has alleged that defendant violated that order. Plaintiff has alleged that the defendant was aware that plaintiff had filed a bankruptcy petition, received a subsequent discharge, and the requirements of § 524(c). Therefore, plaintiff has alleged the elements of contempt and dismissal is not warranted. Defendant, however, may later raise defenses to plaintiff's allegations in the complaint.

Section 105(a) creates a contempt remedy that is consistent with the greater protection Congress afforded debtors who enter into reaffirmation agreements. As the First Circuit noted a reaffirmation agreement is the only method which can be utilized to allow personal liability to survive bankruptcy. Jamo v. Katahdin Federal Credit Union, 283 F.3d 392, 398 (1st Cir.2002).

Defendant relies on the recent Seventh Circuit decision in Cox v. Zale Delaware Inc., supra, to argue that plaintiff must allege that her payments were involuntary. In Cox, the Seventh Circuit affirmed the dismissal of a similar claim regarding reaffirmation agreements. 239 F.3d at 917. Contrary to defendant's argument, Cox explicitly states that "once he has paid the debt in full and is not in jeopardy of being sued, affirmative relief can be sought only in the bankruptcy court that issued the discharge." Id. at...