Kitchen v. Fund Recovery Servs., LLC (In re Argon Credit LLC)
| Citation | 632 B.R. 300 |
| Decision Date | 02 September 2021 |
| Docket Number | Case No. 16-39654,Adv. Proc. No. 21-00048 |
| Parties | IN RE ARGON CREDIT LLC, Debtor. Latonya D. Kitchen and Karensa Hutchens, Plaintiffs, v. Fund Recovery Services, LLC, Defendant. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Peter J Roberts, Cozen O'Connor, 123 North Wacker Drive, Suite 1800, Chicago, IL 60606, Attorney for Defendant.
Jeffrey Wilens, Lakeshore Law Center, 18340 Yorba Linda Blvd., Suite 107-610, Yorba Linda, CA 92886, Attorney Plaintiffs.
Honorable Deborah L. Thorne, United States Bankruptcy Judge The matter comes before the court on a motion to dismiss the amended adversary complaint filed by Latonya D. Kitchen and Karensa Hutchens (together, "Plaintiffs") in which they allege that defendant Fund Recovery Services, LLC ("FRS") violated California law in three ways when it collected on certain consumer loans extended to Plaintiffs by two Argon entities ("Argon" or the "Debtors"). As explained below, the motion to dismiss is granted without prejudice as to Plaintiffs' breach of contract claim and denied as to Plaintiffs' other claims
In 2015 and 2016, Argon entered into consumer loan agreements with California residents—agreements which identified "Argon LLC" as the lender.1 Plaintiffs allege on information and belief that 1,000 or more people entered into those consumer loan agreements. Argon financed these consumer loans by borrowing under a loan and security agreement ("LSA"), giving Argon's lender a security interest in the consumer loan receivables. That secured lender subsequently assigned all rights and remedies under the LSA—and its interest in the consumer loan receivables—to another entity, which subsequently assigned them to FRS.
In December 2016, the Debtors filed voluntary petitions for chapter 11 relief under the United States Bankruptcy Code.2 FRS is a secured creditor of Argon X, LLC and holds an unsecured claim against Argon Credit LLC, with a total amount claimed against both entities of approximately $37 million. Due to the Debtors' inability to adequately protect FRS's property interest in the consumer loan receivables, the court modified the automatic stay and entered an order allowing FRS to begin collecting on the consumer loans and applying amounts collected against FRS's secured claim. See Dkt. No. 129.
During these collection efforts, FRS presented itself to borrowers as Argon by using the name, phone number, email address, collection letters and invoices associated with Argon. Moreover, FRS threatened to report delayed payments and nonpayments to credit rating agencies to ruin Plaintiffs' credit if they did not pay immediately. Under the heading "Payment Method," the consumer loan agreements included an elective option (referred to as an "ACH Authorization") by which Plaintiffs could authorize Argon to debit Plaintiffs' checking accounts for amounts owing on each scheduled payment date or thereafter. See Dkt. No. 279, Exhibit 1, at 9. The consumer loan agreements provided that the ACH Authorization would remain in full force and effect until "Argon LLC" had "received written notification from [Plaintiffs] of its termination." Id . at 10. FRS used or threatened to use the ACH Authorization to take money from Plaintiffs' accounts.
FRS's collection efforts paid off. Specifically, by "[c]laiming the authority of the loan agreements, FRS received payments or took at least $3,468.45 from Plaintiff Latonya Kitchen's bank accounts and at least $4,144.26 taken from Plaintiff Karensa Hutchens' bank accounts." Adv. Dkt. No. 13, para. 34. Nearly all these amounts paid by or taken from Plaintiffs were applied toward the finance charges provided for in the consumer loan agreements.
In response to FRS's collection efforts, Plaintiffs obtained legal counsel and began pursuing remedies against Argon, FRS and another financial company. Plaintiffs and other borrowers not named in this proceeding obtained orders from the court modifying the automatic stay, which allowed Plaintiffs and others to pursue arbitration against FRS in California as required by the consumer loan agreements. See Dkt. Nos. 327, 359. FRS apparently refused to pay the arbitration fees or participate in the arbitration. As a result, the arbitrators closed the cases. This led to the present adversary proceeding.3
Plaintiffs' amended complaint alleges three causes of action against FRS. First, Plaintiffs claim that the consumer loan agreements that they (and various unknown class members) entered into with Argon are either voided, or contain provisions invalidated, by operation of the California Financing Law ("CFL"). Cal. Fin. Code § 22000 et. seq . Plaintiffs allege that they lost money when FRS collected from them under the authority of the void, or partially invalid, consumer loan agreements in violation of California's Unfair Competition Law ("UCL"). Cal. Bus. & Prof. Code § 17200 et. seq . Second, Plaintiffs claim that FRS's collection efforts breached the consumer loan agreements, causing Plaintiffs to incur damages. Third, Plaintiffs claim that FRS's collection efforts violated California's Fair Debt Collection Practices Act ("CFDCPA"). Cal. Civ. Code § 1788 et. seq .
In the context of their first claim (the "UCL Claim"), Plaintiffs allege that Argon violated the CFL by lending under the name "Argon LLC" though its lending license was under different names; by lending from an entity with an address that did not match the one on its license; and by failing to properly post the license online (where the loans were made) or properly disclose the license in advertising materials.
Plaintiffs claim that because these violations were willful, the CFL voids the consumer loan agreements in their entirety (including Plaintiffs' obligations under those agreements to repay the principal amount of their loans). In the alternative, Plaintiffs claim that if the violations were only negligent, then the CFL invalidates only those provisions in the consumer loan agreements requiring them to pay interest and charges, while the agreements themselves (and Plaintiffs' obligations to repay the principal amount of their loans) remain enforceable. Plaintiffs also allege that they would not have made any payments to FRS if they had known that the consumer loan agreements were void or partially invalid in ways that nullified their obligations to make those payments.
FRS seeks dismissal of the amended complaint under Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, which are applicable in the bankruptcy court under Rule 7012(b) of the Federal Rules of Bankruptcy Procedure. FRS argues that (I) the UCL Claim should be dismissed (A) under Rule 12(b)(1) because Plaintiffs have not alleged any concrete injury in fact, so they have no constitutional standing to invoke the court's subject matter jurisdiction, and also (B) under Rule 12(b)(6) because without having alleged any economic injury that resulted from FRS's unfair business practices, Plaintiffs have no statutory standing to sue under the UCL; (II) Plaintiffs' breach of contract claim should be dismissed under Rule 12(b)(6) because the pleadings neglect to establish certain essential elements of the cause of action; and (III) Plaintiffs' third claim (the "CFDCPA Claim") should be dismissed under Rule 12(b)(1) for lack of subject matter jurisdiction on the same grounds as the UCL Claim.
For the following reasons, FRS's motion to dismiss is denied as to the UCL Claim and the CFDCPA Claim and granted as to the breach of contract claim, which is dismissed without prejudice.
The court has core jurisdiction over claims against the estate and other proceedings affecting the liquidation of the assets of the estate. 28 U.S.C. §§ 1334(b), 157(b)(2)(B), (O). Venue is proper in the Northern District of Illinois, Eastern Division pursuant to 28 U.S.C. § 1409(a).4 Neither party has challenged the court's jurisdiction.
FRS moves to dismiss the amended complaint under Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. Moving under Rule 12(b)(1), FRS challenges the court's subject matter jurisdiction. Moving under Rule 12(b)(6), FRS asserts that Plaintiffs have failed to state a claim upon which relief can be granted.
Surviving a motion to dismiss under Rule 12(b)(6) requires that the "complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 129 S. Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 127 S. Ct. 1955, 1974, 167 L.Ed.2d 929 (2007) ) (internal citations and quotations omitted). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id . FRS's motion to dismiss presents a Rule 12(b)(6) challenge to Plaintiffs' UCL Claim and breach of contract claim.
If a facial challenge has been raised, the standard for surviving a motion to dismiss under Rule 12(b)(1) is the same as the Iqbal - Twombly standard for a Rule 12(b)(6). Silha v. ACT, Inc. , 807 F.3d 169, 173-74 (7th Cir. 2015). A facial challenge tests the sufficiency of the plaintiff's allegations to establish subject matter jurisdiction. Id . at 173. This contrasts with a factual challenge which claims that there is in fact no subject matter jurisdiction regardless of the form of the pleadings.
Apex Digital, Inc. v. Sears, Roebuck & Co. , 572 F.3d 440, 443-44 (7th Cir. 2009) (). FRS's motion to dismiss presents a facial challenge to Plaintiffs' UCL Claim and CFDCPA Claim.
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