Lentz v. Nat'l Debt Relief LLC (In re Ernst)

• Decision Date: 29 March 2021
• Docket Number: ADV. PROC. NO. 20-06018-KMS,CASE NO. 20-50368-KMS
• Court: U.S. Bankruptcy Court — Southern District of Mississippi
• Parties: IN RE: MATTHEW P. ERNST HANNAH N. ERNST DEBTORS KIMBERLY R. LENTZ., as Chapter 7 Trustee for the Bankruptcy Estate of Matthew P. Ernst & Hannah N. Ernst, Debtors PLAINTIFF v. NATIONAL DEBT RELIEF LLC DEFENDANT

IN RE: MATTHEW P. ERNST HANNAH N. ERNSTDEBTORS

KIMBERLY R. LENTZ., as Chapter 7 Trustee for the Bankruptcy Estate ofMatthew P. Ernst & Hannah N. Ernst, DebtorsPLAINTIFF v. NATIONAL DEBT RELIEF LLCDEFENDANT

CASE NO. 20-50368-KMS

ADV. PROC. NO. 20-06018-KMS

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF MISSISSIPPI

March 29, 2021

The Order of the Court is set forth below.The docket reflects the date entered.

CHAPTER 7

OPINION AND ORDER DENYING MOTION TO DISMISS

This matter came on for hearing on the following motions by Defendant National Debt Relief LLC ("NDR"): the Motion for Judgment on the Pleadings or to Compel Arbitration, ECF No. 17, with Response by Plaintiff Kimberly R. Lentz ("the Trustee"), ECF No. 21; and the Motion to Dismiss, ECF No. 13, also with Response by the Trustee, ECF No. 20.

The dispute centers on the alleged prepetition participation by Debtors Matthew P. Ernst and Hannah N. Ernst in what the Trustee describes as NDR's "debt relief and credit repair program."Am. Compl. ¶ 4, ECF No. 12.The Amended Complaint ("Complaint") alleges that the Ernsts enrolled in the program approximately four years before filing their chapter 7 case; that NDR misrepresented the program's benefits; and that in reliance on the misrepresentations, the Ernsts suffered injury.

The Complaint alleges four counts.Counts I, II, and III are core under, variously, 28 U.S.C. § 157(b)(2)(A), (E), and (H)—for turnover of records under 11 U.S.C. § 542(e), avoidance of fraudulent transfers under 11 U.S.C. § 548(a) with recovery under 11 U.S.C. § 550, and an accounting under 11 U.S.C. § 542(a).Id.¶¶ 71-91, ECF No. 12at 9-11.Count IV is non-core under the Credit Repair Organizations Act (CROA), 15 U.S.C. §§ 1679-1679j.In Count IV ("CROA Count"), the Trustee seeks damages or, in the alternative, rescission of NDR's alleged agreement with the Ernsts and restitution of the more than $10,000 that, according to the Trustee, the Ernsts paid NDR. Am. Compl. ¶ 117, ECF No. 12 at 14-15.Taken together, the motions seek a judgment on the pleadings under Rule 12(c) of the Federal Rules of Civil Procedure("Rules") on the bankruptcy counts; and as to the CROA Count, either dismissal for lack of subject matter jurisdiction under Rule 12(b)(1)¹ based on the Trustee's lack of standing, or if there is standing, either an order compelling arbitration or a judgment on the pleadings.

NDR does not consent to entry of final orders or judgment in non-core proceedings.Answer, ECF No. 16at 2.Absent consent, a bankruptcy court may not enter final orders or judgment in non-core proceedings but instead must submit proposed findings of fact and conclusions of law to the district court for de novo review.See generally28 U.S.C. § 157(b)-(c)(defining core and non-core proceedings and setting out bankruptcy court's authority as to each).

Litigation on the merits of the CROA Count would be a non-core proceeding.The Motion to Dismiss for lack of subject matter jurisdiction, however, is a core proceeding.SeeEtterbeek v.APTCAM, LLC(In re Lewiston), 521 B.R. 811, 814(Bankr. E.D. Mich.2014)(determining subject matter jurisdiction on motion to remand or abstain);Bavelis v. Doukas(In re Bavelis), 453 B.R. 832, 845(Bankr. S.D. Ohio2011);Ludwig & Robinson, PLLC v. Yelverton Law Firm, PLLC(In re Yelverton), Adv.No. 11-10001, 2011 WL 2975967, at *1(Bankr. D.C.July 20, 2011);Casey v. Grasso(In re Riccitelli), 320 B.R. 483, 487(Bankr. D. Mass.2005);see alsoFed. R. Civ. P. 12(h)(3)(as applied under Fed. R. Bankr. P. 7012)("If the [bankruptcy] court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.").Accordingly, this Court"may enter appropriate orders and judgments,"28 U.S.C. § 157(b)(1), on the Motion to Dismiss.

This Opinion and Order resolves only the Motion to Dismiss the CROA Count, which is denied.The Motion for Judgment on the Pleadings as to the bankruptcy counts is granted separately.SeeECF No. 32.As to the Motion for Judgment on the Pleadings or to Compel Arbitration of the CROA Count, the Court submits separately to the district court Proposed Findings of Fact and Conclusions of Law Recommending Entry of Order Compelling Arbitration and Dismissing CROA Count.SeeECF No. 34.

I.STANDARD UNDER RULE12(b)(1)

"Without jurisdiction the court cannot proceed at all in any cause."Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94(1998).Consequently, the request for dismissal under Rule 12(b)(1) for lack of subject matter jurisdiction must be considered before the request for judgment on the pleadings under Rule 12(c) or the request for an order compelling arbitration.SeeLower Colo. River Auth. v. Papalote Creek II, L.L.C., 858 F.3d 916, 927(5th Cir.2017)("court must have subject matter jurisdiction over the underlying dispute in order to compel arbitration");Ramming v. United States, 281 F.3d 158, 161(5th Cir.2001)("When a Rule 12(b)(1) motion isfiled in conjunction with other Rule 12 motions, the court should consider the Rule 12(b)(1) jurisdictional attack before addressing any attack on the merits.").

A challenge to subject matter jurisdiction may be either facial or factual.Paterson v. Weinberger, 644 F.2d 521, 523(5th Cir.1981).A facial attack challenges the sufficiency of the complaint to allege jurisdiction.Id.A factual attack challenges "the underlying facts supporting the complaint."Cell Sci. Sys. Corp. v. La. Health Serv., 804 F. App'x 260, 263-64(5th Cir.2020).The court may dismiss for lack of subject matter jurisdiction "on any one of three separate bases: (1) the complaint alone; (2) the complaint supplemented by undisputed facts evidenced in the record; or (3) the complaint supplemented by undisputed facts plus the court's resolution of disputed facts."Williamson v. Tucker, 645 F.2d 404, 413(5th Cir.1981)."The burden of proof for a Rule 12(b)(1) motion to dismiss is on the party asserting jurisdiction."Ramming, 281 F.3d at 161.

NDR asserts three arguments against subject matter jurisdiction, all challenging the Trustee's standing to bring the CROA Count.First, the Trustee alleges injuries that are outside CROA's scope.ECF No. 28at 1, 8.Second, the Trustee alleges only bare procedural violations that do not satisfy the concreteness requirement for injury in fact.ECF No. 14at 10, 13.And third, the Trustee has sued the wrong party.ECF No. 14at 10, 11;ECF No. 28at 8-11.Whether the injuries are outside CROA's scope and whether the Trustee has sued the correct party go to the merits, not to standing, and are therefore not considered under Rule 12(b)(1).SeeGrant v. Gilbert, 324 F.3d 383, 387(5th Cir.2003)("It is inappropriate for the court to focus on the merits of the case when considering the issue of standing.").Only the concreteness argument goes to standing.The challenge is facial because it is based on the allegations in the Complaint.

On a facial challenge, the court considers the allegations in the complaint as true.Williamson, 645 F.2d at 412."At the pleading stage, allegations of injury are liberally construed."Little v. KPMG LLP, 575 F.3d 533, 540(5th Cir.2009)(citingLujan v. Defens. of Wildlife, 504 U.S. 555, 561(1992))."If th[e] jurisdictional allegations are sufficient the complaint stands."Paterson, 644 F.2d at 523.

II.JURISDICTIONAL ALLEGATIONS

CROA is a consumer protection law enacted to, in part, "protect the public from unfair or deceptive advertising and business practices by credit repair organizations."Am. Compl. ¶¶ 35, 36, ECF No. 12 at 5(quoting15 U.S.C. § 1679(b)(2)).Prohibited acts include misrepresentation and fraud or deception:

[(a)] No person may—

. . . .

(3) make or use any untrue or misleading representation of the services of the credit repair organization; or

(4) engage, directly or indirectly, in any act, practice, or course of business that constitutes or results in the commission of, or an attempt to commit, a fraud or deception on any person in connection with the offer or sale of the services of the credit repair organization.

15 U.S.C. § 1679b(a)(3)-(4);Am. Compl. ¶ 113.

The Complaint alleges:

NDR is a credit repair organization.Am. Compl. ¶ 38."NDR created a financial program for the purpose of targeting distressed consumers."Id.¶ 1.The Ernsts enrolled in that program.Id.¶ 2.NDR told the Ernsts to stop paying their creditors and instead pay over $500 per month into NDR's program.Id.¶¶ 57, 59.Between May 2016 and January 2020, the Ernsts paid over $10,000.Id.¶ 95.NDR violated § 1679b(a)(3) and (4) by misrepresenting to the Ernsts that itsprogram would provide debt relief, improved credit ratings, and bankruptcy avoidance.Id.¶¶ 96, 97, 113.The Ernsts suffered the following injuries in reliance on the misrepresentations: Loss of over $10,000; loss of the use of over $10,000 during the program; credit deterioration; increase in the amount of their debts during the program; bankruptcy; and emotional distress.Id.¶¶ 56, 63-66, 68-70.The Trustee seeks actual damages either in the amount of the Ernsts' actual damages or the amount they paid NDR, whichever is greater; punitive damages; and attorney's fees and costs; or in the alternative, rescission of the Ernsts' agreement with NDR and restitution of the amount paid.Id.¶ 117.

III.CONCLUSIONS OF LAW

The doctrine of standing restricts the category of litigants who may sue in federal court and is rooted in the Constitution's limitation of federal court jurisdiction to "Cases" and "Controversies."Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547(2016)(quotingU.S. Const. art. III, § 2).To establish the "irreducible constitutional minimum" of standing at the pleading stage, the plaintiff must clearly allege facts demonstrating three elements: "The plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to...