Smith v. Levine Leichtman Capital Partners Inc. ., C 10-00010 JSW.

• Decision Date: 29 June 2010
• Docket Number: No. C 10-00010 JSW.,C 10-00010 JSW.
• Citation: 723 F.Supp.2d 1205
• Parties: Christina SMITH, et al., Plaintiffs, v. LEVINE LEICHTMAN CAPITAL PARTNERS, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of California

723 F.Supp.2d 1205

Christina SMITH, et al., Plaintiffs,

v.LEVINE LEICHTMAN CAPITAL PARTNERS, INC., et al., Defendants.

No. C 10-00010 JSW.

United States District Court,N.D. California.

June 29, 2010.

COPYRIGHT MATERIAL OMITTED.

Paul Arons, Law Office of Paul Arons, Friday Harbor, WA, Deepak Gupta, Public Citizen Litigation Group, Washington, DC, Irv Ackelsberg, John James Grogan, Langer Grogan & Diver, P.C., Philadelphia, PA, Ronald Wilcox, Attorney at Law, San Jose, CA, for Plaintiffs.

Scott Michael Pearson, Brian C. Frontino, Stroock & Stroock & Lavan LLP, Michael Andrew Taitelman, Joshua G. Blum, Freedman & Taitelman LLP, Los Angeles, CA, Douglas Robert Schwartz, Schwartz & Cera LLP, San Francisco, CA, for Defendants.

ORDER REGARDING DEFENDANTS' MOTIONS TO DISMISS AND MOTIONS TO STRIKE

JEFFREY S. WHITE, District Judge.

Now before the Court are the motions to dismiss filed by Defendants Levine Leichtman Capital Partners, Inc. and Levine Leichtman Capital Partners III, L.P. (collectively, “LLCP”) and Defendant National Corrective Group, Inc. (“NCG”), the motion to strike pursuant to Federal Rule of Civil Procedure 12(f) filed by Defendants Michael Schreck (“Schreck”) and Brett Stohlton (“Stohlton”), the motion to strike pursuant to California Code of Civil Procedure 425.16 filed by NCG, and the joinders by Schreck and Stohlton in the other parties' motions to dismiss and strike and LLCP's joinder in NCG's motion to strike. Having carefully reviewed the parties' papers, considered their arguments and the relevant authority, and good cause appearing, the Court hereby denies all of Defendants' motions with the exception that the Court will dismiss Plaintiffs' misrepresentations claims against LLCP, Schreck and Stohlton with leave to amend. ¹

BACKGROUND

Plaintiffs Christina Smith, Lois Artz, Ashley Henderson, Jana Sperling and Toni Nelson (collectively, “Plaintiffs”) filed this purported class action against Defendants asserting claims under the Fair Debt Collection Practices Act (“FDCPA”) and RICO, among other claims. According to Plaintiffs, NCG is a private debt-collection company that specializes in collecting dishonored checks on behalf of retail-merchant payees. NCG conducts this activity under the guise of being an official “district attorney bad check restitution program.” (First Amended Complaint (“FAC”), ¶ 2.) Until April 2009, the company was known as American Corrective Counseling Services (“ACCS”), but was reorganized as NCG through bankruptcy. ( Id.)

ACCS, and now NCG, has agreements with over two dozen California district attorneys to administer a bad check diversion program. The exemplar agreement attached to the FAC provides that the District Attorney of San Mateo wanted to provide a pretrial diversion program consistent with 15 U.S.C. § 1692p (the “Act”) and retained ACCS to provide consulting services and to staff and operate the District Attorney diversion program seminars. (FAC, Ex. A.) According to the agreement, the district attorney will determine if probable cause of a bad check violation exists under state law and that contact with the alleged offender for purposes of participation in the diversion program is appropriate and consistent with the Act. However, the agreement further provides that district attorney's the determination of probable cause shall be communicated by its authorized and approved intake, dispute resolution, and prosecution review criteria established prior to the start of the diversion program. ( Id., Ex. A at ¶ (v)(c); see also Ex. A at ¶ 4.)

The district attorney will approve, in advance, the format, content, and frequency of any oral or written communication with participants in the diversion program and ACCS may mail the written communications concerning the payment of fees “under its assigned administrative responsibilities per [the] Agreement.” ( Id., Ex. A at ¶¶ (v)(e), (f).) Participants will be directed to respond to the district attorney's mailing address or a post office box held in the district attorney's name. ( Id., Ex. A at ¶¶ (v)(g).)

The agreement provides that ACCS employees shall remain the employees of ACCS, not the district attorney, but that while performing the administrative support services under the agreement, ACCS' employees shall be subject to the managerial control of the district attorney. ( Id., Ex. A at ¶ 13.)

Attached to the FAC is a document entitled “San Mateo County District Attorney Bad Check Restitution Program Intake Criteria,” which provides that checks that remain unpaid after ten days of the victim taking reasonable steps to provide notice to the check writer are eligible for the program. ( Id., Ex. B.) Checks that have been partially repaid to the victim and checks dishonored due to bank error or failure to notify the check writer of the bank adjustment, among other categories of checks, are ineligible for the program. ( Id.) According to this document, this eligibility criteria is the definition of probable cause. ( Id.)

Also attached to the FAC is a document entitled “San Mateo County District Attorney Bad Check Restitution Program Prosecution Review Criteria.” ( Id., Ex. B.) This form provides that only checks greater than $250 may be forwarded for prosecution review and provides that written notice provided by the victim is required for prosecution review, unless the checks were written on a closed account. ( Id.) Checks written by persons living out of state, checks dishonored due to a stop payment order, checks that have been partially paid to the program, and checks that are included in a bankruptcy petition shall not be forwarded for prosecution review. ( Id.)

The District Attorney also approved a series of core demand letters, as well as a core letter series timing schedule. (FAC, ¶ C.) The schedule provides that the “Official Notice” may be sent upon receipt of a crime report and that follow up letters may be sent if no response is received within a specified amount of time. ( Id.) The Official Notice, sent on district attorney letter head, states that “This Office has received a report(s) of criminal activity alleging that you have violated California Penal Code Section 476(a), ‘Passing a Worthless Check.’ A conviction under this statute is punishable by up to one (1) year in the county jail, or in state prison, and up to $1,000 in fines.” ( Id.) The notice further provides “you may avoid a court appearance by participating in the San Mateo County District Attorney Diversion Program,” which includes paying restitution on the reported checks, all fees, and attending a financial responsibility class. The district attorney “will not initiate prosecution proceedings against individuals who comply with the Diversion Program.” ( Id.) The notice states: “Failure to pay in full and schedule the class within TEN (10) DAYS from the date of this Notice may result in your case being forwarded for criminal prosecution.” ( Id.)

The letters actually received by Plaintiffs differ slightly. For example, the letter sent to Artz states that:

The Sonora County District Attorney's Office has received a CRIME REPORT alleging you have violated Penal Code 476(a) of the California State Statute: Issuing a Worthless Check.....

YOU MAY AVOID A COURT APPEARANCE if you agree to enroll in a special Bad Check Restitution Program ....

...

Program enrollment is OPTIONAL. You may wish to consult an attorney to obtain legal advice about your rights in regards to this matter....

If you successfully comply ... THERE WILL BE NO CRIMINAL, POLICE, OR COURT RECORD OF THIS MATTER!

WARNING-Completion of the Bad Check Restitution Program is valid ONLY if you comply with ALL District Attorney requirements. Failure to comply with payment of restitution and fees, or class attendance may subject you to criminal court proceedings.

( Id., Ex. D (emphasis in original).) The letter is signed by the Chief Deputy District Attorney. ( Id.)

Smith received a letter entitled “WARNING OF CRIMINAL CHARGES.” This letter states:

Our records indicate that you have failed to respond to the District Attorney's Official Notice.

Your failure to respond immediately may result in the filing of criminal charges. Call this Office by 05/03/2009 if you wish to prevent this action.

The letter is signed by the District Attorney. ( Id., Ex. F (emphasis in original).) Smith also received a letter stating: “Please contact this Office to clear a report(s) of criminal activity. Your immediate cooperation is required to avoid potential criminal prosecution.” This letter was sent on San Mateo County District Attorney letter head. ( Id., Ex. G.) In addition, Smith received letters entitled “SECOND WARNING OF CRIMINAL CHARGES,” “THIRD WARNING OF CRIMINAL CHARGES,” “THIRD NOTICE OF FAILURE TO COMPLY,” “NOTICE OF FAILURE TO COMPLY,” and “FINAL NOTICE: INITIATING PROSECUTION REVIEW.” ( Id., Exs. H, I, J, and K (emphasis in original).) The Final Notice states: “Due to your failure to comply with the requirements of the Diversion Program as specified in previous Notices, this Office will now initiate a review of your case for possible criminal charges under California Penal Code Section 476(a), ‘Passing a Worthless Check.’ ” ( Id., Ex. K.) This letter was sent on San Mateo County District Attorney letter head and is signed by the District Attorney. ( Id.)

According to Plaintiffs, NCG is the one who actually sends out these notices. ( Id., ¶ 3.) Plaintiffs allege that these notices falsely represent that a district attorney has received a crime report about the dishonored checks and that a prosecution will likely ensue unless the consumer pays the amount of the check plus over $200 in fees to NCG. ( Id.) Plaintiffs further allege that the referrals of dishonored checks to NCG are actually made directly by national retail merchants without any prior prosecutorial review. ( Id.)

According to Plaintiffs, by sending out these notices ACCS, and now NCG, make the following...