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Ellswick v. Quantum3 Group LLC

United States District Court, N.D. Alabama, Eastern Division

March 21, 2018




         Stanley W. Ellswick appeals from the Bankruptcy Court's June 24, 2016 order denying his motion to compel arbitration of his adversary proceeding and the Bankruptcy Court's November 23, 2016 order granting appellee Quantum3 Group, LLC's motion to dismiss his adversary proceeding. (See Doc. 1). For the reasons discussed below, the Court affirms the order denying Mr. Ellswick's motion to compel arbitration, and the Court vacates the order granting Quantum's motion to dismiss and remands this matter for further proceedings in the Bankruptcy Court.


         The Court has jurisdiction over Mr. Ellswick's appeal under 28 U.S.C. § 158(a)(1). Section 158(a)(1) states: “The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title.” When it reviews final decisions of a bankruptcy court, the district court functions as an appellate court. In re Piper Aircraft Corp., 362 F.3d 736, 738 (11th Cir. 2004). “In reviewing a bankruptcy court judgment as an appellate court, the district court reviews the bankruptcy court's legal conclusions de novo.” In re Englander, 95 F.3d 1028, 1030 (11th Cir. 1996). The Court reviews a ruling on a motion to dismiss de novo. Miljkovic v. Shafritz and Dinkin, P.A., 791 F.3d 1291, 1296-97 (11th Cir. 2015). Likewise, the Court reviews the denial of a motion to compel arbitration de novo. Parm v. Nat'l Bank of California, 835 F.3d 1331, 1334 (11th Cir. 2016); Parnell v. CashCall, Inc., 804 F.3d 1142, 1146 (11th Cir. 2015).


         A. Quantum's Proof of Claim in Mr. Ellswick's Bankruptcy Case and Mr. Ellswick's First Request for Arbitration

         On July 31, 2015, Mr. Ellswick filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Northern District of Alabama. (Doc. 4, p. 8). On September 4, 2015, Quantum filed a proof of claim in Mr. Ellswick's bankruptcy case. (Doc. 4, p. 8). Quantum claimed $592.50 pursuant to a payday loan. (Doc. 3-15, p. 1). The “Documents” section in the proof of claim provided the following instructions to Quantum:

Attach redacted copies of any documents that show the debt exists and a lien secures the debt. You must also attach copies of documents that evidence perfection of any security interest and documents required by FRBP 3001(c) for claims based on an open-end or revolving consumer credit agreement or secured by a security interest in the debtor's principal residence. You may also attach a summary in addition to the documents themselves. FRBP 3001(c) and (d). If the claim is based on delivering health care goods or services, limit disclosing confidential health care information. Do not send original documents, as attachments may be destroyed after scanning.

(Doc. 3-15, p. 2, ¶ 7).[1]

         Quantum attached to its proof of claim a form entitled “Bankruptcy Rule 3001(c)(3)(A) Statement of Account Information.” (Doc. 3-15, p. 4). The form accurately provided information that Federal Rule of Bankruptcy Procedure 3001(c)(3)(A) requires to be disclosed with a proof of claim for “an open-end or revolving” account, “such as an agreement underlying the issuance of a credit card.” Fed.R.Bankr.P. 3001 advisory committee's note.[2] But, the debt underlying Quantum's proof of claim was neither open-end nor revolving. (Doc. 3-18, ¶ 10). Rather, the debt was a “closed-end” payday loan. (Doc. 3-18, ¶ 12). The Bankruptcy Rules do not prohibit creditors from providing the information required for an open-end debt with a proof of claim for a closed-end debt. But because the debt Mr. Ellswick owes to Quantum is closed-end, under Rule 3001(c)(1), Quantum was required to attach to its proof of claim a copy of the written agreement underlying the debt.[3] Quantum did not do so. (Doc. 3-18, ¶ 11).

         Mr. Ellswick filed an objection to Quantum's claim. (Doc. 3-16). In the objection, Mr. Ellswick argued that the underlying debt was void under state law and the federal Truth in Lending Act. (Doc. 3-16, p. 1). Mr. Ellswick alleged that Quantum violated Ala. Code § 5-18A-13(k) because the loan contract “state[d] in the Truth in Lending Disclosure that debtor was giving creditor a security interest in debtor's check.” (Doc. 3-16, p. 1, ¶ 1.a).[4] Mr. Ellswick alleged that the state law violation rendered the debt void because “Alabama Supreme Court precedent makes it clear that loans in violation of a regulatory act . . . are void.” (Doc. 3-16, p. 1) (citing Marx v. Lining, 165 So. 207, 209-10 (Ala. 1935)). Mr. Ellswick alleged that “additional violations making the contract void also makes said contract in violation of [the federal Truth in Lending Act].” (Doc. 3-16, p. 1).

         The contract for the payday loan contains a “Dispute Resolution” provision which states that the parties to the loan must resolve disputes between them either in small claims court or in arbitration. (Doc. 3-27, p. 5). In conjunction with his objection to the proof of claim, Mr. Ellswick cited the arbitration provision in the payday loan contract and asked the Bankruptcy Court to stay the objection to the claim pending arbitration. (Doc. 3-16, p. 1). The Bankruptcy Court granted Mr. Ellswick's request. (Doc. 3-21). After arbitration of Mr. Ellswick's objection, the arbitrator voided the debt (Doc. 3-33) and Quantum withdrew its claim (Doc. 3-36).

         B. Mr. Ellswick's Adversary Proceeding

         After objecting to Quantum's proof of claim, Mr. Ellswick filed an Adversary Proceeding, AP No. 15-40048-JJR (“AP”), in the Bankruptcy Court (Doc. 3-18).[5] Mr. Ellswick alleged in the AP that Quantum violated the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”), by attaching to its proof of claim a “Bankruptcy Rule 3001(c)(3)(A) Statement of Account Information” form, a form which would indicate that “the underlying debt was based on an open[-end] account.” (Doc. 3-18, p. 3, ¶ 10). An open-end account is, for example, a credit card charge account. (Doc. 3-7, p. 2).

         Mr. Ellswick alleged that the underlying debt actually “was a closed-end payday loan.” (Doc. 3-18, p. 3, ¶ 12). Mr. Ellswick alleged that Quantum's assertion through its filing of a Rule 3001(c)(3)(A) form with its proof of claim that the underlying debt was based on an open-end account was a false representation to the Bankruptcy Court, and “the FDCPA applies ‘even when the audience for such conduct is someone other than the consumer.'” (Doc. 3-18, p. 3, ¶ 17) (quoting Miljkovic, 791 F.3d at 1297). Mr. Ellswick alleged that “[b]y representing to the Court that Quantum was collecting on an open account, Quantum violated 15 U.S.C. § 1692(e), ” because that section of the FDCPA “prohibits the false representation of the character of a debt.” (Doc. 3-18, p. 3, ¶ 14). In addition, Mr. Ellswick alleged that the misrepresentation violated § 1692e(10), “which prohibits ‘[t]he use of any false representation or deceptive means to collect or attempt to collect any debt, '” and § 1692f, “which provides: ‘A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt.'” (Doc. 3-18, p. 3, ¶¶ 15-16). Furthermore, Mr. Ellswick alleged that because the underlying debt was a closed-end payday loan, under Bankruptcy Rule 3001, Quantum had to file a copy of the contract between Quantum and himself, that Quantum did not do so, and that Quantum's failure to do so was a sanctionable offense under Rule 3001. (Doc. 3-18, p. 2, ¶¶ 11-12).

         C. Quantum's Motion to Dismiss the AP

         On November 16, 2015, Quantum filed a motion to dismiss the AP for failure to state a claim upon which relief may be granted under the FDCPA. (Doc. 3-22, p. 7). Quantum argued that it did not make a false representation and that even if attaching the Rule 3001(c)(3)(A) form to the proof of claim was a false representation of the character of the debt, the company cannot be held liable under the FDCPA because the proof of claim is not misleading or deceptive. (Doc. 3-22, p. 8). Quantum maintained that all of the information it provided in the Rule 3001(c)(3)(A) form was true and that Mr. Ellswick could not have been misled as to the character of the debt because he was in possession of the underlying contract for closed-end debt. (Doc. 3-22, p. 8). Quantum also contended that Mr. Ellswick failed to allege any conduct amounting to unfair or unconscionable debt collection practices. (Doc. 3-22, p. 9).

         D. Mr. Ellswick's Motion to Compel Arbitration of the AP

         On February 22, 2016, Mr. Ellswick filed a motion to compel arbitration of the AP pursuant to the dispute resolution provision in the written credit agreement. (See Doc. 3-27, p. 5). Quantum opposed the motion. (Doc. 3-28). On June 24, 2016, the Bankruptcy Court denied the motion to compel arbitration because Mr. Ellswick waived his right to arbitration, and the AP was a core proceeding that must be decided by a bankruptcy court. (Doc. 3-32, pp. 5, 7). The Bankruptcy Court held that Mr. Ellswick waived his right to arbitration because he participated in substantial litigation activities before moving to compel arbitration, leading Quantum to expend significant resources in litigation. (Doc. 3-32, p. 5).[6] The Bankruptcy Court held, moreover, that it could not compel arbitration because claims in the AP could not exist apart from the bankruptcy case, such that allowing an arbitrator to decide the AP claims “would create an inherent conflict with the [Bankruptcy] Code and [Federal] Rules [of Bankruptcy Procedure] . . . .” (Doc. 3-32, p. 7).

         E. Order Dismissing the AP

         On November 23, 2016, the Bankruptcy Court granted Quantum's motion to dismiss. (Doc. 3-7). The Bankruptcy Court held that Mr. Ellswick failed to allege how the form attached to Quantum's proof of claim misled, confused, or deceived him. In reaching its decision, the Bankruptcy Court applied the standard of a reasonable but least sophisticated consumer under § 1692e of the FDCPA. (Doc. 3-7, pp. 8-9). The bankruptcy judge explained:

[Mr.] Ellswick must resort to arguing that by mentioning Rule 3001(c)(3)(A) in the heading of its proof of claim disclosure statement, but without mention of what that Rule is all about, and making disclosures required for open-end and revolving transactions-but not disallowed for closed-end obligations- Quantum made a technically, albeit implicit, false representation that [Mr.] Ellswick's obligation was [open-end], and that such an implicit representation would qualify as a “representation” under the FDCPA. . . . This court disagrees, and concludes that the act of attaching to a bankruptcy proof of claim accurate disclosures required for open-end and revolving obligations was not a “false representation” under the FDCPA when the obligation was actually closed-end.

(Doc. 3-7, p. 11).

         F. Mr. Ellswick's Appeal

         On December 7, 2016, Mr. Ellswick appealed from the Bankruptcy Court's order granting Quantum's motion to dismiss the AP and the Bankruptcy Court's order denying his motion to compel arbitration. (Doc. 1-1). The parties have submitted their ...

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