United States District Court, N.D. Alabama, Eastern Division
STANLEY W. ELLSWICK, Appellant,
QUANTUM3 GROUP, LLC, Appellee.
MEMORANDUM OPINION AND ORDER
MADELINE HUGHES HAIKALA UNITED STATES DISTRICT JUDGE
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.
JURISDICTION AND STANDARD OF REVIEW
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).
PROCEDURAL HISTORY AND FACTUAL BACKGROUND
Quantum's Proof of Claim in Mr. Ellswick's Bankruptcy
Case and Mr. Ellswick's First Request for
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).
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. 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. Quantum did not do so. (Doc. 3-18, ¶
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). 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).
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).
Mr. Ellswick's Adversary Proceeding
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). 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).
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,
Quantum's Motion to Dismiss the AP
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).
Mr. Ellswick's Motion to Compel Arbitration of the
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). 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).
Order Dismissing the AP
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).
Mr. Ellswick's Appeal
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 ...