VanHuss v. Kohn Law Firm S.C.

Citations: 127 F. Supp. 3d 980; 2015 U.S. Dist. LEXIS 116465; 2015 WL 5123699Docket: No. 14-cv-839-wmc

Court: District Court, W.D. Wisconsin; September 1, 2015; Federal District Court

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Plaintiffs allege violations of the Fair Debt Collection Practices Act (FDCPA) and the Wisconsin Consumer Act (WCA) by defendants Kohn Law Firm and Discovery Bank, claiming unlawful garnishment of funds. Discovery Bank, represented by Kohn Law Firm, allegedly filed a lawsuit against plaintiff Patricia VanHuss, obtained a judgment, and subsequently filed a Non-Earnings Garnishment against VanHuss 'DBA Joint Effects', misleadingly suggesting the judgment applied to the partnership she ran with plaintiff Loretta LoMastro. 

Several motions are pending, including the plaintiffs' motions to strike the defendants' bona fide error defense and to quash a subpoena to Citibank, as well as defendants' motion for judgment on the pleadings. The court will deny the plaintiffs' motions but grant in part and deny in part the defendants’ motion for judgment. 

The defendants assert a bona fide error defense, claiming any violations were unintentional and resulted from a mistake despite having reasonable procedures in place to avoid errors, as recognized in both the FDCPA and WCA. The plaintiffs argue that the defendants did not plead their defense with sufficient particularity regarding the alleged fraud or mistake. In response, the defendants amended their answer to detail their belief that Joint Effects was a sole proprietorship based on statements from VanHuss during a pre-trial conference. The plaintiffs have not withdrawn their motion to strike, insisting that the defendants failed to specify the procedures in place to prevent unlawful garnishments. The court notes that motions to strike affirmative defenses are generally disfavored due to their potential to cause delays.

A motion to strike is typically granted only if the challenged defense is deemed frivolous or lacks a legitimate issue of fact or law. Courts must be assured that there are no factual questions and that any legal questions are clear and undisputed, meaning the defense cannot succeed under any circumstances. The Seventh Circuit mandates that affirmative defenses comply with the pleading standards of the Federal Rules of Civil Procedure, requiring a "short and plain statement." In this case, the defense relies on a bona fide error, which constitutes a genuine mistake, necessitating a specific statement of the circumstances of the mistake. Courts have indicated that this defense is subject to heightened pleading requirements under Rule 9(b), which specifies that the details of the mistake must include the "who, what, when, where, and how."

The defendants successfully outlined these elements, citing an erroneous statement made by VanHuss at a pre-trial conference regarding her status as a sole proprietor, which clarified the "when, where, and how" of the mistake. They contended that this belief led to their incorrect assumption that Joint Effects was a sole proprietorship, allowing them to garnish its accounts. This adequately met the heightened standard of Rule 9(b), countering plaintiffs’ arguments that the defense was merely unnecessary clutter. 

Plaintiffs referenced Reichert v. National Credit Systems to assert that more detail is required concerning the procedures meant to prevent such errors; however, this case pertained to the requirements at the summary judgment stage, not the pleading stage. Consequently, the motion to strike was denied.

Additionally, plaintiffs filed a motion to quash a subpoena from the defendants directed at Citibank for billing statements related to an AT&T credit card account held by VanHuss. This was relevant due to an alleged $10,000 balance transfer from the Citibank account contributing to an unpaid balance on a credit card issued by Discover Bank.

Defendants are requesting Van-Huss's AT&T card billing statements to ascertain if the expenditures were for business or personal use, as the Fair Debt Collection Practices Act (FDCPA) pertains to debts primarily for personal, family, or household purposes. Plaintiffs argue against the subpoena, claiming it seeks protected confidential information. However, defendants assert that plaintiffs have not provided evidence that Van-Huss’s privacy interests outweigh the need for discoverable information, nor have they shown an inability to seal the records to protect her privacy. Plaintiffs also claim further discovery would be burdensome since Van-Huss stated during her deposition that the card was used only for personal expenses. In contrast, defendants reference Van-Huss's prior claims of using the card for business purposes. The motion to quash is denied for three reasons: the relevance of the debt's classification under the FDCPA and WCA, the necessity to examine Van-Huss’s testimony, and plaintiffs' failure to demonstrate that the subpoena is overly broad or burdensome.

Defendants also moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) to dismiss all claims. Such motions are granted only when it is clear that the plaintiff cannot substantiate any facts supporting their claims. The court must view the allegations favorably toward the non-moving party while not ignoring facts that weaken the plaintiff's case. 

The plaintiffs are Patricia VanHuss and Loretta LoMastro, residents of Sauk County, Wisconsin, and partners in the Joint Effects partnership. The defendant, Kohn Law Firm S.C., based in Milwaukee, primarily engages in debt collection. On April 26, 2013, Kohn filed a lawsuit against VanHuss on behalf of Discover Bank, seeking to recover a debt from charges on a Discover credit card, which were primarily for personal and family use. VanHuss acknowledged the charges and consented to a judgment of $10,068.56 against herself, which was entered on July 3, 2013. Neither LoMastro nor Joint Effects were involved in this lawsuit.

On January 15, 2014, Kohn initiated a Non-Earnings Garnishment on behalf of Discover Bank, identifying the debtor as Patti VanHuss, also known as Patricia A. VanHuss, doing business as (DBA) Joint Effects. On February 11, Kohn filed a proposed 'Order to Garnishee,' which was served to VanHuss and Baraboo National Bank, requesting the bank to remit funds held for VanHuss to Discover Bank. Following this, Baraboo National Bank froze the account of Joint Effects, restricting access to the funds for VanHuss, LoMastro, and Joint Effects.

Two days later, the Sauk County Circuit Court dismissed the garnishment based on VanHuss’s objection, noting that the action was originally against VanHuss and that changing the caption to include DBA Joint Effects was inappropriate, as no evidence linked Joint Effects to the debt. The court ordered Baraboo National Bank to release the frozen funds. Subsequently, VanHuss sought to reopen the small claims judgment but was denied, as the alleged violations occurred post-judgment.

In response, the plaintiffs filed a federal lawsuit claiming violations of the Fair Debt Collection Practices Act (FDCPA) and the Wisconsin Consumer Act (WCA), along with common law conversion. Defendants countered that altering the caption in the garnishment was permissible, as garnishment actions are separate from the underlying actions, and the DBA designation does not constitute a distinct legal entity. However, this argument was seen as inadequate at the pleading stage, suggesting the need for further legal scrutiny.

Plaintiffs assert that defendants improperly froze and attempted to garnish funds by mislabeling the garnishment caption, suggesting that "Joint Effects" was merely another name for Patricia VanHuss, which may violate Wisconsin law regarding garnishment of partnership assets. The court rejects defendants' claim that the caption alteration does not establish liability. Regarding the Fair Debt Collection Practices Act (FDCPA), defendants argue that 15 U.S.C. § 1692e(5) applies only to threats of unlawful action, not to actions already taken. They cite support from district courts in the Seventh Circuit, emphasizing that the provision prohibits only threats, not actual illegal actions. The court agrees with defendants, noting that plaintiffs' claims are based on actions taken rather than threats. However, plaintiffs reference cases from other circuits arguing that the FDCPA should protect against actual illegal actions as well, suggesting that a collection agency should not evade FDCPA restrictions by acting without legal authority. The discussion highlights a split in judicial interpretation regarding the applicability of § 1692e(5) to actions versus threats.

1692e(5) of the Fair Debt Collection Practices Act (FDCPA) is interpreted to apply only to threats made by debt collectors, rather than actions taken, as supported by case law including Poirier and Foster. The court aligns with the majority view that the statutory language indicates a prohibition on threats, not on actual actions taken, contrasting with other sections of the FDCPA that explicitly address both threats and actions. While actions taken unlawfully can lead to liability under other FDCPA provisions, such as 1692e and 1692f, the court maintains that 1692e(5) should not be expanded beyond its clear wording. 

Regarding 1692f, which prohibits unfair or unconscionable means in debt collection, the court notes that it does not specifically define what constitutes unfair or unconscionable behavior. Defendants argue that 1692f(6)(C) limits its applicability to nonjudicial actions for dispossession, asserting that their judicial actions cannot violate this provision. However, the court expresses skepticism about this argument, citing the non-exhaustive nature of 1692f. Additionally, defendants contend that 1692f cannot be invoked if the conduct is already addressed by other FDCPA sections, a view supported by case law. Consequently, the court concludes that defendants are entitled to judgment on the claims under 1692e(5) and does not dismiss the potential applicability of 1692f.

A claim under Section 1692f of the Fair Debt Collection Practices Act (FDCPA) is insufficient if it does not identify misconduct distinct from allegations made under other FDCPA provisions. The court has previously determined that the plaintiffs' complaints do not pertain to Section 1692e(5), the only other provision cited, and neither party has indicated applicability of any other specific FDCPA prohibitions. If the plaintiffs had successfully pled a viable Section 1692e(5) claim based on the same facts, it would be reasonable to dismiss the Section 1692f claim as an attempt to extend claims into broader categories. However, since the plaintiffs did not clearly align their allegations with any specific FDCPA provision, it would be premature to dismiss the Section 1692f claim on this basis.

Regarding the claims under the Washington Collection Agency Act (WCA), the plaintiffs allege that the defendants violated Sections 427.104(1)(j) and 425.107 of the WCA by attempting to garnish a bank account without valid rights. The defendants argue that they followed state law in their garnishment actions and thus cannot be held liable under the FDCPA. The court supports this argument, referencing precedent that debt collectors adhering to state law procedures cannot be deemed to have acted unfairly or unconscionably, even if the judgment they sought to enforce was later vacated. Therefore, the court does not find the defendants' actions to be unconscionable or unfair.

In Beler, a judgment was entered against the plaintiff for a debt, which she failed to pay, appeal, or declare bankruptcy. Subsequently, a debt collector sent a Citation to Discover Assets to her bank, instructing it not to turn over assets exempt from execution under applicable laws. Instead of complying, the bank froze her assets until it could determine which funds might be exempt. Beler's attorney claimed all funds were exempt under federal law, leading the debt collector to dismiss the citation without contesting the assertion. Beler then filed a lawsuit under the Fair Debt Collection Practices Act (FDCPA), alleging a violation of 1692f due to the debt collector's actions violating the Social Security Act and Illinois law. 

The Seventh Circuit rejected her claims, asserting that 1692f does not serve as an enforcement mechanism for other laws and noted that the debt collector had complied with Illinois law by issuing the citation. The court refused to create a federal common law requiring a hearing on exemptions before asset freezing, emphasizing that such a rule should arise through legislative processes, not judicial interpretation. The ruling clarified that state judges are responsible for determining how judgments are collected, and federal judges should not override state decisions on creditor collection practices.

Despite this, the court indicated that alleged facts could support liability for the defendants regarding their attempt to garnish from Joint Effects’ account, as they did not follow Wisconsin's garnishment procedures correctly. The defendants' proper procedural filings did not absolve them of liability for improperly including an unnamed entity as a debtor. The court highlighted that while using state processes is legitimate, attempting to misuse those procedures is not. A jury could find that garnishing funds from debtors current on payments constituted unfair means of debt collection under 1692f. Conversely, if the defendants had only named the correct debtor and garnished exempt funds, they would not face FDCPA liability. The court noted that a creditor's use of the court system to protect its rights is not inherently improper, even if the debtor disputes the debt.

No Wisconsin statute allows debt collectors to garnish funds from an entity without a judgment against it. The court finds that the alleged conduct could be deemed unfair under the Fair Debt Collection Practices Act (FDCPA), as it may represent an abusive debt collection practice. The FDCPA aims to protect debtors from practices that disrupt their lives, and garnishing funds from a debtor's business partner or family member could be disruptive. However, the court emphasizes that liability under the FDCPA isn't automatically conferred merely by following state procedures, and defendants might claim a bona fide error as a defense, which would be addressed at summary judgment.

The defendants assert that Baraboo National Bank is responsible for the error, referencing a case where a bank's mistake absolved the debt collector of liability. They argue that their request to freeze funds was misinterpreted by the bank, which wrongly froze funds belonging to the legally independent entity Joint Effects. The court, however, distinguishes this situation from the referenced case, noting that here, the defendants’ drafting of the garnishment order may have misled the bank. The court remains open to finding that the defendants' actions contributed to the error, implying potential liability for an unlawful attachment precipitated by their conduct. Thus, the court declines to fully absolve the defendants based on the current evidence.

Defendants may resubmit their argument at summary judgment if they obtain additional evidence or legal authority. The court's order includes the following rulings: Plaintiffs’ motion to strike and motion to quash are both denied; Defendants’ motion for judgment on the pleadings is granted in part and denied in part; Defendants’ motions to stay discovery and to file a reply are denied as moot. The court emphasizes that Rule 9(b) serves to inform defendants of allegations, prevent frivolous complaints, and protect reputations. However, the rationales for this rule do not apply when a party pleads its own mistake as a defense.

The court directs parties to establish a protective order for confidential information. Exhibits attached to the complaint are considered part of the pleadings. The Rooker-Feldman doctrine applies when a state court’s judgment causes the injury in federal court; since the state court ruled in favor of the plaintiffs, they seek additional damages accordingly. Plaintiffs are only required to plead facts, not legal theories, and need not specify a violation of a particular statute section to succeed.

The complaint identifies a violation under § 1692e(5), but the alleged conduct does not meet the criteria of that provision, which is meant to protect consumers from misleading communications by debt collectors. The actions described may have misled the circuit court or a bank but were not misleading to the consumer, VanHuss. Regarding § 1692f(6), while not explicitly invoked, the amended complaint relies on the broader protections of § 1692f. The Wisconsin Consumer Act (WCA) imposes liability for actions taken, not just threats, supporting the continued existence of the plaintiffs' state law conversion claim despite the defendants' request for the court to relinquish supplemental jurisdiction.