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Velazquez v. Midland Funding, LLC

United States District Court, D. Idaho

December 10, 2018

MIDLAND FUNDING, LLC, a Delaware limited liability company, Defendant.


          Honorable Candy W. Dale United States Magistrate Judge


         Before the Court are Plaintiff's motion to amend the complaint, Defendant's motion to stay this matter and to compel arbitration, and Defendant's motion for protective order. (Dkt. 17, 24, 33.) The parties filed responsive briefing, and the Court conducted a hearing on October 17, 2018, during which the parties appeared and presented their arguments. Thereafter, the Court provided an opportunity for Defendant to supplement the record.[1] For the reasons that follow, the Court will grant Plaintiff's motion to amend, deny Defendant's motion to stay and compel arbitration, and deny Defendant's motion for protective order.


         Plaintiff claims that Midland Credit Management, Inc., which acted at the direction of or under the control of Defendant, filed a collection action against Plaintiff in Canyon County, Idaho, on May 16, 2017. The state court complaint alleged Defendant owned a debt incurred by Plaintiff with Citibank, N.A., and alleged Plaintiff owed Defendant the sum of $1, 074.80. During discovery in this matter, Plaintiff learned Citibank originally owned the debt, and had charged off Plaintiff's account in the amount of $1, 074.80 prior to selling the debt now owned by Defendant. The parties negotiated a settlement of the state court collection action, with Plaintiff paying Defendant 50% of the alleged debt, in the amount of $537.40. Defendant then dismissed the collection action with prejudice.

         After the collection action was dismissed, Plaintiff asserts that Citibank informed him he had a credit on his account for debt protection fees and related finance charges previously billed in error, in the amount of $88.11. Plaintiff alleges that Midland Credit knew or should have known of Citibank's error when it filed the collection action, yet it continued its efforts to recover the entire sum of $1, 074.80 inclusive of the erroneously billed $88.11. Plaintiff contends that Midland Credit knew or should have known that the $1, 074.80 incorrectly included the $88.11 because, in July of 2015, Citibank entered into a Consent Order with the Consumer Financial Protection Bureau in which Citibank admitted to overcharging consumers and agreed as part of the order to credit these amounts. Plaintiff asserts that Midland Credit and Defendant would have known about these forgiven amounts as part of the asset purchase agreement it entered into with Citibank, which occurred in 2016, after entry of the Consent Order in July of 2015.

         Plaintiff further alleges that, despite his settlement agreement with Defendant for him to pay the amount of $537.40 exclusive of attorney fees and costs, Defendant issued a 1099-C to the Internal Revenue Service for $758.40, causing Plaintiff to pay income tax on an inflated debt forgiveness amount of $758.40. Plaintiff alleges that the difference between the settlement amount and the amount reported on the 1099-C constitutes Midland Funding's court filing fees and process server fees, which were included wrongfully in the total amount reported according to the terms of the parties' settlement agreement.


         Plaintiff's complaint against Defendant Midland Funding LLC included one count for misrepresentation under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et. seq., and one count for abuse of process. Prior to Defendant filing an answer to the complaint, Plaintiff filed an amended complaint on February 12, 2018. (Dkt. 4.) The amended complaint contains three counts of misrepresentation asserted against Defendant pursuant to the FDCPA, and one count for abuse of process.

         Defendant filed its answer on March 6, 2018, and the Court conducted a scheduling conference with the parties on April 12, 2018. Pursuant to the Court's case management order, the deadline to file a motion to join parties and amend pleadings was July 2, 2018.[3] (Dkt. 14.) Plaintiff filed a motion to amend the first amended complaint on June 29, 2018. (Dkt. 17.) The proposed second amended complaint does not materially alter the general allegations asserted against Defendant as set forth in the first amended complaint.

         The proposed second amended complaint requests the following three substantive changes: 1) adding Midland Credit Management, Inc., as a defendant; 2) proposing this case be converted from a claim on behalf of an individual into a class action on behalf of two proposed classes; and 3) deleting one of the three causes of action for misrepresentation asserted under the Fair Debt Collection Practices Act.[4] Defendant does not oppose the addition of Midland Credit Management, Inc., as a defendant, or the deletion of one of the three causes of action under the FDCPA, and concedes amendment is proper under Fed. Rule Civ. P. 15. However, Defendant argues the proposed amendment to convert this matter to a class action is made in bad faith and would be both prejudicial and futile. Accordingly, Defendant asserts that, regardless of the propriety of the other two proposed amendments, the motion should be denied because the request to add class claims is improper under Rule 15.

         Additionally, Defendant filed a motion to compel arbitration.[5] In opposition to Defendant's motion to compel arbitration, Plaintiff asserts that Defendant has not established the parties had a valid, existing agreement to arbitrate; and, even if valid, Plaintiff claims Defendant waived its right to enforce arbitration by pursuing litigation in state court and waiting to assert its right to compel arbitration until late in this action. According to Plaintiff, Defendant is precluded from enforcing the arbitration provision of the card agreement even if it is deemed valid by the Court.

         Also related to the two motions is Defendant's motion for a protective order. In support of its motion to compel arbitration, Defendant produced a copy of what it claims is the governing card agreement containing the arbitration clause, but Defendant did not provide a copy of the asset purchase agreement whereby Defendant claims it acquired from Citibank the right to enforce the underlying card agreement. Rather than provide the same in response to Plaintiff's request for production, Defendant filed a motion for protective order.

         During the hearing, however, the Court noted that the terms of the asset purchase agreement transferring Citibank's accounts and receivables to Defendant, which accounts and receivables purportedly included Plaintiff's account, appeared integral to deciding the motion to compel arbitration. The Court provided Defendant the option of filing the agreement under seal with the Court. If not filed, the Court indicated a ruling on the motion to compel arbitration would be made based on the record to date. Defendant elected to file the Purchase and Sale Agreement under seal, together with a related Assignment and Release attached to Ms. Taylor's declaration as Exhibit B. (Dkt. 41, 42, 47.) Accordingly, the motion for protective order (Dkt. 33) will be denied in its entirety.[6]Below, the Court will analyze the motion to amend first, followed by the motion to stay and compel arbitration.

         1. Motion to Amend Complaint

         A. Rule 15 Standard

         Federal Rule of Civil Procedure 15(a) provides that, once a responsive pleading has been served, a party may amend its pleading “only with the opposing party's written consent or the court's leave. The court should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a)(2). The Court of Appeals for the Ninth Circuit recognizes that “the underlying purpose of Rule 15 [is] to facilitate [a] decision on the merits, rather than on the pleadings or technicalities, ” and, therefore, “Rule 15's policy of favoring amendments to pleadings should be applied with extreme liberality.” Chudacoff v. University Med. Cent. of Southern Nev., 649 F.3d 1143, 1152 (9th Cir. 2011) (quoting United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981)).

         The decision whether to grant or deny a motion to amend under Rule 15(a) rests in the sole discretion of the trial court. The factors that are commonly used to determine the propriety of a motion for leave to amend are: 1) undue delay, bad faith or dilatory motive on the part of the movant; 2) repeated failure to cure deficiencies by amendments previously allowed; 3) undue prejudice to the opposing party by virtue of allowance of the amendment; and 4) futility of amendment. C.F. ex rel. Farnan v. Capistrano Unified Sch. Dist., 654 F.3d 975, 985 n. 5 (9th Cir. 2011) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)).

         However, “[t]hese factors . . . are not of equal weight in that delay, by itself, is insufficient to justify denial of leave to amend.” Webb, 655 F.2d at 979 (“The mere fact that an amendment is offered late in the case is . . . not enough to bar it.”); Bowles v. Beade, 198 F.3d 752, 758 (9th Cir. 1999). “Only where prejudice is shown or the movant acts in bad faith are courts protecting the judicial system or other litigants when they deny leave to amend a pleading.” Webb, 655 F.2d at 980 (citation omitted). The Ninth Circuit has held that, although all these factors are relevant to consider when ruling on a motion for leave to amend, the “crucial factor is the resulting prejudice to the opposing party.” Howey v. United States, 481 F.2d 1187, 1189 (9th Cir. 1973). Prejudice is the touchstone of the inquiry under Rule 15(a). Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003). Ultimately, “[u]nless undue prejudice to the opposing party will result, a trial judge should ordinarily permit a party to amend its complaint.” Howey, 481 F.2d at 1190.

         B. Analysis

         (1) Undue Delay, Bad Faith, or Dilatory Motive

          Defendant contends Plaintiff's representation that the class claims were not known until certain discovery was conducted in this case is not true, as the class claims should have been well known due to the public nature of the Citibank consent order, and the fact that nothing was learned during Defendant's deposition that was not already apparent from that consent order. Accordingly, Defendant asserts that, because the factual basis for the class claims should have been known, the filing of the proposed amended complaint on the eve of the deadline is in bad faith or was pursued with undue delay.

         When faced with a similar argument in Willnerd v. Sybase, Inc., the Court noted that Rule 15(a) is “very liberal, ” and “all inferences [are] in favor of granting the motion.” Willnerd, No. CV 09-500-S-BLW, 2010 WL 2643316 at *1 (D. Idaho June 29, 2010) (citing William O. Gilley Enterprises, Inc. v. Atlantic Richfield Co., 588 F.3d 659, 669 n.8 (9th Cir. 2009) (citation omitted)). The Court explained that, for the factors of bad faith, undue delay, or unfair prejudice, it “need only look to the agreed Case Management Order entered following a telephone scheduling conference attended by both parties.” Willnerd, 2010 WL 2643316, at *1. Because the plaintiff had filed the motion to amend by the agreed upon deadline, [7] the Court found neither bad faith, unfair prejudice, or undue delay. Id.

         The Court finds the same here. Plaintiff filed the motion to amend prior to the agreed upon deadline for doing so. Under the circumstances, and under Willnerd, the Court finds neither bad faith nor undue delay.

         Defendant's reliance upon Fidelity Fin. Corp. v. Fed. Home Loan Bank of San Francisco, 792 F.2d 1432, 1438 (9th Cir. 1986), for the proposition that the motion should be denied when the factual bases of the claims were known prior to previous amendments, is misplaced. There, the plaintiff sought leave to file a fourth amended complaint after the court had announced its decision to grant summary judgment for the defendant. The court denied the motion to amend, finding that the new claims merely restated earlier claims and that permitting amendment would be prejudicial. 792 F.2d at 1438. Upon review, the Court of Appeals for the Ninth Circuit agreed, finding that the plaintiff was merely “restating its prior claims under new labels” when the factual bases of the claims were known to the plaintiff long before. Id. Further, given the posture of the case, the court found also that the defendant would be prejudiced if the motion to amend was granted. Id.

         Such is not the case here. First, the posture of this case is quite different than in Fidelity, because dispositive motions have not been filed, and Plaintiff filed the motion to amend prior to the agreed upon and Court imposed deadline. And second, Defendant's argument that the factual bases of the claims based upon the consent order cuts both ways---the consent order and its terms would have been equally available to Midland Credit and Defendant, and the complaint alleges also that Defendant should have known of the amounts Citibank forgave under the terms of the asset purchase agreement.[8] Last, it appears disingenuous for Defendant to argue that the proposed addition of Midland Credit as a defendant is not undertaken in bad faith or with undue delay, yet the class claims are.

         (2) Futility

         Defendant next argues Plaintiff's proposed amendment to assert class claims is futile. Plaintiff's proposed second amended complaint defines two classes as follows:

The First Class consists of (a) all individuals in Idaho (b) to whom Midland Funding or Midland Credit (c) filed a complaint against (d) which included an amount sought which included amounts Citibank overcharged the individual (e) which complaint was filed within the one (1) year period immediately preceding the filing of this complaint.
The Second Class consists of (a) all individuals in Idaho (b) to whom Midland Funding or Midland Credit (c) issued a 1099-C to (d) which included amounts for court costs and service fees which were not allowed by contract or statute (e) which 1099-C was mailed to the consumer within the one (1) year period immediately preceding the filing of this complaint.

         Defendant raises two objections. First, Defendant contends the allegations related to the classes proposed by Plaintiff do not provide sufficient information suggesting that a class actually exists. Second, Defendant asserts the definitions of the two classes impermissibly require a determination of the merits prior to ensuring the existence of a class. Defendant explains that, because the classes are defined as either individuals whom Defendant or Midland Credit “impermissibly” sued for amounts charged off by Citibank, or to whom Defendant or Midland Credit mailed 1099-C's that included costs and service fees not allowed by contract or statute, the class definitions erroneously require a finding of liability. Plaintiff argues that the facts concerning the individuals comprising the two classes have been adequately pled, and any deficiencies concerning the class descriptions can be remediated at the time class certification is sought.

         An amendment is considered futile if “no set of facts can be proved under the amendment to the pleadings that would constitute a valid and sufficient claim or defense.” Arbon Valley Solar LLC v. Thomas & Betts Corp., No. 4:16-CV-00070-DCN, 2017 WL 5613009, at *3 (D. Idaho Nov. 21, 2017) (quoting Missouri ex rel. Koster v. Harris, 847 F.3d 646, 656 (9th Cir. 2017), in turn quoting Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988)). “When a motion to amend is opposed on the grounds that amendment would be futile, the standard of review in considering the motion is akin to that undertaken by a court in determining the sufficiency of a complaint which is challenged for failure to state a claim under the Federal Rules of Civil Procedure, Rule 12(b)(6).” Doe v. Nevada, 356 F.Supp.2d 1123, 1125 (D. Nev. 2004). “A Rule 12(b)(6) dismissal may be based on either a ...

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