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May 1, 2003


The opinion of the court was delivered by: Joan Gottschall, District Judge


Defendants have moved for reconsideration of his court's order of August 14, 2001, denying defendants' motion to dismiss Count I of the Amended Complaint. The defendants' motion is based on the October 30, 2002 decision of the First Circuit in Arruda v. Sears, Roebuck & Co., 310 F.3d 31 (1st Cir. 2002). The court has reviewed its August 14 order in light of the First Circuit's decision but adheres to its original decision. The motion to reconsider is denied.

Count I of the Amended Complaint alleges that the plaintiff, Linda Peeples, purchased consumer goods, specifically a washer and dryer, from Sears on credit. Peeples thereafter filed a Chapter 7 bankruptcy proceeding, listing her obligation to Sears among her debts, and Sears received notice of the bankruptcy. Ultimately, Peeples' Sears debt was discharged.

On August 8, 2000, some months after the debt was discharged and the bankruptcy case was closed, Sears' collection agents, the Blatt law firm, filed a replevin action against Peeples seeking to recover the washer and dryer, in which Sears had a security interest. On September 5, 2000, while the replevin action was pending, the Blatt firm sent Peeples a letter offering to allow her to retain the washer and dryer if she paid $461.98, asserted by the letter to be the fair market value of the goods. Peeples signed a redemption agreement and paid the $461.98. She then sued, alleging, among other things, violations of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692c, et seq. ("FDCPA"), by the Blatt firm in connection with the events leading to her redemption of the washer and dryer.

The complaint seeks to allege a scheme "designed to induce debtors to pay money on account of discharged debts" (Amended Complaint at ¶ 3), and it is evasion of the effcct of the bankruptcy discharge, specifically alleged in Count II, that is the complaint's primary focus. In its August 14, 2001, order, this court dismissed Count II of the Amended Complaint, in which plaintiffs attempted to state a private action against defendants for violation of the discharge injunction, finding that action precluded by Cox v, Zale Delaware., Inc., 239 F.3d 910 (7th Cir, 2001). The court declined to dismiss Count I of the Amended Complaint brought under the FDCPA, however, concluding that Peeples had adequate1y alleged a debt subject to the FDCPA despite her bankruptcy discharge.

The First Circuit in Arruda held that once a consumer debt has been discharged in bankruptcy, collection activities in connection with a surviving security interest in the property from which the debt arose are not subject to the FDCPA. The court reasoned that to state. a claim under the FDCPA, "[a]t a minimum . . . a complaint must allege a scenario involving the collection (or attempted collection) of a debt," 310 F.3d at 23, and the complaint before it, while alleging that defendants' conduct was intended to coeree plaintiffs into paying money, "makes no reference to any obligation to pay money the crux of `debt' as the term is defined by the FDCPA." Id. (emphasis in original). Indeed, the First Circuit reasoned, plaintiffs had no such obligation since a bankruptcy discharge "`extinguishes . . . the personal liability of the debtor." Id. (quoting Johnson v. Home State Bank, 501 U.S. 78, 83 (1991)) (quoting 11 U.S.C. § 524 (a)(1)). Once the debtor's personal liability has been extinguished in bankruptcy, the debtor no longer has a personal obligation to pay money. To hold that such a complaint stated a claim under the FDCPA, the First Circuit ruled, "would require us to read the word `obligation' out of the statute." Id.

The First Circuit's reading of the FDCPA, which excludes a large class of collection activities arising from consumer credit transactions from the statute's protection, appears to this court to read the definition of "debt" too narrowly. While a bankruptcy discharge extinguishes the debtor's personal liability, it does not extinguish the debt. Rather, it limits the creditor's remedy for breach of the debtor's obligation to its interest in the collateral. Johnson v, Home State Bank, 501 U.S. 78 (1991), relied on by the First Circuit for the proposition that bankruptcy extinguishes the debtor's personal liability, makes clear that such a discharge merely restricts a creditor's means of satisfying its claim but does not extinguish the claim. in Johnson, the question before the Court was whether a debtor, whose personal obligation secured by mortgaged property has been discharged in a Chapter 7 bankruptcy proceeding, can include the mortgage lien in a subsequent Chapter 13 reorganization proceeding. The Court held that the mortgage lien on the debtor's property survived the discharge and could therefore be subject to the reorganization proceeding. A Chapter 7 bankruptcy proceeding extinguishes the debtor's personal liability, but the creditor's claim, along with its right to foreclose on the mortgage, survives. "Even after the debtor's personal obligations have been extinguished, the mortgage holder still retains a `right to payment' in the form of its right to the proceeds from the sale of the debtor's property." Id. at 84 (emphasis added). The Court concluded:

The Court of Appeals thus erred in concluding that the discharge of petitioner's personal liability on his promissory notes constituted the complete termination of the Bank's claim against petitioner. Rather, a bankruptcy discharge extinguishes only one mode of enforcing a claim — namely, an action against the debtor in personam— while leaving intact another — namely. an action against the debtor in rem.
Id. (emphasis in original). Peeples' obligation to Sears did not evaporate upon her receipt of her bankruptcy discharge. All that happened was that Sears became limited in the means it could employ to enforce Peeples' obligation.*fn1

Nor does the statute's definition of "debt" exclude this court's reading. "Debt" is defined as an obligation or alleged obligation to pay money arising out of a consumer transaction. 15 U.S.C. § 1692a(5). The Seventh Circuit has trade clear that "the statute's definition of a `debt' focuses on the transaction creating the obligation to pay," Newman v. Boehm, Pearlstein & Bright, Ltd., 119 F.3d 477, 481 (7th Cir. 1997), and that "[a]s long as the transaction creates an obligation to pay, a debt is created." Bass v, Stolper, Koritzinsky, Brewster & Neider, S.C., 111 F.3d 1322, 1325 (7th Cir. 1997). There can be no question that the transaction in this case was the sale of consumer goods on credit, creating an obligation on Peeples' part to pay for them. Defendants' collection activities, albeit limited by Peeples' bankruptcy discharge to Sears' collateral rights, are based on Peeples' breached promise to pay for the washer and dryer; defendants' challenged conduct was thus manifestly an attempt to collect on Peeples' "obligation . . . to pay money arising out of a [consumer] transaction . . .," 15 U.S.C. § 1692a(5), albeit in the limited manner allowable after Peeples' bankruptcy discharge.

As pointed out in this court's August 14 order denying this portion of defendants' motion to dismiss, Judge Zagel of this court has decided this precise issue. This court did then, and does now, agree with his analysis. In Perovich v. Humphrey, No. 97 C 3209, 1997 WL 674975 (N.D. Ill. Oct. 28, 1997), in response to the argument that defendants' attempt to recover secured merchandise did not constitute debt collection activities within the purview of the FDCPA because defendants did not seek to collect money, Judge Zagel observed that defendants were merely describing "the characteristic of [their] collection activities, not the underlying obligation upon which defendants' acts were based." Id. at *2. A "debt" as defined in the FDCPA arose in the consumer credit transaction by which Peeples became the owner of the washer and dryer at issue. The bankruptcy discharge did not extinguish the debt. Rather, it merely limited the method of enforcing Peeples' obligation to an in rem proceeding. Defendants here, as in Perovich, are attempting to collect on the plaintiff's underlying obligation to pay money, and that brings them within the reach of the FDCPA. Accord Degrosiellier v. Solomon & Solomon, No. 00 CV 1065, 2001 WL 1217181, at *3 (N.D.N.Y. Sept. 27, 2001).*fn2

The motion for reconsideration ...

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