Lentz v. Parkland Legal Grp. (In re Gaughf)

IN RE: PATRICIA E. GAUGHF DEBTOR

KIMBERLY R. LENTZ as Chapter 7 Trustee for

the Bankruptcy Estate of Patricia Gaughf, Debtor PLAINTIFF v. PARKLAND LEGAL GROUP, PL; MITCHELL S. ORTEGA;

GLOBAL CLIENT SOLUTIONS, LLC; GLOBAL HOLDINGS, LLC DEFENDANTS

CASE NO. 19-50947-KMS

ADV. PROC. NO. 19-06031-KMS

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF MISSISSIPPI

March 12, 2020

The Order of the Court is set forth below. The docket reflects the date entered.

CHAPTER 7

OPINION AND ORDER GRANTING MOTION TO COMPEL ARBITRATION

This matter came on for hearing on the Motion to Dismiss or, Alternatively, to Compel Arbitration and Stay or Dismiss the Case, ECF No. 17, by Defendants Global Client Solutions LLC ("Global") and Global Holdings LLC, with Response by Plaintiff and chapter 7 Trustee Kimberly R. Lentz, ECF No. 24. As to Global,¹ the Complaint pleads three counts within the bankruptcy court's core jurisdiction: Turnover of Estate Property under 11 U.S.C. § 542(e), Fraudulent Transfer under 11 U.S.C. § 548, and Accounting under 11 U.S.C. § 542(a). TheComplaint also pleads one count within the bankruptcy court's non-core jurisdiction: aiding and abetting the other Defendants' alleged breach of fiduciary duty ("Aiding and Abetting Count").

The Motion seeks dismissal of the entire Complaint for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure.² In the alternative as to only the Aiding and Abetting Count, the Motion seeks an order compelling arbitration. As to the core counts, the Court ruled from the bench, in part granting and in part denying the Motion, ECF No. 35, but took under advisement the questions of dismissal or arbitration of the Aiding and Abetting Count. Concluding that the Aiding and Abetting Count must be referred to arbitration, the Court does not consider dismissal and instead stays that count pending the arbitrator's ruling.

THE STANDARD UNDER RULE 12(b)(6)

When considering a motion under Rule 12(b)(6), the court accepts as true all well-pleaded facts and construes them in favor of the plaintiff. Martin K. Eby Constr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004). The facts must be specific. Guidry v. Bank of LaPlace, 954 F.2d 278, 281 (5th Cir. 1992) ("[C]onclusory allegations and unwarranted deductions of fact are not admitted as true"). To defeat dismissal, the plaintiff must plead enough facts to state a claim that is "plausible on its face." Hale v. King, 642 F.3d 492, 498-99 (5th Cir. 2011) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). The court may consider only the pleadings and their attachments, except for documents attached to the motion to dismiss, which "are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to her claim." Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir. 2000).

FACTS ACCEPTED AS TRUE

The events giving rise to this adversary proceeding occurred prepetition, when Debtor Patricia Gaughf found herself struggling under the burden of over $40,000 in unsecured debt. Compl. ¶¶ 10-11, ECF No. 1 at 3. Wanting to repay her creditors and looking to the Internet for options, Gaughf found Parkland Legal Group PL ("Parkland Legal"), a company that provides consumer debt settlement services.³ Id. ¶¶ 6, 13. Gaughf talked to a sales representative for Parkland Legal and, after being led to believe that Parkland Legal's lawyers would be working to resolve her debts, enrolled her debts into the program. Id. ¶¶ 13-15.

Gaughf received a welcome packet, which stated that "[Parkland Legal's] negotiations team has years of experience and is fully staffed with aggressive, trained specialists who know the best way to approach your specific situation and how to obtain the most affordable settlements possible." Id. ¶ 17; Ex. A to Compl., ECF No. 1-1 at 2. Gaughf also received a retainer agreement, which a field agent reviewed with her. Compl. ¶¶ 17, 19. Having been led to believe the program could resolve her debts and enable her to avoid bankruptcy, Gaughf signed the agreement. Id. ¶¶ 19-20.

In addition to the agreement with Parkland Legal, Gaughf signed an agreement with Global. See Dedicated Account Agreement and Application ("DAAA"), Ex. A to Mot., ECF No. 18 at 2-5. Global partners with Parkland Legal and other providers of debt settlement programs, the purposes of which include improving consumers' credit scores. Compl. ¶ 6. Global's role and its principal business is to receive and hold funds collected from the consumer clients of debt settlement providers and to distribute the funds among creditors. Id. ¶ 36. The debt settlementprograms could not operate without Global. Id. ¶ 8. Gaughf paid for Global's services through fees that Global deducted directly from Gaughf's account. ECF No. 18 at 2.

By signing the DAAA, Gaughf agreed to its arbitration provision ("Arbitration Agreement"), which in part provides that "any controversy between the parties . . . (whether contractual, statutory, in tort, or otherwise) arising out of or relating to this [DAAA] or its performance, breach, termination, enforcement, interpretation or validity, including the determination of the validity, scope or applicability of this provision to arbitrate, must be resolved by binding and confidential arbitration." Id. at 2, 3.

Although Gaughf was current on her credit card payments, Parkland Legal told her to stop paying her creditors and instead to make monthly payments into the program, which she did for approximately ten months, ultimately paying more than $5000. Compl. ¶¶ 16, 22, 24, 30. But notwithstanding these payments and Parkland Legal's "aggressive trained specialists," Gaughf felt after several months that she was doing all the work. Id. ¶ 26.

Eventually, she was sued by one of the credit card companies she enrolled in the program. Id. ¶ 27; Ex. D to Compl., ECF No. 1-4. According to Parkland Legal's welcome packet, Gaughf was represented by Parkland Legal attorneys. Compl. ¶ 23; Ex. C to Compl, ECF No. 1-3 at 2 ("Always tell your creditors that you have hired an attorney . . . .") But Parkland Legal's only response to the lawsuit was to email Gaughf instructions on what to do in court and a pro se answer. Compl. ¶ 28; Ex. E to Compl., ECF No. 1-5 at 2. The only attorney involvement Gaughf remembers is a conversation about bankruptcy with a Parkland Legal attorney in Alabama. Compl. ¶ 30.

Frustrated, Gaughf got out of the program. Id. ¶ 29. Her debt had increased, not decreased, and she and her husband filed the underlying chapter 7 case. Id. ¶¶ 33, 34.

CONCLUSIONS OF LAW

In the Fifth Circuit, a motion to compel arbitration presents two questions. The first is whether the arbitration agreement is valid under state law, that is, whether the parties formed "any arbitration agreement at all." Tower Loan of Miss., L.L.C. v. Willis (In re Willis), 944 F.3d 577, 579 (5th Cir. 2019) (quoting Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 201 (5th Cir. 2016)). If yes, the second question is whether the arbitration agreement covers the claim at issue. Id. Ordinarily, the court answers both questions. Id. But if the arbitration agreement includes a delegation clause empowering the arbitrator to rule on the second question, the analysis changes. Kubala, 830 F.3d at 201. After finding a valid arbitration agreement, the court asks only whether the purported delegation clause "evinces an intent to have the arbitrator decide whether a given claim must be arbitrated." Id. at 202. If yes, the claim must be compelled to arbitration "absent some exceptional circumstance." Id. at 203.

I. The Arbitration Agreement Is Valid and Binding on the Trustee andIncludes a Valid Delegation Clause.

As to the first question, the Trustee does not challenge the validity of the Arbitration Agreement. The Arbitration Agreement therefore binds Gaughf. But does it bind the Trustee?

"A trustee may pursue any claim that the debtor would have had in the absence of a bankruptcy case . . . ." Huffman v. Legal Helpers Debt Resol., L.L.C. (In re Huffman), 486 B.R. 343, 354-55 (Bankr. S.D. Miss. 2013). In asserting such claims derived from the debtor's rights, the trustee "stands in the 'shoes' of the debtor and is limited to the same extent as the debtor under nonbankruptcy law." Id. at 355 (citing Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1153 (3d Cir. 1989); see generally Ins. Co. of N. Am. v. NGC Settlement Tr. & Asbestos Claims Mgmt. Corp. (In re Nat'l Gypsum Co.), 118 F.3d 1056, 1068-69 (5th Cir. 1997) (discussing distinction between actions derived from the debtor and actions created by theBankruptcy Code). Because the Aiding and Abetting Count is a nonbankruptcy claim that Gaughf herself could assert, the Trustee stands in Gaughf's shoes. See Togut v. RBC Dain Correspondent Servs. (In re S.W. Bach & Co.), 425 B.R. 78, 82-83 (Bankr. S.D.N.Y. 2010) (concluding that aiding and abetting breach of fiduciary duty was state law claim that Trustee brought standing in shoes of debtor). Because Gaughf is bound by the Arbitration Agreement, the Trustee is bound.

As to the second question, the Arbitration Agreement includes a delegation clause. To determine its validity and enforceability, the Court compares it to the delegation clause that was found valid and enforceable in Kubala. That clause stated, "The arbitrator shall have the sole authority to rule on his/her own jurisdiction, including any challenges or objections with respect to the existence, applicability, scope, enforceability, construction, validity and interpretation of this Policy and any agreement to arbitrate a Covered Dispute." 830 F.3d at 204. The delegation clause here is substantially similar: "[A]ny controversy between the parties . . . (whether contractual, statutory, in tort, or otherwise) arising out of or relating to this [DAAA] or its performance, breach, termination, enforcement, interpretation or validity, ...