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Klein v. Affiliated Group, Inc.

United States District Court, D. Minnesota

January 17, 2019

Dina Klein, Plaintiff,
v.
The Affiliated Group, Inc., and Credit Management, L.P., Defendants.

          ORDER

          ELIZABETH COWAN WRIGHT UNITED STATES MAGISTRATE JUDGE

         This matter is before the Court on Plaintiff Dina Klein's (“Klein” or “Plaintiff”) Motion to Compel and for Sanctions (Dkt. No. 30) (“Motion to Compel”) and Plaintiff's Motion to Amend the Amended Complaint (Dkt. No. 34) (“Motion to Amend”). For the reasons below, the Court grants the Motion to Amend and grants in part the Motion to Compel.

         I. MOTION TO AMEND

         A. Factual Background

         1. Operative Amended Complaint

         The present action relates to Defendants' alleged violations of the Fair Debt Collections Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”). (Dkt. No. 12 ¶ 2.) Klein alleges, in relevant part, the following as part of the operative July 20, 2018 Amended Complaint.

         On November 20, 2017, Defendant The Affiliated Group, Inc. (“Affiliated”), a debt collector, attempted to collect a debt from Klein arising out of health care goods or services provided by North Memorial Health Care (“North Memorial”), providing her a billing statement for two separate accounts totaling $1, 084.35. (Dkt. No. 12 ¶ 7.)

         In March 2018, Klein received a letter on letterhead from Defendant Credit Management, LP (“Credit Management”), a debt collector, to collect a debt from Klein arising out of health care goods or services provided by North Memorial, providing her a billing statement for two separate accounts totaling $1, 084.35. (Id. ¶ 13.) The March 2018 billing statement from Credit Management included that “the above-listed account has been turned over to us by our client” and indicated that Klein could “avoid continued collection activities by sending your payment in full directly to Credit Management, LP.” (Id. ¶¶ 14-15.) According to Klein, North Memorial did not, as represented in the March 2018 billing statement, turn her account over to Credit Management for collection after first turning it over to Affiliated. (Id. ¶ 20.) The alleged purpose of the communication in the March 2018 billing statement was a conspiracy between Affiliated and Credit Management to give Klein the false impression that North Memorial had turned her account over to a second debt collector, thereby increasing the pressure on Klein to pay. (Id. ¶ 21.)

         Klein claims that the above actions by Affiliated violated 15 U.S.C. § 1692e(14), which prohibits a debt collector from collecting under a name that is not the debt collector's true name. (Id. ¶¶ 26, 39.) As it relates to Credit Management, Klein alleges that the above actions by Credit Management violated 15 U.S.C. §§ 1692e(5) (prohibiting misrepresentations of the character or legal status of the debt) and 1692e(10) (prohibiting the use of false information to collect a debt), as North Memorial had not taken the debt back from Affiliated then placed it with Credit Management for collection. (Id. ¶¶ 27, 38.)

         Klein also alleged that Defendants' conduct violated 15 U.S.C. §§ 1692f and 1692f(1) by using unfair and unconscionable means to collect or to attempt to collect the debt, and by attempting to collect an amount not authorized by contract or law. (Id. ¶ 35.) In particular, Klein asserted that sending a medical billing statement with no reference to the non-profit hospital's financial aid policies is expressly prohibited by certain Treasury Regulations set forth in 26 C.F.R. § 1.501(r)-4(b)(5)(i)(D)(2). (Id. ¶¶ 17, 35.) In addition, Klein claims Defendants' references to “continued collection activities” in their communications to her if she did not pay Defendants in full violated 15 U.S.C. § 1692e(5) because it was a threat “to take action that cannot legally be taken, ” given the legal prohibition on the sending of collection letters without reference to financial assistance. (Id. ¶ 37.)

         The Amended Complaint also alleges the following:

Indeed, North Memorial Health Care is party to an agreement with the Minnesota Attorney General (and approved by the Ramsey County District Court) stating that “a hospital bill should never get in the way of a Minnesotan receiving essential health services, ” and acknowledging the importance of communicating financial aid policies to patients. Defendants' conduct described herein violates both law and public policy.

(Id. ¶ 19 (emphasis added).) According to Klein, an attempt to collect a debt while failing to comply with other applicable law violates the FDCPA. (Id. ¶ 36.)

         The Defendants filed an Answer to the Amended Complaint. (Dkt. No. 16.)

         2. Proposed Second Amended Complaint

         The changes in the proposed Second Amended Complaint focused on the Agreement between North Memorial and the Minnesota Attorney General (“AG Agreement”) already referenced at Paragraph 19 of the Amended Complaint:

24. As referenced in Paragraph 19 above, in 2005 North Memorial resolved litigation with the Minnesota Attorney General through an agreement relating to patient billing and medical debt collection practices (the “AG Agreement”). On June 22, 2012, the provisions of the AG Agreement were put into an Order executed and entered by the Ramsey County District Court. See Ramsey County District Court No. 62-C8-05-004574 attached as Exhibit A.
25. The Order from the Ramsey County District Court imposes strict legal requirements on collection practices involving third-party collectors: [North Memorial] shall enter into a written contract with any collection agency utilized by it to collect debt from its patients. The contract shall require the collection agency to act in accordance with the terms of this Agreement, applicable laws, and the policies described in paragraph 36.
26. As of March 2018, when Credit Management attempted to collect the alleged North Memorial debt from Ms. Klein, there was no written contract between North Memorial and Credit Management authorizing Credit Management to collect the alleged debt. By law, Credit Management was not authorized to attempt to collect this debt.
27. Credit Management's collection attempt was prohibited by law.

(Dkt. No. 34-1 ¶¶ 24-27.)

         Based on these additional proposed factual allegations, Klein asserts (1) that Credit Management violated 15 U.S.C. § 1692e(5) because it was not legal for it to continue collection activities in the absence of a written contract with North Memorial authorizing the collection efforts and requiring compliance with the terms of the Ramsey County District Court Order (id. ¶ 29); (2) that the violation of 15 U.S.C. §§ 1692e(5) (prohibiting misrepresentations of the character or legal status of the debt) and 1692e(10) (prohibiting the use of false information to collect a debt) is evidenced by the fact that at the time Credit Management sent the billing statement to Klein, there was no contract or agreement whatsoever between Credit Management and North Memorial authorizing Credit Management to collect the alleged debt (id. ¶ 31); and (3) Klein was harmed by Defendants because her rights and protections under the Ramsey County District Court Order were violated, as was her right to receive truthful information regarding the placement of her alleged debt for collection (id. ¶ 33).

         In her “Cause of Action” section alleging violations of the FCDPA, the proposed Second Amended Complaint claims Defendants also violated 15 U.S.C. §§ 1692f and 1692f(1) by attempting to collect an alleged North Memorial debt from Klein without any agreement with North Memorial authorizing such collection, which is expressly prohibited by the AG Agreement. (Id. ¶ 39.) Finally, the proposed amendment asserts that Defendants' references to “continued collection activities” if Klein did not pay Defendants in full violated 15 U.S.C. § 1692e(5) because it was a threat “to take action that cannot legally be taken, ” given “the legal prohibition on the collection of North Memorial debt in the absence of a written contract with North Memorial.” (Id. ¶ 41.)

         B. Legal Standard

         Klein's Motion to Amend is generally governed by Rules 15 and 16 of the Federal Rules of Civil Procedure, and Local Rule 16.3 of the Local Rules for the District of Minnesota.

         1. Rule 15

         Federal Rule of Civil Procedure 15(a) provides that leave to amend “shall be freely given when justice so requires.” The determination as to whether to grant leave to amend is entrusted to the sound discretion of the trial court. See, e.g., Niagara of Wisconsin Paper Corp. v. Paper Indus. Union Mgmt. Pension Fund, 800 F.2d 742, 749 (8th Cir. 1986) (citation omitted). The Eighth Circuit has held that “[a]lthough amendment of a complaint should be allowed liberally to ensure that a case is decided on its merits . . . there is no absolute right to amend.” Ferguson v. Cape Girardeau Cty., 88 F.3d 647, 650-51 (8th Cir. 1996) (citing Thompson-El v. Jones, 876 F.2d 66, 67 (8th Cir. 1989); Chesnut v. St. Louis Cty., 656 F.2d 343, 349 (8th Cir. 1981)). Denial of leave to amend may be justified by “undue delay, bad faith on the part of the moving party, futility of the amendment or unfair prejudice to the opposing party.” Sanders v. Clemco Indus., 823 F.2d 214, 216 (8th Cir. 1987) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)); see also Hillesheim v. Myron's Cards and Gifts, Inc., 897 F.3d 953, 955 (8th Cir. 2018) (citation omitted) (“A district court's denial of leave to amend a complaint may be justified if the amendment would be futile.”).

         In this case, where Defendants have alleged that the proposed amendments are futile, this Court must determine whether the proposed claims state a claim for relief at this stage of the case. See Zutz v. Nelson, 601 F.3d 842, 850-51 (8th Cir. 2010) (“Denial of a motion for leave to amend on the basis of futility means the district court has reached the legal conclusion that the amended complaint could not withstand a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Accordingly, in reviewing a denial of leave to amend we ask whether the proposed amended complaint states a cause of action under the Twombly pleading standard . . . .”) (citation and marks omitted); see also Hillesheim, 897 F.3d at 955; In re Senior Cottages of Am., LLC, 482 F.3d 997, 1001 (8th Cir. 2007) (“[W]hen a court denies leave to amend on the ground of futility, it means that the court reached a legal conclusion that the amended complaint could not withstand a Rule 12 motion.”); United States ex rel. Gaudineer & Comito, L.L.P. v. Iowa, 269 F.3d 932, 936 (8th Cir. 2001) (“The denial of leave to amend based on futility means that the court found that the amended complaint failed to state a claim . . . .”). To “survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 550 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (quoting Twombly, 550 U.S. at 556). Analysis under Rules 15 and 12(b)(6) generally requires a court not consider matters outside the pleadings to determine whether leave to amend should be given. See Arias v. Am. Family Mut. Ins. Co., No. CV 13-1681 (PJS/JJG), 2013 WL 12145854, at *2 (D. Minn. Oct. 28, 2013) (finding “[n]o matters outside the pleading may be considered” when conducting a futility analysis under Rules 12(b)(6) and 15) (citing Casazza v. Kiser, 313 F.3d 414, 417 (8th Cir. 2002)).

         2. Rule 16

         Under Rule 15(a) leave to amend should be granted liberally, if “justice so requires.” However, the Eighth Circuit has held that when a party has filed a motion to amend the complaint after the deadline provided in a court's pretrial scheduling order, then the court may properly require, pursuant to Federal Rule of Civil Procedure 16(b), that good cause be shown for leave to file a pleading that is out of time with that order. See Freeman v. Busch, 349 F.3d 582, 589 (8th Cir. 2003) (citing In re Milk Prod. Antitrust Litig., 195 F.3d 430, 437 (8th Cir. 1999)). “If we considered only Rule 15(a) without regard to Rule 16(b), we would render scheduling orders meaningless and effectively would read Rule 16(b) and its good cause requirement out of the Federal Rules of Civil Procedure.” In re Milk Prod. Antitrust Litig., 195 F.3d at 437-38 (citation omitted).

         As pointed out by Defendants in their opposition (Dkt. No. 39 at 1 n.1), the Court's Pretrial Scheduling Order required that motions which seek to amend the pleadings must be served on or before October 15, 2018. (Dkt. No. 21 at 3.) At the hearing, Klein's counsel requested that the present motion be also treated as a motion to amend the scheduling order to extend the time for amendments. Because Klein did not bring this motion until after the expiration of the deadline for non-dispositive motions, the “good cause” standard of Rule 16(b) applies to its motion to amend both the scheduling order and the complaint.

         Scheduling orders pursuant to Rule 16(b)(1) “assure[ ] that at some point both the parties and the pleadings will be fixed . . . .” Fed.R.Civ.P. 16(b), advisory committee's note to 1983 amendment. Moreover, “Rule 16(b) assures that ‘[a] magistrate judge's scheduling order ‘is not a frivolous piece of paper, idly entered, which can be cavalierly disregarded . . . without peril.'” Archer Daniels Midland v. Aon Risk Servs., Inc., 187 F.R.D. 578, 582 (D. Minn. 1999) (quoting Gestetner Corp. v. Case Equip. Co., 108 F.R.D. 138, 141 (D. Me. 1985)). Under Rule 16(b), “[a] schedule may be modified only for good cause and with the judge's consent.” Fed.R.Civ.P. 16(b)(4). Similarly, Local Rule 16.3 requires a party moving to modify a scheduling order to “establish good cause” for the proposed modification.

         “The primary measure of good cause is the movant's diligence in attempting to meet the order's requirements.” Sherman v. Winco Fireworks, Inc., 532 F.3d 709, 716-17 (8th Cir. 2008) (citing Rahn v. Hawkins, 464 F.3d 813, 822 (8th Cir. 2006)); see also Fed. R. Civ. P. 16(b), advisory committee's note to 1983 amendment (“[T]he court may modify the schedule on a showing of good cause if it cannot reasonably be met despite the diligence of the party seeking the extension.”). “[T]he ‘good cause' standard [of Rule 16(b)] is an exacting one, for it demands a demonstration that the existing schedule cannot be reasonably met despite the diligence of the party seeking the extension.” Scheidecker v. Arvig Enters., 193 F.R.D. 630, 632 (D. Minn. 2000) (citation omitted).

         While the prejudice to the nonmovant resulting from modification of the scheduling order may also be a relevant factor, generally, the Court will not consider prejudice if the movant has not been diligent in meeting the scheduling order's deadlines. See Bradford v. DANA Corp., 249 F.3d 807, 809 (8th Cir. 2001) (concluding that there was ‘no need to explore beyond the first criterion, [diligence, ] because the record clearly demonstrate[d] that Bradford made only minimal efforts to satisfy the [scheduling order's] requirements”). In short, Rule 16(b) focuses on “the diligence of the party seeking to modify a Scheduling Order, as opposed to the litany of unpersuasive excuses, inclusive or inadvertence and neglect, which commonly undergird an untimely Motion to Amend.” Scheidecker, 193 F.R.D. at 632 n.1 (citations omitted).

         With these standards in mind, the Court turns to Klein's motion for leave to amend.

         C. Analysis

         1. Rule 16

         At the hearing, Klein's counsel represented that Klein only received the agreement between Defendants' parent entity (The CMI Group, Inc.) and North Memorial pertaining to the substitution of Credit Management for Affiliated regarding third party collection services (the “North Memorial Agreement”), [1] underlying at least in part the amendments at issue, from the Defendants two days prior to Klein filing the present motion to amend. Given that Klein did not have these documents until after the expiration of the October 15, 2018 motion to amend deadline and the fact that she quickly moved to amend the Amended Complaint once in receipt of this information, the Court finds good cause under Rule 16 to allow the amendment to proceed. See Shank v. Carleton Coll., No. 16-CV- 01154 (ECT/HB), 2019 WL 121938, at *3 (D. Minn. Jan. 7, 2019); see also Aviva Sports, Inc. v. Fingerhut Direct Mktg., Inc., No. 09-cv-1091 (JNE/JSM), 2010 WL 4193076, at *6 (D. Minn. Oct. 7, 2010) (“[A] party does not meet the good cause standard under Rule 16(b) if the relevant information on which it based the amended claim was available to it earlier in the litigation.”) (citations omitted).

         2. Rule 15

         At the hearing, Klein's counsel represented that the proposed amendments fell into two categories. First, Klein's counsel asserted that the new allegations provided additional facts in support of paragraph 20 of the Amended Complaint alleging that “[o]n information and belief, North Memorial did not, as represented in the March 2018 billing statement, turn Ms. Klein's account over to Credit Management for collection after first turning it over to Affiliated.” (Dkt. No. 12 ¶ 20.) Klein asserts that Defendants produced documents on November 28, 2017 confirming the allegations in paragraph 20. (Dkt. No. 36 at 2-3.) At the hearing, Klein's counsel was only able to point to the North Memorial Agreement, effective May 11, 2018 (albeit signed in May and October 2018), as confirming those allegations.[2]

         Second, most of the proposed additions by Klein to the Amended Complaint pertain to Credit Management's efforts to collect a debt for North Memorial without a written contract in violation of the AG Agreement, which according to Klein constitutes new grounds for her assertion that Credit Management violated her rights under 15 U.S.C. § 1692f(1), as an attempt to collect on a debt not authorized by the law.[3] (See also Dkt. No. 36 at 3 (describing “legal significance” of new allegations).) According to Klein's counsel, the theory in the operative Amended Complaint was that Credit Management had no authority to collect on Klein's debt on behalf of North Memorial. That theory was based on the allegation that there was no agreement between Credit Management and North Memorial at the time of the collection. Klein's counsel argued that the proposed amendments specifying that there was no “written contract” between those entities are necessary to protect against any assertion by Defendants that the contracts were orally transferred to Credit Management in January 2018, thereby authorizing Credit Management to collect on the debt.[4] In other words, Klein's proposed new theory appears to be that Credit Management violated the FDCPA because it did not have the authority under the AG Agreement to collect on her debt with North Memorial in March 2018, given that the earliest effective date of the written North Memorial Agreement is May 2018. (See Dkt. No. 36 at 3.)

         In response, Defendants argued that this Court should deny the Motion to Amend because it is futile and because it would result in undue prejudice to them in the form of requiring Defendants to file yet another answer and potentially take Plaintiff's deposition again on the new theories presented.[5] (Dkt. No. 39 at 1-2.)

         As it relates to futility, Defendants invoked Spokeo, Inc. v. Robins, 136 S.Ct. 1540 (2016), at the hearing, arguing that Klein cannot demonstrate the requisite harm to bring a FDCPA claim. In particular, Defendants argue that the fact that there was no alleged valid collections contract between North Memorial and Credit Management at the time Credit Management attempted collection of her debt did not injure Klein, and that the lack of injury is demonstrated by her deposition testimony that she was unaware of the lack of a contract between Credit Management and North Memorial:

It is obvious that Plaintiff was not aware of the alleged lack of contract and could not have been harmed by it. If the proposed amendments actually were “merely flesh[ing] out the factual background” of Plaintiff's complaint, then surely Plaintiff would have testified that she was harmed by CM allegedly not having a contract with NMHC. Yet Plaintiff did not do this. The only alleged harm Plaintiff ever testified to was being confused as to who should be collecting the debt.

(Dkt. No. 39 at 3-4 (citation omitted) (emphasis added).)

         Defendants go on to assert that “Plaintiff's testimony contradicts her own claims regarding this alleged harm, as Defendants will show during dispositive briefing.” (Id. at 4 n.2.) The FDCPA aims to protect consumers from risks of fraud, deception, and abusive collecting practices. See Peters v. Gen. Serv. Bureau, Inc., 277 F.3d 1051, 1054 (8th Cir. 2002). In order to have standing to bring a FDCPA claim there must be violation of the statute that causes a concrete injury. See Demarais v. Gurstel Chargo, P.A., 869 F.3d 685, 691 (8th Cir. 2017) (citing Spokeo, 136 S.Ct. at 1549). “That concrete injury can be ‘the risk of real harm.'” Id. (quoting Spokeo, 136 S.Ct. at 1549). “Where ‘the violation of a procedural right granted by statute' creates the risk of real harm, a plaintiff ‘need not allege any additional harm beyond the one Congress has identified.'” Id. (quoting same). A debt collector's alleged misrepresentation regarding the current legally authorized creditor could create a concrete risk of Article III harm, because a debtor who is confused about the identity of the authorized collector might be misled into making payments to the wrong entity.[6] Moreover, Defendants' argument regarding a lack of harm to is based on Klein's deposition testimony, which is outside the pleadings. Se ...


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