Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almb-1_07-ap-01011/USCOURTS-almb-1_07-ap-01011-0/pdf.json

Parties Involved:
Johnny Wayne Dawsey
Plaintiff
Kimberly Glanton Dawsey
Plaintiff
Citifinancial Auto Corporation
Defendant

Document Text:

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF ALABAMA

In re Case No. 06-11077-DHW

 Chapter 13

JOHNNY WAYNE DAWSEY

KIMBERLY GLANTON DAWSEY,

 Debtors.

JOHNNY WAYNE DAWSEY

KIMBERLY GLANTON DAWSEY,

 Plaintiffs, Adv. Pro. No. 07-1011-DHW

 v.

CITIFINANCIAL AUTO CORPORATION,

 Defendant.

MEMORANDUM OPINION

The plaintiffs, Johnny and Kimberly Dawsey, filed this adversary

proceeding requesting redress for an alleged violation of the Truth in

Lending Act (“TILA”), 15 U.S.C. §1601 et seq. The alleged violation arises

from a consumer credit transaction with Mitchell Nissan in September

2003 which was assigned to the defendant CitiFinancial Auto Corporation.

The defendant filed a motion to compel arbitration, and the

plaintiffs filed a motion for leave to amend the complaint. The motions

came on for hearing on March 29, 2007 at which the parties presented oral

arguments in support of and opposition to the motions. The court took the

motions under advisement at the close of the hearing. 

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Plaintiffs’ Motion to Amend Complaint

The original complaint is not clear. Paragraphs one and four claim

damages “by way of recoupment” for the alleged TILA violation. However,

the final paragraph requests an affirmative judgment for damages, actual

and statutory, plus attorney’s fees and costs.

The plaintiffs move to amend the complaint to state as follows: 

The Complaint which is filed in way of counterclaim to

the proof of claim of the Debtors includes a claim for

damages by way of recoupment pursuant to the Truth In

Lending Act (TILA) 15 U.S.C. § 1601 et seq. to reduce the

proof of claim filed by the Defendant for actual damages,

statutory damages and to award costs including

reasonable attorney fees by reason of Citifinancial’s

violation of TILA and regulations thereunder 12 C.F.R.

§ 226.

Therefore, the amended complaintwillrequest actual and statutory

damages solely by way of recoupment through a reduction in the

defendant’s proof of claim. The plaintiffs will still seek an affirmative award

of attorney’s fees and costs.

Because the defendant has filed an answer to the complaint, the

plaintiffs may amend the complaint only “by leave of court or by written

consent of the adverse party.” Fed. R. Civ. Proc. 15(a) (made applicable to

bankruptcy proceedings by Fed. R. Bankr. Proc. 7015). The rule instructs

that “leave shall be freely given when justice so requires.” The Supreme

Court dictates exercise of the court’s discretion as follows:

In the absence of any apparent or declared reason – such

as undue delay, bad faith or dilatory motive on the part of

the movant, repeated failure to cure deficiencies by

amendments previously allowed, undue prejudice to the

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opposing party by virtue of allowance of the amendment,

futility of amendment, etc. – the leave sought should as

the rules require, be “freely given.” 

Foman v. Davis, 371 U.S. 178, 182 (1962); see Espey v. Wainwright, 734

F.2d 748, 750 (11th Cir. 1984). In applying these factors, “the court should

draw inferences in favor of granting the motion to amend.” 1 James Wm.

Moore et al., Moore’s Manual: Federal Practice and Procedure § 9.51[4][b]

(2006). 

The plaintiffs filed this adversary proceeding on January 24, 2007.

The plaintiffs filed the motion for leave to amend on March 27, 2007, about

30 days after the answer was filed and shortly before the scheduling

conference was held on March 29, 2007. The motion states that no

discovery has been commenced. The plaintiffs contend that the defendant

will not be prejudiced by the amendment at this early stage of the

proceeding. 

The defendant counters that the sole purpose of the amendment

is to attempt to bring the complaint within the statute of limitations for

asserting a TILA violation. However, this is not the type of prejudice

contemplated by Rule 15. Merely because the amendment may remove a

potential legal defense does not mean that the defendant suffers undue

prejudice. See Hanflik v. Ratchford, 848 F. Supp. 1539, 1543 (N.D. Ga.

1994). An almost opposite scenario occurred in Hanflik where the court

allowed a defendant to amend the answer to assert a statute of repose

defense. The court stated, “[t]o the extent that plaintiffs are prejudiced

because they are less likely to ultimately prevail in their lawsuit, this type

of ‘prejudice’ does not appear to the Court to be the type that would

warrant the disallowance of the amendment, pursuant to Eleventh Circuit

precedent.” Hanflik, 848 F. Supp. at 1543. See Foman v. Davis, 371 U.S.

178 (1962) (reversing lower court decision denying motion to amend

complaint to allege alternative theory of recovery). 

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In addition, the court notes that the amendment seeks more to

clarify an ambiguity in the original complaint than to assert new relief. See

Hanflik, 848 F. Supp. at 1542. The original complaint contains two

statements that the plaintiffs seek monetary relief or damages “by way of

recoupment.” Therefore the defendant has been on notice since service of

the original complaint that the plaintiffs may be seeking relief via

recoupment. 

The court concludes that the amendment will not result in undue

prejudice to the defendant. Neither does the court find any bad faith,

undue delay, or dilatory motive on the part of the plaintiffs. The motion to

amend will be granted by separate order. 

Defendant’s Motion to Compel Arbitration

The defendant filed a motion to compel arbitration of the

complaint. The court will review the motion as applied to the complaint as

amended. 

The plaintiffs executed an arbitrationagreementin connection with

the consumer credit transaction in September 2003 pursuant to which the

plaintiffs purchased an automobile. The plaintiffs filed a case under chapter

13 in September 2006. CitiFinancial filed a proof of claim in the amount of

$16,821.88. The debtors provided for payment of the claim as secured in

the amount of $8,965, the value of the vehicle. The plan, which proposes

$2,000 pro rata to unsecured creditors, was confirmed on February 12,

2007. The plaintiffs filed this adversary proceeding on January 24, 2007

requesting relief for the defendant’s alleged violation of TILA.

The plaintiffs oppose the motion on only two grounds. First, the

plaintiffs assert that the amount of the claim excludes it from the scope of

the arbitration agreement. Second, the plaintiffs contend that this is a core

proceeding which the court has discretion to retain. 

The arbitration agreement excludes the following:

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 The plaintiffs cannot have it both ways. They cannot couch the action as a

counterclaim to a proof of claim (for purposes of the statute of limitations) and

at the same time exclude the damages claimed by the other party to the action

(for purposes of opposing arbitration). 

5

Any matter where all parties collectively . . . seek

monetary relief in the aggregate of $15,000 or less in total

relief, including but not limited to compensatory,

statutory and punitive damages; restitution;

disgorgement, costs and fees (including attorney’s fees)

The plaintiffs have couched the amended complaint as a counterclaim to

the defendant’s proof of claim. Therefore, it is appropriate to include the

claim of the defendant as part of this proceeding.1 The defendant has filed

a proof of claim in the amount of $16,821.88, which exceeds the $15,000

threshold. Therefore, this proceeding falls within the scope of the

arbitration agreement.

The plaintiffs also contend that this is a core proceeding which the

court has discretion to retain. The defendant contends that this is a noncore proceeding which the court has no discretion to retain. 

The Eleventh Circuit has recently addressed the law controlling the

intersection of arbitration and bankruptcy. See The Whiting-Turner

Contracting Co. v. Electric Machinery Enterprises, Inc. (In re Electric

Machinery Enterprises, Inc.), 2007 WL 548781 (11th Cir. Feb. 23, 2007).

The Eleventh Circuit stated as follows:

The [Federal Arbitration Act] establishes a federal policy

favoring arbitration. However, “[l]ike any statutory

directive the Arbitration Act’s mandate may be overridden

by a contrary congressional command.” “Thus, unless

Congress has clearly expressed an intention to preclude

arbitration of the statutory claim, a party is bound by its

agreement to arbitrate.” The party opposing arbitration

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has the burden of proving “that Congress intended to

preclude a waiver of a judicial remedies [sic] for [the

particular claim] at issue.”

Id. at *3 (citations omitted). The Eleventh Circuit applied a three-factor test

set forth by the Supreme Court to determine whether Congress intended

the Bankruptcy Code to preclude a waiver of judicial remedies. The test

requires a court to examine “(1) the text of the statute; (2) its legislative

history; and (3) “whether ‘an inherent conflict between arbitration and the

underlying purposes [of the statute]’ exists.” Id. 

The Eleventh Circuit found “no evidence within the text or in the

legislative history that Congress intended to create an exception to the FAA

in the Bankruptcy Code.” Id. Applying the third factor, the court held that

[i]n general, bankruptcy courts do not have the discretion to

decline to enforce an arbitration agreement relating to a noncore proceeding. However, even if a proceeding is determined

to be a core proceeding, the bankruptcy court must still

analyze whether enforcing a valid arbitration agreement would

inherently conflict with the underlying purposes of the

Bankruptcy Code.

Id. A core proceeding “involves a right created by the federal bankruptcy

law” or is one that would arise only in bankruptcy.” Id. (citing Nat’l Bank

v. Sanchez (In re Toledo), 170 F.3d 1349, 1348 (11th Cir. 1999). The

Bankruptcy Code contains a non-exhaustive list of core proceedings. See

28 U.S.C. § 157(b)(2)(A)-(P). 

The instant TILA action is not a right created by the federal

bankruptcy law. Nor is it a proceeding that would arise only in bankruptcy.

The plaintiffs could have brought this action outside of bankruptcy.

Therefore the defendant contends that this is not a core proceeding. The

plaintiffs, however, contend that it is a core proceeding because it falls

within a category of core proceedings listed in 28 U.S.C. § 157(b):

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“counterclaims by the estate against persons filing claims against the

estate.” 28 U.S.C. § 157(b)(2)(C). 

The court finds it unnecessary to resolve this dispute because even

if this is a core proceeding, arbitration of the proceeding would not

inherently conflict with the underlying purposes of the BankruptcyCode for

the following reasons. First, there is no bankruptcy purpose to be served

by resolving both the claim and alleged counterclaim in the bankruptcy

court. The plaintiffs have not objected to the defendant’s proof of claim,

and resolution of the TILA action involves a different set of facts and law

than the proof of claim. 

Second, core jurisdiction obtained through 28 U.S.C. § 157(b)(2)(C)

is one of the most tenuous types of core jurisdiction a bankruptcy court can

exercise because the matter may neither arise in or under the bankruptcy

case. But for the counterclaim designation, the TILA action would be a

non-core proceeding merely “related to” the chapter 13 case. See 28

U.S.C. § 1334(b) and 157(c)(1). It raises issues solely of non-bankruptcy

federal law. 

Third, resolution of the action through arbitration will not interfere

with the plaintiffs’ attempted rehabilitation through this chapter 13 case.

If the plaintiffs recover on the TILA claim, the recovery will reduce the

allowed claim of the defendant and possibly increase the amount

distributed to other creditors. “But these same results will occur whether

the recovery is awarded by this Court or an arbitrator. It cannot be

seriously argued that the outcome of this adversary proceeding will have

a material impact on the Plaintiff’s Chapter 13 case or her creditors, other

than [the defendant].” Cooley v. Wells Fargo Financial (In re Cooley), Adv.

No. 06-40122, 2007 WL 512758, at *6 (Bankr. N.D. Ala. Feb. 14, 2007).

Any minimal impact is “not sufficient to override the FAA’s mandate and

the national policy favoring enforcement of arbitration agreements.” Rozell

v. CitiFinancial Auto Corp. (In re Rozell), 357 B.R. 638 (Bankr. N.D. Ala.

2006). 

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By separate order, the motion to amend the complaint will be

granted, and the motion to compel arbitration will be granted.

Done this 16th day of April, 2007.

/s/ Dwight H. Williams, Jr.

United States Bankruptcy Court

c: Cameron A. Metcalf, Attorney for Plaintiffs

 Janine L. Smith, Attorney for Defendant

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