322 F.Supp.2d 95 (2004) | Cited 1 time | D. Massachusetts | June 24, 2004


Plaintiffs Andrew and Kelly Zimmerman filed a class action suitagainst defendants Cambridge Credit Counseling Corp.("Cambridge"), Cambridge/Brighton Budget Planning Corporation("C/B"), Cambridge Credit Corp. ("CCC"), Brighton Credit Corp.("BCC"), Brighton Credit Corporation of Massachusetts ("BCCM"),John Puccio, and Richard Puccio (collectively the "defendants").The five defendant corporations, owned by the Puccio brothers,purport to provide consumer credit counseling.

Along with various state law claims, the complaint allegesviolations of two federal statutes, the Credit RepairOrganizations Act (15 U.S.C. § 1679 et seq.) ("CROA") and theFederal Debt Collection Practices Act (15 U.S.C. § 1692 etseq.) ("FDCPA"). Subject matter jurisdiction is predicated uponthe claims pursuant to CROA and the FDCPA. Defendants' motionposits several alternative grounds for dismissing plaintiffs'federal claims, thereby eliminating federal jurisdiction over this suit. For the reasonsdiscussed below, plaintiffs' claims based on CROA and the FDCPAwill be dismissed. Without adequate basis for jurisdiction, thecourt will exercise its discretion to dismiss the plaintiffs'remaining state law claims without prejudice to their re-filingin state court.


The facts, of course, are accepted for purposes of this motionas true, as they are alleged in the complaint.

Burdened by debt, the Zimmermans sought help from Cambridge onDecember 20, 2001. They had become aware of Cambridge through itsadvertisements on television, on the radio, and in print, andwere attracted by its claims about lowering interest rates,eliminating fees, "re-aging" accounts, and otherwise helpingconsumers manage their debt. Because Cambridge advertised itselfas a nonprofit corporation, the Zimmermans believed that theywould charge less than a typical for-profit company.1

The Zimmermans signed a Service Agreement with Cambridge datedJanuary 3, 2002 (the "Agreement'). They signed an identicalagreement on January 7, 2002, because the first January 3agreement was not entirely legible. The Agreement stated thatCambridge would create a debt management program ("DMP") for theZimmermans in order to consolidate their debt, obtain concessionsfrom their creditors where possible, and distribute their monthlypayments to the creditors. The Zimmermans agreed to pay Cambridgea fee of $948 per month for this service. Four months later, the Zimmermans were dissatisfied with thecounseling they had received: their accounts had not beenre-aged, they owed more money than they did prior to seekingCambridge's help, and their credit report was worse than ever. OnSeptember 20, 2002, the Zimmermans cancelled their account withCambridge because they had decided to use another creditcounseling agency. The Zimmermans claim that Cambridge failed tooffer the sort of unbiased educational programs that theyexpected from a nonprofit organization, and also that Cambridge'snon-profit status is a sham because the Puccios are making asubstantial income.2 Nevertheless, Cambridge was andremains classified by the Internal Revenue Service ("IRS") as anonprofit, tax-exempt entity pursuant to section 501(c)(3) of thetax code.3


Plaintiffs assert federal jurisdiction on the basis of28 U.S.C. § 1331 because their complaint involves federal questionspursuant to CROA and the FDCPA. Defendants have offered fourgrounds for dismissing the FDCPA claim and two grounds fordismissing the CROA claim. According to the defendants, the FDCPAclaim must be dismissed because (1) the claim is barred by thestatute of limitations; (2) the FDCPA applies only to "debtcollectors" and Cambridge is not a debt collector; (3) Cambridgeis statutorily exempt from the FDCPA because it is classified by the IRS as an entity within section 501(c)(3)of the tax code; or (4) plaintiffs have failed to state a claimas required pursuant to Fed.R.Civ.P. 12(b)(6). Similarly,defendants assert that the CROA claim must be dismissed because(1) CROA applies only to "credit repair organizations" andCambridge is not a credit repair organization; and (2) Cambridgeis exempt from CROA because of its 501(c)(3) status. Because thiscourt concludes that the FDCPA claim should be dismissed based onthe applicable statute of limitations and that the CROA claimshould be dismissed based on Cambridge's statutory exemption as a501(c)(3) entity, further discussion of the less compellinggrounds for dismissal offered by defendants is unnecessary. Eachstatute is addressed separately below.

A. Federal Debt Collection Practices Act

The FDCPA contains an explicit one-year statute of limitations:a suit must be filed "within one year from the date on which theviolation occurs." 15 U.S.C. § 1692k(d). The Zimmermans filedsuit on November 3, 2003, more than one year after they severedties with Cambridge on September 20, 2002. Because any violationhad to have occurred before the Zimmermans severed theirrelationship with Cambridge, the statute of limitations is fatalto plaintiffs' FDCPA claim.

Plaintiffs' attempt to resuscitate their FDCPA claim using thedoctrine of equitable tolling is not persuasive. "Federal courtshave typically extended equitable relief only sparingly." Irwinv. Dep't of Veterans Affairs, 498 U.S. 89, 96 (1990). While thedoctrine of equitable tolling may be available to thoseplaintiffs who have failed to satisfy the statute of limitationsbecause they were actively misled or bamboozled by defendants,plaintiffs bear the burden of showing that equitable tolling isnecessary. See Irwin, 498 U.S. at 96; Jensen v. Frank,912 F.2d 517, 521 (1st Cir. 1990); Jonker v. Kelley, 268 F. Supp.2d 81, 86 (D. Mass.2003). Here, plaintiffs do not satisfy their burden in thisregard. They merely claim to have been misled by "defendants'fraudulent concealment of the FDCPA's application to theirbusiness" (Plaintiffs' Complaint, ¶ 164).

This allegation, even if true, would not justify invocation ofequitable tolling. Plaintiffs cannot and do not claim that theywere ever misled by the defendants about the application of thestatute of limitations itself; nor can they deny being on noticeof the applicable limitations period. Under these circumstances,normal operation of the statutory bar is fatal to plaintiffs'claim.

B. Credit Repair Organizations Act

The statute of limitations in CROA is five years, and soplaintiffs' CROA claim is not barred on that basis. However,defendants claim that plaintiffs' CROA claim must be dismissed onequally succinct grounds, i.e., because Cambridge is expresslyexempt from CROA. By its terms, CROA does not apply to "anynonprofit organization which is exempt from taxation undersection 501(c)(3) of Title 26 [of the United States tax code],"15 U.S.C. § 1679a(3)(B)(i). It is undisputed that Cambridge is,in fact, explicitly categorized by the IRS as a nonprofitorganization, exempt from taxation under 501(c)(3) of Title26.4

Nevertheless, plaintiffs assert that the IRS's classificationof Cambridge as a 501(c)(3) entity is not dispositive on the issue of whether Cambridge isexempt from CROA. Rather, plaintiffs contend that this courtshould determine for itself, based on an evidentiary hearingfollowing discovery, whether Cambridge qualifies for an exemptionunder CROA. As support for their position, plaintiffs cite threereported decisions and one unreported order. As discussed below,none of these decisions is persuasive.

Plaintiffs rely heavily on language contained in anunpublished, two-paragraph order dated August 12, 2003, in a casefrom the Central District of California entitled Placsek v.Debticated Consumer Counseling, Inc. et al., Case No. SACV03-01003 CJC (Ctx). In conclusory fashion and without citation toany precedential legal authority, this order blankly states that,in the context of a CROA claim, "[t]his Court is not bound by theIRS determination that [the defendant] is a 501(c)(3)corporation. The Court must make its own independentdetermination in this regard after an evidentiary hearing." Asfar as it goes, this order certainly supports plaintiffs'proposition. However, since it provides no legal analysis of theissue, it is of negligible value as precedent.

Two district court decisions on which plaintiffs rely simplyare inapposite. In Ahmad v. Independent Order of Foresters,81 F.R.D. 722 (E.D.Pa. 1979), a Title VII case, the defendantclaimed to be statutorily exempt as "a bona fide privatemembership club (other than a labor organization) which is exemptfrom taxation under section 501(c)(3)." 81 F.R.D. 728. Contraryto plaintiffs' reading of Ahmad, the district court recognizedthe bifurcated analysis required, accepting that the defendantwas "exempt from taxation under section 501(c)(3)" pursuant toits classification by the IRS, but querying the defendant'sstatus as a "bona fide private membership club." Ahmad,81 F.R.D. at 728. Similarly, in Wright v. Cork Club, 315 F. Supp. 1143 (S.D. Tex. 1970), a case brought under Title II of the Civil Rights Actof 1964, the question was simply whether the defendant wasstatutorily exempt as "a private club," and the district courtdeclined to accept the fact that the IRS had classified thedefendant as a 501(c)(3) entity pursuant to the tax code's"Social Club" provision as conclusive proof that the defendantwas a private club within the meaning of the Civil Rights Act.

Finally, plaintiffs rely on dicta from the district court'sdecision in Richie v. American Council on Gift Annuities, etal., 943 F. Supp. 685, 690 (N.D. Tex. 1996), stating that theIRS's classification of defendants as 501(c)(3) entities was notconclusive proof of their status as "persons described in section501(c)(3)" or "exempt from taxation under section 501(c)(3)"pursuant to the Charitable Gift Annuity Antitrust Relief Act("Relief Act"). Instead, the district court determined that thedefendants bore the burden of proving that they were, in fact,"persons described in section 501(c)(3)" or "exempt from taxationunder section 501(c)(3)" pursuant to the Relief Act, and thattheir 501(c)(3) status could be introduced as evidence. Onappeal, the Fifth Circuit found it unnecessary to considerwhether the defendants were statutorily exempt based exclusivelyon their 501(c)(3) status, and Congress subsequently revised theRelief Act specifically in order to render the district court'sdetermination moot.

In sum, there is only the most slender sliver of authority forthe proposition plaintiffs propose. A glance at the possibleramifications of plaintiffs' argument reveals why few courts have(even arguably) adopted it. If courts possessed the power, asplaintiffs suggest, to go behind the IRS's designation andproceed to make their own independent determinations, on acase-bycase basis, of an entity's substantive classificationaccording to section 501(c)(3), the uncertainty not only for theentity itself, but for all persons or parties dealing with it,would be almost boundless. An entity might enjoy 501(c)(3) status for somepurposes and not for others, or before some courts and notothers. Every 501(c)(3) entity would have to be on guard for thepossibility that at some future date, in some discrete piece oflitigation, some action or some failure to act on its part mightbe construed as justifying forfeiture of some of the myriadprotections afforded by 501(c)(3) status. Much is gained bygiving the IRS exclusive power to award 501(c)(3) status and,where appropriate, to remove that status. Much would be lost bymaking an entity's 501(c)(3) status, and subsequent statutoryprotections, dependent on any trial court's ad hocdetermination. While conceivably situations may arise where acourt would be justified in looking behind the IRS' determinationof 501(c)(3) status, this case does not present one.

In other cases where plaintiffs challenged defendants'501(c)(3) status in the context of statutes providing specialtreatment for 501(c)(3) entities, the courts consistently haveassumed that, to make this challenge, the litigant would berequired to attack the IRS's 501(c)(3) designation directly.See Fulani v. League of Women Voters Educ. Fund, 882 F.2d 622(2nd Cir. 1989); Research Consulting Assocs. v. Electric PowerResearch Institute, 626 F. Supp. 1310 (D. Mass. 1986). To dothis as a threshold matter, a party must have standing in orderto challenge the merits of the IRS's 501(c)(3) designation.Standing in this context requires "(1) an injury in fact, (2)fairly traceable to the granting of tax-exempt status . . . (3)that is likely to be redressed by enjoining the further grant oftax-exempt status." Research Consulting Assocs., 626 F. Supp. 1310,1313 (D. Mass. 1986). See also Allen v. Wright468 U.S. 737 (1984); Becker v. FEC, 230 F.3d 381, 385 (1st Cir.2000). In this circumstance, standing is construed narrowly,leaving "the door . . . only barely ajar" for those seeking it.Research Consulting Assocs., 626 F. Supp. at 1313. Any standing claim by the Zimmermans would clearly fail tosatisfy the second prong. The only strand connecting Cambridge'stax-exempt status to plaintiffs' alleged injury is the statementthat they chose Cambridge because they assumed a nonprofit wouldcharge lower rates. This, alone, does not render plaintiffs'alleged injury "fairly traceable" to Cambridge's tax exemptstatus. Under these circumstances, defendants are clearly exemptfrom application of the CROA.


For the reasons set forth above, defendants' Motion to Dismiss(Docket No. 12) is hereby ALLOWED. The clerk is ordered to enterdismissal without prejudice as to plaintiffs' remaining state lawclaims. This file may now be closed.

It is So Ordered.

1. The Zimmermans have had no contact with any of thedefendant corporations besides Cambridge. Nonetheless, plaintiffsclaim that all of the defendant corporations are owned by thePuccios and are purposefully interwoven in a web designed toavoid detection and perpetrate fraud.

2. The Puccios have received generous salaries from Cambridgein recent years: $210,400 each in 1998; $271,600 each in 1999;$312,000 each in 2000; $391,958 each in 2001; and $624,000 eachin 2002. Cambridge's general manager, Chris Viale, also receiveda generous salary: $167,713 in 1998; $185,562 in 1999; $234,172in 2000; $394,122 in 2001; and $374,726 in 2002. In 1997,Cambridge reported assets of $85,726, but by 2002 it had assetsof $25,736,642.

3. Section 501(c)(3) refers to "[c]orporations, and anycommunity chest, fund, or foundation, organized and operatedexclusively for religious, charitable, scientific, testing forpublic safety, literary, or educational purposes. . . ."26 U.S.C. § 501(c)(3).

4. Defendants make a similar argument with regard to the FDCPAclaim, but the language of the FDCPA differs from CROA in oneimportant respect. By its terms, the FDCPA does not apply to "anynonprofit organization which, at the request of consumers,performs bona fide consumer credit counseling and assistsconsumers in the liquidation of their debts by receiving paymentsfrom such consumers and distributing such amounts to creditors."15 U.S.C. § 1692 a(6)(E). Although, by definition, all 501(c)(3)entities are nonprofit organizations, the FDCPA exemptionincludes a second prong — performance of bona fide consumercredit counseling and other assistance — that is absent fromCROA.

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