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Quick v. Educap Inc.

United States District Court, District of Columbia

July 12, 2018

DEWAINE QUICK, et al., Plaintiffs,
EDUCAP, INC., et al., Defendants.


          Amit P. Mehta United States District Judge.

         This case is born out of two student loans issued by Defendant HSBC Bank, one to Plaintiff Dewaine Quick and the other to Plaintiff Lynn Davis, as co-signer for her niece. Although the two loans are unrelated, Plaintiffs' stories are much the same. After each loan went into default, Defendant EduCap, represented by Defendant Weinstock, Friedman & Friedman, filed a collection action against each Plaintiff in D.C. Superior Court. In those cases, EduCap sought the balance of the loan, unpaid interest, and attorneys' fees. Quick never appeared, and eventually the D.C. Superior Court entered a default judgment against him. Davis, on the other hand, appeared and agreed to entry of a consent judgment against her.

         Approximately two years later, Plaintiffs filed this case as a class action, alleging that EduCap, Weinstock, and HSBC (collectively, “Defendants”) violated state and federal law through their joint debt-collection activities. Plaintiffs' suit centers on a single alleged transgression: that EduCap falsely misrepresented in the collection actions that EduCap, as opposed to HSBC, had entered into the loan agreements with Plaintiffs. That falsehood, Plaintiffs maintain, enabled EduCap to foreclose on their defaulted loans when it had no right to do so. EduCap repeated this unfair debt collection practice, according to Plaintiffs, in state courts throughout the country.

         This matter is before the court on Defendants' motions to dismiss and Plaintiffs' motion for leave to amend their complaint. Defendants argue that this suit must be dismissed for two primary reasons: (1) the Rooker-Feldman doctrine divests the court of subject-matter jurisdiction; and (2) the doctrine of res judicata precludes Plaintiffs' claims. Additionally, Defendants move to dismiss all causes of action for failure to state a claim and a subset of them for lack of standing. For the reasons that follow, Defendants' motions to dismiss are granted, and Plaintiffs' motion for leave to amend their complaint is denied as futile.

         I. BACKGROUND

         A. Factual Background[1]

         This case arises out of two student loans taken out more than a decade ago. On July 2, 2007, Plaintiff Lynn Davis co-signed a student loan issued by Defendant HSBC to her niece. See Pls.' Mot. for Leave to File Second Am. Compl., ECF No. 24, Second Am. Class Compl., ECF No. 24-1 [hereinafter Second Am. Compl.], ¶¶ 25-27. The loan agreement obligated Davis, as cosigner, to repay the amount of the loan and interest to HSBC, see id. ¶¶ 26-27, and identified Defendant EduCap as the loan servicer, see id. ¶ 39. See also Pls.' Mot. for Class Cert., ECF No. 12, Ex. B, ECF No. 12-3 (copy of Verified Complaint against Davis) [hereinafter Davis Compl.].[2] Plaintiff Dewaine Quick's story is similar. Quick took out a student loan from HSBC for $16, 200 on July 30, 2007. Second Am. Compl. ¶¶ 18-20. The loan agreement obligated Quick to repay the amount of the loan with interest to HSBC, id. ¶¶ 19-20, and identified EduCap as the loan servicer, see id. ¶ 39. See also Pls.' Mot. for Class Cert., Ex. C, ECF No. 12-4 (copy of Verified Complaint against Quick) [hereinafter Quick Compl.].

         When Plaintiffs obtained these loans, EduCap, HSBC, and other private lenders were part of a “partnership” created for the purpose of disbursing student loans, which Plaintiffs refer to as the “L2L” partnership. Second Am. Compl. ¶ 59. At the same time, EduCap sponsored a trust entity known as the L2L Education Loan Trust 2006-1 (“the L2L Trust”), which was an asset-backed security that held a pool of direct-to-consumer student loans originated by various private banks. See id. ¶ 60. The L2L Trust operated in the following manner: HSBC sold to EduCap student loans that it had originated, and EduCap in turn conveyed legal title to those loans to the L2L Trust. Id. ¶ 65. The Trust then issued securities that were backed by the future receivables on the underlying student debt. Id. This arrangement allowed the L2L Trust's creators-which included HSBC and EduCap-“to convert future receivables on [student] loans into immediate cash while, at the same time, insulating HSBC and EduCap from potential risk.” Id. ¶ 63. Under this arrangement, HSBC would receive money when it sold its student loans to EduCap, EduCap would receive money when it transferred title to the L2L Trust, and the L2L Trust would receive money from investors, whose return was based on the expected future stream of student loan repayment. Id. ¶ 67.

         The financial crisis of 2007, however, changed everything. At that point, according to Plaintiffs, “the Defendants' plan began to unravel in a failure of colossal proportions.” Id. ¶ 68. Market conditions rendered EduCap “unable” to buy student loans. Id. ¶ 69. To “avoid financial collapse, ” HSBC bought some of its loans back from EduCap, and it retained, sold, or securitized other loans, “thereby generating millions of dollars to improve its balance sheet and financial performance ratios.” See id.

         Eventually Quick defaulted on his student loan, leading EduCap to file a debt collection action in D.C. Superior Court. Id. ¶ 21-22. Defendant Weinstock, Friedman & Friedman (“Weinstock”), the law firm that filed the complaint, identified “EDUCAP Inc.” as the plaintiff, id. ¶ 22, even though EduCap was neither the loan originator nor a party to the promissory note, see id. ¶¶ 40-41; see also Quick Compl. The complaint against Quick sought repayment of the loan balance and pre-judgment interest. Second Am. Compl. ¶ 23; Quick Compl. ¶ 2. It also demanded payment of an additional $2, 263.01, as a “15% contingency-based attorney's fee” based on the balance of the loan, id., even though the terms of Quick's promissory note did not allow for the collection of such fees, see Second Am. Compl. ¶ 24.

         Davis's story is much the same. After the primary borrower defaulted, Weinstock filed a debt collection action against Davis in D.C. Superior Court on December 4, 2013. Id. ¶ 28-29; see generally Davis Compl. As in the action against Quick, the Davis lawsuit incorrectly listed “EDUCAP Inc.” as the plaintiff.[3] Second Am. Compl. ¶ 29; see id. ¶¶ 40-41. And, as with the debt collection action against Quick, Weinstock's lawsuit against Davis sought a 15 percent contingency-based attorney's fee, amounting to $785.50, even though that fee was not authorized by the terms of the promissory note. See id. ¶¶ 30-31; Davis Compl. ¶ 2.

         Plaintiffs allege that these debt collection actions were premised on a lie: that EduCap had power to bring them. To establish EduCap's standing, Weinstock attached to both the Quick and Davis complaints a sworn affidavit from EduCap employee Marcus Maiorca. The Maiorca Affidavit falsely stated that Quick and Davis had “entered into a written promissory note with EduCap, ” when in fact HSBC had issued the loans and EduCap did not own the loans at the time. See Second Am. Compl. ¶¶ 35, 40-41; Quick Compl. at 4; Davis Comp. at 4. This affidavit, filed in thousands of other debt collection actions brought by EduCap, was used to “trick courts and consumers across the country into believing that EduCap [was] the actual creditor, or ha[d] authority to sue on behalf of HSBC.” Second Am. Compl. ¶ 55. At the time of the actions against Quick and Davis, Weinstock “only represented EduCap”; it had no attorney-client or employment relationship with HSBC. Id. ¶ 38.

         Defendants' deceitful conduct continued during the pendency of the collection actions, as Weinstock repeatedly sought to change the named plaintiff. In 2015, Weinstock moved to change the plaintiff in the case against Quick from “EduCap” to “EduCap, Inc. on behalf of HSBC Bank USA, N.A.” Id. ¶ 42. The Superior Court entered a default judgment against Quick two weeks later. Id. ¶ 43. But in 2017 Weinstock once again asked permission to change the named plaintiff in Quick's case-this time, to “HSBC Bank, USA, N.A” Id. ¶ 44. As for Davis, she agreed to entry of a consent judgment on July 16, 2015, whereby she promised to pay $5 each month directly to Weinstock. Id. ¶ 45. Davis has paid Weinstock $5 a month ever since. See id. In 2017, Weinstock successfully moved to change the named plaintiff against Davis to “HSBC Bank USA, N.A.” Id. ¶ 46.

         B. Procedural Background

         Some two years later, this federal action followed. Plaintiffs filed a class-action complaint on June 26, 2017, which they amended as of right on July 10, 2017. See Compl., ECF No. 1; Am. Compl., ECF No. 6. The Amended Complaint asserts claims under the federal Racketeer Influenced and Corrupt Practices Act (“RICO”), 18 U.S.C. §§ 1962 et seq.; the federal Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. §§ 1692 et seq.; the District of Columbia Debt Collection Law, D.C. Code § 28-3814; as well as common law claims of abuse of process and unjust enrichment. See generally Am. Compl. Defendants moved to dismiss the Amended Complaint on August 31, 2017. See HSBC's Mot. to Dismiss, ECF No. 15 [hereinafter HSBC's Mot.]; EduCap & Weinstock's Mot. to Dismiss, ECF No. 17 [EduCap & Weinstock's Mot.].

         On November 17, 2017, after briefing on Defendants' motions had concluded, Defendant HSBC sent Plaintiffs a draft Rule 11 sanctions motion, asserting that the “foundational factual predicate” for Plaintiffs' First Amended Complaint “was unequivocally false.” Def. HSBC Bank USA, N.A.'s Opp'n to Pls.' Mot. for Leave to File Second Am. Compl., ECF No. 26 [hereinafter HSBC's Opp'n], at 4-5; see Pls.' Mot. for Leave to file Second Am. Compl., at 1, 3; id., Ex. B., ECF No. 24-2 [hereinafter HSBC's Draft Rule 11 Mot.]. HSBC accused Plaintiffs' counsel of possessing “key facts that refuted his theory that Plaintiffs' loans were securitized.” HSBC's Draft Rule 11 Mot. at 1. More specifically, according to HSBC, counsel had learned through discovery in another case that “Plaintiffs' loans were owned by HSBC and never securitized.” Id. HSBC did not, however, file a Rule 11 sanctions motion.

         Thereafter, on December 5, 2017, Plaintiffs moved to amend their complaint a second time, seeking to add “facts and claims arising from recent admissions by HSBC” in its draft Rule 11 memorandum. Pls.' Mot. for Leave at 1. Plaintiffs' motion identifies two such admissions: (1) that HSBC bought back Davis's loan from EduCap in December 2008, and (2) that HSBC has held Quick's loan since it originated. Id. at 5. These statements, Plaintiffs claim, show that “Defendants engaged in unlawful debt collection by misrepresenting EduCap as the actual creditor.” Pls.' Mot. for Leave at 6; see also id. at 5. Plaintiffs' Second Amended Complaint thus proposes to add allegations that HSBC owned Plaintiffs' loans at the time Weinstock filed the D.C. Superior Court actions. See Second Am. Compl. ¶¶ 53-54; see also EduCap & Weinstock's Opp'n to Pls.' Mot. for Leave to File Second Am. Compl., ECF No. 25 [hereinafter EduCap & Weinstock's Opp'n], Ex. B, ECF No. 25-1 (redlined copy of Plaintiffs' Second Amended Complaint) [hereinafter Redlined Second Am. Compl.].[4]

         The court held a hearing on the pending motions on April 18, 2018, and now turns to the merits.


         A. Dismissal Under Rule 12(b)(1)

         The court begins with three jurisdictional issues: (1) whether the court lacks subject-matter jurisdiction over Plaintiffs' claims under the Rooker-Feldman doctrine; (2) whether both Plaintiffs lack standing to sue HSBC; and (3) whether Plaintiff Quick possesses standing to assert any claims. Under Rule 12(b)(1) of the Federal Rules of Civil Procedure, the plaintiff bears the burden of establishing that the court has subject-matter jurisdiction. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). In deciding a Rule 12(b)(1) motion, the court “may consider materials outside the pleadings, ” but “must still accept all of the factual allegations in the complaint as true.” Jerome Stevens Pharm., Inc. v. Food & Drug Admin., 402 F.3d 1249, 1253-54 (D.C. Cir. 2005) (citation and alteration omitted). “Because subject-matter jurisdiction focuses on the court's power to hear the plaintiff's claim, a Rule 12(b)(1) motion imposes on the court an affirmative obligation to ensure that it is acting within the scope of its jurisdictional authority.” Grand Lodge of Fraternal Order of Police v. Ashcroft, 185 F.Supp.2d 9, 13 (D.D.C. 2001). Accordingly, “‘the plaintiff's factual allegations in the complaint will bear closer scrutiny in resolving a 12(b)(1) motion' than in resolving a 12(b)(6) motion for failure to state a claim.” Id. (quoting 5A Charles A. Wright & Arthur R. Miller, Fed. Prac. & Proc. Civ. 2d § 1350).

         For the reasons that follow, the court finds that: (1) it lacks jurisdiction under the Rooker-Feldman doctrine to hear Plaintiffs' RICO, unjust enrichment, and abuse of process claims, but has jurisdiction as to their federal and District of Columbia unfair debt collection statutory claims; (2) Plaintiffs lack standing to pursue claims against HSBC; and (3) Plaintiff Quick has standing to pursue some but not all of his claims against EduCap and Weinstock.

         1. Rooker-Feldman

         The court begins with Defendants' argument that Plaintiffs' lawsuit is a de facto challenge to final state court judgments-the District of Columbia collection actions-and, as a result, this court lacks subject-matter jurisdiction under the Rooker-Feldman doctrine. HSBC's Mot., Mem. in Supp., ECF No. 15-1 [hereinafter HSBC's Mem.], at 9-13; EduCap & Weinstock's Mot., Mem. in Supp., ECF No. 17-1 [hereinafter EduCap & Weinstock's Mem.], at 10-12; see also EduCap & Weinstock's Opp'n at 10-11; HSBC Opp'n at 7-8. Because Plaintiffs do not expressly seek as relief the undoing of the D.C. Superior Court judgments, Defendants argue that Plaintiffs' current action is “inextricably intertwined” with the D.C. Superior Court judgments because the “core” of their federal claims “is that EduCap did not have standing to pursue the collection actions.” HSBC's Mem. at 10-11; see also EduCap & Weinstock's Mem. at 7. They believe the suit is tantamount to a request to undo the D.C. Superior Court judgments because, in order to succeed on their claims, Plaintiffs “must demonstrate that the D.C. Superior Court wrongly entered judgments in favor of EduCap despite EduCap's purported lack of standing.” HSBC's Mem. at 10-11; EduCap & Weinstock's Mem. at 7. Plaintiffs counter that Rooker-Feldman does not apply here because their challenge is to Defendants' pre-judgment unfair debt collection practices- namely, the drafting of the false Maiorca affidavit-rather than the D.C. Superior Court judgments themselves. See Pls.' Omnibus Opp'n to Mots. to Dismiss, ECF No. 20, Pls.' Mem. in Supp., ECF No. 20-1 [hereinafter Pls.' Opp'n], at 9-11; Pls.' Omnibus Reply Br., ECF No. 27 [hereinafter Pls.' Reply]. Alternatively, Plaintiffs argue that, because Defendants procured the D.C. Superior Court judgments by fraud or deception, Rooker-Feldman does not divest this court of jurisdiction. See Pls.' Opp'n at 10 n.69.

         The Rooker-Feldman doctrine hails from the only two Supreme Court cases in which the Court has applied it: Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983). The doctrine is rooted in 28 U.S.C. § 1257, a statute that vests sole authority in the Supreme Court to review state court judgments. See Skinner v. Switzer, 562 U.S. 521, 531 (2011). In both Rooker and Feldman, the plaintiffs “asked the District Court to overturn the injurious state-court judgment, ” and in both cases the Court held that “District Courts lacked subject-matter jurisdiction over such claims.” Id.

         Since the Rooker and Feldman cases, the Supreme Court has emphasized that the doctrine occupies a “narrow ground.” Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005); see Croley v. Joint Comm. on Judicial Admin., No. 15-5080, 2018 WL 3320864, at *4 (D.C. Cir. July 6, 2018). In Exxon Mobil, the Court instructed that the doctrine “is confined to cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the federal district court proceedings commenced and inviting district court review and rejection of those judgments.” 544 U.S. at 284. This limited construction of Rooker-Feldman means that district courts do not lack jurisdiction “simply because a party attempts to litigate in federal court a matter previously litigated in state court.” Id. at 293. Rather, “[i]f a federal plaintiff ‘present[s] some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party . . ., then there is jurisdiction and state law determines whether the defendant prevails under principles ...

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