Zimmerman v. Cambridge Credit Counseling Corp.

United States Court of Appeals
For the First Circuit

No. 04-2039

ANDREW ZIMMERMAN, KELLY ZIMMERMAN
On behalf of Themselves and All Others Similarly Situated,

Plaintiffs, Appellants,

v.

CAMBRIDGE CREDIT COUNSELING CORP., CAMBRIDGE/BRIGHTON
BUDGET PLANNING CORP., CAMBRIDGE CREDIT CORP., BRIGHTON
CREDIT CORP., BRIGHTON CREDIT CORP. OF MASSACHUSETTS,
JOHN PUCCIO, RICHARD PUCCIO,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Michael A. Ponsor, U.S. District Judge]

Before

Howard, Circuit Judge,

Cyr, and Stahl, Senior Circuit Judges.

David J. Vendler, with whom Richard H. Nakamura, Maureen M.
Home, Morris Polich & Purdy, LLP, Stephen G. Hennessy, Garrett M.
Smith, Gary W. Kendall, Michie, Hamlett, Lowry, Rasmussen & Tweel,
PC, and Gregory S. Duncan, were on brief, for appellants.
Paul M. Kaplan, with whom Michael J. Tuteur, Lawrence M.
Kraus, Stephen D. Riden and Epstein Becker & Green, P.C., were on
brief for appellees.

May 31, 2005
 HOWARD, Circuit Judge. The Credit Repair Organizations

Act (CROA or the Act) creates a cause of action for consumers

harmed by the unscrupulous business and advertising practices on

the part of credit repair organizations. See 15 U.S.C. § 1679 et

seq. But the Act does not permit lawsuits against "any nonprofit

organization which is exempt from taxation under section 501(c)(3)"

of the Internal Revenue Code. See 15 U.S.C. § 1679a(3)(B)(i). The

question we face is whether an Internal Revenue Service (IRS)

determination that an entity is tax-exempt under section 501(c)(3)

is sufficient to bring the entity within the statutory exclusion

set forth in § 1679(a)(3)(B)(i).

I.

Saddled with substantial debt, the plaintiffs, Andrew and

Kelly Zimmerman, sought assistance from Cambridge Credit Counseling

Corporation (Cambridge) near the end of 2001.1 The plaintiffs had

seen advertising from Cambridge claiming that it could help debtors

obtain lower interest rates, eliminate fees, re-age debt, and

otherwise assist in debt management efforts. The plaintiffs say

that they were drawn to Cambridge because it identified itself as

a nonprofit organization. This led the plaintiffs to believe that

Cambridge would charge low fees for its services. Cambridge is

1
As this appeal arises from the grant of the defendants'
motion to dismiss, we accept the well pleaded allegations in the
complaint as true. See Viqueira v. First Bank, 140 F.3d 12, 15
(1st Cir. 1998).

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organized as a charitable organization under Massachusetts law, see

Mass. Gen. Laws ch. 180, and has obtained an IRS determination that

it is tax-exempt under section 501(c)(3) of the Internal Revenue

Code, see 26 U.S.C. § 501(c)(3).2

In early 2002, the plaintiffs enrolled with Cambridge.

For a fee of $948 per month, Cambridge developed a customized debt

management program for them. Several months later, the plaintiffs

cancelled their contract with Cambridge after they became

dissatisfied with its services. At the time of cancellation, the

plaintiffs owed more money and had worse credit scores than before

contracting with Cambridge. Believing that they had been swindled,

the plaintiffs sued Cambridge, its owners John and Richard Puccio,

and several related entities for violations of the CROA.3 They

alleged that Cambridge was subject to suit under the Act because

its claimed nonprofit status was a sham.

2
Section 501(c)(3) specifies that, inter alia, charitable and
educational organizations, whose net earnings do not benefit
shareholders or individuals, are exempt from federal taxation. See
26 U.S.C. § 501(c)(3).
3
The plaintiffs also sued under the Fair Debt Collection
Practices Act, see 15 U.S.C. § 1692, and state law. The district
court dismissed the Fair Debt Collection Practices Act claim on
statute of limitations grounds and declined to exercise
jurisdiction over the state law claims under 28 U.S.C. § 1367(b).
See Zimmerman v. Cambridge Credit Counseling Corp., 322 F. Supp. 2d
95, 98 & 101 (D. Mass. 2004). The plaintiffs have not appealed
these rulings.

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 The defendants moved to dismiss the complaint on the

ground that Cambridge was a section 501(c)(3) tax-exempt

organization and therefore within the exclusion specified in 15

U.S.C. § 1679a(3)(B)(i). The district court agreed and dismissed

the CROA claim. See Zimmerman, 322 F. Supp. 2d at 99-101. The

court found the CROA exclusion applicable because the IRS had

determined that Cambridge qualified for section 501(c)(3) tax-

exempt status. See id. The court based its interpretation

principally on a policy rationale. It concluded that permitting

courts to "go behind the IRS's designation and proceed to make

their own independent determinations, on a case-by-case basis, of

an entity's substantive classification according to section

501(c)(3)" would create excessive uncertainty concerning the

validity of an entity's tax-exempt status, and that this

uncertainty could destabilize the operation of the nonprofit

sector. See id. at 100. The plaintiffs timely appealed.

II.

Our review of the district court's grant of the motion to

dismiss is de novo.4 See Goldings v. Winn, 383 F.3d 17, 21 (1st

Cir. 2004). At issue is the reach of 15 U.S.C. § 1679a(3)(B)(i),

4
The parties dispute whether the defendants' motion should
have been raised under Fed. R. Civ. P. 12(b)(1) or Fed. R. Civ. P.
12(b)(6). This dispute is immaterial because the parties agree
that either way we must accept the well pleaded allegations as true
and consider the interpretive question de novo.

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which provides that "a credit repair organization does not include

any nonprofit organization which is exempt from taxation under

section 501(c)(3)" of the Internal Revenue Code. 15 U.S.C. §

1679a(3)(B)(i). The plaintiffs argue that the exclusion requires

(1) that the credit repair organization actually operates as a

nonprofit entity and (2) that the credit repair organization meets

the eligibility requirements in in section 501(c)(3) of the tax

code. The defendants respond that the phrase "exempt from taxation

under section 501(c)(3)" defines "nonprofit organization."

Therefore, the defendants contend that a credit repair organization

must only have received section 501(c)(3) from the IRS to qualify

for the exclusion.

"As in any case of statutory construction, our analysis

begins with the language of the statute." Hughes Aircraft Co. v.

Jacobson, 525 U.S. 432, 438 (1999) (internal quotation marks and

citation omitted). The Act qualifies a large group of entities for

the exclusion -- all nonprofit organizations -- and then limits the

excluded group to a smaller group of nonprofit organizations "which

are tax-exempt under section 501(c)(3) . . . ." 15 U.S.C. §

1679a(3)(B)(i). The most natural reading of the text is that it

establishes two requirements. The nonprofit language excludes some

entities from eligibility (namely, profit making entities), and the

"tax-exempt" language distills the excluded group to the kinds of

organizations identified in section 501(c)(3) (e.g., charitable or

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educational organizations) which are, in fact, tax-exempt. Read in

this way, the Act does not define "nonprofit organization" as an

entity with section 501(c)(3) status but rather establishes two

independent criteria for the exclusion: nonprofit status and

section 501(c)(3) status.

This plain reading of the exclusion is supported by the

surrounding text. See Massachusetts v. Morash, 490 U.S. 107, 115

(1989). In addition to excluding nonprofit organizations with

section 501(c)(3) status, the CROA excludes creditors and

depository institutions. But as to these latter exclusions,

Congress defined the excluded entities by reference to another

section of the United States Code. See 15 U.S.C. § 1679a(3)(B)(ii)

(excluding "any creditor (as defined in section 1062 of this

title)"); 15 U.S.C. § 1679a(3)(B)(iii) (excluding "any depository

institution (as that term is defined in section 1813 of Title

12)"). Had the drafters of the CROA intended to define "nonprofit"

simply by reference to section 501(c)(3) of the Internal Revenue

Code, they had at their disposal a method for doing so

unambiguously -- a method they employed for other exclusions under

the CROA. See King v. St. Vincent's Hosp., 502 U.S. 215, 220-21

(1991).

This drafting choice cannot be considered accidental

because the United States Code is replete with statues which

clearly define a "nonprofit organization" as an entity that is tax-

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exempt under the Internal Revenue Code. Indeed, several statutes

expressly define a nonprofit organization to mean an organization

described under section 501(c) of the Internal Revenue Code. See,

e.g., 5 U.S.C. § 3102(a)(3) (stating that "'nonprofit organization'

means an organization determined by the Secretary of the Treasury

to be an organization described in section 501(c) of the Internal

Revenue Code of 1986"); 16 U.S.C. § 1447a(5) (similar); 29 U.S.C.

§ 2703(4) (similar); 42 U.S.C. § 1485(w)(1)(B) (similar); 42 U.S.C.

§ 1760(d)(5) (similar); 42 U.S.C. § 5603(23) (similar).5 This

construction links the definitional term "nonprofit" directly to

the organization's federal tax-exempt status. We may assume that,

when drafting the CROA, Congress was aware of this archetypal

language for equating nonprofit status with federal tax-exempt

status. See S. Dakota v. Yankton Sioux Tribe, 522 U.S. 329, 351

(1998). Yet Congress chose a different formulation for the CROA.

This is strong evidence that Congress did not intend to conflate

nonprofit status with section 501(c)(3)tax-exempt status.6

The plaintiffs' interpretation of the exclusion also

honors the principle "that '[a]ll words and provisions of statutes

5
These statutes predate the enactment of the CROA.
6
The legislative history is inconclusive. The only mention of
the exclusion appears in the House of Representatives Ways and
Means Committee report from the Congress preceding the one that
enacted the CROA. H.R. Rep. No. 103-486 (1994), 1994 WL 164513.
This report states that the definition of a credit repair
organization "does not include a nonprofit organization." Id.

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are intended to have meaning and are to be given effect, and no

construction should be adopted which would render statutory words

or phrases meaningless, redundant, or superfluous.'" United States

v. Ven-Fuel, Inc., 758 F.2d 741, 751-52 (1st Cir. 1985)). The

defendants read the exclusion as if it said only that the CROA

excludes any organization "which is tax-exempt under section

501(c)(3). . . " They have ascribed no independent meaning to the

term "nonprofit."

Additionally, the plaintiffs' reading is consonant with

the rule favoring the narrow construction of exclusions in remedial

statutes. See Hogar Agua Y Vida En El Desierto, Inc. v. Suarez-

Medina, 36 F.3d 177, 182 (1st Cir. 1994). Congress enacted the

CROA to remedy abuses in the credit repair industry. The Act

includes a finding by Congress that "[c]ertain advertising and

business practices of some companies engaged in the business of

credit repair services have worked a financial hardship upon

consumers, particularly those of limited economic means and who are

inexperienced in credit matters." 15 U.S.C. § 1679(a)(2). The

CROA's expressed purpose is to "to protect the public from unfair

or deceptive advertising and business practices by credit repair

organizations." 15 U.S.C. § 1679(b)(2). Its remedial goal is thus

unmistakable. See Fed. Trade Comm'n v. Gill, 265 F.3d 944, 949-50

(9th Cir. 2001).

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 If a credit repair organization only needed to obtain a

section 501(c)(3) designation to qualify for the exception, the

exception might well eviscerate the liability-creating provisions.

See generally Marta Lugones Moakley, Credit Repair Organizations

After Regulation, 77-AUG Fla. B.J. 28, 33 (2003) (describing the

increase in credit repair organizations seeking section 501(c)(3)

status after the passage of the CROA). After all, the IRS usually

grants section 501(c)(3) status based solely on representations

made by the applying entity. See IRS Form 1023. In fact, the IRS'

subsequent notification that an entity has qualified for tax-exempt

status contains a disclaimer stating that the IRS has made its

determination based solely on representations provided to it by the

party seeking the status. See Letter from IRS District Director to

Cambridge Credit Counseling Corp. of 2/12/98 at 1 (stating that

section 501 (c)(3) status is granted "based on information

supplied, and assuming [that] operations will be as stated in your

application for recognition of the exemption"). And the

determination is not binding in subsequent litigation challenging

the applying entity's tax-exempt status. See 26 U.S.C. §

6110(k)(3) (stating that "a written determination [from the IRS]

may not be cited as precedent"). Congress cannot have intended

unscrupulous credit repair organizations to have such easy access

to CROA immunity. Cf. Edsen v. Bank of Boston, 229 F.3d 154, 177

(2d Cir. 2000) ("An erroneous ruling by an IRS key district

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director, especially when procured by submission of limited or

confusing information, cannot defeat the express statutory rights

of [consumers]. The adjudication of those rights is for the

federal courts, not the field offices of the IRS.").

The district court rejected the plaintiffs'

interpretation of the exclusion out of understandable concern that

permitting a court to decide whether an entity is actually

operating as a nonprofit organization will substantially

destabilize the nonprofit sector. See Zimmerman, 322 F. Supp. 2d

at 99-100. The concern is two-fold. First, it will unsettle the

expectations of the tax-exempt organization and those interacting

with it if section 501(c)(3) status can be lost in non-tax related

litigation. Second, subjecting a nonprofit organization to

litigation over its status will significantly raise its cost of

doing business. Two responses to these concerns immediately

suggest themselves.

First, a determination that an organization is not

operating as a nonprofit for purposes of the CROA will not directly

impact the organization's tax-exempt status under section

501(c)(3). Whether an entity is entitled to federal tax-exempt

status is a determination that is committed, in the first instance,

to the IRS. See Bob Jones Univ. v. United States, 461 U.S. 574,

596-97 (1982). True, a determination under the CROA that a credit

repair organization is not operating as a nonprofit will likely

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catch the attention of the IRS. But there are already processes

for alerting the IRS to improvident grants of tax-exempt status.

There is a procedure for the IRS to field complaints about an

entity's abuse of its tax-exempt status. See

www.irs.gov/compliance/enforcement (last visited May 5, 2005).

Moreover, Congress itself occasionally holds hearings on the

matter.7 Thus, a finding that a credit repair organization is not

operating as a nonprofit for purposes of the CROA will be just

another source of information from which the IRS can decide to

target a particular credit repair organization for review. But

such a finding will not mean that a credit repair organization

loses its tax-exempt status without further action by the IRS.8

Second, it is already common for courts and

administrative agencies to examine whether an entity actually

7
Indeed, Congress has held hearings on the abuse of tax-exempt
status by credit counseling and repair organizations. See Section
501(c)(3) Credit Counseling Organizations: Hearing Before the
House of Representatives Ways and Means Subcommittee on Oversight,
108th Cong. (2003); Profiteering in a Non-Profit Industry: Abusive
Practices in Credit Counseling: Hearing Before the Senate
Governmental Affairs Subcommittee on Investigations, 108th Cong.
(2004). The IRS has responded with an initiative to review the
granting of tax-exempt status in this industry. See IRS Fact Sheet
2003-17, IRS Takes Steps to Ensure Credit Counseling Organizations
Comply with Requirements for Tax-Exempt Status (Oct. 2003).
8
In any event, even if a determination under the CROA could
directly impact an organization's tax-exempt status, it would not
typically affect the interests of those doing business with it.
See Letter from IRS District Director to Cambridge of 2/12/98, at
1 (stating that "contributors may rely on determination [of tax-
exempt status] unless the Internal Revenue Service publishes notice
to the contrary").

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operates as a nonprofit, irrespective of its tax-exempt status.

For example, the Federal Trade Commission, which does not have

jurisdiction over nonprofit organizations, see 15 U.S.C. §§ 44 &

45(a), determines, without reference to a target organization's

tax-exempt status, whether the organization in fact operates as a

nonprofit and is therefore beyond its jurisdiction. See In re Ohio

Christian Coll., 80 F.T.C. 815, 848-49 (1972). Similarly, state

courts frequently inquire into whether an entity actually operates

as a nonprofit to determine whether the entity is entitled to tax-

exemptions reserved for nonprofits. See, e.g., W. Mass. Lifecare

Corp. v. Bd. of Assessors, 747 N.E.2d 97, 103 (Mass. 2001) ("The

mere fact that the organization . . . has been organized as a

charitable corporation does not automatically mean that it is

entitled to an exemption for its property. Rather, the

organization must prove that it is in fact so conducted that in

actual operation it is a public charity.") (internal quotation

marks and citations omitted).9

9
In addition to relying on the district court's policy
rationale, the defendants contend that their interpretation of the
exclusion is superior because of the rule of construction providing
that a specific term in a statute (viz. "exempt from taxation under
section 501(c)(3)") governs over a more general term (viz.
"nonprofit organization"). See Morales v. Trans World Airlines,
Inc., 504 U.S. 374, 384 (1992). But this rule of interpretation
applies only "where there is inescapable conflict between" the
statute's terms. 2A Norman J. Singer, Sutherland on Statutes and
Statutory Construction § 46.05, at 177 (2000). Because the
interpretation we adopt gives different meanings to "nonprofit" and
"exempt from taxation under section 501(c)(3)," this rule of

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 In sum, to be excluded from the CROA under 15 U.S.C. §

1679a(3)(B)(i), a credit repair organization must actually operate

as a nonprofit organization and be exempt from taxation under

section 501(c)(3). Having reached this conclusion, we must

identify the standard to be applied in deciding whether an entity

satisfies the "nonprofit" component of the exclusion.

Where Congress left "nonprofit" undefined in an exclusion

from another statutory scheme, we concluded that "nonprofit" status

depended primarily on proof that the entity did "not distribute

profits to stockholders or others." See Town of Brookline v.

Gorsuch, 667 F.2d 215, 221 (1st Cir. 1981). This is consistent

with the standard definition of the term: a nonprofit corporation

is "a corporation organized for some purpose other than making a

profit." Black's Law Dictionary at 367 (8th ed. 1999); see also

Bruce Hopkins, The Law of Tax-Exempt Organizations 5 (8th ed. 2003)

(A "nonprofit organization . . . is not permitted to distribute its

profits . . . to those who control it . . . ."). Here, we apply

the standard defintion.

For motion to dismiss purposes, the plaintiffs' complaint

sufficiently alleges that Cambridge was not, in fact, operating as

construction does not apply.

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a nonprofit organization.10 The complaint states that, while

Cambridge claimed that its purpose was "to provide direct aid to

financially distressed debtors," in reality "Cambridge's primary

purpose was to make money for its owners and operators, John and

Richard Puccio." The complaint further claims that the Puccios

never intended to operate Cambridge as a nonprofit, but rather

intended to use it "to enrich themselves and their key executives

by permitting them to siphon off corporate assets of their business

through huge compensation packages." In support of this

allegation, the complaint alleges that the Puccios and their key

executives have received exorbitant salaries from Cambridge. These

allegations, if true, could support a finding that Cambridge was

not actually operating as a nonprofit organization and is therefore

subject to the CROA.

III.

For the reasons stated, we vacate the judgment and remand

for proceedings consistent with this opinion.

So ordered.

10
The parties have not briefed which side has the burden of
proof on this issue. The majority view is that the burden rests
with Cambridge. See United States v. Columbus Country Club, 915
F.2d 877, 881-82 (3d Cir. 1990); United States v. Lansdowne Swim
Club, 894 F.2d 83, 85 (3d Cir. 1990); Quijano v. Univ. Fed. Credit
Union, 617 F.2d 129, 132 (5th Cir. 1980); Nesmith v. YMCA, 397 F.2d
96, 101 (4th Cir. 1968). But there is contrary authority. See
EEOC v. Chicago Club, 86 F.3d 1423, 1429 (7th Cir. 1996). We do
not take a position on this question because, even if the
plaintiffs shoulder the burden of proof, their complaint is
adequate for motion to dismiss purposes.

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