Third Circuit Affirms NJ Doctrine of Necessaries Not Preempted by Equal Credit Opportunity Act

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Third Circuit Affirms NJ Doctrine of Necessaries Not Preempted by Equal Credit Opportunity Act
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Banking & Title Insurance Client Alert March 24, 2021
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In a recently published opinion, the United States Court of Appeals for the Third Circuit affirmed a finding that the Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. § 1691 et seq., does not preempt New Jersey’s common law doctrine of necessaries that allows a creditor to seek collection of necessary expenses from the debtor’s spouse. See Klotz v. Celentano, Stadtmauer & Walentowicz LLC, 2021 WL 969479 (3d Cir. Mar. 16, 2021). The doctrine of necessaries provides that “both spouses are liable for necessary expenses incurred by either spouse in the course of the marriage,” and that a “non-debtor is liable for the debts of her spouse . . . if the assets of the spouse who incurred the debt are insufficient.” See, e.g., Jersey Shore Med. Ctr. Fitkin Hosp. v. Baum’s Est., 84 N.J. 137 (N.J. 1980) (Defining the doctrine and holding that wife would be liable to hospital for late husband’s medical bills, but holding was to be applied prospectively); Dubois, Sheehan, Hamilton & DuBois v. DeLarm, 243 N.J. Super. 175, 185-187 (App. Div. 1990) (wife liable to law firm for husband’s legal defense fees because “the family’s support, income and well-being may be affected by incarceration, loss of driver’s license or any other sentence of consequence.”).

In Klotz, a hospital retained a law firm to collect on a medical debt that had been incurred by Plaintiff’s husband, who passed away without paying the debt and left no estate. Following the mailing of two collection letters to Plaintiff, she sued the firm in the United States District Court for the District of New Jersey for an alleged violation of the Fair Debt Collection Practices Act (“FDCPA”), 15. U.S.C. § 1691 et seq., arguing that she was not liable for the debt and that the firm violated the FDCPA because its collection letters sought payment of a debt that she did not owe. The firm argued that Plaintiff had a legal obligation to pay the debt under the doctrine of necessities. In turn, Plaintiff argued that the ECOA, which makes it unlawful for creditors to discriminate based on certain criteria, including marital status, preempted the doctrine of necessaries. Among other things, the ECOA and its related regulations provide that “a creditor shall not require the signature of an applicant’s spouse . . . on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested.” Plaintiff thus argued that by the creditor imposing liability on her for her deceased husband’s debt under the doctrine of necessaries, she was effectively being treated as a spousal co-signer on his debt in violation of the ECOA, and therefore, the FDCPA. The law firm moved to dismiss the complaint, and the District Court granted the motion to dismiss. Plaintiff then moved for reconsideration and for leave to file an amended complaint with additional allegations, and that motion was also denied. Plaintiff then appealed.    

The Third Circuit affirmed the judgment of the District Court. The Court first noted that in order for the ECOA to preempt New Jersey’s doctrine of necessaries, Plaintiff had to show that “compliance with both state and federal law [was] impossible, or where the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Here, the ECOA allowed the Federal Reserve Board to exempt certain categories of transactions from its scope, and it exercised this authority in promulgating a regulation exempting “incidental credit” from its spousal signature prohibition. “Incidental credit” was further defined as extensions of consumer credit not made pursuant to the terms of a credit card account, not subject to a finance charge, and not payable by agreement in more than four installments. In this case, the medical debt at issue satisfied these three criteria, thus, it was incidental debt carved out from the ECOA. Thus, the Court found that “given that the spousal-signature prohibition does not apply, . . . the ECOA and its regulations do not conflict-preempt the doctrine of necessaries.” The Court also rejected Plaintiff’s alternative argument that the doctrine was preempted because it frustrates the purpose of the ECOA, as the statute is ultimately “focused on ensuring the availability of credit rather than the allocation of liability between spouses.” Lastly, the Court rejected alternative arguments that the firm did not comply with the procedural requirements of the doctrine of necessaries, which require the creditor to first seek to collect from the debtor spouse. The Court found that the debtor did not have an estate, and the firm was not required to seek administration of the estate since it would have been insolvent. It also found that allowing an amendment to her complaint in order to further clarify the nature of debt would be futile, because even with said clarifications, the debt at issue would still fall within the doctrine of necessaries. Given the foregoing, the Court affirmed the District Court’s judgment dismissing Plaintiff’s complaint.

This case is important because it makes clear that creditors may continue to collect debts under the doctrine of necessaries without fear of a violation of the ECOA, so long as the credit is “incidental” as set forth above. Here, because that was the case, and because the debt collector complied with the other formalities of the doctrine of necessaries, there was no claim.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.