June 23, 2005 | Read Time: 1 minute
A federal law that bars lawsuits against certain tax-exempt organizations does not prevent a Massachusetts couple from suing a credit-counseling charity, a federal appeals court has ruled.
At issue was whether Andrew and Kelly Zimmerman could sue Cambridge Credit Counseling Corporation in Massachusetts for failing to make payments to the couple’s debtors as previously agreed to in a debt-relief plan.
The case turned on different interpretations of the Credit Repair Organizations Act. The law allows consumers to sue companies for unscrupulous business practices or advertising, but does not permit lawsuits against “any nonprofit organization which is exempt from taxation under Section 501(c)(3) of the Internal Revenue Code.”
The counseling organization said that it was exempt from lawsuits under the act because it is viewed by the Internal Revenue Service as a charity under Section 501(c)(3) of the code. But the Zimmermans argued that they could sue the counseling organization because, they alleged, its founders, brothers John Puccio and Richard Puccio, received its profits, making its nonprofit status a sham.
In its ruling, the U.S. Court of Appeals for the First Circuit said that acceptance of an organization’s charity status by the IRS is not sufficient to determine whether a group is operating as a nonprofit organization under federal and state laws. The argument by the Zimmermans “sufficiently alleges that Cambridge was not, in fact, operating as a nonprofit organization,” the court said, so the case can be tried in court (Andrew Zimmerman et ux. v. Cambridge Credit Counseling Corp. et al, No. 04-2039).
