We don’t know about you, but we’ve been following the contentious litigation between the Consumer Financial Protection Bureau (CFPB) and debt-relief services company Morgan Drexen pretty closely. The CFPB filed its lawsuit in August 2013, alleging, among other things, that the company deceived consumers into paying unlawful up-front fees for debt relief services by disguising them as fees related to “sham” bankruptcy services. The CFPB claimed that the defendant’s practices violated the Telemarketing Sales Rule (TSR), 16 C.F.R. § 310, and the Consumer Financial Protection Act (CFPA).
The action offered its share of drama even during motion practice, when the defendant was one of those that took up the sword against the Bureau on constitutionality grounds. It lost that motion last month but managed first to get the Court to hold that CFPB officials could be subjected to depositions. Trial was set to begin on February 10, 2015, but instead the court held an evidentiary hearing that day in connection with the CFPB’s motion for sanctions against the defendant for fabricating and destroying evidence.
At the hearing, CFPB attorney Gabriel D. O’Malley alleged that the defendant created or altered relevant bankruptcy petitions in June or July of 2014, after the CFPB had served its discovery requests on the defendant. The CFPB claims that the defendant’s former Chief Operating Officer tipped off the CFPB just last month that the defendant had altered dates on existing documents or fabricated bankruptcy petitions entirely. The defendant flatly denies these allegations and paints the former COO as a disgruntled ex-employee with a vendetta against the company. The court has not yet ruled on the CFPB’s motion.
Before these more dramatic developments, both parties took the less colorful but equally interesting (for you law nerds, anyway) step of moving for summary judgment on the merits. The Court denied both motions. In response to both parties’ arguments under the TSR, the Court found that the defendant had presented sufficient evidence to create a genuine factual dispute as to whether the defendant’s fees were charged for debt settlement or bankruptcy services. Although the CFPB had provided evidence that bankruptcy petitions were rarely filed on behalf of the defendant’s customers, the defendant offered evidence that the threat of bankruptcy and the preparation of bankruptcy documents “can serve a strategic purpose in debt settlement negotiations” even if those documents are never filed. The Court found that the close relationship between debt settlement and bankruptcy services under the defendant’s model did not necessarily mean that fees were not specific to the preparation of the bankruptcy filings that the company helped create.
In response to both parties’ CFPA arguments, the Court found that the parties had presented competing evidence as to whether the defendant’s advertisements guaranteed that consumers “will” be debt free. Televised advertisements stated “Be debt free!” while a voice-over pitched “your opportunity to become debt free in months” (emphasis added). There were also several qualifiers in the fine print of the advertisements, including that there was no guarantee that a customer’s debts would be lowered by a specific amount or in a specific period of time. Based on that contradictory evidence, the Court found an issue of fact existed as to whether the advertisements were expressly misleading. As to whether the ads were impliedly misleading, the Court noted that evidence as to whether a significant portion of consumers were actually deceived would be critical. Both parties relied on market survey evidence: the CFPB noted that 57% of viewers believed they “could” become debt free in “months” or “less than a year,” while the defendant relied on the finding that only 5-7% of viewers believed they “will” be debt free in “months.” In light of that evidence, plus the advertisements’ fine-print provisos regarding fees and guarantees, the court found a genuine factual dispute existed as to whether any implied message deceived a significant number of consumers.