Federal district court refuses to dismiss CFPB lawsuit against law firms and attorneys for unlawful debt relief practices

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A California federal district court has refused to dismiss a lawsuit filed by the CFPB in January 2017 against several law firms and attorneys alleging that the defendants violated the FTC’s Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA) by illegally charging upfront fees for debt relief services which were disguised as fees for bankruptcy services.  The defendants were alleged to have partnered with Morgan Drexen to offer debt relief services to consumers and, after the CFPB filed its lawsuit in August 2013 against Morgan Drexen and its CEO for similar TSR and CFPA violations, to have taken over Morgan Drexen’s operations.  The CFPB also alleged that the defendants had substantially assisted Morgan Drexen and its CEO in their TSR violations.  (Morgan Drexen eventually sought bankruptcy relief and the CFPB’s lawsuit ended with the entry of a final judgment requiring the bankrupt Morgan Drexen to pay $132,882,488 in restitution and a $40 million civil money penalty.  That judgment followed a stipulated final judgment against Morgan Drexen’s CEO which, based on the CEO’s inability to pay, required him to pay $500,000 in consumer redress and a $1 civil money penalty.)

In moving to dismiss the CFPB’s complaint, the defendants’ primary arguments were (1) the CFPB had no authority to bring the lawsuit because the CFPA excludes the practice of law from its jurisdiction, and (2) the CFPB’s substantial assistance claim did not satisfy the heightened pleading standard for fraud claims in Rule 9(b) of the Federal Rules of Civil Procedure.  Although the defendants also challenged the CFPB’s constitutionality, the court ruled that the constitutional challenge was not properly before it because the defendants had attempted to incorporate by reference a constitutional challenge in an unrelated case instead of explaining why they believed the CFPB is unconstitutionally structured.

The CFPA provides that the CFPB “may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law under the laws of a State in which the attorney is licensed to practice.”  An exclusion from such limitation provides that it  “shall not be construed to limit the authority of the Bureau with respect to any attorney, to the extent such attorney is otherwise subject to any of the enumerated laws or the authorities transferred under subtitle F or H.”

The court observed that subtitle H of the CFPA authorizes the CFPB to enforce the TSR and that the TSR, in turn, contains no applicable exception for the practice of law or attorneys.  The defendants had argued that the word “otherwise” in the CFPA exclusion meant only that the CFPB could enforce another consumer law against an attorney who was engaged in an activity that was not part of the practice of law.  Calling such an interpretation “superfluous,” the court concluded that the word “otherwise” meant that while Congress did not want the CFPB to use is general UDAAP enforcement authority to regulate the practice of law, Congress did not intend the practice of law exclusion to prevent the CFPB from enforcing other consumer protection laws that already applied to legal practices.

With regard to the defendants’ argument that that the CFPB’s substantial assistance claim did not satisfy Rule 9(b)’s heightened pleading standard for fraud claims, the court found no basis to apply such standard because the CFPB’s substantial assistance claim did not sound in fraud.  While observing that the CFPB had alleged that the defendants made misrepresentations about the debt relief services and that such allegations would be subject to Rule 9(b), it ruled that the CFPB had stated a substantial assistance claim under the TSR without such allegations because the defendants could be liable for providing substantial assistance even if they did not make such misrepresentations.  The court cited to the TSR’s substantial assistance standard which provides that a person provides substantial assistance to a seller or marketer when that person knew or consciously avoided knowing that the seller or marketer was engaged in an act or practice that violated the TSR.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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