Update on CFPB/NY AG lawsuit against RD Legal Funding

by Ballard Spahr LLP
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RD Legal Funding, LLC is seeking to dismiss the lawsuit filed against it, two of its affiliates, and their individual principal in February 2017 by the CFPB and the New York Attorney General in a NY federal district court alleging that a litigation settlement advance product offered by the defendants is a disguised usurious loan that is deceptively marketed and abusive.  In particular, the complaint alleged that the transactions were falsely marketed as assignments rather than loans and violated New York usury laws. The complaint also alleged that the transactions could not be assignments because the underlying settlements expressly prohibited assignment of claimant recoveries.

In the complaint, both the CFPB and the NY AG asserted deception and abusiveness claims under Sections 1031 and 1042 of Dodd-Frank.  In addition to alleged violations of state civil and criminal usury laws (which were the predicate for one of the CFPB’s deception claims), the NY AG’s state law claims included alleged violations of NY’s UDAP statute.

In their motion to dismiss, the defendants argue that the court should strike down the CFPB as a whole (rather than make the Director removable without cause as the D.C. Circuit panel did in PHH) because its structure is unconstitutional.  The defendants’ other arguments for dismissal include: (1) the court does not have jurisdiction under the CFPA because the defendants’ transactions did not involve an extension of credit and therefore none of the defendants are “covered persons” under the CFPA, (2) the complaint’s deceptive conduct claims fail to meet the heightened pleading standard for claims based on allegations of fraud, (3) the complaint fails to allege abusive conduct because the defendants’ representations about the nature of the transactions were truthful and consumers were encouraged to seek professional advice before entering into a transaction, and (4) state usury laws do not apply because the transactions were sales.

In addition to defending the constitutionality of the CFPB’s structure in their opposition to the motion to dismiss , the CFPB and NY AG assert that the defendants are “covered persons” under the CFPA because they offered or extended credit through the transactions and that all counts in the complaint state valid claims for relief (for reasons that include the argument that heightened pleading standards for fraud claims do not apply to consumer protection claims under the CFPA or NY law.)

When the complaint was filed, the CFPB and the NY AG issued press releases and prepared remarks in which they referenced transactions entered into by the defendants with former NFL players who were entitled to payments from the settlement of the NFL concussion litigation.  Class counsel for the plaintiff settlement class in the concussion litigation filed a letter with the NY district court seeking permission to file a memorandum of law as amicus in support of the CFPB.  In their proposed memorandum, they assert that their participation is intended to address the defendants’ “erroneous” position that the settlement agreement in the concussion litigation permits the assignment of the settlement’s monetary awards.

A request to file a memorandum of law as amicus in support of the CFPB was also filed by the American Legal Finance Association (ALFA), which describes itself as a trade association that represents the country’s leading consumer legal funding companies.  In its memorandum, ALFA indicates that, due to the possibility that a holding in the case could impact the entire legal funding industry, its participation is intended to “assist the Court with expertise not otherwise represented by the parties” regarding the differences between the pre-settlement legal funding transactions offered by ALFA members and the defendants’ transactions.

The defendants opposed the requests of class counsel and ALFA to participate as amici and while the case docket indicates that the court granted permission to ALFA to file its amicus memorandum, it does not indicate the disposition of class counsel’s request.

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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