Federal Court Dismisses Some, But Not All, Counts by CFPB Against Structured Settlement Factoring Company

Federal Court Dismisses Some, But Not All, Counts by CFPB Against Structured Settlement Factoring Company

A federal district court this month dismissed four of five counts of a complaint brought by the Consumer Financial Protection Bureau against a structured settlement factoring company’s allegedly abusive business practices.

The ruling by District Judge J. Frederic Motz of the U.S. District Court for the District of Maryland, in Consumer Fin. Proc. Bureau v. Access Funding, L.L.C., Civil No. 16-03759-JFM, 2017 U.S. Dist. LEXIS 149519 (D.Md. Sept. 13, 2017), lets stand one count concerning allegedly illegal business practices arising out of the payment by Access Funding of “advances” to structured settlement payees.

As to that remaining count, the court ordered discovery to allow the CFPB “the opportunity to prove that consumers who could not otherwise repay the advances were told that they were obligated to go forward with the transactions even if they realized it was not in their best interest and that consumers did not understand the risks or conditions of the advances, including that the advances did not bind them to complete the transactions.”

The court also denied the motion by the defendants – Access Funding, another affiliated company Assoc, L.L.C., and a number of individuals, including attorney Charles Smith – for the court to abstain, or for the court to stay the proceedings.

The court said that, at the motion to dismiss stage, it must accept as true the facts alleged in the complaint, and then set forth a number of the relevant allegations, including the following:

  • Plaintiff CFPB is an ‘agency of the United States charged with regulating the offering and providing of consumer-financial products and services” under certain federal statutes, including the CFPA.’
  • Defendant Access Funding. LLC, “purchased payment streams from structured settlement holders — a practice known as ‘structured settlement factoring’ — from December 2012 to November 2015.”
  • Defendant Charles Smith is “‘a Maryland-based attorney who provided purportedly independent professional advice for almost all Maryland consumers who made structured-settlement transfers to Access Funding.'”
  • “Structured setllement factoring is the offering to ‘recipients of structured settlements the opportunity to transfer a portion of their future payment streams in exchange for a discounted immediate lump sum.'”
  • “Maryland is one of forty-nine states that have enacted Structured Setllement Protection Acts (‘SSPAs’) in order to protect individuals who have suffered long-term physical or cognitive harm from entering into transactions that are not in their best interest.”
  • “Maryland’s SSPA requires structured setllement factoring companies to obtain court approval before purchasing a payment stream.”
  • The Maryland SSPA also requires the court to find that the payee “has consulted with an independent professional advisor (‘IPA’) before it can approve a structured-settlement transfer.”
  • Access Funding’s “aggressive business practices included searching court records to identify consumers who had previously transferred a portion of their structured settlements, then contacting those consumers and enticing them to transfer the remainder of their setllements to Access Funding; searching court records for pending filings by other structured-settlement-factoring companies, then contacting the consumers named in those filings and enticing them to back out of the impending transfers and enter into deals with Access Funding instead; pressuring individuals who had already entered into transactions with Access Funding to transfer to Access Funding all of their remaining expected payments; and more generally pursuing structured settlement holders via aggressive phone and mail solicitations.”
  • The complaint alleges that “Access Funding violated the [Consumer Financial Protection Act] by abusing consumers with respect to the payment of advances.  It alleges that after contacting consumers and offering to purchase their settlements, Access Funding entered into advance agreements with many of them, pursuant to which it advanced their lump sum payments while they waited to complete their paperwork and finalize their transfers. . . .  ‘These advances often consisted of $500 for signing a contract, $1,000 when a court date was set, and another $1,000 when a judge approved the sale.’ . . . .  The advance agreements notified the consumers that they would be liable to repay the advances if they did not ultimately go through with the transaction, and that in order to keep the advances they would have to cooperate fully with the company in obtaining court approval for the transaction. . . .  Specifically, the complaint alleges that ‘consumers who could not otherwise repay the advances were told that they were obligated to go forward with the transfer even if they realized it was not in their best interest.’ . . . .  It further alleges that the consumers, many of whom were ‘lead- poisoning victims with cognitive impairments,’ . . . ‘did not understand the risks or conditions of the advances, including that the advances did not bind them to complete the transaction’.”
  • “The second basis for the complaint is Smith’s conduct as an IPA.  The complaint alleges that Access Funding used Smith as the IPA for ‘almost all of its Maryland transaction’.” . . . .  Although Smith was supposed to be an independent advisor, he in fact had both personal and professional ties to Access Funding. . . .  Specifically, Access Funding paid him $200 for each IPA letter he provided. . . .  Access Funding would email Smith, ‘telling him when and at which phone number to contact consumers’ and would ‘courier[] to consumers prepaid cell phones that Smith used to contact the consumers.’  . . . .  Smith would then get on the phone with consumers to provide what was supposed to be “independent professional advice” regarding the “legal, tax, and financial implications” of the transfers. . . .  In fact, the calls would last only a few minutes and involved Smith doing little more than reciting the terms of the contract and asking the consumers whether they understood them. . . .  Afterwards. Smith would send an affidavit to the consumers for them to sign, which stated that they had been ‘advised to seek independent professional advice in connection with the transfer’ and in fact had received such advice and still desired to proceed with the transfer. . . . [The consumers did not know that Smith had ties to Access Funding . . . .”

The CFPB filed its complaint on November 21, 2016, alleging “that Smith engaged in unfair (Count I), deceptive (Count II), and abusive (Count III) acts and practices, in violation of 12 U.S.C. §§ 5531 (a), (b), and (d) and that the Access Funding Defendants substantially assisted Smith’s unfair, deceptive, and abusive acts (Count IV), in violation of 12 U.S.C. § 5536(a)(3)” and that, in Count V, “the CFPB alleges that the Access Funding Defendants engaged in abusive acts and practices, in violation of 12 U.S.C. § 5531(d)(2)(A).”

As for the motion to abstain, the court reviewed the appropriate considerations and rejected the defendants’ arguments.  First, said the court, “there are no difficult questions of state law before the court” and, “[i]n fact, there are no questions of state law before the court” because “[t]he only question before the court is how to interpret the Consumer Financial Protection Act of 2010, which is a question of federal law.”  The court also said that “review of this case will not disrupt Maryland’s efforts to establish a coherent policy with respect to a matter of substantial public concern” in that “[t]he Maryland SSPA requires the sellers of structured settlements to obtain court approval before selling a settlement [payment right]” and “[t]his requirement reflects a policy decision that Maryland citizens should not be allowed to make ill-advised, uninformed decisions to sell structured settlement[] [payment rights]” but that “[r]igid enforcement of the CFPA — a federal statute meant to protect consumers from unfair, deceptive, and abusive acts and practices by individuals who provide consumer-financial products or services — would do nothing to create confusion regarding this policy” and “[i]f anything, the consumer protection rationale underlying the state and federal statutes is the same.”

The court also rejected the argument that the CFPA’s claims were barred by the doctrine of issue preclusion from relitigating two issues that were decided in Maryland state court cases – that is, whether Smith provided independent professional advice and whether the structured settlement transfers were fair to the consumers.

In dismissing Counts I through IV, the court rejected the defendants’ argument and instead concluded that Smith was a “covered person” within the meaning of the CFPA, but next decided that Smith’s activities were within the “practice of law” exclusion of the CFPA.

[T]the complaint alleges that Smith’s advice was biased and erroneous, and that he encouraged the consumers to enter into transactions that were not in their best interest.  Accepting the truth of that allegation, Smith nevertheless gave that advice and encouragement in his capacity as an attorney.  Bad legal advice is still legal advice.  By offering such advice, Smith was engaged in the practice of law.  Therefore, his conduct falls within the ‘practice of law’ exclusion to the CFPA, set forth in § 5517(e) [of the CFPA].  Accordingly, I dismiss Counts I-IV of the Complaint.

Finally, as for Count V, the court denied the motion to dismiss.  Said the court:

The CFPB alleges in Count V that Access Funding engaged in abusive acts or practices relating to the advances they allegedly gave consumers, in violation of §§ 5531(d)(2)(A) and 5536(a)(1)(B). Section 5531(d)(2)(A) provides:

The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.

And as stated above, under § 5536(a)(1)(B), ‘it shall be unlawful for any covered person or service provider to engage in any unfair, deceptive, or abusive act or practice.’

The complaint alleges that Access Funding provided consumers with advances while the consumers waited to complete their paperwork and finalize their structured settlement transfers. . . .  These advances allegedly consisted of $500 for signing a contract, $1,000 when a court date was set, and $1,000 when a judge approved the sale. . . .  Count V of the complaint alleges that the Access Funding Defendants abused customers with respect to these advances.  Specifically, it alleges that the company encouraged consumers who had an immediate need for cash to take advances to meet that need and alleges that consumers were bound to either pay back their advances or complete the transfers. . . .  Access Funding argues that having to pay back an advance is not unfair, and in fact is ‘true with any advance payment of a purchase price.’

But the CFPB alleges something further.  Specifically, the complaint alleges that ‘consumers who could not otherwise repay the advances were told that they were obligated to go forward with the transfer even if they realized it was not in their best interest’ and that ‘consumers did not understand the risks or conditions of the advances, including that the advances did not bind them to complete the transactions.’ . . . .  These allegations, if true, are sufficient to state a claim upon which relief could be granted.  Indeed, if defendants misrepresented to the consumers the nature of the advances and the obligations that were incurred once an advance was accepted, that would constitute ‘taking unreasonable advantage of consumers’ lack of understanding of the material risks, costs, or conditions of [a] product or service.’  Accordingly, it would fall squarely under § 5531(d)(2)(A).

Defendants argue that the complaint is deficient because it fails to identify any particular consumers who were the subject of abusive acts or practices with respect to advances. . . .  At this stage, the CFPB is not required to do so.  It is sufficient that it alleges that defendants engaged in such acts or practices in their dealings with consumers.  Discovery may reveal that defendants were pressuring certain vulnerable individuals by offering them free money and then misrepresenting what accepting that money obligated them to do going forward.  It may instead reveal that defendants apprised all consumers of their precise legal rights and obligations.  Regardless, the CFPB’s inability to identify specific consumers at this stage is no reason to dismiss the claim.

The court therefore denied defendants’ motion to dismiss Count V, and ordered “discovery in order to allow the CFPB the opportunity to prove that consumers who could not otherwise repay the advances were told that they were obligated to go forward with the transactions even if they realized it was not in their best interest and that consumers did not understand the risks or conditions of the advances, including that the advances did not bind them to complete the transactions.”

An article about the decision is available here and the full opinion is available here.

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