Court Reinstates Claims Against Attorney in Lawsuit Over Settlement Factoring Practices

Court Reinstates Claims Against Attorney in Lawsuit Over Settlement Factoring Practices

Just four months after dismissing all claims against a lawyer who provided independent professional advice for dozens of structured settlement factoring transactions, a federal court reinstated a claim against the lawyer by the Consumer Financial Protection Bureau (CFPB) that has claimed that such transactions involved abusive practices.

The CFPB sought leave to file an amended complaint that alleged that structured settlement payees were unaware that attorney Charles Smith was, in fact, a lawyer – and therefore they lacked the intent to form an attorney-client relationship.

That allegation would not be futile, said U.S. District Court Judge Ellen Lipton Hollander in Consumer Fin. Prot. Bureau v. Access Funding, LLC, Civil No. ELH-16-03759, 2017 U.S. Dist. LEXIS 204703 (D. Md. Dec. 13, 2017), allowing the CFPB to file the amended complaint and reinstate the claims against Smith.

The CFPB in its lawsuit claims, among other things, that Access Funding violated the Consumer Financial Protection Act by abusing consumers with respect to the payment of advances to payees of structured settlement payments in circumstances where Access Funding was seeking to effectuate such transfers by obtaining court orders approving such transactions.

The Maryland Structured Settlement Protection Act provides that such transactions are not effective without court approval, and that such approval can be given by a court only where the transfer complies with the SSPA’s requirements – including the requirement that the payee receive “independent professional advice” from an attorney or other licensed professional.

In analyzing the CFPB’s motion for leave to file an amended complaint, Judge Hollander said the following:

Counts I-IV of the initial complaint alleged violations of the [Consumer Financial Protection Act]. . . .  As indicated, the CFPA contains a ‘practice of law exclusion.’  According to 12 U.S.C. § 5517(e)(1), ‘[e]xcept as provided under paragraph (2), the Bureau 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 the state in which the attorney is licensed to practice law.’  Paragraph (2) sets forth two exceptions to the ‘practice of law exclusion.’  The first exception is for conduct ‘that is not offered or provided as part of, or incidental to, the practice of law, occurring exclusively within the scope of the attorney-client relationship.’ 12 U.S.C. § 5517(e)(1).  The second exception is for conduct ‘that is otherwise offered or provided by the attorney in question with respect to any consumer who is not receiving legal advice or services from the attorney in connection with such financial product or service.’  12 U.S.C. § 5517(e)(2).

Judge [J. Frederic] Motz dismissed Counts I-IV, finding that if each of the allegations in the complaint were true, Smith was practicing law and his conduct did not fall within either of the exceptions. . . .  He concluded that the first exception—for conduct that, although undertaken by an attorney practicing law, takes place ‘outside the scope of the attorney-client relationship’ — did not apply. . . .  The court reasoned that if the allegations were true, ‘both Smith and the consumers manifested the intent necessary to form an attorney-client relationship.’

CFPB acknowledges that because Smith was engaged in the practice of law, he would normally be subject to the “practice of law exclusion.” . . . .  However, it claims Smith’s conduct falls within the first exception to the exclusion because it did not take place within the scope of the attorney-client relationship. . . .  It argues that the new allegations in the amended complaint clarify that the consumers never manifested the intent to form an attorney- client relationship with Smith. . . .


Most of the amended complaint does nothing to alter the court’s analysis. . . .

The second new allegation, however, does alter the court’s analysis.  When the initial complaint alleged that the consumers relied on Smith, a Maryland-based attorney, to provide them with legal advice about transactions, the court presumed the consumers knew Smith was an attorney. . . .  According to the proposed amended complaint, however, the consumers were unaware that Smith was an attorney, because no one apprised them of that fact.

It is logically impossible for a ‘client’ to form an attorney-client relationship with someone she does not know is an ‘attorney.’  Therefore, accepting each of the allegations in the proposed amended complaint as true, Smith and the consumers did not form an attorney-client relationship, which means Smith’s alleged conduct falls within the § 5517(e)(2)(A) exception to the ‘practice of law exclusion.’  For this reason, the proposed amended complaint would not be futile.  Accordingly, I shall grant CFPB leave to file the amended complaint.

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).”

An earlier Secondary Insurance Market Blog post on the CFPB v. Access Funding litigation is here.

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