On February 7, 2017, the Consumer Financial Protection Bureau (“CFPB”) and the New York Attorney General filed a complaint in federal court accusing companies RD Legal Funding, LLC, RD Legal Finance, LLC, and RD Legal Funding Partners, LP (collectively, “RD Legal”) and their principal, Roni Dersovitz, of misleading consumers regarding advances made on payouts from settlement funds, including certain 9/11 first responders and former NFL players.  According to the complaint, RD Legal advanced funds to consumers who are entitled to payouts from legal settlement funds.  This includes 9/11 first responders suffering from respiratory conditions, cancer, and other illnesses, who are eligible to receive payments from the “Zadroga Fund,” established when Congress passed the James Zadroga 9/11 Health and Compensation Act of 2010.  It also includes former NFL players who are eligible to receive amounts from a fund created by the settlement of a class-action lawsuit against the NFL relating to brain injuries.

According to the complaint, after a consumer was notified of an entitlement to compensation by the administrator of a fund, but before receipt of that compensation, RD Legal would offer to advance a lump sum payment to the consumer representing a portion of the consumer’s award. RD Legal also allegedly promised it could help consumers “cut through red tape” to receive their awards faster and promised to advance funds in an expedited manner.  If a consumer accepted RD Legal’s offer, once the consumer received their award from the settlement fund, they then made a direct payment to RD Legal in an amount larger than the advance.  For example, the complaint alleges that one consumer received an advance of $18,590 on a $65,000 award from the Zadroga Fund, and paid back $33,800 six months later.  While the agreements with consumers were labeled by RD Legal as “assignment and sale agreements” the complaint alleges that the Zadroga Fund and the NFL settlement agreement prohibit assignment of a claimant’s right to receive funds and that the agreements therefore cannot be assignments.  Instead, the agreements must be extensions of credit, making them subject to the CFPB’s jurisdiction.

As alleged in the complaint, in providing and collecting on these alleged extensions of credit, RD Legal engaged in multiple deceptive and abusive acts and practices. Specifically, according to the complaint, RD legal deceived consumers by: (1) misrepresenting to consumers that they were entering a valid and enforceable assignment (since the assignments were prohibited); (2) collecting amounts that were not due because the effective interest rates exceeded state usury limits, rendering the loans void; (3) misrepresenting that RD Legal could cut through red tape so that consumers could receive funds more quickly, despite lacking any power to do so; and (4) misrepresenting how quickly consumers could expect to receive funds from RD Legal.  The complaint further alleges that RD Legal engaged in abusive conduct by materially interfering with consumers’ ability to understand the terms and costs of its products and by taking advantage of the inability of consumers to protect their interests in these transactions.  In particular, according to the complaint, RD Legal misstated the nature of the agreements as valid and enforceable assignments, which prevented consumers from understanding the terms and cost of credit and limited their ability to evaluate and compare RD Legal’s offer to other alternatives to determine whether this offer was appropriate.  The complaint also alleges a number of related violations of New York law, including state usury laws.

In January 2017, RD Legal filed preemptive lawsuits against the CFPB and New York Attorney General, in which it claims it does not offer extensions of credit but “purchases legal receivables.”  However, neither this framing nor the language in the agreements calling them assignments deterred the CFPB, which once again evaluated the application of its jurisdiction by looking at the substance of the transaction rather than the form—here looking past RD Legal’s claim that the agreements are assignments to allege that they are in fact extensions of credit.  Whether that is the case is now up to the district court to determine.