On January 30, 2017, the Consumer Financial Protection Bureau (“CFPB”) filed a complaint in the Eastern District of California against a group of law firms and attorneys, alleging that the defendants charged illegal fees in a debt relief scheme targeted at “vulnerable consumers suffering financial difficulties” in violation of the Telemarketing and Sales Rule (“TSR”), 16 C.F.R. pt. 310. The complaint is related to the CFPB’s 2013 lawsuit against Morgan Drexen, Inc. (“Morgan Drexen”) for substantially similar TSR violations (the “Morgan Drexen litigation”).  Defendants allegedly collaborated with Morgan Drexen beginning in 2007 to create the debt relief scheme, and then took over Morgan Drexen’s business operations before it ceased operations in June 2015 in response to a permanent injunction issued in the Morgan Drexen litigation.  The CFPB contends that defendants continued collecting the same fees from consumers that Morgan Drexen had been enjoined from collecting.

The TSR prohibits companies that engage in telemarketing from receiving advance fees before renegotiating, settling, reducing, or altering the terms of at least one of a consumer’s debts. In the January 30, 2017 complaint, the CFPB alleges that defendants engaged in a common enterprise beginning in 2007 to offer debt relief services to financially vulnerable consumers alongside Morgan Drexen, the company performing the majority of the work, in violation of the TSR.

Defendants and Morgan Drexen marketed a debt relief program through television, radio, and internet advertisements. These advertisements represented that the program would help consumers eliminate debt and avoid bankruptcy, and explicitly stated that consumers would not have to pay advance fees.  The January 30, 2017 complaint alleges that, despite their promises of no advance fees, defendants began making automatic monthly withdrawals from a consumer’s bank account immediately after the consumer enrolled in the program but before defendants engaged in any settlement efforts on the consumer’s behalf.  Moreover, the CFPB contends that defendants orchestrated a scheme that constituted an effort to disguise advance fees for debt relief services by having consumers sign two contracts to enroll in the debt relief services:  one contract for debt relief services and another contract for bankruptcy-related services.  According to the CFPB, this dual-contract created a “façade” of compliance with the TSR because defendants counted advance fees charged to consumers as fees under the bankruptcy services contract, not the debt relief services contract.

The CFPB first challenged this activity in the Morgan Drexen litigation, which resulted in a permanent injunction against Morgan Drexen. The permanent injunction restrained Morgan Drexen from collecting any further fees from consumers who had paid advance fees prior to the company renegotiating, settling, reducing, or otherwise altering at least one of the consumers’ debts, or from consumers who had enrolled in the program in response to the allegedly deceptive telemarketing.  Morgan Drexen ceased operations on June 18, 2015 – the same day that the injunction was issued.  At that time, defendants named in the January 30, 2017 complaint had allegedly already taken over Morgan Drexen’s business operations and were thereby able to continue collecting fees from the consumers that the injunction was intended to protect.

The January 30, 2017 complaint continues the CFPB’s efforts to stop the debt relief scheme. CFPB Director Richard Cordray stated in a press release accompanying the complaint that “The defendants exploited consumers who were already suffering financial difficulties by tricking them into paying steep, illegal fees.  We put a stop to this scam once already, and we intend to do it again.”

The complaint seeks injunctive relief, restitution, and civil money penalties.