By Katalina M. Bianco, J.D.
Law firms and attorneys engaged in providing consumer debt relief services were unable to convince a U.S. district judge that the Consumer Financial Protection Act practice-of-law exclusion required the dismissal of the Consumer Financial Protection Bureau’s enforcement suit. The bureau’s suit claiming violations of the Federal Trade Commission’s Telemarketing Sales Rule also survived several other arguments for dismissal raised by the attorneys (CFPB v. Howard, May 26, 2017, Staton, J.).
According to the CFPB, the attorneys and their law firms continued the illegal debt-relief business of Morgan Drexen after the bureau essentially forced the company into bankruptcy. The attorneys’ financial arrangements with clients included what was termed an "upfront engagement fee" of between $1,000 and $3,250, as well as an administrative fee. While the CFPB claims these fees constituted advance fees that are prohibited by the Telemarketing Sales Rule provisions on debt relief services, the attorneys claim they were fees for bankruptcy case legal services that actually were performed.
Legal provisions. The TSR, adopted by the FTC under the Telemarketing and Consumer Fraud and Abuse Prevention Act, prohibits debt relief service providers from seeking or accepting any payments until at least one of the consumer’s debts has been renegotiated and the consumer has made at least one payment. Any fee charged must be proportionate to either the consumer’s total debt or the amount the debt renegotiation saved the consumer (16 CFR §310.4(a)).
Debt relief services fall under the CFPB’s general enforcement authority under the CFPA. The Act says that the bureau has no enforcement authority over a licensed attorney’s activities that are part of the practice of law (15 U.S.C. §5517(e)). However, the CFPA adds a limitation on that exclusion—the exclusion does not apply to the activities of an attorney who is "otherwise subject to any of the enumerated consumer laws" that the bureau is to enforce.
The Telemarketing and Consumer Fraud and Abuse Prevention Act is one of those enumerated consumer laws when consumer financial products or services are involved, the judge pointed out. Moreover, the FTC considered including an exclusion in the TSR for attorneys but declined to do so.
Practice of law exclusion. The attorneys claimed that the limitation on the exclusion simply meant that an attorney engaged in activities that are not part of the practice of law is subject to the CFPB’s authority. The judge disagreed, saying that this interpretation would make the limitation unnecessary. The CFPA denies the bureau the authority to regulate the practice of law under its general enforcement authority but allows the bureau to act against legal practices that are subject to other consumer financial protection statutes, she said.
The judge also disagreed with the attorneys’ assertion that the upfront fees were permitted by the Bankruptcy Code and thus not banned by the TSR. The bureau claimed that the bankruptcy services contracts had been created to evade the TSR upfront-fee ban, and that was enough to prevent the dismissal of the suit.
Other arguments. Other arguments for dismissal that were raised by the attorneys were disposed of quickly:
- The CFPB could seek an injunction even though the attorneys had ceased the challenged conduct because the attorneys could easily resume it.
- The bureau’s complaint was not subject to the Federal Rules of Civil Procedure heightened pleading standards for fraud complaints because the bureau’s claim that the attorneys had facilitated Morgan Drexen’s conduct "does not sound in fraud." The attorneys could have facilitated Morgan Drexen’s fraud without themselves making any fraudulent statements.
- The bureau’s choice to proceed separately and first against Morgan Drexen did not, under theories of estoppel or issue preclusion, prevent its subsequent enforcement action against the attorneys.
