United States District Court, C.D. California
For Consumer Financial Protection Bureau, Plaintiff: Jan E Singelmann, R Gabriel D O'Malley, Shirley T Chiu, LEAD ATTORNEYS, PRO HAC VICE, Consumer Financial Protection Bureau, Washington, DC; Kent A Kawakami, LEAD ATTORNEY, AUSA - Office of U.S. Attorney, Civil Division, Los Angeles, CA; Amy N Radon, Nandan M Joshi, PRO HAC VICE, Consumer Financial Protection Bureau, Washington, DC; Kristin L Bateman, Consumer Financial Protection Bureau, Washington, DC.
For Kimberly A. Pisinski, Intervenor Plaintiff: Celeste M Brecht, Venable LLP, Los Angeles, CA; Randal M Shaheen, PRO HAC VICE, Venable LLP, Washington, DC.
For Morgan Drexen Inc, Walter Ledda, individually, Walter Ledda, as owner, officer or manager of Morgan Drexen, Inc., Defendants: Gerald A Klein, LEAD ATTORNEY, Klein & Wilson, Newport Beach, CA; Jeffrey Allen Katz, LEAD ATTORNEY, Morgan Drexen, Costa Mesa, CA; Nicholas M DePalma, LEAD ATTORNEY, PRO HAC VICE, Venable LLP, Tysons Corner, VA; Randall K Miller, LEAD ATTORNEY, PRO HAC VICE, Venable LLP, Tyson Corner, VA; Celeste M Brecht, Venable LLP, Los Angeles, CA; Randal M Shaheen, PRO HAC VICE, Venable LLP, Washington, DC.
ORDER DENYING DEFENDANTS' MOTION TO DISMISS
JOSEPHINE L. STATON, UNITED STATES DISTRICT JUDGE.
Before the Court is a Motion to Dismiss (" Motion" ) filed by Defendants Morgan Drexen, Inc. (" Morgan Drexen" ) and Walter Ledda. (Doc. 22.) Plaintiff Consumer Financial Protection Bureau (" CFPB" ) filed an Opposition, and Defendants replied. (Opp'n, Doc. 25; Reply, Doc. 27.) Having considered the papers and supporting documentation submitted by the parties, heard oral argument, and taken the matter under submission, the Court DENIES Defendants' Motion.
A. The CFPB
In 2010, Congress passed and the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (" Dodd-Frank Act" ). Pub. L. No. 111-203, July 21, 2010. The Dodd-Frank Act created the CFPB as an independent agency in the Federal Reserve System, and tasked the agency with " regulat[ing] the offering and provision of consumer financial products or services under the Federal consumer financial laws." 12 U.S.C. § 5491(a). Those laws include 18 pre-existing consumer-protection statutes and Title X of the Dodd-Frank Act. Id. § 5481(14), (12). Title X prohibits a " covered person" or " service provider" from engaging in any " unfair, deceptive, or abusive
act or practice." Id. § § 5531(a), 5536(a)(1).
The CFPB is led by a Director, who is appointed to a five-year term by the President with the advice and consent of the Senate. Id. § 5491(a)-(b). The President may remove the Director only " for inefficiency, neglect of duty, or malfeasance in office." Id. § 5491(c)(3). The CFPB receives its funding from the earnings of the Federal Reserve System. Id. § 5497(a)(1). Each year, the CFPB receives the amount the Director determines to be reasonably necessary to carry out the responsibilities of the CFPB. Id. § 5497(a)(1). The allocation is capped at a percentage of the total operating expenses of the Federal Reserve in 2009--12% for 2013 and thereafter, adjusted for inflation. Id. § 5497(a)(2).
The CFPB is empowered to promulgate rules to implement the federal consumer financial laws, and to enforce those laws through investigation, adjudication, and the commencement of civil litigation. Id. § § 5512, 5531(b), 5561-5565. Pursuant to its enforcement powers, the CFPB commenced the present action against Defendants on August 20, 2013. (Compl., Doc. 1.)
B. The Complaint
Defendant Morgan Drexen is a Nevada corporation offering debt relief services. ( Id. ¶ 5.) Defendant Walter Ledda is the President and CEO of Morgan Drexen. (Compl. ¶ 6.) Morgan Drexen employs the " Attorney Model" of debt relief services. ( Id. ¶ 8.) Under this model, a consumer contracts with an attorney affiliated with Morgan Drexen for debt relief services, but Morgan Drexen, not the attorney, actually performs the debt relief work and receives the majority of the fees. ( Id.)
Morgan Drexen advertises debt relief services through television commercials, radio advertisements, and the internet. ( Id. ¶ 15.) In its commercials, Morgan Drexen claims it can help consumers eliminate their debt through debt relief programs supported by attorneys. ( Id. ¶ 17.) Morgan Drexen's commercials also claim that the advertised services require no up-front fees, and are a way for consumers to avoid bankruptcy. ( Id. ¶ ¶ 19-20.)
When a consumer calls Morgan Drexen, the consumer often hears a recorded testimonial that emphasizes the benefits of avoiding bankruptcy. ( Id. ¶ 27.) One testimonial recites, " I thought I was going to have to claim bankruptcy, but I really didn't want to do that, so I decided to take a chance on the program I saw advertised. . . . I'm debt free now." ( Id. ¶ 27.) After Morgan Drexen obtains information about a consumer's income and debt, the consumer is transferred to a " Legal Intake Specialist." ( Id. ¶ 29.) The Legal Intake Specialist follows a script when speaking with the consumer. ( Id. ¶ 29.) The script states that Morgan Drexen will work with an attorney to allow the consumer " to pay back the debt at a reduced amount, without the scar of filing for bankruptcy." ( Id.)
As the final step of an intake call, a Morgan Drexen employee asks the consumer to access a web portal and electronically sign two contracts, an Attorney/Client Agreement -- Debt Resolution Representation (" Debt Relief Contract" ) and an Attorney/Client Bankruptcy Fee Agreement (" Bankruptcy Contract" ). ( Id. ¶ 34.) Most consumers contact Morgan ...