RICHARD W. STORY, District Judge.
The Consumer Financial Protection Bureau ("CFPB") brings this suit against numerous individuals and entities in connection with a massive debt-collection scheme. According to the CFPB, several individuals created limited liability companies in Georgia and New York to perpetrate a debt-collection scheme targeting millions of consumers. All said, through that operation, they collected more than $5 million in false or inflated debts.
After nearly four years, the case is now at summary judgment. Currently before the Court are Defendants Sumant Khan and S Payment Processing Solutions, LLC's Motion for Summary Judgment [450]; the CFPB's Motion for Summary Judgment [451]; and Defendant Tasha Pratcher's Motion for Permission to File an Answer Out of Time to the CFPB's Motion [547]. After reviewing the record, the Court enters the following Order.
The Defendants in this case are a set of individuals and limited liability companies that the CFPB accuses of working together in a fraudulent scheme to collect debts from consumers that did not exist or that Defendants were not entitled to collect. Defendants are best organized into two groups: (1) the LLC Defendants and (2) the Individual Defendants.
The LLC Defendants include: (1) Universal Debt & Payment Solutions ("UDPS"); (2) Universal Debt Solutions; (3) WNY Account Solutions and WNY Solutions Group, LLC; (4) Check & Credit Recovery, LLC; (5) Credit Power, LLC; and (6) S Payment Processing & Solutions, LLC ("S Payment"). UDPS, Check & Credit Recovery, Credit Power, and S Payment are all Georgia companies. Meanwhile, Universal Debt Solutions, WNY Solutions Group, and WNY Account Solutions were based out of New York.
According to the CFPB, each of the LLC Defendants played a part in the debt-collection scheme. At least three of them—UDPS, WNY Account Solutions, and Credit Power
For its part, UDPS—a company that operated with no employees—compiled the telephone numbers and addresses of people with debts through an account with CBC Innovis, and also broadcast automated collection calls using a separate account with Global Connect. UDPS maintained merchant processing accounts as well, which allowed it to take payments from consumers who used their bankcards.
Similarly, WNY Account Solutions (which also operated under the fictitious name, "WNY Account Solutions Group" and self-identified as a debt-collection agency) used a Global Connect account to broadcast automated collection calls to consumers. Credit Power did the same, and also paid for WNY Account Solutions' account with Global Connect, as well as a similar account held by Check & Credit Recovery. And, like UDPS, Credit Power opened an account with CBC Innovis to "track Debtor's [sic] addresses and phone numbers." (Dkt. [454-16].)
The other companies engaged in similar conduct. For instance, WNY Solutions Group operated as a collection agency in Buffalo, while Universal Debt Solutions' operations have been characterized as "collect[ing] aggressively from third parties (debtors)," both from its own "significant debt collection portfolio" and also on behalf of Credit Power on a contingency basis. (Dkt. [454-6].) Universal Debt Solutions did so using a variety of names, including "Payday Loans & More" and "Worldwide Requisition." It also took funds from the debt-collection scheme to purchase real property and generate rental income.
S Payment, on the other hand, was organized later than the other LLC Defendants, in April 2014. The same day, S Payment executed a contract with Marcus Brown that permitted Brown and his affiliated companies to process debt-collection payments using S Payment's merchant processing account. In return, S Payment received a 5% commission.
The Individual Defendants are: Marcus Brown, Mohan Bagga, Sumant Khan, Sarita Brown, and Tasha Pratcher. Each of them was affiliated with one or more of the LLC Defendants. Marcus Brown, though, was in one way or another associated with them all.
From 1991 to 2005—years before the events giving rise to this lawsuit—Marcus Brown held jobs at multiple collection agencies. In 2005, he pleaded guilty in New York to grand larceny, scheme to defraud, and identity theft. Among other things, the State charged Brown with committing credit card fraud.
Years later, Brown began traveling between Buffalo and Atlanta to help the LLC Defendants collect consumer debts. Brown was an owner, officer, or registered agent of nearly all the LLC Defendants. Notably, he organized Universal Debt Solutions then advised the company's clients on how to organize a debt-collection business. Brown also taught WNY Solutions Group how to improve collectors' performances and drafted collection letters. Similarly, when asked to help set up a debt-collection business in Atlanta, Brown provided Credit Power with what he called the "Brown Doctrine." It included call scripts and recommendations on how to motivate debt collectors to increase productivity. Later, Brown took control of Credit Power, along with Mohan Bagga. Furthermore, Brown purchased and sold debt for WNY Account Solutions. He also paid the bills for its merchant processing and Global Connect accounts. And he used S Payment's merchant processing accounts as well.
In addition to the advice he provided, Brown also drafted scripts that the LLC Defendants's employees used when making collection calls, as well as demand letters that were sent to consumers. He also recruited employees for the LLC Defendants, owned or controlled nearly half of the 70 phone numbers the debt collectors used, and opened Global Connect accounts for three LLC Defendants—UDPS, WNY Account Solutions, and Check & Credit Recovery—which they used to broadcast collection calls. Brown further compiled information about consumers by purchasing payday loan leads and alleged debt portfolios and performing skip tracing. He also facilitated the collection of debts by using payment processing accounts "to take and process consumers' credit and debit card payments." In the end, Brown received $321,492.00 in checks from the LLC Defendants. That does not include cash payments or personal expenses Brown paid using the LLC Defendants' corporate accounts.
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From 2011 to 2015 Defendants were responsible for millions of collection calls to consumers seeking to collect debts that were not owed or that Defendants were not authorized to collect. They acquired consumers' contact information in two ways. First, Marcus Brown purchased debt portfolios and payday loan leads, which gave them access to names, addresses, places of employment, Social Security numbers, telephone numbers, and bank account information. Second, Defendants performed "skip tracing" to verify and update existing contact information.
Defendants then used this information to place automated calls to consumers. They opened accounts with Global Connect LLC, a telephone broadcasting service, and furnished robo-call scripts that Global Connect recorded and broadcast to tens of thousands of consumers nationwide. The robo-call messages told consumers that they were accused of bank fraud or that a legal claim had been filed against them and that they must call a specified phone number to avoid legal action.
Eventually, consumers were connected to a member of the debt-collection staff. Those staff members often falsely identified themselves as litigators and threatened legal action or even arrest if the consumer did not pay up immediately. They had scripts and guides telling them how to respond when asked specific types of questions. And if the employee speaking to the consumer—referred to as a "litigator"—obtained a verbal commitment to pay, then the employee would transfer the consumer to an "auditor" who took the consumer's payment information. As stated previously, Defendants had multiple payment processing accounts, which allowed them to take payments from consumers through credit or debit card transactions.
As for the purported debts, Defendants misrepresented the amount owed, misrepresented their authority to collect on the purported debt, and took more in credit or debit card payments than the consumers authorized. None of the money collected actually went towards paying off any debt. Instead, Defendants took it for themselves. They used the collections to purchase properties, pay personal bills, and cover other expenses.
Hundreds of consumers complained about Defendants' debt-collection practices. They lodged complains with the Better Business Bureau and in the form of chargebacks—i.e., by disputing credit or debit card transactions. The CFPB has also produced sworn declarations from eight consumers who were personally affected. In brief, consumers reported: (a) frequent robo-calls; (b) debt collectors contacting third parties such as employers and family members; (c) threats of legal action or arrest; (d) use of fake identities; (e) misrepresentations about debts being owed or the caller's right to collect; and (f) failure to provide written confirmation of the amount of the debt and the name of the creditor to whom the debt was owed.
Overall, a total of $5,554,285.00 was processed through the various LLC Defendants' merchant processing accounts. Only $292,801.00 was ever refunded to consumers through chargebacks. Accordingly, Defendants collected at least $5,261,484.00 from the debt-collection scheme.
The CFPB is an independent agency of the United States responsible for protecting consumers through the enforcement of federal consumer financial laws. 12 U.S.C. § 5491(a). It brought this action on behalf of the consumers injured as a result of Defendants' debt-collection practices.
The CFPB alleges violations of the Consumer Financial Protection Act ("CFPA"), 12 U.S.C. §§ 5531, 5536(a), and the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. §§ 1692-1692p. The Complaint includes seven counts based on the conduct described above:
(1) that Defendants' concealment and failure to meaningfully disclose their identities to consumers during collection calls, along with their use of threats and making of false allegations, all had the "natural consequence" of harassing, oppressing, or abusing consumers in violation of the FDCPA, 15 U.S.C. § 1692d (Count I);
(2) that Defendants' misrepresentations to consumers were "false, deceptive, [and] misleading" under the FDCPA, 15 U.S.C. § 1692e (Count II);
(3) that by failing to provide consumers a written notice within five days of their initial communication, Defendants violated the FDCPA's requirement that debts be validated, 15 U.S.C. § 1692g (Count III);
(4) that Defendants' violations of the FDCPA also constitute violations of the CFPA, 12 U.S.C. § 5536(a)(1)(A) (Count IV);
(5) that Defendants' misrepresentations to consumers qualify as both "deceptive" (Count V) and "unfair" (Count VI) practices under the CFPA, 12 U.S.C. §§ 5531, 5536(a)(1)(B); and
(6) that the Individual Defendants knowingly or recklessly provided "substantial assistance" to the LLC Defendants' unfair or deceptive conduct in violation of the CFPA, 12 U.S.C. § 5536(a)(3) (Count VII).
The CFPB filed this lawsuit on March 26, 2015. The landscape has changed dramatically since then.
Originally, there were 18 named Defendants. In addition to the Individual and LLC Defendants named above, the CFPB asserted claims against four payment processors—Global Payments, Inc.; Pathfinder Payment Solutions, Inc.; Frontline Processing Corp.; and EMS—as well as Global Connect. However, those parties moved for sanctions under Rule 37 of the Federal Rules of Civil Procedure. Ultimately, the Court granted those motions, finding that the CFPB had failed to produce a knowledgeable witness for a deposition under Rule 30(b)(6) and blatantly disregarded the Court's instructions about certain objections. The Court therefore struck Counts VIII, IX, X, and XI of the Complaint, which left no claims against the four payment processors and Global Connect. So, those Defendants were dismissed from the case. (
Separately, the CFPB named Varinderjit "Veena" Bagga as a Defendant, alleging that she participated in the debt-collection scheme. But the CFPB later moved to dismiss M. Bagga, with prejudice, (Dkt. [449]). Shortly after that, she was dismissed from the case.
A number of the LLC Defendants have defaulted. In fact, only two have not—S Payment and WNY Account Solutions. As for the others, the CFPB moved for an entry of default against Universal Debt Solutions, WNY Solutions Group, Check & Credit Recovery, and Credit Power on September 2, 2015, after those parties failed to file answers or motions to dismiss, (Dkt. [150]). Before that, counsel for UDPS withdrew, (Dkt. [122]). So, the Court ordered UDPS to show cause why its Answers should not be sticken, given that corporations cannot proceed pro se in federal court, (Dkt. [177]). UDPS did not respond, however. And as a result, on November 24, 2015, the Court struck its Answers and directed the Clerk to enter default against UDPS, (Dkt. [199]).
Accordingly, the pending motions relate only to S Payment, WNY Account Solutions, and the Individual Defendants.
Before reaching the merits of the case, the Court provides a brief overview of the two statutes involved in this lawsuit: the CFPA and the FDCPA.
The CFPA was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376. In addition to establishing the CFPB, the CFPA also vests the CFPB with broad authority to enforce its terms. 12 U.S.C. §§ 5491(a), 5511(a), 5481(12), (14). Generally speaking, the CFPA prohibits "covered person[s]" from engaging in "unfair, deceptive, or abusive act[s] or practice[s] under Federal law," and also makes it unlawful to provide "substantial assistance" to those committing such acts. 12 U.S.C. §§ 5531(a), 5536(a). A "covered person" is an individual or entity "that engages in offering or providing a consumer financial product or service." § 5481(6)(A), (19). Any debt-collection activity is considered a "[c]onsumer financial product or service." § 5481(5), (15)(A)(x).
The CFPB is authorized to use the extent of its enforcement powers to "prevent" certain acts or practices that are "unfair," "deceptive," or "abusive." 12 U.S.C. § 5531(a). For an unfair act or practice, the CFPB must show that "[1] the act or practice causes or is likely to cause substantial injury to consumers [2] which is not reasonably avoidable by consumers; and [3] such substantial injury is not outweighed by countervailing benefits to consumers or to competition." 12 U.S.C. § 5531(c)(1). Similarly, an act or practice is "abusive" if it:
12 U.S.C. § 5531(d).
The term "deceptive," on the other hand, is not defined in the CFPA. However, the CFPB argues—and no party disputes—that the term should carry the same meaning as it does in § 5(a) of the Federal Trade Commission Act ("FTC Act"), an analogous provision making "unfair or deceptive acts or practices in or affecting commerce" unlawful. 15 U.S.C. § 45(a)(1). The Court agrees. So, as with § 5, to establish liability for a deceptive act or practice under the CFPA, the CFPB must prove: "(1) there was a representation; (2) the representation was likely to mislead customers acting reasonably under the circumstances, and (3) the representation was material."
According to 12 U.S.C. § 5536(a)(3), it is unlawful for "any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of section 5531 of this title [prohibiting unfair, deceptive, or abusive acts or practices]." This Court interpreted that provision in a previous Order, (Dkt. [149]). There, the Court drew on a similar substantial-assistance provision in § 20(e) of the Securities and Exchange Act of 1934 to analyze the requirements for liability under 12 U.S.C. § 5536(a)(3).
The CFPB must also satisfy a scienter requirement, which tracks the Eleventh Circuit's formulation of severe recklessness:
The FDCPA aims to remedy abusive, deceptive, and unfair debt collection practices by imposing civil liability on "debt collectors" who engage in certain prohibited conduct.
These prohibitions are enforced through administrative action and private lawsuits. Ultimately, to prevail on a claim under the FDCPA, a plaintiff must establish:
Federal Rule of Civil Procedure 56 requires that summary judgment be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." "The moving party bears `the initial responsibility of informing the . . . court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact.'"
The applicable substantive law identifies which facts are material.
Furthermore, in resolving a motion for summary judgment, the court must view all evidence and draw all reasonable inferences in the light most favorable to the non-moving party.
Finally, where there are cross-motions for summary judgment, the standard of review does not differ from that applied when only one party files a motion, but simply requires a determination of whether either of the parties deserves judgment as a matter of law on the facts that are not disputed.
The CFPB moves for summary judgment on all of its claims against the remaining LLC Defendants not in default—S Payment and WNY Account Solutions—and all of the Individual Defendants. Several of these parties have failed to respond, however.
The following Defendants did not file responses to the CFPB's motion: Marcus Brown, Sarita Brown, and WNY Account Solutions. Likewise, Tasha Pratcher failed to timely respond; however, on July 9, 2018, she asked the Court for permission file a response on the basis that she was unaware of the existence of the CFPB's motion. (Dkt. [547].) Ms. Pratcher's position is dubious at best, but either way, she has not included a proposed response with her motion, so there is nothing for the Court to consider. Ms. Pratcher's motion is, therefore,
In light of the foregoing, the CFPB's arguments as to Ms. Pratcher, Mr. Brown, Ms. Brown, and WNY Account Solutions are deemed unopposed.
The CFPB argues that WNY Account Solutions' role in the debt-collection scheme makes it subject to and in violation of both the CFPA and FDCPA. The Court agrees.
As to the CFPA, the Court finds that WNY Account Solutions is subject to the terms and restrictions of the CFPA because it self-identified and operated as a "Debt Collection Agency" with the primary objective of collecting debts from consumers.
For those reasons and others, WNY Account Solutions also violated the FDCPA. First, WNY Account Solutions qualifies as a "debt collector" under the FDCPA because it "regularly collect[ed] or attempt[ed] to collect, directly or indirectly, debts owed or due or asserted to be owed or due another." 15 U.S.C. § 1692a(6). The FDCPA prohibits debt collectors from "engag[ing] in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt" and using "any false, deceptive, or misleading representation[s] . . . in connection with the collection of any debt." §§ 1692d, 1692e. Further, under § 1692g(a), "[w]ithin five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall . . . send the consumer a written notice containing" the amount of the debt, the name of the creditor to whom the debt is owed, and a number of statements regarding debt validation, unless that information was already supplied.
Here, WNY Account Solution was involved in transmitting robo-calls to consumers across the country that falsely represented the nature or amount of purported debts, and misled consumers about the potential consequences of failing to pay. There is also no suggestion in the record that WNY Account Solutions validated the purported debts in the initial phone call, or at any time thereafter. There are, on the other hand, numerous complaints from consumers who never received the mandatory disclosures. Such behavior is plainly prohibited by the FDCPA. §§ 1692d(6); 1692e(2)(a), (4), (5), (7), (10), (14); 1692g.
Accordingly, the CFPB is entitled to summary judgment on its claims against WNY Account Solutions (Counts I-VI).
Based on the undisputed facts before the Court, Marcus Brown qualifies as a "covered person" under the CFPA and a "debt collector" under the FDCPA. He also violated those statutes.
Brown was the ringleader of the debt-collection scheme. He not only knew about the deceptive and harassing nature of the collection activities, but was largely responsible for their development and implementation. He "provided advice on debt collection techniques, and drafted call scripts for the LLC Defendants' employees to use when dealing with consumers, job listings to recruit employees, and demand letters for the LLC Defendants to send to consumers." (Pl.'s SOF, Dkt. [452] ¶ 109.) Brown also organized or served as an officer or agent for most of the LLC Defendants
Based on these undisputed facts, the CFPB is entitled to summary judgment on its CFPA and FDCPA claims against Marcus Brown (Counts I-VII).
The CFPB argues Sarita Brown violated the CFPA by "knowingly or recklessly provid[ing] substantial assistance to" other Defendants in connection with the debt-collection scheme—specifically, UDPS, Universal Debt Solutions, WNY Account Solutions, and Marcus Brown—all of whom are "covered persons" under the Act. (Pl.'s MSJ Br., Dkt. [45-1] at 35 (quoting 12 U.S.C. § 5536(a)(3).) For her part, Ms. Brown served in key positions or identified herself as serving in such a role, for all three LLC Defendants. At the direction of her brother, Marcus Brown, Ms. Brown filed the articles of organization for UDPS in New York and opened bank accounts for the other two LLC Defendants. She then used those "bank accounts to pay personal and business expenses for the Defendants." (Pl.'s SOF, Dkt. [452] ¶ 202.) Ms. Brown also provided Mr. Brown access to the companies' bank accounts by, among other things, signing a number of blank checks for him. And she gave Mr. Brown permission to forge her name on documents "whenever he needed it." (
Based on these undisputed facts, the Court finds that Ms. Brown provided substantial assistance to Mr. Brown and the LLC Defendants in committing unfair, abusive, and deceptive acts, in violation of 12 U.S.C. § 5536(a)(3). The CFPB is, therefore, entitled to summary judgment on its CFPA claim against Ms. Brown (Count VII).
Like Ms. Brown, the CFPB seeks to hold Tasha Pratcher liable for providing substantial assistance to other Defendants in perpetrating the debt-collection scheme. Ms. Pratcher is Marcus Brown's estranged wife. In 2005, she entered a guilty plea for her involvement in an identity theft scheme coordinated by Mr. Brown. Eight years later, Ms. Pratcher organized Universal Debt Solutions together with Mr. Brown. Ms. Pratcher also organized and operated RX Office Solutions, a company with no earnings and no expenses that was used to process payments and funnel money from the debt-collection scheme. Ms. Pratcher spent this money supporting the scheme by paying rent for the office space out of which a majority of the enterprise's operations took place. She received $122,910.00 in checks from WNY Account Solutions.
This constitutes substantial assistance to Mr. Brown and Universal Debt Solutions in their commission of acts prohibited under the CFPA. And, at the very least, Ms. Pratcher provided such assistance recklessly, given her history with Mr. Brown. Accordingly, the Court finds that Ms. Pratcher violated 12 U.S.C. § 5536(a)(3). The CFPB is, therefore, entitled to summary judgment on its claim against Ms. Pratcher (Count VII).
The CFPB alleges that Sumant Kahn and S Payment violated the CFPA and FDCPA. As to the CFPA claims, Mr. Kahn and S Payment respond that issues of material fact preclude summary judgment; as to the FDCPA claims, Mr. Kahn and S Payment argue that they (not the CFPB) are entitled to summary judgment because those claims fail as a matter of law. The Court will reach these contentions shortly, but must first address objections raised by the CFPB as the rulings on those objections could affect the evidence before the Court on the pending summary judgment motions.
The CFPB filed a Notice of Objections [531] in conjunction with its summary judgment reply. The CFPB asks the Court to strike, or in the alternative disregard, two declarations relied on by Mr. Khan and S Payment—one of which is attached to their motion for summary judgment, (Dkt. [450-1]), and the other to their response to the CFPB's motion for summary judgment, (Dkt. [498-1]). The CFPB seeks the same fate for a submission entitled "Defendants Sumant Khan and S Payment Processing & Solutions LLC's Statement of Material Facts Presenting a Genuine Issue for Trial," (Dkt. [513]).
Both of the declarations at issue are Mr. Khan's. The CFPB argues they fail to comply with 28 U.S.C. § 1746. That provision allows an unsworn declaration to be considered at summary judgment with the same force and effect as an affidavit so long as it is signed and dated and includes language in substantially the following form: "I declare (or certify, verify, or state) under penalty of perjury . . . that the foregoing is true and correct. Executed on (date). (Signature)." 28 U.S.C. § 1746.
Here, Mr. Khan's declarations include (basically) the language spelled out in § 1746, but end with Mr. Khan's electronic signature, rather than a written one. According to the CFPB, the typed signature of a non-attorney is insufficient. And the CFPB has cited numerous cases—albeit, most of them outside this Circuit—in which judges struck or refused to consider declarations that were electronically signed. (
The CFPB argues the Court should strike or disregard Mr. Khan and S Payment's statement of disputed facts because they were filed 25 days after the deadline for their response to the CFPB's motion for summary judgment. The Court disagrees. Although late, the statement of disputed facts still predated the CFPB's reply by 22 days. Thus the CFPB had ample time to respond.
Accordingly, the CFPB's objections are
The CFPB alleges that Mr. Khan and S Payment used harassing and abusive methods in violation of 15 U.S.C. § 1692d, made false or misleading representations in violation of § 1692e, and failed to validate debts under § 1692g. Mr. Khan and S Payment seek summary judgment on these claims. They argue: (1) the FDCPA does not apply because neither Mr. Khan nor S Payment is a "debt collector" as defined in § 1692a, and (2) there is no evidence of Mr. Khan or S Payment engaging in the conduct alleged by the CFPB. The Court takes these arguments in turn.
The FDCPA's prohibitions only apply to "debt collectors." 15 U.S.C. § 1692, et seq. Thus, "whether an individual or entity is a `debt collector' is determinative of liability under the FDCPA."
In the way of the CFPB's reasoning, though, is the statutory verbiage, "collects." To collect is "[t]o call for and obtain payment of," or "[t]o recover control of." Collect, AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE (4th ed. 2006). An obvious example of someone who collects debt is the proverbial "repo man"—or the one who actually reclaims the property from a defaulted debtor.
Of course, the statute goes on to say that one may be a debt collector, even if his collecting is done indirectly. But there is no reason to suppose that the inclusion of "indirectly" broadens the definition of "debt collector" so far as to encompass persons as detached from the actual collection process as S Payment was. Instead, it seems to the Court that one who indirectly collects a debt must nonetheless take part in the initial securing of the debt—for example, a principal who hires an agent to send collection letters.
That said, there is at least one piece of evidence obstructing the way to summary judgment for S Payment. In S Payment's application for a merchant processing account, the "type of goods sold" is described as "collections." (Dkt. [456-5] at 1.) While a company's own description of its operations might not be conclusive evidence of debt collecting,
The Court also cannot say as a matter of law, if Mr. Khan was or was not a debt collector. Of course, if S Payment was engaged in debt collection, then so was Mr. Khan.
However, the CFPB also accuses Mr. Khan of being a debt collector before he organized S Payment. The CFPB points to conduct such as (1) sending a letter to Pathfinder on behalf of Marcus Brown to obtain a merchant processing account for Universal Debt Solutions, (2) being listed as a reference on UDPS's application for a merchant processing account to CBC Innovis, (3) helping UDPS respond to the CFPB's civil investigative demand, and (4) advising Brown on debt collection laws in all 50 states. But none of these things actually constitutes collecting a debt. At most, they raise an issue of fact about Mr. Khan's connection to the other Defendants' and their activities. This uncertainty is amplified by Mr. Khan's allegations of forgery. Accordingly, the Court finds that summary judgment would be improper.
That issues of fact remain as to whether Mr. Khan and S Payment are "debt collectors" subject to the FDCPA does not end the inquiry for the purposes of Mr. Khan and S Payment's motion for summary judgment. And that is because, to avoid summary judgment, the CFPB must also present evidence that Mr. Khan and S Payment actually violated the FDCPA.
By and large, the CFPB attempts to tie Mr. Khan and S Payment to the debt collection activities of the other Defendants. In doing so, the CFPB makes sweeping allegations like labeling Mr. Khan and S Payment "key participants" in the "debt collection enterprise." But in reality, the evidence against Mr. Khan and S Payment specifically (as opposed to the enterprise generally) is quite thin.
Nevertheless, there remains uncertainty as to the nature of Marcus Brown's relationship with S Payment. Throughout its briefing, the CFPB describes Brown as an "agent" or "independent contractor" of S Payment. (
The CFPB alleges that Mr. Khan and S Payment violated the CFPA by employing acts or practices that were deceptive and unfair, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), and that Mr. Khan provided substantial assistance to the other Defendants as they engaged in unfair or deceptive conduct, § 5536(a)(3). The CFPB also argues that Mr. Khan and S Payment are liable under the CFPA by virtue of their violating the FDCPA, 12 U.S.C. § 5536(a)(1)(A). While true that violations of the FDCPA are expressly recognized as violations of the CFPA, 12 U.S.C. § 5536(a)(1)(A), in light of the Court's previous findings,
S Payment's liability under the CFPA stems, not necessarily from its own actions, but rather the existence of a "common enterprise" among the LLC Defendants.
Where entities are found to be part of a common enterprise, "each may be held liable for the deceptive acts and practices of the other."
Looking to the undisputed facts in this case, the Court cannot say that a common enterprise clearly existed between S Payment and the other LLC Defendants. The primary link between S Payment and the debt-collection enterprise was Marcus Brown. But it was Mr. Khan, not Brown, who organized S Payment and served as its only officer. (Pl.'s SOF, Dkt. [452] ¶¶ 39-40.) And while it is undisputed that Brown contracted with S Payment to process consumers' bankcard payments, as described above, the extent of Brown's control over the company and its operations (if any) is disputed.
Thus, there are issues of material fact as to whether S Payment and the other LLC Defendants shared common control, facilities, and equipment, and whether they commingled funds. It cannot be said, then, as a matter of law, that S Payment was part of a common enterprise. And so, the CFPB is not entitled to summary judgment on its claims against S Payment.
Mr. Khan does not dispute that he is subject to the CFPA as either a "covered person" or "service provider." Thus, the Court's focus is on whether the undisputed evidence—viewed in the light most favorable to Mr. Khan—establishes that he can be personally liable for engaging in unfair, deceptive, or abusive acts or practices. The Court finds that it does not.
Some authority suggests that an individual may be held liable for a corporate entity's unfair, deceptive, or abusive acts or practices if that individual (1) "participated directly in the wrongful acts or practices or had the authority to control the corporate defendant who did, and (2) had some knowledge of the acts or practices."
Substantial assistance liability requires (1) a primary violation, (2) a culpable state of mind, and (3) substantial assistance.
The next element—the knowledge requirement—is more difficult. The CFPB must prove Mr. Khan and S Payment's "general awareness" of the roles they were playing in the primary fraud and that they knowingly contributed to it.
Mr. Khan argues the CFPB has failed to establish that he knew the other Defendants were engaged in unlawful activities. In support, he cites the S Payment contract with Brown. There, Brown certified that he would not use the merchant processing accounts to do anything unlawful. Of course, the agreement is also clear that Brown would be "process[ing] payments for debt collection practice companies," and it provided recourse for Mr. Khan in the event Brown violated the law. (Dkt. [454-19] at 5.) But, to Mr. Khan's point, that does not necessarily mean that Brown's activities would actually be illegal.
However, the warning signs of fraudulent debt-collection activity were too numerous and too obvious for Mr. Khan not to have known that Brown was using S Payment to process wrongfully-collected debts. First, when Mr. Khan agreed to let Brown use S Payment's merchant processing accounts, he knew that one of Brown's affiliated companies—UDPS—was under investigation by the CFPB. (Dkt. [493-19].) In fact, during that investigation, a document authored by "Sumant" was produced with a list of approximately 9,500 consumers' names, including personal material like social security numbers and contact information, as well as details about debts those individuals owed. (Dkt. [489-10] ¶ 16; Dkt. [530-6].) Yet, Mr. Khan proceeded to execute a contract that did not specify or limit which of Brown's companies would be using the merchant accounts. The contract, itself, is also suspect because its principal purpose—allowing Brown and his companies to submit their transactions through S Payment for processing—is prohibited under S Payment's merchant agreements. And that is surely because the practice—sometimes called "factoring" or "aggregating"—is essentially a form of laundering. So, at the very least, Mr. Khan knew from the start that Brown would be using S Payment's merchant accounts for improper means.
Finally and perhaps most significantly, the contract required Brown to submit monthly reports on the "debt payments being processed," but he never did. And Mr. Khan evidently took no action to inquire into Brown's activities. This is especially telling, given that oversight and the avoidance of unlawful conduct were such integral parts of Mr. Khan's agreement with Brown. That Mr. Khan could not only have looked into the nature of the payments being processed but was contractually entitled to such information gives way to only one explanation for his alleged ignorance: Mr. Khan consciously ignored obvious signs of fraud to avoid learning about Brown's unlawful debt-collection activities. In doing so Mr. Khan was "highly unreasonable," and such conduct amounts to "an extreme departure from the standards of ordinary care," thus presenting an obvious danger of debt-collection fraud to consumers of which Mr. Khan must have been aware.
Still, the Court acknowledges that Mr. Khan's level of knowledge or recklessness is a close question based on the present record. But, the Court's conclusion is bolstered by the high level of assistance Mr. Khan and S Payment provided to the other Defendants' unlawful debt collection practices.
Indeed, there is no doubt that S Payment, and by extension Mr. Khan (the company's only officer) provided material assistance to Marcus Brown and his affiliated companies. They furnished access to merchant processing accounts, which were used to process credit and debit card payments for consumer debts. And there is no evidence suggesting that anyone other than Brown and his affiliates ever used S Payment's accounts or that S Payment engaged in any other type of legitimate business. As a result, the only reasonable inference that can be drawn is that Mr. Khan formed S Payment and opened its merchant processing accounts solely for the purpose of helping Brown. (
The CFPB argues Mohan Bagga is liable under the CFPA and FDCPA for engaging in unlawful debt collection practices and providing substantial assistance to other members of the enterprise as they perpetrated acts in violation of the CFPA. In response, Mr. Bagga denies ever being involved in debt collection activities and claims that Marcus Brown forged his signature on a number of documents relied on by the CFPB.
However, the facts conceded by Mr. Bagga, alone, support summary judgment for the CFPB's "substantial assistance" claim under the CFPA. Mr. Bagga admits nearly 200 of the 362 paragraphs in the CFPB's statement of undisputed material facts. (
Given Mr. Bagga's critical role with UDPS—a debt-collection business engaged in unlawful collection activities—it cannot be said that his ongoing association with the company and the assistance he provided were products of mere "simple or even inexcusable negligence," but rather constitute "an extreme departure from the standards of ordinary care" where the threat of misleading consumers was "either known to [Mr. Bagga]" or was "so obvious that [Mr. Bagga] must have been aware of it."
It seems these facts are also sufficient to establish liability on the CFPB's remaining CFPA claims. Indeed, it is undisputed that Mr. Bagga is a "covered person" under the statute. The CFPA treats as a "covered person" anyone who meets the definition of a "related person." 12 U.S.C. § 5481(25)(B). A "related person," in turn, includes any "director," "officer," "controlling shareholder," or "agent" of a covered person, as well as "any shareholder, consultant, joint venture partner, or other person" who "materially participates in the conduct of the affairs of [a] covered person." § 5481(25)(C)(i)-(ii). So, as a result of his affiliation with United Debt, Mr. Bagga is covered by the CFPA's prohibitions. And it also seems beyond doubt that Mr. Bagga violated those prohibitions by directly engaging in unfair, deceptive, and abusive acts or practices.
First, Mr. Bagga's forgery allegations are either refuted by his own prior testimony or wholly irrelevant. Mr. Bagga claims that, unbeknownst to him, Marcus Brown signed Mr. Bagga's name more than 80 times without permission. (Bagga Decl., Dkt. [540-2] ¶¶ 3-4.) Mr. Bagga, however, cites only 16 documents he alleges to fall into this category. (
Second, Mr. Bagga's denial of personal involvement in debt collection is legally deficient. And that is because the statements amount to mere legal conclusions based on Mr. Bagga's belief or speculation. (Dkt. [540-2] ¶¶ 5, 8, 9);
Mr. Bagga does, however, properly deny ever calling or harassing consumers. (Dkt. [540-2] ¶ 8.) But the CFPB has provided ample—and unrebutted—evidence establishing that Mr. Bagga was personally involved in the debt collection scheme in other ways. For instance, in addition to the activities described above, Mr. Bagga testified that he helped Marcus Brown "open[] a collection agency in the United States" by letting Brown use his name, bank account, and merchant account. (Dkt. [470] at 168-69.) And similarly, Mr. Bagga financed the launch of Credit Power—a business he repeatedly characterized as a "collection agency"—then took control of Credit Power's bank account and bought debt for the company to collect on. (Dkt. [473] at 46-56.) He also reopened Credit Power after it went out of business, and at that point, he was Credit Power's only officer. (
Recall that under a similar statutory scheme, the Eleventh Circuit has said that "[i]ndividuals may be liable for FTC Act violations committed by a corporate entity if the individual `participated directly in the [deceptive] practices or acts or had authority to control them,"
The CFPB has met that standard here. The CFPB has offered evidence that Mr. Bagga was an officer of both Credit Power and UDPS, and that he knew those companies were calling consumers and collecting debts that were sometimes not owed and that Defendants were not entitled to collect. He received consumer chargeback advices and complaints. And he knew consumers were not receiving validation letters, which is required under the CFPA. What is more, Mr. Bagga controlled Credit Power and UDPS's bank accounts. He, therefore, cannot plausibly claim ignorance as to the illegal practices going on. Accordingly, the Court finds that Mr. Bagga is directly liable under the CFPA, and the CFPB is entitled to summary judgment on its claims against him under that statute.
For these same reasons the CFPB is also entitled to summary judgment on its FDCPA claims. As an initial matter, Mr. Bagga is subject to the FDCPA. It is undisputed that he is a "debt collector" who sought to recover debts from consumers. Indeed, by purchasing debts to collect, compiling information about consumers through skip tracing accounts, and opening an account used to broadcast collection calls, Mr. Bagga used an "instrumentality of interstate commerce" for "the principal purpose of" collecting debts. 15 U.S.C. § 1692a(6);
Accordingly, the CFPB is entitled to summary judgment on its CFPA and FDCPA claims against Mohan Bagga (Counts I-VII).
The CFPA authorizes courts to "grant any appropriate legal or equitable relief with respect to a violation of Federal consumer financial law, including a violation of a rule or order prescribed under a Federal consumer financial law." 12 U.S.C. § 5565(a)(1). Such relief may include restitution, disgorgement or compensation for unjust enrichment, civil money penalties, and limits on the activities or functions of a person, among other things. § 5565(a)(2). The Act goes on to define three tiers of civil penalties, ranging from $5,000.00 to $1,000,000.00 for each day the violation continues, depending on the person's state of mind. § 5565(c)(2) (establishing separate penalties "any violation," reckless violations, and knowing violations).
Here, the CFPB seeks a permanent injunction against all Defendants; restitution in the amount of $5,261,484 for which all of the non-defaulted Defendants would be jointly and severally liable; and civil money penalties against each Defendant, ranging from $50,000.00 up to $1.5 million.
The Court finds that a ruling on damages would be premature at this point. Instead, the Court finds it appropriate to proceed to trial on the remaining issues related to Sumant Khan and S Payment's liability. Then, the Court will hold a hearing, after which it will grant appropriate relief. The Court notes, however, that this is not an invitation for the parties to re-litigate summary judgment. For instance, the CFPB has already established that WNY Account Solutions, Marcus Brown, Sarita Brown, Tasha Pratcher, and Mohan Bagga are liable under the CFPA and FDCPA and that Sumant Khan is liable for providing substantial assistance to other Defendants in violation of the CFPA. Similarly, the CFPB has proved that Defendants collected at least $5,261,484.00 from the debt-collection scheme.
As described above, the CFPB's Motion for Summary Judgment [451] is
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