Morgan Drexen, Inc. and Walter Ledda
Documents in this case
Case summary
The CFPB filed a lawsuit in federal district court against a Nevada corporation, Morgan Drexen, Inc., and its president and chief executive officer, Walter Ledda, for charging illegal upfront fees and deceiving consumers. The company falsely claims that it does not charge consumers upfront fees for debt-relief services and falsely represents to consumers that they will become debt free in months if they work with Morgan Drexen.
Complaint ()
PDF of this document (20 pages)
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LUCY E. MORRIS, WA Bar # 16510
Deputy Enforcement Director For Litigation
R. GABRIEL D. O’MALLEY, MA Bar # 651432 (E-mail: gabriel.o’[email protected])
(Phone: 202-435-9747)
SHIRLEY CHIU, IL Bar # 6296079
(E-mail: [email protected])
(Phone: 202-435-7592)
1700 G Street NW oe Washington, DC 20552 | ee
Fax: (202) 435-7722
KENT KAWAKAMI, CA Bar # 149803 — Local Counsel (Phone: 213-894-4858)
(E-mail: [email protected])
United States Attorney’s Office
Central District of California - Civil Division
300 North Los Angeles Street, Room 7516
Los Angeles, CA 90012
Fax: (213) 894-2380
Attorneys for Plaintiff Consumer Financial Protection Bureau
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
Consumer Financial Protection Bureau, | Case No.
Plaintiff, COMPLAINT FOR PERMANENT INJUNCTION AND OTHER v. RELIEF
Morgan Drexen, Inc., and Walter Ledda, individually, and as owner, officer, or manager of Morgan Drexen, Inc.,
Defendants.
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OTA
SACV13-01267 JST (JEMx)
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The Consumer Financial Protection Bureau (the “Bureau”) alleges the following against Morgan Drexen, Inc. (“Morgan Drexen’”) and Walter J. Ledda (“Mr. Ledda”’) (together, “Defendants’”):
INTRODUCTION 1, The Bureau brings this action under Sections 1031(a), 1036(a), 1054, and
1055 of the Consumer Financial Protection Act of 2010 (“CFPA”), 12 U.S.C. §§ 5531 (a), 5536(a), 5564(a), and 5581, and under the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §§ 6102(c)(2), 6105(d), based on Defendants’ violations of the CFPA and the Telemarketing Sales Rule (“TSR”), 16 C.F.R. pt. 310, in
connection with the marketing and sale of debt relief services. JURISDICTION AND VENUE
2. This Court has subject-matter jurisdiction over this action because the action
is “brought under Federal consumer financial law,” 12 U.S.C. § 5565(a)(1), presents a federal question, 28 U.S.C. § 1331, and is brought by an agency of the United States, 28 US.C. § 1345.
EA Venue is proper in this District under 28 U.S.C. §§ 1391(b) and (c), and 12 U.S.C. § 5564(f).
PLAINTIFF
4, The Bureau is an independent agency of the United States charged with regulating the offering and provision of consumer financial products or services under Federal consumer financial laws. 12 U.S.C. § 5491(a). It has independent litigating authority, 12 U.S.C. § 5564(a)-(b), including the authority to enforce the TSR as it applies to persons subject to the CFPA, 15 U.S.C. §§ 6102(c)(2), 6105(d); 12 U.S.C. § 5531(a).
DEFENDANTS
5. Defendant Morgan Drexen, Inc. (“Morgan Drexen”) is a Nevada
corporation. Its physical business address is 675 Anton Blvd., Costa Mesa, CA 92626.
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Morgan Drexen offers and provides debt relief services, as defined in the TSR, 16 C.F.R. § 310.2(m) (2010), and financial advisory services within the meaning of the CFPA, 12 U.S.C. § 5481(15)(A)(viii), including, but not limited to, debt relief services. At all times material to this Complaint, Morgan Drexen transacts or has transacted business in the Central District of California.
6. Defendant Walter J. Ledda is the President and Chief Executive Officer of Morgan Drexen. At all times material to this complaint, acting alone or in concert with others, Mr. Ledda has formulated, directed, controlled, or participated in the acts and practices of Morgan Drexen, including the acts and practices set forth in this Complaint. Given his status as an officer or managerial employee, Mr. Ledda is a “related person” under the CFPA. 12 U.S.C. § 5481(25). Because of his status as a “related person” under the CFPA, Mr. Ledda is a “covered person” under the CFPA. Jd. Mr. Ledda is also a “covered person” under the CFPA because he engages in the offering or providing of consumer financial services through his provision of financial advisory services, including services to assist consumers settle debts. At all times material to this Complaint, Mr. Ledda has transacted business in the Central District of California.
BACKGROUND 7. Mr. Ledda founded Morgan Drexen in or around March 2007. At the time, a
number of states that regulated the for-profit debt relief industry provided an exemption, in some form, for attorneys practicing law in connection with debt relief.
8. In or around August 2007, Morgan Drexen began employing what is known colloquially as the “Attorney Model” of debt relief services. Under the Attorney Model, consumers contracted directly with attorneys affiliated with Morgan Drexen for the provision of debt relief services and paid the attorneys up-front fees in advance of any debt being settled. Morgan Drexen, not the attorneys, actually performed the debt relief work on behalf of consumers. The attorneys, in turn, paid Morgan Drexen the majority
of the up-front fees they received from consumers.
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9. At the outset of its use of the Attorney Model, Morgan Drexen entered into a business arrangement with a number of lawyers (“Engagement Attorneys”). Morgan Drexen and the Engagement Attorneys agreed that they would work together to offer debt relief services to the entire nation. Each of the Engagement Attorneys was assigned a region of the country. The Engagement Attorneys then contracted with attorneys in jurisdictions where the Engagement Attorneys were not licensed to practice law (“Local Attorneys”) (Collectively, Local Attorneys and Engagement Attorneys are referred to herein as “Network Attorneys”).
10. Though consumers paid Network Attorneys directly, the attorneys would only keep a small percentage of the funds received. Morgan Drexen retained the majority of the up-front fees paid by consumers.
11. In October 2010, the FTC responded to the proliferation of abusive and deceptive practices in the debt relief sector by amending the TSR to, among other things, prohibit debt relief companies engaged in telemarketing from requesting or receiving advance fees before renegotiating, settling, reducing, or otherwise altering the terms of at least one of a consumer’s debts. The TSR amendments do not provide an exemption for attorneys practicing law in connection with debt relief.
12. Onor around the effective date of the TSR amendment, Morgan Drexen changed its business practice.
13. | Under its new practice, Morgan Drexen presents the consumer with two contracts to enter into with a Network Attorney, one purportedly for debt relief services and one purportedly for bankruptcy-related services (“Dual Contract Model”).
14. The Dual Contract Model is designed to disguise consumers’ up-front payments for debt relief services provided by Morgan Drexen as payments for
bankruptcy-related work purportedly performed by Network Attorneys.
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DEFENDANTS’ DUAL CONTRACT MODEL
Morgan Drexen Advertises Debt Relief Services
15. Morgan Drexen markets debt relief services through television commercials, radio advertisements, and the internet, including through websites that it creates and manages for Network Attorneys.
16. Morgan Drexen’s television commercials appear on network and cable television on local and national stations across the country. The commercials contain messages that encourage consumers to call Morgan Drexen immediately to take advantage of a limited opportunity.
17. In its commercials, Morgan Drexen claims that it can help consumers eliminate their debt through debt relief programs supported by attorneys. In the television commercials, these claims are generally plastered across the screen in large neon print. Such claims include:
a. “No more debt”
b. “Eliminate your debt”
c. “Call now! And erase your debt”
d. “Call for...a free legal services catalogue to explain how the attorneys can eliminate your debt”
e. “Attorneys supported by Morgan Drexen will work to reduce any type of unsecured debt”
18. In one commercial, a woman smiles and states, “Now I’m debt free, yes I am, yes.” In some commercials, a background voice instructs, “Call now, this is your opportunity to be debt free in months,” while the message “Be debt free in months” flashes on the screen in large, bold neon print.
19. Morgan Drexen states in its commercials that the advertised services do not
require any up-front fees. In television commercials, the words “$0 up-front fees” are
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displayed on the screen in large bold neon print, while a voice in the background announces, “Best part — no up-front fees. You have nothing to lose except your debt.”
20. Morgan Drexen also advertises its services as a way for consumers to avoid bankruptcy, with statements such as: “Start your life over without filing bankruptcy.”
21. Inits commercials, Morgan Drexen claims that attorneys will work on behalf of consumers to reduce their debt. For example, one commercial includes the following statement: “attorneys supported by Morgan Drexen will work to reduce your debt.” Another includes the following statement: “Put a lawyer on your side.” In most commercials, Morgan Drexen does not name a specific attorney. Instead, it refers generally to “attorneys supported by Morgan Drexen.”
22. Each television and radio commercial contains a toll-free telephone number for consumers to call in order to speak with a Morgan Drexen representative.
The Intake Call
The Pitch
23. Consumers respond to Morgan Drexen’s advertising and call the toll-free
telephone number listed by Morgan Drexen to inquire about the advertised debt relief services.
24. During telephone calls, employees of Morgan Drexen advise consumers that Morgan Drexen can assist in negotiating unsecured debts so that a consumer will be able to repay the debt for less than what is owed.
25. Morgan Drexen employees advise consumers that, under the terms of the advertised debt relief program, the consumers will make fixed monthly payments for a defined period of time.
26. Morgan Drexen employees further advise that, once Morgan Drexen has negotiated a settlement of unsecured debt, the funds the consumer has paid on a monthly
basis will be used to pay the negotiated, reduced debt amount, thereby settling the debt.
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27. Consumers are often placed on hold during their initial call to Morgan Drexen. While on hold, consumers hear testimonials from people who state they are happy with the program advertised by Morgan Drexen. These testimonials often
emphasize the benefits of avoiding bankruptcy. For example, one such testimonial reads:
And 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. Now of course I was very nervous at first because it was something new I hadn’t heard of before. But, I’m debt free now. I could hardly believe it. It’s awesome to get a second chance.
28. Morgan Drexen employees obtain detailed information from consumers about the amount and source(s) of their income and the amount and number of their debts.
29. Once Morgan Drexen has obtained information about the consumer’s income and debt, the consumer is transferred to a “Legal Intake Specialist,” another Morgan Drexen employee at its call center. Morgan Drexen has prepared a script for Legal Intake Specialists to follow when talking to consumers. The script includes the following language:
Basically, I’m a Morgan Drexen Legal Intake Specialist who works with (name the firm). This is a law firm that settles with creditors. (Name the firm), with our support, negotiates with your creditors to get you out of the debt. Although this depends on the circumstances of each individual client, their average settlements are about 40 to 50% of the balance due (excluding fees and accretion). Ultimately, they work with you to pay back the debt at a reduced amount, without the scar of filing for bankruptcy.
30. Ifaconsumer is still interested in signing up for the advertised debt relief program, a Morgan Drexen employee determines the amount of the monthly payment the
consumer will have to make under the program and informs the consumer of this.
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The Fees
31. During the intake call, Morgan Drexen makes a series of contradictory statements about the fees consumers must pay under the advertised debt relief program.
32. For example, per Morgan Drexen’s call scripts, Morgan Drexen employees state that the “only fee” a consumer will be charged for debt relief services is a flat percentage of the consumer’s original balance of a debt, and that the flat percentage will only accrue once the debt is settled.
33. But then the employee explains that the consumer will also be charged three fees for bankruptcy services: (1) a $1,000 to $1,500 engagement fee; (2) a $450 bankruptcy filing fee; and (3) a $50 monthly administrative fee. The employee states that Morgan Drexen provides the consumer with bankruptcy services as a “safety net, just in case you need a new beginning.” The employee describes how an attorney will prepare a bankruptcy petition for the consumer, but will not file it until the consumer consents and has paid the fees. The employee then explains that these fees are “built into” the consumer’s payment and thus are not an “out of pocket expense.”
34. As the final step of the intake call, the Morgan Drexen employee asks consumers with internet access to access a web portal and electronically sign two contracts for services with the Network Attorney to which Morgan Drexen has assigned them. The first contract is titled, “Attorney/Client Agreement — Debt Resolution Representation” (“Debt Relief Contract”). The second contract is titled, “Attorney/Client Bankruptcy Fee Agreement” (“Bankruptcy Contract”).
35. The Debt Relief Contracts are at least five-pages long, contain many legal terms, and are written in small font, in single-spaced form. The Bankruptcy Contracts are at least four-pages long, contain many legal terms, and are also written in small font, in singled spaced form.
36. Consumers do not have any contact with an attorney prior to signing these
contracts.
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37. The vast majority of consumers seeking Morgan Drexen’s debt relief services sign both contracts.
38. When consumers enroll in the program, Morgan Drexen employees tell them to stop paying debts they want to settle.
39. Consumers who stop paying debts as a result of Morgan Drexen’s advice may be harmed because the failure to pay may result in, among other things, a lowered credit score, collection calls, and the imposition of late fees.
40. Morgan Drexen also obtains authorization from consumers to automatically deduct a monthly payment from their bank account. Once Morgan Drexen has this authorization, it immediately withdraws $100.
The Architecture of Morgan Drexen’s Dual Contract Model
The Debt Relief Contract 41. Under the Dual Contract Model, the Debt Relief Contract the consumer
signs does not require the payment of up-front fees. Instead, it requires that the consumer pay his or her attorney a contingent fee that is a percentage (18%) of the verified original balance of the resolved account at the time of engagement. It also requires the consumer to pay a “pass-through charge” of either 4% of each debt that is settled or $10 per each payment the consumer makes to pay off a debt that is settled, whichever is less.
42. The contract commits a Network Attorney to represent a consumer with respect to the attempted negotiation and settlement of the consumer’s debts. In numerous instances, however, Morgan Drexen, not Network Attorneys, performs virtually all of the debt resolution work. Among other things, Morgan Drexen:
a. Creates and publishes advertisements for debt relief services;
b. Fields phone calls from consumers responding to its advertisements; c. Performs consumer intake;
d. Analyzes consumers’ budgets to determine the potential savings that
consumers may realize as a result of enrolling in the debt relief program;
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43.
. Determines consumers’ monthly payments;
Appoints Network Attorneys for consumers to enter into a contract with;
. Sends letters to consumers instructing them to call Morgan Drexen rather
than their attorneys if they have a question;
. Obtains paperwork from consumers to process enrolled debts;
Sets up automatic withdrawals from consumers’ bank accounts;
Develops relationships with creditors to facilitate debt relief;
. Sends letters to creditors in the names of Network Attorneys (Morgan
Drexen has signature stamps from the attorneys that it uses for this purpose);
Directs creditors to communicate only with Morgan Drexen, not
attorneys;
. Determines when to make a settlement offer to creditors; . Directly negotiates with creditors to settle consumers’ debts;
. Transfers funds from the accounts of Network Attorneys to itself,
creditors, and other third parties; and
. Handles inquiries or complaints from consumers, the Better Business
Bureau, and government agencies.
In numerous instances, Network Attorneys perform little, if any, work with
respect to debt relief.
44.
Local Attorneys receive a monthly retainer of $500 for a client base of three
hundred consumers ($1.66 per consumer). Morgan Drexen provides incentives to Local
Attorneys to approve settlement offers. Local Attorneys receive an additional $250 per
month to review and approve or reject up to fifty settlement offers ($5 per offer). After
receipt of the initial $250, Local Attorneys are eligible to receive another $5 per
settlement offer, but only for settlement offers that they approve.
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45. When Morgan Drexen has negotiated a settlement offer from a creditor, it emails Local Attorneys through a web portal. Upon receipt of the email, an attorney
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must choose one of four options: “cancel,” “accept,” “accept with comments,” or “deny.” If Local Attorneys do not respond to the settlement proposal within 24 hours, the proposal is automatically deemed approved. Settlement offers are routinely approved.
46. Ifdebt settlement negotiations fail, and a creditor seeks to collect a debt through litigation, consumers are not provided representation under the Debt Relief Contract.
47. Ifaconsumer wants litigation representation, he or she may enter into a separate, limited scope agreement with a per-service fee structure, and even then receives
only a consultation regarding the filing of pro-se pleadings.
The Bankruptcy Contract
48. Under the Bankruptcy Contract presented to the consumer, the consumer is required to pay up-front fees. At the outset of the engagement, a consumer pays:
a. an engagement fee of between $1,000 and $1,500, as determined by Morgan Drexen;
b. a $450 bankruptcy filing fee; and
c. a flat monthly servicing fee of $50.
49. By the bankruptcy contract’s own limited scope, little to no bankruptcy work is performed for consumers.
50. Though the Bankruptcy Contract refers to bankruptcy in its title and throughout the document, the contract does not commit Network Attorneys to provide legal representation to consumers in a bankruptcy proceeding. It limits a Network Attorney’s engagement to counseling the consumer “with respect to preparation for possibly filing a bankruptcy petition” and “with respect to pre- and post-filing claims by
creditors.” If a consumer seeks representation in a bankruptcy proceeding, he or she must
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pay the Network Attorney additional fees under a new contract, or find another attorney to represent him or her.
Morgan Drexen’s Receipt of Up-Front Fees
51. Once the consumer enrolls in Morgan Drexen’s Dual Contract Model program by signing both contracts, Morgan Drexen commences making automatic monthly withdrawals from the consumer’s account and depositing this money in his or her Network Attorney’s account.
52. With limited exception, it is not until the consumers’ payments have covered the up-front fees due under the Bankruptcy Contract — which may take a number of months — that the consumer’s monthly payments (minus the $50 monthly administrative fee or other outstanding fees) are placed into a trust account to be used towards settlements with the consumer’s creditors as negotiated by Morgan Drexen.
53. Morgan Drexen transfers the vast majority of all of these fees from the Network Attorneys’ accounts into its own account.
54. Ifconsumers seek to terminate their relationship with Morgan Drexen and the Network Attorneys and obtain a refund of the money they have paid, they typically are unable to do so, or they obtain only a partial refund. Morgan Drexen routinely argues that the fee payments are nonrefundable, regardless of whether Morgan Drexen has obtained any settlements for the consumer.
The Consumer Experience Under The Dual Contract Model
55. Consumers who respond to Morgan Drexen’s marketing efforts have unsecured debt(s) and typically are having difficulty making their monthly payments. They typically contact Morgan Drexen to inquire about debt relief services, not bankruptcy-related services.
56. At least 22,000 consumers have enrolled in Morgan Drexen’s Dual Contract program since October 27, 2010 and have been charged millions of dollars in up-front
fees.
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57. On average, Morgan Drexen customers who enter into the Dual Model Contract program enroll fourteen debts, totaling tens of thousands of dollars.
58. Few, if any, consumers become debt free in months by using Morgan Drexen’s Dual Contract Model program.
59. Only a tiny fraction of consumers who enter into Morgan Drexen’s Dual Contract Model have all of their enrolled debts renegotiated, settled, reduced, or otherwise altered. The vast majority of consumers do not have any enrolled debt renegotiated, settled, reduced, or otherwise altered.
60. Morgan Drexen and the Network Attorneys rarely perform any bankruptcyrelated work for consumers. Typically, where bankruptcy work is performed, it is limited to Morgan Drexen’s preparation of a draft bankruptcy petition for the consumer.
ROLE OF INDIVIDUAL DEFENDANT WALTER J. LEDDA
61. Mr. Ledda has engaged in the offering or providing of debt relief services through Morgan Drexen. He is the President of Morgan Drexen’s two-person Board of Directors, and the President and Chief Executive Officer of the company. He also holds a 93.09% stake in the company.
62. Among other acts relating to Morgan Drexen, Mr. Ledda manages the company’s day-to-day operations, is the sole signatory on Morgan Drexen’s bank accounts, and was instrumental in the creation of the Morgan Drexen’s Dual Contract Model.
THE TELEMARKETING SALES RULE
63. The TSR was promulgated for the explicit purpose of preventing consumer
harm from debt relief operations like Morgan Drexen’s. 75 Fed. Reg. 48, 458 (Aug. 10, 2010).
64. The TSR, 16 C.F.R. § 310.2(m), defines “debt relief service” as “any program or service represented, directly or by implication, to renegotiate, settle, or in any
way alter the terms of payments or other terms of the debt between a person and one or
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more unsecured creditors or debt collectors, including, but not limited to, a reduction in the balance, interest rate, or fees owed by a person to an unsecured creditor or debt collector.”
65. The TSR, 16 C.F.R. § 310.2(dd), defines “telemarketing” as “a plan, program, or campaign which is conducted to induce the purchase of goods or services or a charitable contribution, by use of one or more telephones and which involves more than one interstate telephone call.”
66. The TSR, 16 C.F.R. § 310.2(aa), defines “seller” as “any person who, in connection with a telemarketing transaction, provides, offers to provide, or arranges for others to provide goods or services to the customer in exchange for consideration.”
67. The TSR, 16 C.F.R. § 310.2(cc), defines “telemarketer” as “any person who, in connection with telemarketing, initiates or receives telephone calls to or from a customer or donor.”
68. Defendants are “sellers” or “telemarketers” of “debt relief service,” who engage in “telemarketing,” as defined in the TSR.
69. The TSR, 16 C.F.R. § 310.4(a)(5)(i), provides that a seller or a telemarketer may not request or receive payment of any fee or consideration for any debt relief service until and unless, among other things, “the seller or telemarketer has renegotiated, settled, reduced, or otherwise altered the terms of at least one debt pursuant to a settlement agreement, debt management plan, or other such valid contractual agreement executed by the customer” and “the customer has made at least one payment” pursuant to such an agreement or plan.
70. The TSR, 16 C.F.R. § 310.4(a)(5)(ii), provides that a seller or a telemarketer may request or require customers to place funds in an account to be used for the debt relief provider’s fees and for payments to creditors or debt collectors in connection with the renegotiation or settlement of a debt, provided that, among other things: “the
customer owns the funds held in the account and is paid interest on the account” and “the
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customer may withdraw from the debt relief service at any time without penalty and must receive all funds in the account, other than funds earned by the debt relief service in compliance with §310.4(a)(5)(i)(A) through (C), within seven (7) business days of the consumer’s request.”
71. The TSR, 16 C.F.R. § 310.3(a)(2)(ii), prohibits a seller or telemarketer from misrepresenting, directly or by implication, in the sale of goods or services, any material restriction, limitation, or condition to purchase, receive, or use goods or services that are the subject of the sales offer.
72. The TSR, 16 C.F.R. § 310.3(a)(2)(ii1), prohibits a seller or telemarketer from misrepresenting, directly or by implication, in the sale of goods or services, any material aspect of the performance, efficacy, nature, or central characteristics of goods or services that are the subject of a sales offer.
73. The TSR, 16 C.F.R. § 310.3(a)(2)(x), prohibits a seller or telemarketer from misrepresenting, directly or by implication, in the sale of goods or services, any material aspect of any debt relief service.
VIOLATIONS OF THE TSR COUNT I 74. Plaintiff re-alleges Paragraphs 1 — 73 and incorporates them herein by
references:
75. Inthe course of telemarketing debt relief services from October 27, 2010 to the present, Defendants have requested or received fees from consumers for debt relief services before renegotiating, settling, reducing, or otherwise altering the terms of at least one of such consumers’ debts. Defendants have requested or received payment of these fees prior to consumers making at least one payment pursuant to any settlement agreement, debt-management plan, or other valid contractual agreement between
consumers and their creditors.
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76. Therefore, Defendants’ acts or practices violate the TSR, 16 C.F.R. § 310.4(a)(5)(i), and are abusive acts or practices in telemarketing. Because Defendants are “covered persons,” their conduct is unlawful under sections 1031(a) and 1036(a)(1) of the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1). 15 U.S.C. § 6102(c)(2).
COUNT II
77. Plaintiff re-alleges Paragraphs 1 — 73 and incorporates them herein by reference.
78. Inthe course of telemarketing debt relief services from October 27, 2010 to the present, Defendants have required consumers to place up-front fee payments in an account and failed to hold these payments such that consumers own the funds, or to allow consumers to withdraw from the debt relief program without penalty and receive all funds held in the account.
79. Therefore, Defendants acts or practices violate the TSR, 16 C.F.R. § 310.4(a)(5)(ii), and are abusive acts or practices in telemarketing. Because Defendants are “covered persons,” their conduct is unlawful under sections 1031(a) and 1036(a)(1) of the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1). 15 U.S.C. § 6102(c)(2).
COUNT Il
80. Plaintiff re-alleges Paragraphs 1 — 73 and incorporates them herein by reference.
81. In numerous instances, in connection with the advertising, marketing, promoting, offering for sale, or sale of debt relief services, Defendants have represented, directly or indirectly, expressly or by implication, that consumers are not charged an advance fee for Defendants’ debt relief services.
82. In fact, consumers are charged advance fees for Defendants’ debt relief services.
83. Therefore, Defendants’ representations as described herein violate the TSR,
16 C.F.R. § 310.3(a)(2)(i1) and (x), and are deceptive acts or practices in telemarketing.
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Because Defendants are “covered persons,” their conduct is unlawful under sections 1031(a) and 1036(a)(1) of the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1). 15 U.S.C. § 6102(c)(2).
COUNT IV
84. Plaintiff re-alleges Paragraphs 1 — 73 and incorporates them herein by reference.
85. In numerous instances, in connection with the advertising, marketing, promoting, offering for sale, or sale of debt relief services, Defendants have represented, directly or indirectly, expressly or by implication, that consumers who enroll in the debt relief program advertised by Defendants will be debt free in months, i.e., less than a year, of enrolling in the program.
86. In fact, in numerous instances, consumers do not become debt free in months, i.e., less than a year, of enrolling in Defendants’ debt relief program.
87. Therefore, Defendants’ representations as described herein violate the TSR, 16 C.F.R. § 310.3(a)(2)(ii1) and (x), and are deceptive acts or practices in telemarketing. Because Defendants are “covered persons,” their conduct is unlawful under sections 1031(a) and 1036(a)(1) of the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1). 15 U.S.C. § 6102(c)(2).
THE CONSUMER FINANCIAL PROTECTION ACT 88. Sections 1031 and 1036(a)(1)(B) of the CFPA, 12 U.S.C. §§ 5531,
5536(a)(1)(B), prohibit covered persons from engaging “in any unfair, deceptive, or
abusive act or practice.”
89. Section 1036(a)(1)(A) of the CFPA provides that it is “unlawful for any covered person to offer or provide to a consumer any financial product or service not in conformity with Federal consumer law, or otherwise commit any act or omission in violation of a Federal consumer financial law.” Section 1054(a) of the CFPA grants the
Bureau authority to commence a civil action against any person who violates a Federal
Page 19
SD WAND Wn FP WY NY
—"
So
Zo
consumer financial law. The CFPA is a Federal consumer financial law. 12 U.S.C. § 5481(14).
90. Defendants are “covered person[s]” within the meaning of the CFPA, 12 U.S.C. §§ 5481(6) and 5481(25).
VIOLATIONS OF THE CFPA COUNT V 91. Plaintiff re-alleges Paragraphs 1 — 73 and incorporates them herein by
reference.
92. In numerous instances, in connection with the advertising, marketing, promoting, offering for sale, or sale of debt relief services, Defendants have represented, directly or indirectly, expressly or by implication, that consumers are not charged an advance fee for Defendants’ debt relief services.
93. In fact, consumers are charged advance fees for Defendants’ debt relief services.
94. Therefore, Defendants’ representations as set forth in Paragraph 91 are false and misleading, and constitute deceptive acts or practices in violation of Sections 1031 and 1036 of the CFPA, 12 U.S.C §§ 5531, 5536.
COUNT VI
95. Plaintiff re-alleges Paragraphs 1 — 73 and incorporates them herein by reference.
96. In numerous instances, in connection with the advertising, marketing, promoting, offering for sale, or sale of debt relief services, Defendants have represented, directly or indirectly, expressly or by implication, that consumers who enroll in the debt relief program advertised by Defendants will be debt free in months, 7.e., less than a year, of enrolling in the program.
97. In fact, in numerous instances, consumers do not become debt free in
months, i.e., less than a year, of enrolling in Defendants’ debt relief program. Therefore,
Page 20
Oo AN HD Nn FBP WY NO
BO NO NO WN ND ND WN WN HN w& F&F HF FS KF SS Fe Re eS OonN HD Nn FBP W NY KF TD OO WBN DW Nn FBP W NO KF CO
Defendants’ representations as set forth in Paragraph 95 are false and misleading, and constitute deceptive acts or practices in violation of Sections 1031 and 1036 of the CFPA, 12 U.S.C $§ 5531, 5536.
CONSUMER INJURY
98. Consumers have suffered and will continue to suffer substantial injury as a
result of Defendants’ violations of the TSR and the CFPA. In addition, Defendants have been unjustly enriched as a result of their unlawful acts or practices. Absent injunctive relief by this Court, Defendants are likely to continue to injure consumers, reap unjust
enrichment, and harm the public.
THIS COURT’S POWER TO GRANT RELIEF 99. The CFPA empowers this Court to grant any appropriate legal or equitable
relief with respect to violations of Federal consumer financial law, including, without limitation, permanent or temporary injunction, rescission or reformation of contracts, the refund of moneys paid, restitution, disgorgement or compensation for unjust enrichment, and civil money penalties. 12 U.S.C. §§ 5538(a) and 5565(a). PRAYER FOR RELIEF 100. Wherefore, the Bureau requests that the Court:
a. Award Plaintiff such injunctive and ancillary relief as may be necessary to enjoin Defendants from harming consumers through the advertisement, marketing, promotion, offering for sale, or selling of any consumer financial product or service;
b. Permanently enjoin Defendants from advertising, marketing, promoting, offering for sale, or selling any debt relief product or service.
c. Permanently enjoin Defendants from committing future violations of the CFPA, 12 U.S.C. §§ 5531, 5536, and the TSR, 16 C.F.R. pt. 310;
d. Award such relief as the Court finds necessary to redress injury to
consumers resulting from Defendants’ violations of the CFPA and the
Page 21
So Wnt Dn BR WW PO
NO NY NY NHN WD NY NY ND NO HB HB HB Bee ee ee Se pe Ye oN DMN FW Ne F& DO WON DWN BP WH PB HO
TSR, including, but not limited to, rescission or reformation of contracts,
the refund of moneys paid, restitution, and disgorgement or compensation
for unjust enrichment;
e. Award Plaintiff civil money penalties; and
f. Award Plaintiff the costs of bringing this action, as well as such other and
additional relief as the Court may determine to be just and proper.
Dated: August 20, 2013
Respectfully submitted,
LUCY E. MORRIS Deputy Enforcement Director For Litigation = 7 7
“R. Gabriel D. O’ Malley
(E-mail: gabriel.o’[email protected])
(Phone: 202-435-9747)
Shirley Chiu
(E-mail: [email protected])
(Phone: 202-435-7592)
Enforcement Attorneys
Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20552
Fax: (202) 435-7722
Order ()
PDF of this document (28 pages)
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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
CONSUMER FINANCIAL PROTECTION BUREAU,
Plaintiff,
vs.
MORGAN DREXEN, INC., ET AL.,
Defendants.
CASE NO. SACV 13-1267-JLS (JEMx)
ORDER (1) GRANTING PLAINTIFF’S MOTION FOR SANCTION OF DEFAULT JUDGMENT AGAINST MORGAN DREXEN, INC. (Docs. 255-2, 274) AND (2) REQUIRING SUPPLEMENTAL BRIEFING AS TO DEFENDANT WALTER LEDDA Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 1 of 28 Page ID #:29531
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I.
INTRODUCTION Before the Court is a Motion for Sanctions filed by Plaintiff Consumer Financial Protection Bureau (the “Bureau”). (Mot., Docs. 255-2, 274.) Defendants Morgan Drexen Inc. and Walter Ledda filed an Opposition, and Plaintiff replied. (Opp’n, Doc. 261; Reply, Doc. 262.) After considering the briefing and supporting documentation submitted by the parties, holding an evidentiary hearing, and taking the matter under submission, the Court GRANTS Plaintiff’s Motion for Sanctions against Defendant Morgan Drexen Inc. and ORDERS supplemental briefing regarding the potential personal liability of Defendant Walter Ledda and whether default judgment should be entered against him as well.
II.
BACKGROUND Morgan Drexen, Inc. has been in business since 2007.1 Defendant Walter Ledda is the Chief Executive Officer of Morgan Drexen and has been a member of the company’s Board of Directors since May 21, 2007. Morgan Drexen provides debt settlement and bankruptcy services to attorneys and consumers. Specifically, Morgan Drexen works with attorneys to service clients who are subject to actions and lawsuits by organizations within the debt collection industry.
Prior to October 27, 2010, the effective date for recent amendments to the Telemarketing Sales Rule (“TSR”), consumers paid the attorneys that contract with Morgan Drexen an up-front engagement fee and a monthly fee for debt settlement services. However, in 2009, Morgan Drexen became aware of proposed amendments to the TSR that would ban advance fees for debt settlement services. Morgan Drexen considered the proposed amendments to be a threat to its business. As the October 27, 2010 effective date approached, Morgan Drexen began contracting with attorneys to not only offer debt settlement services to customers, but also offer bankruptcy services. Customers are
1 Unless otherwise noted, all facts in this section were undisputed by Defendants in their Statement of Genuine Issues of Fact. (Doc. 188-1.) Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 2 of 28 Page ID #:29532
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required to sign separate contracts for the debt settlement services and bankruptcy services. Under the debt settlement contract, the consumer pays no up-front fees. Under the bankruptcy services contract, the consumer must pay an up-front engagement fee and a monthly maintenance fee.
On August 20, 2013, the Bureau filed suit against Defendants. The Complaint asserts six claims, four for violations of both the TSR, 16 C.F.R. § 310, and the Consumer Financial Protection Act (“CFPA”), 12 U.S.C. §§ 5531, 5536(a)(1), and two solely for violations of the CFPA. The Bureau alleges, among other things, that Defendants violated the TSR and the CFPA by (1) requesting or receiving up-front fees for debt relief services, and (2) representing to consumers that they will not be charged advance fees for debt relief services, but in fact charging such fees. In short, the Bureau claims that Defendants bundled unnecessary bankruptcy services into the package to disguise the fact that they continued to charge an upfront fee for what were essentially debt relief services.
A.
The Parties’ Motions for Summary Judgment On October 7, 2014, Defendants filed a motion for partial summary judgment, and on October 8, 2014, the Bureau filed a motion for summary judgment. On November 25, 2014, the Court issued an Order regarding the parties’ motions for summary judgment, relying on the following evidence concerning Defendants’ debt settlement and bankruptcy services:
Between October 27, 2010 and August 31, 2014, 95% of Morgan Drexen’s customers signed up for both debt settlement and bankruptcy services. ([Defs’ SGI] ¶ 124.) Approximately 93% of those enrolled in both services were charged an up-front fee. (Id. ¶ 128.) However, of those enrolled in both services during that time period, somewhere between 0.897% and 5.1% filed a Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 3 of 28 Page ID #:29533
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Chapter 7 bankruptcy petition. (Hanson Decl., Pltf’s SJ Ex. 138 ¶ 35, Doc. 176; Walker Decl., Defs’ Opp’n Ex. 11 ¶ 125, Doc. 188-8; Defs’ SGI ¶ 294.)2 Only 0.7% of those customers enrolling in any program offered by Morgan Drexen between October 27, 2010 and August 31, 2014, signed up for debt settlement services only (Defs’ SGI ¶ 133), while 4.3% of those customers enrolling in any program offered by Morgan Drexen between October 27, 2010 and August 31, 2014, signed up for bankruptcy services only. (Defs’ SGI ¶ 138.)
For those customers signing up for both debt settlement and bankruptcy services, a Chapter 7 bankruptcy petition is prepared using information received from the customer, whether or not the customer decides to file for bankruptcy. (Id. ¶¶ 203, 209, 212.) Morgan Drexen and the contracting attorneys believe that preparing Chapter 7 bankruptcy petitions for all clients serves a strategic advantage when conducting debt settlement negotiations with creditors and can result in better agreements due to the threat of bankruptcy. (Id. ¶¶ 299, 302.) The [Bureau], on the other hand, alleges that there is only anecdotal evidence that the threat of bankruptcy results in greater debt reduction and better settlements, and contends that Morgan Drexen is providing bankruptcy services and preparing petitions simply to charge up-front fees from customers for debt settlement services. (Id. ¶¶ 300-314, 317, 327.)
(Order at 4-5, Doc. 198) (footnote in original). In its motion for summary judgment, the Bureau asserted that Defendants have unlawfully charged nearly 60,000 customers improper “up-front” fees totaling $90.7 million, because little if any bankruptcy services are actually performed for the customers. In response, Defendants asserted that a Chapter
2 The parties dispute the actual percentage of customers who filed for bankruptcy during this time. Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 4 of 28 Page ID #:29534
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7 bankruptcy petition is prepared using information received from the customer, whether or not the customer decides to file for bankruptcy, because the preparation of the petition serves as leverage in debt settlement negotiations, prevents litigation, and helps customers obtain better settlement offers from creditors. Defendants further argued that the reason so few customers ultimately file for bankruptcy is that “many consumers are unwilling to pull the bankruptcy trigger,” “some consumers drop out of the bankruptcy process when they feel they can resolve their own debts,” and it is “the failure to pay fees in full that prevents many bankruptcy petitions from being filed.” (Defs’ Opp’n at 15-16.) Relying on the evidence submitted and assertions made by Defendants, the Court denied both motions for summary judgment. The Court found that the existence and use of bankruptcy petitions were highly relevant to the central issue of whether Defendants’ business model charges up-front fees for debt settlement or bankruptcy services. The Court accepted at face value Defendants’ representation that bankruptcy petitions were prepared for all customers at the outset of their engagement with Defendants, whether or not the customer ultimately decided to file for bankruptcy. The Court stated that “Defendants have offered some evidence suggesting that the threat of bankruptcy and preparation of certain documents in connection with bankruptcy can serve a strategic purpose in debt settlement negotiations. While debt settlement and bankruptcy services seem to be closely related under Morgan Drexen’s business model, this does not necessarily mean that the upfront fees are not specific to the bankruptcy petitions Morgan Drexen and the attorneys help prepare for consumers.” (Summary Judgment Order at 12- 13, Doc. 198.) As a result, the Court found that Defendants had created a genuine dispute as to the legality of Morgan Drexen’s business model.
B.
The Bureau’s Motion for Sanctions On February 25, 2014, the Bureau served Morgan Drexen with a request for production of documents, including a request for all documents related to a random sampling of 450 consumers who were enrolled in a Morgan Drexen program between 2010 Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 5 of 28 Page ID #:29535
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and 2014. (O’Malley Decl. ¶ 4, Doc. 274-3.) For months, Morgan Drexen failed to produce the requested documents and failed to comply with Court orders regarding discovery. (O’Malley Decl. ¶¶ 3-29.) According to Linh Tran, associate general counsel for Morgan Drexen, Defendants were ready to start producing consumer files to the Bureau in May or early June 2014. (Transcript of February 10, 2015 hearing at 95, Docs. 278, 280.) However, Jeffrey Katz, Morgan Drexen’s general counsel, asked Tran to delay the production because supposedly there was additional information that Katz believed should be included in the files. (Id. at 95-97.) On June 13, 2014, the Magistrate Judge issued an order that required Defendants to produce all consumer files by June 20, 2014. (Doc. 84.) On June 18, 2014, Defendants requested an extension of time, providing four specific reasons for why they could not meet the deadline. (Ex Parte App., Doc. 85.) On August 4, 2014, the Magistrate Judge ordered Morgan Drexen to complete production of the requested documents (Order at 1-2, Doc. 115), and the Court stated that it “intends to impose monetary sanctions (which Defendants conceded are appropriate) but will withhold doing so until document production is complete.” (Id. at 3.) Defendants eventually produced the requested documents for the random sample of consumers. The documents that Morgan Drexen produced included bankruptcy petitions for the consumers in the sample. On January 23, 2015, the Bureau filed the present Motion for Sanctions. The Bureau asserts “[i]n the weeks leading up to their document production to the Bureau, Defendants manufactured bankruptcy petitions that did not previously exist.” (Reply at 1.) Specifically, the Bureau claims that Defendants manipulated, altered, and destroyed evidence by:
(1) creating bankruptcy petitions that did not exist at the time of the Bureau’s document request and adding them to consumer files before producing files to the Bureau; (2) altering bankruptcy petitions in consumer files that did exist at the time of the Bureau’s document request by inputting information into the Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 6 of 28 Page ID #:29536
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petitions to make it look like Morgan Drexen had performed more work on the petitions than it actually had prior to the Bureau’s document request; and (3) altering log notes in consumer files to hide the fact that it had created and altered petitions prior to producing the files to the Bureau.
(Mem. at 1, Doc. 274-1.) The Bureau contends that Defendants’ alleged actions constitute fraud on the Court and “were premeditated and performed with a bad faith intent to pervert justice.” (Mem. at 2.)
1.
The Bureau’s Contentions and Evidence In support of its Motion, the Bureau submitted declarations and provided testimony regarding Defendants’ alleged manipulation, alteration, and destruction of evidence during the discovery process.
First, the Bureau submitted a declaration from Joseph Calvarese, an e-law litigation support specialist at the Bureau who reviewed the metadata3 of the bankruptcy petitions Morgan Drexen produced as part of their production of consumer files to the Bureau. (Calvarese Decl. ¶¶ 1-12, Doc. 274-5.) According to Calvarese, “[t]he metadata indicates that Morgan Drexen created huge numbers of bankruptcy petitions after the Bureau commenced its lawsuit and after Morgan Drexen received the Bureau’s document request.” (Id. ¶ 13 (emphasis in original).) Calvarese asserts that 145 of the 222 bankruptcy petitions that he found in the 150 consumer files he reviewed were created by Morgan Drexen between June 27, 2014, and July 3, 2014. (Id. ¶¶ 8, 17; see Calvarese Decl.) 126 of these 145 petitions were for consumers who were not enrolled in a Morgan Drexen program during that 2014 time period. (Calvarese Decl. ¶ 22; see, e.g., Calvarese
3 Metadata provides information about an electronic document's content. "A text document's metadata may contain information about how long the document is, who the author is, when the document was created, and a short summary of the document." (Calvarese Decl. ¶ 4.) Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 7 of 28 Page ID #:29537
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Decl., Exs. 3-6.) Only 68 of the bankruptcy petitions Morgan Drexen produced have creation dates in 2011, 2012, or 2013. (Mem. at 9.) The Bureau cites numerous statements made by Morgan Drexen during this litigation suggesting that all bankruptcy petitions should have been created at the time the consumers were enrolled in Morgan Drexen programs. (See Mem. at 10; O’Malley Decl., Exs. 15-17, Doc. 274-3; see, e.g., O’Malley Decl., Ex. 15 at 10 (“Morgan Drexen employees do all of the work necessary to prepare the bankruptcy petitions at the outset of the engagement by the clients, so that the petitions can be sent to creditors giving the attorney a credible threat of filing bankruptcy to prevent further litigation efforts by creditors.”) (emphasis added).) According to the Bureau, “[f]rom the outset of this litigation, Defendants have highlighted the creation of petitions as the key fact they believe removes them from coverage under the” TSR. (Reply at 3.) Second, the Bureau submitted the declaration of Rita Augusta, a former member of Morgan Drexen’s Board of Directors and the Chief Operating Officer of Morgan Drexen from in or around 2010 to November 2014. (Augusta Decl. ¶¶ 4, 6, Doc. 274-4; Opp’n at 10 n. 4-5.) In November 2014, Augusta was placed on administrative leave without pay by Ledda purportedly because she expressed her concerns about Morgan Drexen and certain actions the company had taken in response to the Bureau’s lawsuit.4 (Augusta Decl. ¶ 9; Augusta Decl., Ex. 1, Doc. 274-4.)
4 Defendants assert that “much of what Augusta told the Bureau is false.” (Opp’n at 11 (emphasis omitted).) According to Defendants, “since September 25, 2014, Augusta had been angling for a payoff from Morgan Drexen to buy out her equity and even hired a lawyer threatening a lawsuit against Morgan Drexen.” (Id.) Augusta allegedly “told other employees she intended to bring Morgan Drexen down, and, in December 2014 when Morgan Drexen refused to pay her off as she demanded, she apparently called the Bureau to take revenge against Morgan Drexen and particularly[] Katz.” (Id.) In essence, Defendants assert that Augusta is lying. “In order to make determinations about the party’s conduct, a court may ‘make inferences and credibility determinations from evidence received.’” The Sunrider Corp. v. Bountiful Biotech Corp. No. SACV 08-1339, 2010 WL 4589156, at *5 (C.D. Cal. Nov. 3, 2010) (quoting Wyle v. R.J. Reynolds Indus., Inc., 709 F.2d 585, 592 (9th Cir. 1983).) Though Defendants have attempted to refute the majority of Augusta’s declarations and testimony, the Court finds that, in light of the other evidence submitted to the Court, Augusta has provided the Court with credible evidence. Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 8 of 28 Page ID #:29538
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Augusta asserts that Katz asked her to help with document production related to this case in mid-June 2014. (Augusta Decl. ¶ 13.) According to Augusta, Katz and another Morgan Drexen employee, Nancy Jin, instructed Augusta to “(1) create bankruptcy petitions for the consumer if there was no petition in the consumer’s file; and (2) add whatever information was available about consumers to any bankruptcy petitions that were already in the files to make the petitions appear more complete.” (Id. ¶¶ 13, 15.) Augusta asserts that Katz told her that “Morgan Drexen needed petitions to appear as complete as possible in order to make it seem like Morgan Drexen was actually performing bankruptcy-related work for consumers enrolled in the dual program.” (Id. ¶ 13.) Augusta further contends that “Ledda was aware of the project to create and alter bankruptcy petitions.” (Id. ¶ 23; see also Transcript of February 10, 2015 hearing at 54-55.) Under Jin’s supervision, Augusta assigned Morgan Drexen employees/processors to complete this requested work. (Augusta Decl. ¶¶ 16-17.) According to Augusta, Jin provided the processors with specific instructions on how to create and update the bankruptcy petitions. (Id. ¶¶ 18, 24.) The processors allegedly were told to backdate the bankruptcy petitions to make the documents look like they had been created at an earlier time. (Id. ¶ 24.) Augusta later clarified that her use of the term “backdate” does not refer to the actual dating of bankruptcy petitions, but rather refers to Defendants’ use of old versions of petitions to make it seem that they were created earlier than they actually were created. (Transcript of February 10, 2015 hearing at 56.) Further, Augusta asserts that all of the processors were directed to complete their work under a new, unique username, which allowed Morgan Drexen to alter “the document retention system in such a way that the log notes in a consumer’s file did not reflect that a processor using his or her unique username had created a petition or altered information in a petition already in the file.” (Augusta Decl. ¶ 26.) Augusta claims that Katz directed Avi Gupta, the Chief Information Officer of Morgan Drexen, to delete entries in the log notes related to the creation or alteration of these bankruptcy petitions. (Id. ¶ 27.) In support of her declaration, Augusta attached spreadsheets that she used to track Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 9 of 28 Page ID #:29539
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the processors’ work. (Suppl. Augusta Decl., Exs. 1-3, Doc. 262-3.) These spreadsheets show that, as part of the document production, Defendants performed means tests for certain customers and then included that information in the bankruptcy petitions produced to the Bureau. (Id.) A means test is used by Morgan Drexen “to determine whether or not the client fit[s] the criteria or guidelines to file for bankruptcy.” (Transcript of February 10, 2015 hearing at 30-31.) On February 10, 2015, the Court held an evidentiary hearing regarding the Bureau’s Motion for Sanctions, and Augusta testified regarding the alleged events that occurred during Defendants’ document production to the Bureau. (See Transcript of February 10, 2015 hearing.) At the hearing, Augusta asserted that Katz directed her “to go through the files and if there was no petition there, . . . create a petition; and if there were petitions, . . . go through the file with the log notes[ and] any documents that were not processed already and add any information that they could extract from that into the petition.” (Id. at 13-14.) According to Augusta, Katz stated that he needed it “to appear like Morgan Drexen was doing the work that . . . we stated that we were; that there needed to be work product to justify the fees that were charged.” (Id. at 14.) Augusta testified she was told by Jin that “it was important for us to [begin with] the cancelled ones that had paid the highest fees, because those ones needed to have the most complete bankruptcy petition done.” (Id. at 16.) Not only were the processors working on the petitions directed to include information from a variety of written sources, but the processors also were directed to contact active clients to see if they could get more information that could be included in the bankruptcy petitions. (Id. at 20.) The Bureau also questioned Augusta regarding an e-mail chain between Augusta, Jin, and the two processors that Augusta had assigned to work on the document production project at Morgan Drexen. (Id. at 26-41; Augusta Decl., Ex. 2, Doc. 274-4.) The e-mail chain includes a chart that details the work that was performed on various consumer files after the Bureau’s document production request. (Augusta Decl., Ex. 2.) The chart shows that considerable work, including the running of means tests with income information that Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 10 of 28 Page ID #:29540
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was provided by the customer at the outset of the engagement, was performed on customer files after the Bureau’s document production request. (Id.) Further, the e-mail chain includes a response from Jin that directs the processors to select bankruptcy forms that were in existence at the time of the “last cleared positive ACH,” which reflects the last time the customer made a payment. (Id.) The e-mail chain also includes a response from Jin where she states, in regards to a specific customer’s file, that the “means test has the incorrect applicable period.” (Id.) Additionally, on June 18, 2014, one of the processors assigned to the project e-mailed Jin to inform her that means tests were being run for certain customer files. (Augusta Decl., Ex. 6, Doc. 274-4.) Based on this e-mail chain, Jin not only was aware of the means tests being run by the processors, but actually “went through some of those files to determine if everything was the way that she had instructed . . . [and] stated areas that needed to be reviewed by” the processors. (Transcript of February 10, 2015 hearing at 41.) Based on this evidence, the Bureau requests that the Court sanction Defendants by entering a default judgment against them. (Mem. at 2.)
2.
Defendants’ Contentions and Evidence In response to the Bureau’s claim that Defendants falsified evidence, Defendants describe Morgan Drexen as a “virtual office” and claim that all bankruptcy petitions are kept in their MDIS computer platform and Automated Bankruptcy Module (“ABM”). (Opp’n at 1; see Tran Decl. ¶¶ 12-15, Doc. 261-1; Gupta Decl. ¶¶ 3-5, Doc. 261-1.) Defendants describe MDIS as a relational database that stores almost all of the information relating to Morgan Drexen’s attorney clients. (Opp’n at 6.) Despite the fact that they have made statements throughout this litigation to the contrary, Defendants now claim that bankruptcy petitions normally are not created unless an attorney requests that Morgan Drexen generate one; until that time all of the information “remains housed in the MDIS/ABM system.” (Opp’n at 21.) Defendants further contend that, in response to the Bureau’s document production requests and “[t]o expedite production of documents, while Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 11 of 28 Page ID #:29541
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at the same time redacting consumer names, [Defendants] generated bankruptcy petitions . . . so the petitions could be redacted and all information related to a particular consumer could [be] assembled in one place in a readable form.” (Id. at 7.) According to Defendants, “the only way to extract all the information the Bureau requested from MDIS and ABM is to download the information into a bankruptcy petition.” (Id. at 2.) Defendants therefore contend that terminating sanctions are not appropriate because they did not act with the intent to falsify or manufacture evidence. (See generally id.) Defendants submitted declarations and provided testimony from Morgan Drexen employees and other individuals involved with the document production that is currently at issue.
First, Defendants submitted a declaration from Katz. (Katz Decl., Doc. 26-1, Ex. B.) Katz details the directions he purportedly provided Jin and Augusta regarding the Bureau’s document production requests. (Id. ¶¶ 58-59.) According to Katz, it was Augusta, not Jin or Katz, who attempted to backdate bankruptcy petitions. (Id. ¶ 59.) Katz asserts that he in fact told Jin not to backdate the petitions. (Id.) Katz maintains that “Morgan Drexen did not alter any information in the customer files and the computer data produced to the Bureau was produced intact and it is still on the database.” (Id. ¶ 61 (emphasis omitted).) However, Katz admits that he directed Jin and Augusta to “input additional data from all sources available (i.e., Best Case MDIS, unprocessed documents, oral conversations with clients of the law firm, and etc.)” for the consumer files that were produced to the Bureau. (Id. ¶ 58.) Katz also testified at the Court’s evidentiary hearing in this matter. (See Transcript of February 10, 2015 hearing at 157-211.) Katz testified that he and Tran were responsible for keeping the Bureau apprised of the document production process. (Id. at 162.) Katz explained that when the process took longer than expected, the Bureau began to forcefully demand the requested information and immediate production of the consumer files. (Id. at 162-165.) According to Katz, the Bureau’s demands concerned him and he recognized that he would need to speed up the production process. (Id. at 165-167.) After the Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 12 of 28 Page ID #:29542
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Magistrate Judge granted the Bureau’s motion to compel, Katz became “very alarmed about [Defendants’] ability to” meet the 7-day deadline, and recognized that if they failed to meet that deadline, Defendants could be subject to “potential significant sanctions.” (Id. at 166-167.) Katz even considered “the possibility there would be terminating sanctions.” (Id. at 170.) Katz claims that because he has been practicing law for more than 20 years, he “would [not have] manufactured evidence to defraud. [His] concern was [to] get the information in a comprehensive fashion as quickly as possible and not risk sanctions.” (Id. at 188.) Yet, despite Katz’s vast litigation experience, he never informed the Bureau, Defendants’ trial counsel, or the Court that Defendants were generating bankruptcy petitions. (Id. at 177-178.) Even though certain documents and log notes were ready to be produced to the Bureau in June 2014, and Defendants were facing potential sanctions if they failed to comply with the Court’s production deadlines, Katz asked Tran not to produce these documents and log notes to the Bureau. (Id. at 195-202.) Katz claims that he did not inform anyone of the creation of bankruptcy petitions because Defendants were “understaffed and overwhelmed by the demands.” (Id. at 178.) Second, Defendants submitted declarations from Tran and Gupta. (Tran Decl., Doc. 261-1; Gupta Decl., Doc. 261-1.) Tran refutes Augusta’s assertion that any log entries were “suppressed” and/or “deleted.” (Tran Decl. ¶ 40.) Gupta also claims that “[a]t no time during the course of Morgan Drexen’s responding to the Bureau’s document request did . . . Katz[] ever request that [Gupta] suppress or delete log notes in a law firm client’s file.” (Gupta Decl. ¶ 6.) Gupta asserts that, after conducting a search of the data on MDIS, he has determined “that there have been no log notes suppressed or deleted.” (Gupta Decl. ¶ 7; Transcript of February 10, 2015 hearing at 151-152.) According to Gupta, it was Augusta, without Gupta’s knowledge, who “created alias petition processor users termed ‘Special Project’ for two users” and intended to suppress log notes. (Gupta Decl. ¶¶ 9-10; Transcript of February 10, 2015 hearing at 151; Gupta Decl., Ex. 1, Doc. 261-1; see also Bush Decl. ¶¶ 10-14, Doc. 261-1; Knox Decl. ¶¶ 8-9, Doc 261-1.) Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 13 of 28 Page ID #:29543
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Third, Defendants submitted declarations from Jin and Armidi Addessi, a certified bankruptcy petition preparer who has been employed by Morgan Drexen since December 2011. (Jin Decl., Doc. 261-1; Addessi Decl., Doc. 261-1.) Jin contends that she never acted outside of the scope of the instructions she received from Katz and Augusta regarding the document production requests and redaction project. (Jin Decl. ¶ 10.) According to Jin, it was Augusta who instructed her to backdate the bankruptcy petitions by using the “‘last cleared positive ACH’ . . . as the time frame in transferring the data in the Client’s file from all available sources.” (Id. ¶ 13.) Jin supports Katz’s assertion that he told her that “under no circumstances should the [bankruptcy petitions] be dated with the ‘last cleared positive ACH’ date” and that instead the bankruptcy petitions should not be dated at all.” (Id. ¶ 14.) Further, Addessi maintains that Jin never directed her to create bankruptcy petitions so that they could “look as good as we can” in relation to this case, that no one ever told him to alter log notes, and that Jin never directed him to pick a bankruptcy petition format that was different than the one originally used for the file. (Addessi Decl. ¶¶ 8-11.) However, Jin admits that processors working on the document production for the Bureau were directed “to cull the information from a variety of locations,” including “the MDIS platform, documents, log entries evidencing information provided by the consumers via telephone, MDCS which contained notes of Orientation Appointments, and handwritten notes.” (Jin Decl. ¶ 12.) Addessi also admits that he was permitted to contact consumers to secure additional information to include in the documents that would be produced to the Bureau. (Addessi Decl. ¶ 6.) Fourth, Defendants submitted a declaration from Ledda. (Ledda Decl., Doc. 261- 1.) Ledda claims that he played a very limited role in Defendants’ production of documents to the Bureau. (Ledda Decl. ¶ 3.) Yet, at the evidentiary hearing, Ledda confirmed that he knew that Morgan Drexen was creating bankruptcy petitions not in the ordinary course of business in order to produce them to the Bureau. (February 10, 2015 hearing at 109.) He does not refute that he had discussions with Augusta regarding the redaction and production process, but he claims that Augusta has distorted their Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 14 of 28 Page ID #:29544
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conversations in a disingenuous way. (Ledda Decl. ¶ 8.) Ledda also admits that Defendants generated bankruptcy petitions and produced them to the Bureau with information that had not yet been input into Defendants’ systems. (See Id. ¶ 4 (“The data was scattered and housed in different systems and different formats: (1) MDIS, (2) ABM Bankruptcy software, (3) Old versions of Best Case Bankruptcy software, (4) Orientation Appointment logs, (5) Unprocessed Bulk Mail, (4) [sic] Partial Orientation recordings, (5) [sic] other misc. sources.”).) However, Ledda maintains that his only role in the document production process was assisting “with the technology issues related to the desired use of an auto redaction process and the compensation for petition processors that would be performing work for the legal team that would be outside of the normal course of business.” (February 10, 2015 hearing at 111; id. at 112.) Ledda “expected that [the Bureau] would have been notified of these petitions as they were created outside the normal course of business,” but claims that he never discussed with Katz whether the Bureau had been informed of the creation of the bankruptcy petitions. (Id. at 115-116.) Based on this evidence, Defendants request that the Court deny Plaintiff’s Motion for Sanctions. (Opp’n.)
III.
LEGAL STANDARD “There are two sources of authority under which a district court can sanction a party who has despoiled evidence: [1] the inherent power of federal courts to levy sanctions in response to abusive litigation practices, and [2] the availability of sanctions under [Federal Rule of Civil Procedure] 37 against a party who ‘fails to obey an order to provide or permit discovery.’” Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006) (quoting Fed. R. Civ. P. 37(b)(2)(A)). “A court may sanction spoliation by: imposing monetary sanctions; instructing the jury to draw an adverse inference against the despoiling party; excluding testimony based on despoiled evidence proffered by the despoiling party; or, if willfulness is found, entering default judgment against the despoiling party.” Columbia Pictures, Inc. v. Bunnell, No. 2:06CV01093 FMC-JCX, 2007 WL 4877701, at *4 (C.D. Cal. Dec. 13, Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 15 of 28 Page ID #:29545
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2007).
First, a district court “‘can sanction a party who has despoiled evidence’ under its ‘inherent power . . . to levy sanctions in response to abusive litigation practices.’” Pringle v. Adams, No. SACV 10-1656-JST RZX, 2012 WL 1103939, at *7 (C.D. Cal. Mar. 30, 2012) (quoting Leon, 464 F.3d at 958). Entry of a default judgment is permitted when the disobedient party has “willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice.” Wyle v. R.J. Reynolds Indus., Inc., 709 F.2d 585, 589 (9th Cir. 1983). A terminating sanction, however, may only issue if the violation or abuse is willful, in bad faith, or the fault of the party. Id. “[W]illfulness, bad faith, or fault does not require wrongful intent; rather, disobedient conduct not shown to be outside the party’s control is by itself sufficient to establish willfulness, bad faith, or fault.” Sanchez v. Rodriguez, 298 F.R.D. 460, 463 (C.D. Cal. Mar. 18, 2014). Second, Federal Rule of Civil Procedure 37 authorizes district courts to issue a “wide range of sanctions when a party fails to comply with the rules of discovery or with court orders enforcing those rules.” Wyle, 709 F.2d at 589; Fed. R. Civ. P. 37. A district court may render a default judgment against a party that “fails to obey an order to provide or permit discovery.” Fed. R. Civ. P. 37(b)(2)(A).
IV.
DISCUSSION A.
Gerald Klein’s Lack of Knowledge As an initial matter, the Court notes that during the Final Pretrial Conference hearing on February 4, 2015, Defendants’ lead trial counsel, Gerald Klein, asserted that he had no knowledge of Defendants’ creation of bankruptcy petitions prior to the filing of the Bureau’s Motion for Sanctions. (Transcript of February 4, 2015 hearing at 9-11, Doc. 271.) Based on the evidence submitted to the Court and Klein’s statements under penalty of perjury, the Court is convinced that Klein did not have any knowledge of Defendants’ falsification of evidence. (See also Transcript of February 4, 2015 hearing at 16, where the Bureau’s counsel states that “Klein has represented to the Court that he was unware of this Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 16 of 28 Page ID #:29546
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situation, and we take him at his word.”).) Accordingly, the Court finds that Klein should not be held accountable for the actions of his clients.
B.
Morgan Drexen’s Willfulness, Bad Faith, and Fault It is well settled that the entry of default judgment is warranted when “a party has engaged deliberately in deceptive practices that undermine the integrity of judicial proceedings.” Anheuser-Busch, Inc. v. Natural Beverage Distributors, 69 F.3d 337, 348 (9th Cir. 1995); see also Phoeceene Sous-Marine, S.A. v. U.S. Phosmarine, Inc., 682 F.2d 802, 806 (9th Cir. 1982) (“It is firmly established that the courts have inherent power to dismiss an action or enter a default judgment to ensure the orderly administration of justice and the integrity of their orders.”). It is now clear to the Court that Defendants do not create bankruptcy petitions in the normal course of business. The evidence shows that Defendants not only acted willfully and in bad faith by falsifying evidence, but also decided to continuously deceive their own trial counsel, opposing counsel, and the Court by engaging in practices that have undermined the integrity of judicial proceedings. In its order denying summary judgment, the Court relied on Defendants’ assertions that Chapter 7 bankruptcy petitions were prepared for all clients at the outset of their engagement with Morgan Drexen, whether or not the customer ultimately decides to file for bankruptcy. (Order at 4-5; Defs’ SGI ¶¶ 203, 209, 212; Defs’ Opp’n at 7-8, 18; Klein Decl., Doc. 188-23; Rugeti Decl., Doc. 188-22.) The Court explicitly relied on the fact that Defendants “offered some evidence suggesting that the threat of bankruptcy and preparation of certain documents in connection with bankruptcy can serve a strategic purpose in debt settlement negotiations,” and found that a genuine dispute of material fact existed as to whether the upfront fees charged by Defendants were “specific to the bankruptcy petitions Morgan Drexen and the attorneys help prepare for consumers.” (Order at 12-13 (emphasis added).) However, now, only after Defendants’ prior statements have been shown to be false, Defendants claim that bankruptcy petitions Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 17 of 28 Page ID #:29547
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normally are not created unless an attorney requests that Morgan Drexen generate one; until that time all of the information “remains housed in the MDIS/ABM system.” (Opp’n at 21.) The fact that Defendants now claim for the first time that bankruptcy petitions are not actually prepared for clients at the outset of their engagement with Defendants strongly suggests that Defendants have deceived the Court in a way that not only undermined the Court’s previous order denying summary judgment, but also now threatens the integrity of trial.
Though the Court finds Augusta’s declarations and testimony credible, even if the Court were to ignore her allegations, the evidence overwhelmingly reflects that Defendants acted willfully and in bad faith by falsifying evidence during the discovery process. First, Defendants admit that they were ready to start producing consumer files to the Bureau in May or early June 2014. (Transcript of February 10, 2015 hearing at 95, Docs. 278, 280.) However, Katz asked Tran to delay the production because there was additional information that Katz wanted to include in the files. (Id. at 95-97.) Katz testified that, even though certain documents and log notes were ready to be produced to the Bureau in June 2014, and Defendants were facing potential sanctions if they failed to comply with the Court’s production deadlines, Katz asked Tran not to produce these documents and log notes to the Bureau. (Id. at 195-202.) Defendants have failed to explain why, even though a large portion of the requested discovery could have been produced to the Bureau, Defendants chose to risk litigation sanctions by delaying production. Absent any explanation by Defendants, the logical explanation is that Morgan Drexen delayed production in order to create hundreds of new bankruptcy petitions to produce to the Bureau because they knew the absence of such petitions would raise serious red flags. (See generally Calvarese Decl.) Second, Defendants’ decision to produce the requested discovery in the form of bankruptcy petitions strongly suggests an intent to deceive the Court and opposing counsel. Defendants contend that “not only is the bankruptcy petition the simplest and most efficient method to extract data from ABM, but it is the only method to extract data Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 18 of 28 Page ID #:29548
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from ABM.” (Tran Decl. ¶ 25 (emphasis omitted).) However, at the evidentiary hearing, Defendants admitted that the requested customer information could have been produced as raw data, and log notes could have been produced in a form other than bankruptcy petitions (e.g. as a .csv file). (Transcript of February 10, 2015 hearing at 153-154.) Further, Defendants specifically chose to use old versions of bankruptcy petitions that coincided with the last payment that the customer had made to Morgan Drexen, rather than current versions of the bankruptcy petitions. (Id. at 56; Jin Decl. ¶ 13.) Defendants have not provided a convincing reason for why they would decide to use old versions of bankruptcy petitions if the only goal was to produce the requested information to the Bureau in a single and convenient format. Once again, Defendants’ actions strongly suggest that they were engaging in behavior intended to mislead the Court and the Bureau by attempting to pass off bankruptcy petitions as if they had been created in the normal course of business.
Third, Defendants admit that the processors assigned to work on the document production project for the Bureau were directed “to cull the information from a variety of locations,” including “the MDIS platform, documents, log entries evidencing information provided by the consumers via telephone, MDCS which contained notes of Orientation Appointments, and handwritten notes.” (Jin Decl. ¶ 12.) Jin and Augusta were directed to “input additional data from all sources available (i.e., Best Case MDIS, unprocessed documents, oral conversations with clients of the law firm, and etc.” for the consumer files that were produced to the Bureau. (Katz Decl. ¶ 58; see also Ledda Decl. ¶ 4.) Processors working on the petitions also were directed to contact active clients to see if they could get more information that could be included in the bankruptcy petitions. (Addessi Decl. ¶ 6.) Defendants thus gathered information from a variety of sources and input data into bankruptcy petitions that did not exist prior to the Bureau’s document production request. The only logical conclusion is that Defendants were attempting to make it seem that more substantive bankruptcy work had been performed on customer files to support Defendants’ charging of upfront fees.
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Fourth, Defendants ran means tests for certain customers and included that information in the bankruptcy petitions produced to the Bureau. (Suppl. Augusta Decl., Exs. 1-3.) Defendants have failed to provide an explanation for why means tests needed to be run on consumer files after the Bureau’s document production request. Once again, the only logical conclusion is that Defendants were attempting to make it seem that more substantive and complete bankruptcy work had been performed on certain consumer files before producing the files to the Bureau. And while Defendants claim that Augusta was the person who directed the processors to perform these means tests, the evidence submitted to the Court proves that Defendants not only knew that means tests were being performed, but that Jin actually “went through some of those files to determine if everything was the way that she had instructed . . . [and] stated areas that needed to be reviewed by” the processors. (Transcript of February 10, 2015 hearing at 41.) Even if it were true that Jin conducted only one means test on a customer file herself (see id. at 121), the e-mails between Augusta, Jin, and the processors reveal that Defendants were aware and actively involved in the running of means tests.
Fifth, and maybe most damning to Defendants’ case, Defendants had numerous opportunities to inform the Court, opposing counsel, or its own trial counsel of the creation of new bankruptcy petitions. However, they continually failed to do so. On June 13, 2014, the Magistrate Judge issued an order that required Defendants to produce all consumer files by June 20, 2014. (Doc. 84.) On June 18, 2014, Defendants requested an extension of the deadline, providing four specific reasons for why they could not meet the deadline (Ex Parte App., Doc. 85.) Yet, Defendants never informed the Court that at least part of the reason for the delay was the fact that Defendants were creating bankruptcy petitions to produce to the Bureau.
Further, in opposition to the Bureau’s subsequent motion for litigation sanctions, Defendants submitted a declaration from Tran which provided several reasons why Defendants were unable to meet their productions deadlines. (Opp’n, Doc. 100; Tran Decl., Dec. 100-3; see also Transcript of February 10, 2015 hearing at 100-102.) Though Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 20 of 28 Page ID #:29550
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Tran delineated five specific reasons why Defendants could not comply with the Court’s production deadlines, Defendants once again failed to inform the Court that Defendants were creating hundreds of new bankruptcy petitions to produce to the Bureau. (See Calvarese Decl. ¶¶ 8, 17; Calvarese Decl., Ex. 1, Doc. 274-5 (showing that of the 222 bankruptcy petitions that Calvarese found in the 150 consumer files he reviewed, 145 were created by Morgan Drexen between June 27, 2014, and July 3, 2014, and 126 of these 145 petitions were for consumers who were not enrolled in a Morgan Drexen program during that 2014 time period).) Additionally, Katz testified that, after the Magistrate Judge granted the Bureau’s motion to compel, he became “very alarmed about [Defendants’] ability to” meet the 7-day deadline, and recognized that if they failed to meet that deadline Defendants could be subject to “potential significant sanctions.” (Transcript of February 10, 2015 hearing at 166-167.) He even considered “the possibility there would be terminating sanctions.” (Id. at 170.) Nevertheless, once again, Katz chose not to inform the Bureau, Defendants’ trial counsel, or the Court that part of the reason for the delay was that Defendants were generating bankruptcy petitions. (Id. 177-178.) Defendants chose to risk sanctions, and potentially terminating sanctions, rather than inform the Court that new bankruptcy petitions were being created for production.
During the discovery process, Defendants also deposed one of the Bureau’s experts, Katherine Porter, who provided testimony related to the bankruptcy petitions produced by Defendants in response to the Bureau’s request. Even though Katz was present at this deposition, and Porter’s testimony opined specifically on many of the newly created bankruptcy petitions, Katz never informed the Bureau or Defendants’ trial counsel that the petitions were not created in the ordinary course of business. (Id. at 208-209.) Finally, even after the Court issued its order denying summary judgment, in which the Court clearly relied on Defendants’ misleading assertions regarding the preparation and creation of bankruptcy petitions that purportedly occurred in the ordinary course of business, Katz never informed the Court, the Bureau, or Defendant’s trial counsel that new Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 21 of 28 Page ID #:29551
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bankruptcy petitions had been created and then produced to the Bureau. (Id. at 210-211.) “A party’s destruction of evidence qualifies as willful spoliation if the party has some notice that the documents were potentially relevant to the litigation before they were destroyed.” Leon, 464 F.3d at 959 (internal quotation marks and citation omitted). Further, “[t]he duty to preserve documents attaches when a party should have known that the evidence may be relevant to future litigation.” Pringle, 2012 WL 1103939, at *7 (quoting In re Napster, Inc. Copyright Litig., 462 F. Supp. 2d 1060, 1068 (N.D. Cal. 2006)). Not only may bad faith destruction of evidence result in the issuance of terminating sanctions, but the manufacturing or alteration of evidence may warrant the issuance of a default judgment as well. See PersonalWeb Technologies, LLC v. Google Inc., No. C13-01317-EJD (HRL), 2014 WL 580290, at *2 (N.D. Cal. Feb. 13, 2014). After holding an evidentiary hearing and reviewing the evidence submitted against Defendants, the Court now is convinced that Defendants willfully and in bad faith engaged in a coordinated and extensive effort to deceive the Court and opposing counsel. Defendants blatantly falsified evidence and then concealed this fact from the Court, opposing counsel, and even their own counsel at every turn. Accordingly, the Court finds that Defendants’ conduct was “utterly inconsistent with the orderly administration of justice.” Wyle, 709 F.2d at 589.
C.
Factors Relevant to the Imposition of a Terminating Sanction Nevertheless, under either Rule 37 or the district court’s inherent power, “[b]efore imposing the harsh sanction of dismissal [or default judgment], the district court must weigh several factors: (1) the public’s interest in expeditious resolution of litigation; (2) the court’s need to manage its dockets; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions.” Anheuser-Busch, 69 F.3d at 348 (citation omitted).
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1.
The Public’s Interest in Expeditious Resolution of Litigation This factor always favors imposing sanctions. Sunrider, 2010 WL 4589156, at *6. The granting of a default judgment is appropriate when a party’s conduct causes considerable delays in a case, such as when a court needs to continue trial, a plaintiff is forced to file discovery motions after the discovery cut-off date, or the filing of multiple sanctions motions frustrates a court’s and the parties’ ability to resolve the litigation. Id. Here, because of Defendants’ deceitful conduct during the discovery process and throughout this litigation, the Court has had to delay trial and hold an evidentiary hearing. Further, the Bureau has been forced to file numerous discovery motions, motions to compel, and motions for sanctions. As a result, the Court finds that Defendants’ conduct has caused considerable delays in this case and has threatened Plaintiff’s and the Court’s ability to resolve the litigation.
Accordingly, the Court finds that this factor weighs in favor of the entry of default judgment against Defendants.
2.
The Court’s Need to Manage its Docket This factor also almost always weighs in favor of granting a default judgment. Sunrider, 2010 WL 4589156, at *6. If a party poses unnecessary hurdles in the resolution of the action, consumes more than his share of judicial time and resources, and affects a court’s ability to manage its other cases, entering default judgment may be warranted. Id. Defendants’ falsification of evidence and deceitful conduct throughout the discovery process have created considerable hurdles to the resolution of this action. The Magistrate Judge and this Court have had to decide numerous discovery and sanctions motions, delay trial, and hold an evidentiary hearing because of Defendants’ wrongdoing. As a result, Defendants have consumed more than their fair share of judicial time and resources and threatened the Court’s ability to manage its docket.
Accordingly, this factor weighs in favor of terminating sanctions.
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3.
The Risk of Prejudice to the Party Seeking Sanctions “The prejudice inquiry looks to whether the [spoiling party’s] actions impaired [the non-spoiling party’s] ability to go to trial or threatened to interfere with the rightful decision of the case.” Leon, 464 F.3d at 959 (alterations in original) (internal quotation marks and citation omitted). “For the Court to impose the sanction of default, it must find that there is a nexus between the Defendants’ misconduct and the merits of the case.” Columbia Pictures, 2007 WL 4877701, at *6. A party suffers prejudice when it is led to rely on incomplete information or spotty evidence or when the opposing party willfully thwarts the discovery process. Pringle, 2012 WL 1103939, at *9; Sunrider, 2010 WL 4589156, at *8. “Whether or not the documents would have changed the outcome of the trial is not the issue in determining prejudice.” Anheuser-Busch, 69 F.3d at 354. Moreover, “it is appropriate to presume that where documents relevant to the merits of the litigation have been concealed the deception casts doubt on the concealing party’s case.” Id.
Defendants contend that the Bureau has not suffered any prejudice because “no evidence was destroyed. Nothing was lost. We’re going to trial on the same basic issues.” (Transcript of February 4, 2015 hearing at 11.) However, not only has the Court relied on Defendants’ misrepresentations and falsified evidence, but the Bureau also has suffered prejudice as a result of Defendants’ wrongdoing. From the outset of this litigation, Defendants have argued that they are entitled to charge upfront fees because of the considerable bankruptcy work performed for clients. (See, e.g., O’Malley Decl., Ex. 15 at 10.) As discussed above, the Court has determined that the existence and use of bankruptcy petitions is highly relevant to the central issue of whether Defendants’ business model charges up-front fees for debt settlement or bankruptcy services. The number of bankruptcy petitions that Defendants prepared and created for clients relates directly to the amount of substantive bankruptcy work Defendants actually performed for its customers. As a result, the creation and number of bankruptcy petitions is at the heart of the defense in this case.
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Therefore, there is no question that Defendants’ falsification of evidence threatened to distort the resolution of the case by forcing the Bureau to rely on fabricated and manufactured evidence. Here, Defendants destroyed the snapshot of what the petitions would have actually looked like had they simply been produced in the ordinary course of business. The Bureau has been misled and prejudiced throughout the discovery process, when preparing its experts for depositions, in arguing for and against summary judgment, and during its preparation for trial. The Bureau asserts that it “has wasted considerable time (deposition and trial preparation) and incurred significant expense (retention of expert Katherine Porter) responding to Defendants’ canard that they actually perform bankruptcy work on bankruptcy petitions and present those bankruptcy petitions to third parties.” (Reply at 8.) The Court agrees, and thus finds that Defendants’ falsification and alteration of evidence has prejudiced the Bureau. Even if this prejudice could be “mitigated somewhat by [the Bureau’s] success in locating some relevant evidence despite Defendants’ misconduct, this factor nonetheless weighs strongly in favor of terminating sanctions.” Columbia Pictures, 2007 WL 4877701, at *7. Accordingly, the Court finds that this factor weighs in favor of an entry of default judgment against Defendants.
4.
The Public Policy Favoring Disposition on the Merits This factor almost always weighs against dismissal. See Sunrider, 2010 WL 4589156, at *8 (“This factor by its very title falls against the imposition of terminating sanctions”). Defendants already have undermined the integrity of the Court’s summary judgment order. And the Court recognizes that the issuance of terminating sanctions prior to trial would prevent the Court from disposing of this case on the merits. However, here, the ability to reach a merits determination has already been compromised by the falsification of evidence.
Accordingly, the Court finds that this factor weighs only slightly against terminating sanctions. Thus, this factor “is insufficient to outweigh the other four factors.” Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 25 of 28 Page ID #:29555
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Pringle, 2012 WL 1103939, at *10.
5.
The Availability of Less Drastic Sanctions “The Court may dismiss the case based on spoliation of evidence where (1) less drastic sanctions would be inappropriate, (2) the Court implemented alternative sanctions before ordering dismissal, and (3) the Court warned the party of dismissal before ordering dismissal.” Id. (citing Leon, 464 F.3d at 960).
As to the first criterion, imposition of a lesser sanction is not appropriate if it would reward a defendant for its misconduct. Wm. T. Thompson Co. v. Gen. Nutrition Corp., 593 F. Supp. 1443, 1456 (C.D. Cal. 1984). Further, lesser sanctions, such as the exclusion of evidence or a jury instruction creating an evidentiary presumption, are insufficient if they would be futile. Leon, 464 F.3d at 960. Here, the Court cannot issue a jury instruction as a lesser sanction because Defendants waived their right to a jury trial. (Stipulation, Doc. 219.) Additionally, Defendants have called into question the authenticity of any bankruptcy work they claim they have performed for customers. The central issue of this case is whether Defendants provide bankruptcy services that warrant charging up-front fees. As a result, a lesser sanction excluding evidence would require the Court to exclude all evidence of bankruptcy services performed by Defendants, a ruling that would be an effective dismissal. Finally, “[i]t is appropriate to reject lesser sanctions where the court anticipates continued deceptive misconduct.” Anheuser-Busch, 69 F.3d at 352. Based on the extent of Defendants’ misrepresentation and falsification of evidence, the Court anticipates that Defendants would continue to deceive the Court, its own trial counsel, and opposing counsel if the Court allowed this case to proceed to trial. Thus, the first criterion under this factor weighs in favor of entering default judgment. The second and third criteria are inapplicable when “the destruction of the evidence occurred before the court had any opportunity to warn” the disobedient party. Leon, 464 F.3d at 960; Pringle, 2012 WL 1103939, at *10. “[A]n explicit warning is not always necessary.” Anheuser-Busch, 69 F.3d at 353 (citation and quotation marks omitted). Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 26 of 28 Page ID #:29556
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Nevertheless, Defendants admitted that they were aware that terminating sanctions could be issued against Defendants if they continued to violate Court orders. (Transcript of February 10, 2015 hearing at 170.) The Magistrate Judge also explicitly stated that he would be issuing monetary sanctions after document production was complete. (Order at 3, Doc. 115.) Thus, the Court finds that the second and third criteria under this factor also weigh in favor of entering default judgment against Defendants. Although termination of a case is a harsh sanction appropriate only in “extraordinary circumstances,” Halaco Eng'g Co. v. Costle, 843 F.2d 376, 380 (9th Cir. 1988), the circumstances in this case warrant the entry of default judgment against Defendants. “Lesser sanctions would not be adequate to punish the [D]efendants for the wrongful conduct and ameliorate the prejudice and harm to the [Bureau].” Columbia Pictures, 2007 WL 4877701, at * 8.
Accordingly, the Court GRANTS the Bureau’s Motion for Sanctions and enters default judgment against Morgan Drexen.
D.
Personal Liability of Walter Ledda At the evidentiary hearing, Ledda confirmed that he knew that Morgan Drexen was creating bankruptcy petitions not in the ordinary course of business in order to produce them to the Bureau. (February 10, 2015 hearing at 109.) Yet, Ledda maintained that his only role in the document production process was assisting “with the technology issues related to the desired use of an auto redaction process and the compensation for petition processors that would be performing work for the legal team that would be outside of the normal course of business.” (Id. at 111; id. at 112.) Ledda contends that he “expected that [the Bureau] would have been notified of these petitions as they were created outside the normal course of business,” but claims that he never discussed with Katz whether the Bureau had been informed of the creation of the bankruptcy petitions. (Id. at 115-116.) The Court finds that the briefing, supporting documentation, and evidence submitted by the parties is insufficient for the Court to determine whether Ledda should be Case 8:13-cv-01267-JLS-JEM Document 284 Filed 04/21/15 Page 27 of 28 Page ID #:29557
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held personally liable for Morgan Drexen’s wrongful conduct at this time. Accordingly, the Court orders that the parties provide supplemental briefing regarding the personal liability of Ledda and whether default judgment should be entered against him as well.
V.
CONCLUSION For the foregoing reasons, the Court GRANTS the Bureau’s Motion for Sanctions as to Defendant Morgan Drexen Inc. (Docs. 255-2, 274.) Pursuant to this Order, all other pending motions are DENIED as moot. (Docs. 248, 250.) The Court ORDERS supplemental briefing regarding the personal liability of Defendant Walter Ledda and whether the Court should enter default judgment against him as well. The Bureau shall file a supplemental brief no later than May 1, 2015. Defendants may respond to the Bureau’s supplemental brief no later than May 15, 2015. Any reply is due no later than May 22, 2015.
DATED: April 21, 2015
__________________________________
JOSEPHINE L. STATON
UNITED STATES DISTRICT JUDGE
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PDF of this document (22 pages)
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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
Consumer Financial Protection Bureau,
Plaintiff,
v.
Morgan Drexen, Inc., and Walter Ledda, individually, and as owner, officer, or manager of Morgan Drexen, Inc.,
Defendants.
Case No. SACV 13-01267-JLS (JEMx)
Hon. Josephine L. Staton
STIPULATED FINAL JUDGMENT AND ORDER AS TO DEFENDANT WALTER J. LEDDA
Plaintiff, the Consumer Financial Protection Bureau (“CFPB”), commenced this civil action on August 20, 2013, pursuant to: (1) Sections 1031(a), 1036(a), 1054 and 1055 of the Consumer Financial Protection Act of 2010 (“CFPA”), 12 U.S.C. §§ 5531(a), 5536(a), 5564(a), and 5581; and (2) the Telemarketing and Consumer Fraud and Abuse and Prevention Act 15 U.S.C. §§ 6102(c)(2), 6105(d), and its implementing regulation, 16 C.F.R. part 310 (“Telemarketing Sales Rule” or “TSR”). On that date, Plaintiff filed a Complaint for Permanent Injunction and Other Relief (“Complaint”) against Defendants Morgan Drexen, Inc. (“Morgan Drexen”) and Walter Ledda (“Ledda”) seeking Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 1 of 22 Page ID #:31572
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permanent injunctive relief, rescission or reformation of contracts, the refund of moneys paid, restitution, disgorgement or compensation for unjust enrichment, civil money penalties, and other equitable relief for violations of the CFPA and TSR in connection with the marketing and sale of debt relief services. (Doc. 1.) On April 21, 2015, the Court entered an Order granting CFPB’s motion for terminating sanctions against Morgan Drexen. (Doc. 284.) On April 30, 2015, the Court entered an Order temporarily freezing Morgan Drexen’s assets pending resolution of the litigation. (Doc. 289.) On June 18, 2015, the Court entered a permanent injunction Order that, among other things, permanently banned Morgan Drexen from telemarketing and receiving remuneration for any debt relief product or service that charges advance fees. (Doc. 306.) The Order further permanently banned Morgan Drexen from making misrepresentations related to consumer financial products or services. (Id.) CFPB and Ledda, by and through their respective counsel, have agreed to the entry of this Stipulated Final Judgment and Order as to Defendant Walter J. Ledda (“Order”) by this Court.
It is therefore ORDERED, ADJUDGED, AND DECREED as follows: I.
FINDINGS 1.
This Court has jurisdiction over the subject matter of this case and over Defendant Ledda pursuant to 12 U.S.C. § 5565(a)(1) and 28 U.S.C. §§ 1331, 1345. 2.
Venue is proper in the Central District of California under 28 U.S.C. §§ 1391(b) and (c), and 12 U.S.C. §§ 5564(f).
3.
CFPB and Ledda agree to the entry of this Order to settle and resolve all matters in dispute arising from the conduct alleged in the Complaint. 4.
The Complaint states claims upon which relief may be granted under the CFPA, 12 U.S.C. §§ 5531(a), 5536(a), 5564(a), and 5581, and the Telemarketing and Consumer Fraud and Abuse and Prevention Act, 15 U.S.C. §§ 6102(c)(2), 6105(d), and its implementing regulation, 16 C.F.R. part 310. The relief provided in this Order is appropriate and available pursuant to Sections 1054 and 1055 of the CFPA, 12 U.S.C. Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 2 of 22 Page ID #:31573
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§§ 5564, 556, and pursuant to the Telemarketing and Consumer Fraud and Abuse and Prevention Act, 15 U.S.C. § 6102(c)(2).
5.
Ledda admits all facts alleged in the Complaint and stated herein, but does not waive any privilege.
6.
Ledda is a “covered person” and/or “related person,” as those terms are defined by the CFPA, 12 U.S.C. § 5481(6)(A), (19), and (25). 7.
Ledda is a “seller” and “telemarketer” of a “debt relief service” who engaged in “telemarketing,” as those terms are defined in the TSR, 16 C.F.R. § 310.2. 8.
Between October 27, 2010 and May 21, 2015, Ledda engaged in selling and telemarketing debt relief services to consumers in every state throughout the United States.
9.
During this time period, Ledda was the Chief Executive Officer of Morgan Drexen and exercised control over the day-to-day affairs of the company. Ledda also was the President of Morgan Drexen from 2011 to May 21, 2015. In these two roles, Ledda determined that Morgan Drexen would accept fees for debt relief services before renegotiating, settling, reducing, or otherwise altering the terms of at least one debt of the consumer.
10.
Morgan Drexen employees—under Ledda’s control—performed virtually all aspects of the debt relief services Morgan Drexen sold and telemarketed to consumers, including:
a. Advertising for debt relief services nationwide; b. Receiving telephone calls from consumers who called the telephone numbers listed in the debt relief service advertisements; c. Performing consumer intake;
d. Determining how much consumers who enrolled in debt relief services would pay each month;
e. Sending letters to creditors;
f. Handling all paperwork relating to consumers’ debts; and Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 3 of 22 Page ID #:31574
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g. Communicating directly with creditors about potential debt settlements. 11.
Morgan Drexen charged consumers up-front fees for debt relief services and retained between 85% - 95% of all fees paid by consumers. Network Attorneys received the remainder of the fees. Morgan Drexen received payment of these fees prior to consumers making at least one payment pursuant to any settlement agreement, debtmanagement plan, or other valid contractual agreement between consumers and their creditors.
12.
Morgan Drexen also required consumers to place up-front fee payments in an account and failed to hold these payments such that consumers owned the funds or to allow consumers to withdraw from the debt relief program without penalty and receive all funds held in the account within seven days.
13.
Morgan Drexen’s and Ledda’s acts or practices described above violate the TSR, 16 C.F.R. § 310.4(a)(5)(i) and (ii), and are abusive acts or practices in telemarketing. Because Ledda is a “covered person,” his conduct is unlawful under sections 1031(a) and 1036(a)(1) of the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1). 15 U.S.C. § 6102(c)(2).
14.
In the course of advertising, marketing, promoting, offering for sale, or the sale of debt relief services from April 26, 2011 to April 11, 2014, Morgan Drexen represented, directly or indirectly, expressly and by implication, that consumers would not be charged an up-front fee for obtaining debt relief services through Morgan Drexen when, in fact, consumers were charged up-front fees for Morgan Drexen’s debt relief services.
15.
In the course of advertising, marketing, promoting, offering for sale, or the sale of debt relief services from December 8, 2010 to April 11, 2014, Morgan Drexen represented, directly or indirectly, expressly and by implication, that consumers who enrolled in debt relief services through Morgan Drexen could be debt free within months of enrollment when, in fact, only a very small number of consumers became debt free in months—i.e., less than a year—of enrollment, and most consumers could not become Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 4 of 22 Page ID #:31575
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debt free in months under the terms of the debt relief services provided by Ledda and Morgan Drexen.
16.
The misrepresentations described in paragraphs 14 and 15 violated the TSR, 16 C.F.R. § 310.3(a)(2)(ii), (iii) and (x), and are deceptive acts or practices in telemarketing. Because Ledda is a “covered person,” his conduct is unlawful under sections 1031(a) and 1036(a)(1) of the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1). 15 U.S.C. § 6102(c)(2).
17.
The misrepresentations described in paragraphs 14 and 15 above also constitute deceptive acts or practices in violation of Sections 1031 and 1036 of the CFPA, 12 U.S.C §§ 5531, 5536.
18.
Ledda waives all rights to seek judicial review or otherwise challenge or contest the validity of this Order. Ledda also waives any claim he may have under the Equal Access to Justice Act, 28 U.S.C. § 2412, concerning the prosecution of this action. Each party will bear its own costs and expenses, including, without limitation, attorneys’ fees, except as otherwise provided in this Order. 19.
Entry of this Order is in the public interest. II.
DEFINITIONS 20.
The following definitions apply to this Order: a. “Affected Consumer” means any consumer who: i. from October 27, 2010 to June 18, 2015, paid fees prior to Ledda or Morgan Drexen renegotiating, settling, reducing, or otherwise altering the terms of at least one debt of the consumer; or ii. enrolled in a debt relief service in response to Ledda’s and Morgan Drexen’s deceptive advertisements as described in paragraphs 14 and 15 of this Order.
b. “Asset” means any legal or equitable interest in, right to or claim to any real, personal, or intellectual property owned or controlled by, or held, in whole or in part, for the benefit of, or subject to access by Ledda, Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 5 of 22 Page ID #:31576
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wherever located, whether in the United States or abroad, including, but not limited to, all Assets identified in: (i) financial statements and supporting documents that Ledda submitted to CFPB; and (ii) oral testimony provided by Ledda on September 2, 2015. This includes, but is not limited to, chattels, goods, instruments, equipment, fixtures, general intangibles, effects, leaseholds, contracts, mail or other deliveries, shares of stock, commodities, futures, inventory, checks, notes, accounts, credits, receivables (as those terms are defined in the Uniform Commercial Code), funds, cash, and trusts, including, but not limited to, any trust held for the benefit of Ledda, any of Ledda’s minor children, or Ledda’s current or former spouse(s), but excludes furniture, computers, clothes, books, and personal healthcare products. c. “Assisting others” includes, but is not limited to: i. providing paralegal or administrative support services; ii. performing customer service functions including, but not limited to, receiving or responding to consumer complaints; iii. formulating or providing, or arranging for the formulation or provision of, any advertising or marketing material, including, but not limited to, any telephone sales script, direct mail solicitation, or the text of any internet website, email, or other electronic communication; iv. formulating or providing, or arranging for the formulation or provision of, any marketing support material or service, including but not limited to, web or internet protocol (“IP”) addresses or domain name registration for any internet websites, affiliate marketing services, or media placement services;
v. providing names of, or assisting in the generation of, potential customers;
vi. performing marketing, billing, or payment services of any kind; and Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 6 of 22 Page ID #:31577
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vii. acting or serving as an owner, officer, director, manager, or principal of any entity.
d. “Competent and reliable evidence” means tests, analyses, research, studies, or other evidence based on the expertise of professionals in the relevant area, that has been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results. e. “Consumer financial product or service” is synonymous in meaning and equal in scope to the definitions of the term in sections 1002(5) and (15) of the CFPA, and, subject to applicable restrictions contained in the CFPA, includes, but is not limited to:
i. extending credit and servicing loans, including acquiring, purchasing, selling, brokering, or other extensions of credit (other than solely extending commercial credit to a person who originates consumer credit transactions);
ii. providing financial advisory services to consumers on individual financial matters or relating to proprietary financial products or services, including providing credit counseling to any consumer or providing services to assist a consumer with debt management or debt settlement, modifying the terms of any extension of credit, or avoiding foreclosure;
iii. collecting, analyzing, maintaining, or providing consumer report information or other account information, including information relating to the credit history of consumers, used or expected to be used in connection with any decision regarding the offering or provision of a consumer financial product or service; and iv. collecting debt related to any consumer financial product or service. Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 7 of 22 Page ID #:31578
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f. “Debt relief product or service” means any product, service, plan, or program represented, expressly or by implication: i. to renegotiate, settle, or in any way alter the terms of payment or other terms of the debt or obligation, including but not limited to a tax debt or obligation, between a person and one or more creditors or debt collectors, including but not limited to, a reduction in the balance, interest rate, or fees owed by a person to a creditor or debt collector; or ii. to relate to Chapter 7, Chapter 9, Chapter 11, or Chapter 13 of the U.S. Bankruptcy Code, or any other bankruptcy-related matter. g. “Defendants” means Morgan Drexen, Inc. and Walter Ledda collectively, and each of them by whatever names each might be known. h. “Document” and “Electronically Stored Information” are synonymous in meaning and equal in scope to the usage of the terms in Rule 34(a) of the Federal Rules of Civil Procedure, and include, but are not limited to, writings, drawings, graphs, charts, photographs, audio and video recordings, computer records, and other data compilations from which the information can be obtained and translated, if necessary, through detection devices into reasonably usable forms. i. “Effective Date” means the date on which this Stipulated Final Judgment and Order as to Defendant Walter J. Ledda is signed by the Court. j. “Enforcement Director” means the Assistant Director of the Office of Enforcement for the Consumer Financial Protection Bureau, or his or her delegee.
k. “Ledda” means Walter J. Ledda, and any other names by which he may be known.
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l. “Network Attorneys” means the attorneys who signed contracts with consumers related to debt relief products or services provided to consumers by Morgan Drexen.
m. “Person” means an individual, partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity.
n. “Related Consumer Action” means a private action by or on behalf of one or more consumers or an enforcement action by another governmental agency brought against Defendants based on substantially the same facts as described in this Order.
o. “Telemarketing” means a plan, program, or campaign which is conducted to induce the purchase of goods or services or a charitable contribution, by use of one or more telephones and which involves more than one interstate phone call.
p. The words “and” and “or” shall be understood to have both conjunctive and disjunctive meanings as necessary to make the applicable phrase or sentence inclusive rather than exclusive.
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ORDER III.
PERMANENT BAN ON TELEMARKETING AND DEBT RELIEF PRODUCTS AND SERVICES IT IS ORDERED that:
21.
Ledda, whether acting directly or indirectly, is permanently restrained and enjoined from:
a. Participating in telemarketing or assisting others engaged in telemarketing a consumer financial product or service; b. Advertising, marketing, promoting, offering for sale, selling, or providing any debt relief product or service;
c. Assisting others in advertising, marketing, promoting, offering for sale, selling, or providing any debt relief product or service; and d. Receiving any remuneration or other consideration from, holding any ownership interest in, providing services to, or working in any capacity for any person engaged in or assisting others in advertising, marketing, promoting, offering for sale, selling, or providing any debt relief product or service.
IV.
PROHIBITED PRACTICES RELATING TO OFFERING CONSUMER FINANCIAL PRODUCTS OR SERVICES IT IS FURTHER ORDERED that:
22.
Ledda, whether acting directly or indirectly, in connection with the advertising, marketing, promotion, offering for sale, sale, or performance of any consumer financial product or service, is hereby permanently restrained and enjoined from misrepresenting, or assisting others in misrepresenting, expressly or by implication: a. Any aspect of any consumer financial product or service, including but not limited to, the amount of savings a consumer will receive from purchasing, using, or enrolling in such consumer financial product or service;
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b. Any aspect of the terms of any refund, cancellation, exchange, or repurchase policy, including but not limited to, the likelihood of a consumer obtaining a full or partial refund, or the circumstances in which a full or partial refund will be granted to the consumer; c. That a consumer will receive any services from or representation by an attorney duly licensed to practice law;
d. The total costs to purchase, receive, or use, or the quantity of, the consumer financial product or service, including that there will be no charge for all or a portion of such service; e. The terms or rates that are available for any loan or other extension of credit, including but not limited to:
i. The payment schedule, the monthly payment amount(s), or other payment terms, or whether there is a balloon payment; interest rate(s), annual percentage rate(s), finance charge(s), or fees; the loan amount, the amount of credit; the draw amount or outstanding balance; the loan term, the draw period, or maturity; or any other term of credit; ii. The savings associated with the loan or credit; iii. Whether the payment of the minimum amount specified each month covers both interest and principal;
f. Any material restriction, limitation, or condition to purchase, receive, or use the consumer financial product or service; g. Any material aspect of the performance, efficacy, nature, or characteristics of the consumer financial product or service; or h. Any other fact material to consumers concerning any consumer financial product or service.
23.
In addition, Ledda, whether acting directly or indirectly, in connection with the advertising, marketing, promotion, offering for sale, or sale of any consumer financial product or service, is hereby permanently restrained and enjoined from making any Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 11 of 22 Page ID #:31582
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representation or assisting others in making any representation, expressly or by implication, about the benefits, performance, or efficacy of any consumer financial product or service, unless, at the time such representation is made, Ledda possesses and relies upon competent and reliable evidence that substantiates that the representation is true.
24.
In addition, Ledda, whether acting directly or indirectly, is permanently restrained from offering or providing any consumer financial product or service for which a state license is required to offer or provide such product or service unless he holds a valid, state-issued license permitting him to do so. V.
PROHIBITED USE OF CONSUMER INFORMATION IT IS FURTHER ORDERED that:
25.
Ledda, whether acting directly or indirectly, is permanently restrained and enjoined from:
a. Disclosing, using, or benefiting from consumer information, including the name, address, telephone number, or disclosing, using, or benefitting from customer information, including the name, address, telephone number, email address, social security number, other identifying information, or any data that enables access to a consumer’s account (including a credit card, bank account, or other financial account) of any person that Ledda, Morgan Drexen, or Network Attorneys obtained prior to entry of this Order in connection with the advertising, marketing, promotion, offering for sale or sale of any debt relief product or service. b. Attempting to collect, collecting, selling, or assigning, or otherwise transferring any right to collect payment from any consumer who purchased or agreed to purchase a debt relief product or service from Ledda, Morgan Drexen, or Network Attorneys.
26.
However, consumer information may be disclosed if requested by a government agency or required by law, regulation, or court order. Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 12 of 22 Page ID #:31583
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VI.
ORDER TO PAY REDRESS IT IS FURTHER ORDERED that:
27.
A judgment for equitable monetary relief is entered in favor of CFPB and against Ledda in the amount of $99,389,115 for the purpose of providing redress to Affected Consumers. However, full payment of this judgment will be suspended upon satisfaction of the obligations in paragraphs 31, 33, 39, and subject to Section VIII of this Order.
28.
Based on financial statements and supporting documentation that Ledda submitted to CFPB, and Ledda’s oral testimony provided on September 2, 2015, Ledda is ordered to pay $500,000 toward the judgment provided for in Paragraph 30 within ten (10) days of the Court’s entry of this Order by wire transfer to CFPB or to CFPB’s agent, and according to CFPB’s wiring instructions.
29.
The judgment set forth in paragraphs 30 and 31 is enforceable against any Asset owned by, or on behalf of, or for the benefit of, or in trust by or for Ledda. 30.
Within ten (10) days of the Effective Date, Ledda must pay $82,951 and turn over possession and control of all non-cash Assets to the Bankruptcy Estate of Morgan Drexen.
31.
Any funds received by CFPB in satisfaction of this judgment will be deposited into a fund or funds administered by CFPB or to CFPB’s agent according to applicable statutes and regulations to be used for redress for injured consumers, including, but not limited to, refund of moneys, restitution, damages or other monetary relief, and for any attendant expenses for the administration of any such redress. 32.
With regard to any redress that Ledda pays under this Section, if Ledda receives, directly or indirectly, any reimbursement or indemnification from any source, including, but not limited to, payment made under any insurance policy, or if Ledda secures a tax deduction or tax credit with regard to any federal, state, or local tax, Ledda must: (a) immediately notify the Enforcement Director in writing, and (b) within ten (10) days of receiving the funds or monetary benefit, Ledda must transfer the full amount of Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 13 of 22 Page ID #:31584
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such funds or monetary benefit (Additional Payment) to CFPB or to CFPB’s agent according to CFPB’s wiring instructions. After CFPB receives the Additional Payment, that payment will be applied toward the judgment entered in paragraphs 30 and 31 and the amount of the suspended judgment referenced in paragraph 30 will be reduced by the amount of the Additional Payment.
33.
If CFPB determines, in its sole discretion, that providing redress to consumers is wholly or partially impracticable, or if funds remain after the administration of redress is completed, CFPB will notify this Court, and then, following Court approval, deposit any remaining funds in the U.S. Treasury as disgorgement. Ledda will have no right to challenge any actions that CFPB or its representatives may take under this Section.
34.
Payment of redress to any Affected Consumer under this Order may not be conditioned on that Affected Consumer waiving any right. VII. ORDER TO PAY CIVIL MONEY PENALTIES IT IS FURTHER ORDERED that:
35.
Under Section 1055(c) of the CFPA, 12 U.S.C. § 5565(c), by reason of the violations of law described in Section 1 of this Order, and taking into account the factors in 12 U.S.C. § 5565(c)(3), Ledda must pay a civil money penalty of $20,000,000 to CFPB. However, full payment of this civil money penalty will be suspended upon satisfaction of the obligations in paragraphs 31, 33, 39, and will be subject to Section VIII of this Order.
36.
Based on financial statements and supporting documents that Ledda submitted to CFPB, and Ledda’s oral testimony provided on September 2, 2015, Ledda is ordered to pay $1.00 toward the civil money penalty provided for in paragraph 38. 37.
Within ten (10) days of the Effective Date, Ledda must pay the $1.00 civil money penalty by wire transfer to CFPB or CFPB’s agent in compliance with CFPB’s wiring instructions.
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38.
The civil money penalty paid under this Order will be deposited in the Civil Penalty Fund of CFPB as required by Section 1017(d) of the CFPA, 12 U.S.C. § 5497(d). 39.
Ledda must treat the civil money penalty paid under this Order as a penalty paid to the government for all purposes. Regardless of how CFPB ultimately uses those funds, Ledda may not:
a. Claim, assert, or apply for a tax deduction, tax credit, or any other tax benefit for any civil money penalty paid under this Order; or b. Seek or accept, directly or indirectly, reimbursement or indemnification from any source, including but not limited to payment made under any insurance policy, with regard to any civil money penalty paid under this Order.
40.
To preserve the deterrent effect of the civil money penalty in any Related Consumer Action, Ledda may not argue that he is entitled to, nor may he benefit by, any offset or reduction of any compensatory monetary remedies imposed in the Related Consumer Action because of the civil money penalty paid in this action (Penalty Offset). If the Court in any Related Consumer Action grants such a Penalty Offset, Ledda must, within 30 days after entry of a final order granting the Penalty Offset, notify CFPB, and pay the amount of the Penalty Offset to the U.S. Treasury. Such a payment will not be considered an additional civil money penalty and will not change the amount of the civil money penalty imposed in this action.
VIII. EFFECT OF MISREPRESENTATION REGARDING FINANCIAL CONDITION IT IS FURTHER ORDERED that:
41.
The suspension of the monetary judgment entered in Section VI of this Order and the suspension of the civil money penalty entered in Section VII of this Order are expressly premised on the truthfulness, accuracy, and completeness of Ledda’s financial statements and supporting documents submitted to CFPB, and Ledda’s oral Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 15 of 22 Page ID #:31586
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testimony provided on September 2, 2015. Ledda asserts that his testimony, financial statements, and supporting documents are materially truthful, accurate, and complete. 42.
If CFPB in its sole discretion determines that Ledda has failed to disclose any material Asset or that any of his financial statements and supporting documents submitted to CFPB or his oral testimony provided on September 2, 2015, contains any material misrepresentation or omission, including misstating the value of any Asset, then CFPB can petition the Court to terminate the suspension of the monetary judgment entered in Section VI and to terminate the suspension of the civil money penalty entered in Section VII. If the Court determines that Ledda failed to disclose any material Asset or that any of his financial statements, supporting documents, or related testimony contain material misrepresentations or omissions, the Court shall order as immediately due and payable: (a) the full judgment entered in paragraphs 30 and 31 of this Order— $99,389,115—less any amounts paid by Ledda under Section VI of this Order; and (b) the full civil money penalty entered in paragraph 38 of this Order—$20,000,000—less any amounts paid by Ledda under Section VII of this Order. 43.
After the reinstatement of the monetary judgment and civil money penalty under this Section, CFPB will be entitled to interest on the judgment, computed from the Effective Date, at the rate prescribed by 28 U.S.C. § 1961, as amended, on any outstanding amounts not paid.
44.
Ledda must pay the full balance of the monetary judgment plus interest and civil money penalty pursuant to paragraphs 44 and 45 within ten (10) days of the Court’s entry of an Order by wire transfer to CFPB or to CFPB’s agent, and according to CFPB’s wiring instructions.
45.
Should the Court reinstate the monetary judgment and civil money penalty pursuant to this Section, in all other respects this Order shall remain in full force and effect unless otherwise ordered by the Court. Proceedings to reinstate the monetary judgment and civil money penalty shall be in addition to, and not in lieu of, any other Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 16 of 22 Page ID #:31587
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civil or criminal remedies as may be provided by law, including any other proceedings that CFPB may initiate to enforce this Order.
IX.
ADDITIONAL MONETARY PROVISIONS IT IS FURTHER ORDERED that:
46.
In the event of any default on Ledda’s obligations to make payment under paragraph 31 of this Order, interest, computed under 28 U.S.C. § 1961, as amended, will accrue on any outstanding payments not paid from the date of default to the date of payment, and will immediately become due and payable. 47.
Ledda must relinquish all dominion, control, and title to the funds paid to the fullest extent permitted by law and no part of the funds may be returned to Ledda. 48.
Under 31 U.S.C. § 7701, Ledda must furnish to CFPB his taxpayer identification number(s), which may be used for purposes of collecting and reporting on any delinquent amount arising out of this Order.
49.
Within 30 days of the entry of a final judgment, consent order, or settlement in a Related Consumer Action, Ledda must notify the Enforcement Director of the final judgment, consent order, or settlement in writing. That notification must indicate the amount of redress, if any, that Ledda paid or is required to pay to consumers and describe the consumers or classes of consumers to whom that redress has been or will be paid. 50.
Under Section 604(a)(1) of the Fair Credit Reporting Act, 15 U.S.C. § 1681b(a)(1), any consumer reporting agency may furnish a consumer report concerning Ledda to CFPB, which may be used for purposes of collecting and reporting on any delinquent amount arising out of this Order.
X.
REPORTING REQUIREMENTS IT IS FURTHER ORDERED that:
51.
Ledda must notify CFPB of any development that may affect compliance obligations arising under this Order, including but not limited to, a dissolution, assignment, sale, merger, or other action that would result in the emergence of a successor company to Morgan Drexen; the creation or dissolution of a subsidiary, parent, Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 17 of 22 Page ID #:31588
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or affiliate that engages in any acts or practices subject to this Order; the filing of any bankruptcy or insolvency proceeding by or against Ledda; or a change to Ledda’s name or address. Ledda must provide this notice at least 30 days before the development or as soon as practicable after the learning about the development, whichever is sooner. 52.
Within seven (7) days of the entry of this Order, Ledda must: c. Designate at least one telephone number and email, physical, and postal address as points of contact, which CFPB may use to communicate with Ledda;
d. Identify all of Ledda’s telephone numbers and all email, internet, physical, and postal addresses, including all residences; e. Identify all businesses for which Ledda is the majority owner, or that Ledda directly or indirectly controls, by all of their names, telephone numbers, and physical, postal, email, and internet addresses; f. Describe the activities of each such business, including the products and services offered, and the means of advertising, marketing, and sales; g. Describe in detail Ledda’s involvement in any business for which he performs services in any capacity or which he wholly or partially owns, including his title, role, responsibilities, participation, authority, control, and ownership.
53.
For five (5) years from the Effective Date, Ledda must report any change in the information required to be submitted under this Section at least 30 days before the change or as soon as practicable after the learning about the change, whichever is sooner. XI.
ORDER DISTRIBUTION AND ACKNOWLEDGEMENT IT IS FURTHER ORDERED that:
54.
Within 30 days of the Effective Date, Ledda, for any business for which he is the majority owner or which he directly or indirectly controls, must deliver a copy of this Order to each of its board members and executive officers, as well as to any Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 18 of 22 Page ID #:31589
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managers, employees, service providers, or other agents and representatives who have responsibilities related to the subject matter of this Order. 55.
For five years from the Effective Date, Ledda, for any business for which he is the majority owner or which he directly or indirectly controls, must deliver a copy of this Order to any business entity resulting from any change in structure referred to in Section X, any future board members and executive officers, as well as to any managers, employees, service providers, or other agents and representatives who will have responsibilities related to the subject matter of this Order before they assume their responsibilities.
56.
Ledda must secure a signed and dated statement acknowledging receipt of a copy of this Order, ensuring that any electronic signatures comply with the requirements of the E-Sign Act, 15 U.S.C. §§ 7001 et seq., within 30 days of delivery, from all persons receiving a copy of this Order under this Section. XII. RECORDKEEPING IT IS FURTHER ORDERED that:
57.
Ledda must create, for at least five (5) years from the entry of this Order, the following business records for any business for which Ledda is a majority owner or which he directly or indirectly controls:
a. All documents and records necessary to demonstrate full compliance with each provision of this Order, including all submissions to CFPB; b. Accounting records showing the gross and net revenues from all consumer financial products or services, all costs incurred in generating those revenues, and the resulting net profit or loss; c. Records showing, for each employee providing services, that person’s: name, telephone number; email, physical, and postal addresses; job title or position; dates of service; and, if applicable, the reason for termination;
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d. Records showing, for each service provider providing services, the name of a point of contact, and that person’s: telephone number; email, physical, and postal addresses; job title or position; dates of service; and, if applicable, the reason for termination;
e. Customer files showing the names, email and postal addresses, telephone numbers, dollar amounts paid, and the quantity and description of goods or services purchased; and f. All consumer complaints and refund requests (whether received directly or indirectly, such as through a third party), and any response to those complaints or requests.
58.
Ledda must retain the documents identified in this Section for at least five (5) years.
59.
Ledda must make the documents identified in this Section available to CFPB upon CFPB’s request.
XII. NOTICES IT IS FURTHER ORDERED that:
60.
Unless otherwise directed in writing by CFPB, Ledda must provide all submissions, requests, communications, or other documents relating to this Order in writing, with the subject line, CFPB v. Morgan Drexen, Inc., Case No. SACV13-01267 JLS (JEMx), and send them either:
a. By overnight courier (not the U.S. Postal Service) to:
Assistant Director for Enforcement Consumer Financial Protection Bureau ATTENTION: Office of Enforcement 1625 Eye Street, N.W.
Washington D.C. 20006; or
b. By first-class mail to the below address and contemporaneously by email to [email protected]:
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Consumer Financial Protection Bureau ATTENTION: Office of Enforcement 1700 G Street, N.W.
Washington D.C. 20552 XIII. COOPERATION WITH CFPB IT IS FURTHER ORDERED that:
61.
Ledda must cooperate fully with CFPB in this matter and in any investigation or proceeding related to or associated with the conduct described in Section I of this Order, including proceedings related to the bankruptcy of Morgan Drexen, Inc., Case No. 8:15-bk-12278-CB (In re Morgan Drexen, Inc.). Ledda must provide truthful and complete information, evidence, and testimony. Ledda must appear for interviews, discovery, hearings, trials, and any other proceedings that CFPB may reasonably request upon five (5) days’ written notice if Ledda resides in the United States at the time of the request to appear, and upon twenty one days’ written notice if Ledda resides outside of the United States at the time of the request to appear, or other reasonable notice, at such times as CFPB may designate, at a location within 100 miles of where Ledda resides, is employed, or regularly transacts business in person, without the service of compulsory process.
XV. COMPLIANCE MONITORING IT IS FURTHER ORDERED that, to monitor Ledda’s compliance with this Order, including the financial representations upon which the judgment for equitable monetary relief was suspended:
62.
Within fourteen (14) days of receipt of a written request from CFPB, Ledda must submit additional compliance reports or other requested information, which must be made under penalty of perjury; provide sworn testimony; or produce documents. 63.
For purposes of this Section, CFPB may communicate directly with Ledda, unless Ledda retains counsel related to these communications. Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 21 of 22 Page ID #:31592
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64.
Ledda must permit representatives of CFPB to interview any employee or other person affiliated with Ledda who has agreed to such an interview. The person interviewed may have counsel present.
65.
Nothing in this Order limits CFPB’s lawful use of civil investigative demands under 12 C.F.R. § 1080.6 or other compulsory process. XVI. RETENTION OF JURISDICTION IT IS FURTHER ORDERED that:
66.
This Court retains jurisdiction of this matter for purposes of construction, modification, and enforcement of this Order. XVII. FINAL JUDGMENT AND ORDER 67.
CFPB and Ledda have consented to the terms and conditions of this Order as set forth above and have consented to the entry thereof.
IT IS SO ORDERED.
Dated: October 19, 2015
____________________________ Honorable Josephine L. Staton United States District Judge Case 8:13-cv-01267-JLS-JEM Document 391 Filed 10/19/15 Page 22 of 22 Page ID #:31593
Order ()
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____________________________________________________________________________ UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES – GENERAL
Case No.: SACV 13-01267-JLS (JEMx) Date: October 19, 2015 Title: Consumer Financial Protection Bureau v. Morgan Drexen Inc. et al. _____________________________________________________________________________ CIVIL MINUTES – GENERAL 1
Present: Honorable JOSEPHINE L. STATON, UNITED STATES DISTRICT JUDGE
Terry Guerrero
N/A
Deputy Clerk
Court Reporter
ATTORNEYS PRESENT FOR PLAINTIFF: ATTORNEYS PRESENT FOR DEFENDANT:
Not Present
Not Present
PROCEEDINGS: (IN CHAMBERS) ORDER REGARDING DAMAGES AND THE ENTRY OF A DEFAULT JUDGMENT AS TO MORGAN DREXEN
On September 10, 2015, Plaintiff Consumer Financial Protection Bureau (“CFPB”) and Ledda filed a Joint Motion to Enter Stipulated Final Judgment and Order as to Defendant Walter J. Ledda. (Joint Mot., Doc. 367.) CFPB and Ledda request that the Court enter their Proposed Stipulated Final Judgment and Order as to Defendant Walter J. Ledda. (Id. at 1; see Proposed Order, Doc. 367-1.) For the following reasons, and with certain modifications as noted below, the Court will enter Judgment concurrently with this Minute Order.
By way of background, the Court notes that on July 7, 2015, the parties were ordered to submit supplemental briefing regarding “whether the Court must wait until adjudication of this matter with respect to [Defendant Walter] Ledda to issue one final judgment” pertaining to both Ledda and Defendant Morgan Drexen, Inc. (Order, Doc. 329 (emphasis added).) After reviewing the papers submitted by the parties, the Court agreed that waiting until the conclusion of Ledda’s trial before taking any further action in regards to the terminating sanctions against Morgan Drexen was warranted. (Order, Doc. 340.) However, despite the Court’s stated intention to issue “one final judgment” in this matter, (see Order, Doc. 329), in submitting the current proposed judgment as to Case 8:13-cv-01267-JLS-JEM Document 390 Filed 10/19/15 Page 1 of 2 Page ID #:31570
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____________________________________________________________________________ UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES – GENERAL
Case No.: SACV 13-01267-JLS (JEMx) Date: October 19, 2015 Title: Consumer Financial Protection Bureau v. Morgan Drexen Inc. et al. _____________________________________________________________________________ CIVIL MINUTES – GENERAL 2
Ledda only, the parties failed to offer any argument for why the Court now has good cause to issue separate, final judgments against Ledda and Morgan Drexen. Nevertheless, the Court has independently reviewed the procedural history and circumstances of this case and finds that there is good cause to enter a final judgment against Ledda at this time. The Court already has issued terminating sanctions against Morgan Drexen (Doc. 284), frozen Morgan Drexen’s assets (Doc. 289), and issued a permanent injunction Order (Doc. 306). Therefore, the only issue left to be determined in regards to Morgan Drexen is damages. In light of this procedural history, and based upon the stipulation between CFPB and Ledda, the Court finds that there is good cause to issue the Stipulated Final Judgment and Order as to Defendant Walter J. Ledda. The Court notes, however, that it has deleted certain portions of the Proposed Stipulated Final Judgment and Order. Specifically, CFBP and Ledda included in the proposed “Findings” section certain purported facts relating to entities or individuals other than Ledda and Morgan Drexen. The Court will not enter an order or judgment containing those purported facts.
Finally, the Court ORDERS CFPB to promptly file a motion for default judgment against Morgan Drexen, in which it offers evidence as to the damages resulting from Morgan Drexen’s illegal conduct. Once the Court has made its determination of damages, the Court then will direct CFPB to file a proposed final judgment as to Morgan Drexen.
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Judgment ()
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____________________________________________________________________________ UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES – GENERAL
Case No. SACV 13-1267-JLS (JEMx) Date: March 16, 2016 Title: Consumer Financial Protection Bureau v. Morgan Drexen, Inc. et al. ______________________________________________________________________________ CIVIL MINUTES – GENERAL
Present: Honorable JOSEPHINE L. STATON, UNITED STATES DISTRICT JUDGE
Terry Guerrero
N/A
Deputy Clerk
Court Reporter
ATTORNEYS PRESENT FOR PLAINTIFF: ATTORNEYS PRESENT FOR DEFENDANT:
Not Present
Not Present
PROCEEDINGS:
(IN CHAMBERS) ORDER GRANTING PLAINTIFF’S MOTION TO ENTER FINAL JUDGMENT (Doc. 393)
Before the Court is Plaintiff Consumer Financial Protection Bureau’s Motion to Enter Final Judgment Against Defendant Morgan Drexen, Inc. (Mot., Doc. 393.) Having considered CFPB’s briefing and heard oral argument, the Court GRANTS CFPB’s Motion. The Court enters a Final Judgment concurrent with this Order.
I.
BACKGROUND
The facts and procedural history in this matter are well-documented. (See generally Order on Terminating Sanctions, “OTS,” Doc. 284; Permanent Injunction, Doc. 306.) This Motion follows the Court’s entry of default judgment against Morgan Drexen and order granting CFPB’s request for terminating sanctions. (OTS at 27.) As a consequence of the default judgment, the Court found that “Morgan Drexen is deemed to have violated the CFPA and TSR[.]” (Permanent Injunction at 2.) CFPB’s request for a Final Judgment followed.
II.
DISCUSSION
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____________________________________________________________________________ UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES – GENERAL
Case No. SACV 13-1267-JLS (JEMx) Date: March 16, 2016 Title: Consumer Financial Protection Bureau v. Morgan Drexen, Inc. et al. ______________________________________________________________________________ CIVIL MINUTES – GENERAL CFPB seeks to recover restitution of “the total unlawful fees charged or received by Morgan Drexen,” and requests that Morgan Drexen be assessed “a significant civil money penalty.” (Mot. at 3, 5.) The Court considers each request in turn.
A. Restitution
CFPB seeks a monetary judgment against Morgan Drexen in the amount of $132,882,488. (Id. at 3.) According to CFPB, “[t]his amount represents the total unlawful fees charged or received by Morgan Drexen between October 27, 2010, the date when the Telemarketing Sales Rule went into effect, and June 18, 2015, when Morgan Drexen ceased operations.” (Id.) CFPB supports its request with a declaration by Timothy Hanson, a forensic accountant at the CFPB. (Hanson Decl., Doc. 393-1.) For the period of October 27, 2010 to August 31, 2014, Hanson’s analysis relies upon data produced in discovery by Morgan Drexen. (Id. ¶¶ 6-7.) For the remaining months, Hanson incorporates “projections about fees that Morgan Drexen charged or received for the period” between September 1, 2014 and June 18, 2015. (Id. ¶ 6 (describing methodology for “Projected Fees”).)
Hanson’s analysis distinguishes between two types of “Affected Consumers,” defined as those individuals who enrolled in Morgan Drexen’s dual services program. (Id. ¶ 8.) The first group includes Affected Consumers who enrolled in Morgan Drexen’s dual services program on the basis of advertisements that the Court has deemed deceptive. (Id. ¶¶ 8-9.) The second group consists of Affected Consumers who enrolled in the dual services program without the aid of deceptive advertisements. (Id.) In his declaration, Hanson states that of the 59,507 Affected Consumers, 30,976 of them enrolled in response to a deceptive advertisement. (Id. ¶ 9.) Separately, Hanson distinguishes between the types of fees Morgan Drexen charged to Affected Consumers. (Id. ¶¶ 10-13, 15.) Hanson defines “Upfront Fees” to include both the “Bankruptcy Planning and Preparation Fee,” as well as certain “monthly maintenance fees” that were charged by or paid to Morgan Drexen prior to an Affected Consumer’s first payment to a creditor. (Id. ¶¶ 11-13.) Hanson defines “Subsequent Fees” as the remaining “monthly maintenance fees” paid to Morgan Drexen after the date of an Affected Consumer’s first creditor payment. (Id. ¶ 15.) Case 8:13-cv-01267-JLS-JEM Document 427 Filed 03/16/16 Page 2 of 5 Page ID #:32006
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____________________________________________________________________________ UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES – GENERAL
Case No. SACV 13-1267-JLS (JEMx) Date: March 16, 2016 Title: Consumer Financial Protection Bureau v. Morgan Drexen, Inc. et al. ______________________________________________________________________________ CIVIL MINUTES – GENERAL
As CFPB correctly states, for the 30,976 Affected Consumers who enrolled in the dual services programs on the basis of deceptive advertisements, “the full measure of restitution encompasses both the unlawful upfront fees charged as well as any subsequent (i.e., non-upfront) fees that the consumers paid.” (Mot. at 4.) Hanson calculates that these Affected Consumers paid Morgan Drexen a total of (1) $46,625,350 in Upfront Fees, (2) $24,981,004 in Subsequent Fees, and (3) $5,675,205 in Projected Fees. (Hanson Decl. ¶¶ 14-17.) In aggregate, these Affected Consumers paid Morgan Drexen $77,281,559 in improper fees. (Id. ¶ 17.)
For the remaining 28,531 Affected Consumers, who enrolled in a Morgan Drexen dual services program without reliance on a deceptive advertisement, “the appropriate measure of restitution is only the amount of upfront fees they were charged during the relevant time period.” (Mot. at 5.) Hanson calculates that these Affected Consumers paid Morgan Drexen a total of (1) $44,061,821 in Upfront Fees, and (2) $11,539,107 in Projected Fees. (Hanson Decl. ¶¶ 18-20.) In total, according to Hanson, these Affected Consumers paid Morgan Drexen $55,600,928 in improper fees. (Id. ¶ 20.)1
In sum, for the period between October 27, 2010 and June 18, 2015, Hanson states that Morgan Drexen “charged or received a total of $132,882,488 in Upfront Fees and Subsequent Fees from the two groups of Affected Consumers.” (Id. ¶ 21.) The Court finds Hanson’s methodology sound and his conclusions persuasive. Accordingly, the Court awards restitution to CFPB in the amount of $132,882,488.
B. Civil Penalty
In addition to a recovery in restitution, CFPB also requests the Court to assess a “significant civil money penalty” against Morgan Drexen. (Mot. at 5.) The Consumer Financial Protection Act provides that any person who “violates . . . any provision of
1 At oral argument, the Court noted an apparent typographical error in paragraph 20 of Hanson’s declaration, wherein he refers to “Affected Consumers who enrolled in response to a deceptive advertisement[.]” (Hanson Decl. ¶ 20.) CFPB clarified that this was, indeed, an inadvertent error and that paragraph 20 of Hanson’s declaration actually refers to Affected Consumers who enrolled without reliance on a deceptive advertisement. After the hearing, CFPB filed a supplemental chart clarifying the error. (Supplemental to Plaintiff’s Motion, Ex. A, Doc. 424-1.) Case 8:13-cv-01267-JLS-JEM Document 427 Filed 03/16/16 Page 3 of 5 Page ID #:32007
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____________________________________________________________________________ UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES – GENERAL
Case No. SACV 13-1267-JLS (JEMx) Date: March 16, 2016 Title: Consumer Financial Protection Bureau v. Morgan Drexen, Inc. et al. ______________________________________________________________________________ CIVIL MINUTES – GENERAL Federal consumer financial law shall forfeit and pay a civil penalty[.]” See 12 U.S.C. § 5565(c)(1) (emphasis added). Here, because the Court previously determined that Morgan Drexen violated various provisions of the CFPA (Permanent Injunction at 2), the Court shall impose a civil penalty pursuant to § 5565(c)(1). The CFPA sets forth three tiers of penalties, with heightened penalties associated with unlawful conduct that was “knowing” or “reckless.” See 12 U.S.C. § 5565(c)(2) (setting the maximum penalties for “knowing” or “reckless” conduct at $1,000,000 per day or $25,000 per day, respectively). Finally, § 5565(c)(3) sets forth certain mitigating factors that the Court must consider. Id.
Morgan Drexen’s unlawful conduct and willful attempts to mislead the Court are well-documented. (See generally OTS at 18; Permanent Injunction at 2-3.) Specifically, CFPB alleged – and Morgan Drexen, by way of default, admitted – that Morgan Drexen made “false and misleading” representations that “constitute deceptive acts or practices” under the CFPA. (Complaint ¶¶ 94, 97; Permanent Injunction at 2-3 (detailing Morgan Drexen’s various CFPA violations).) Moreover, the Court previously concluded that Morgan Drexen acted “willfully and in bad faith” when it falsified evidence and “engag[ed] in practices that . . . undermined the integrity of judicial proceedings.” (OTS at 17.) Although these findings arguably demonstrate that Morgan Drexen’s violations were “willful” under § 5565(c)(3), at a minimum they confirm that Morgan Drexen’s conduct was “reckless.”
“Reckless” violations of the CFPA may support penalties of up to $25,000 per day. See, e.g., Consumer Financial Protection Bureau v. Siringoringo, No. SACV 14- 1155 JVS (AJWx), 2016 WL 102435, at *7, n.4 (C.D. Cal. Jan. 7, 2016) (describing penalty tiers under § 5565(c)(3)). Here, CFPB requests a civil penalty of $40,000,000. (Mot. at 7.) Because the unlawful conduct at issue occurred over a span of 1,695 days between October 27, 2010 and June 18, 2015, CFPB’s request amounts to a penalty of approximately $23,598.82 per day, a number that falls within the statutory limit set forth in § 5565(c)(3). Alternatively, if considered against the 59,507 Affected Consumers, CFPB’s request amounts to a penalty of $672.19 for each individual harmed. See Siringoringo, 2016 WL 102435 at *7 (concluding that a $12 million civil penalty for conduct that affected 2,400 customers over a two-year period does not exceed § 5565(c)(2)(A)’s $5,000 per day threshold). The Court finds CFPB’s proposed Case 8:13-cv-01267-JLS-JEM Document 427 Filed 03/16/16 Page 4 of 5 Page ID #:32008
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____________________________________________________________________________ UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES – GENERAL
Case No. SACV 13-1267-JLS (JEMx) Date: March 16, 2016 Title: Consumer Financial Protection Bureau v. Morgan Drexen, Inc. et al. ______________________________________________________________________________ CIVIL MINUTES – GENERAL $40,000,000 penalty to be both statutorily permitted and reasonable when set against the gravity of Morgan Drexen’s misconduct.
As directed by the CFPA, the Court must also take into account certain mitigating factors. See 12 U.S.C. § 5565(c)(3). After careful consideration of Morgan Drexen’s conduct, the Court finds that none of the enumerated statutory factors – i.e., evidence of good faith, the gravity of the violation, the losses suffered by the consumer, or the history of previous violations – warrant a more lenient penalty. See Siringoringo, 2016 WL 102435, at *7 (refusing to mitigate $12 million penalty absent evidence on the record). If anything, consideration of these factors serve only to further illustrate Morgan Drexen’s bad-faith and the far-reaching magnitude of the harm inflicted on consumers. As a result, the Court finds no basis for mitigating Morgan Drexen’s civil penalty.
III.
CONCLUSION
For the reasons stated, the Court GRANTS CFPB’s Motion. Concurrent with this Order, the Court enters a Final Judgment against Morgan Drexen that awards $132,882,488 in restitution and imposes a $40,000,000 civil penalty pursuant to the CFPA.
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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
Consumer Financial Protection Bureau,
Plaintiff,
v.
Morgan Drexen, Inc., and Walter Ledda, individually, and as owner, officer, or manager of Morgan Drexen, Inc., Defendants.
Case No. SACV13-01267 JLS (JEMx)
FINAL JUDGMENT AGAINST DEFENDANT MORGAN DREXEN, INC.
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Plaintiff Consumer Financial Protection Bureau’s Motion to Enter Final Judgment Against Defendant Morgan Drexen, Inc. having come before the Court, and for the reasons stated in the Court’s Order issued concurrently herewith,
IT IS ORDERED:
1. Restitution: Judgment for equitable monetary relief is entered in favor of the CFPB and against Morgan Drexen in the amount of $132,882,488 as restitution for the unlawful up-front fees and other fees paid by Affected Consumers.
2. Civil Penalty: Judgment for a civil money penalty is entered in favor of the CFPB and against Morgan Drexen in the amount of $40,000,000.
3. Permanent Injunction: This Final Judgment incorporates by reference the Court’s Permanent Injunction, entered on June 18, 2015. Nothing in this Final Judgment is intended to modify the terms set forth therein.
IT IS FURTHER ORDERED that this Court retains jurisdiction of this matter for purposes of construction, modification, and enforcement of this Order.
IT IS SO ORDERED.
Dated: March 16, 2016
________________________
Hon. Josephine L. Staton
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