RD Legal Funding, LLC, RD Legal Finance, LLC, RD Legal Funding Partners, LP, and Roni Dersovitz

Documents in this case

• Opinion · 108 p.
• Order · 5 p.
• Complaint · Feb. 2017 · 23 p.
• Amended complaint · Nov. 2022 · 23 p.
• Stipulation · Dec. 2022 · 3 p.

Case summary

On February 7, 2017, the CFPB and the New York Attorney General filed a complaint against RD Legal Funding, LLC, two related entities, and the companies’ founder and owner, Roni Dersovitz. As set forth in the July 14, 2022 amended complaint, the CFPB alleged that they made misrepresentations to potential borrowers and engaged in abusive practices in connection with cash advances on settlement payouts from victim-compensation funds. On May 15, 2017, the defendants filed a motion to dismiss the CFPB’s complaint, which the CFPB opposed. On June 21, 2018, the court issued an opinion concluding that the defendants are subject to the CFPA’s prohibitions and that the complaint properly pleaded claims against all of them. The court held, however, that the removal provision that applied to the CFPB’s Director violated the constitutional separation of powers and could not be severed from the remainder of Title X of the Dodd-Frank Act. Based on that conclusion, the court ultimately dismissed the entire case. The United States Court of Appeals for the Second Circuit vacated the district court’s judgment and remanded the case for further proceedings. On November 28, 2022, the district court entered a stipulated judgement, providing over $600,000 in debt relief for harmed consumers; injunctive relief barring the defendants from doing business with potential recipients of governmentally created 9/11 victim-compensation funds; and a civil money penalty of $1.

Opinion

PDF of this document (108 pages)

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Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 1 of 108

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4 DOCUMENT + UNITED STATES DISTRICT COURT 1‘ RLECTRONICALLY FILED | SOUTHERN DISTRICT OF NEW YORK po & i CONSUMER FINANCIAL PROTECTION p BAS ® o FELD: we alert: “we fh BUREAU and THE PEOPLE OF THE ons a aeaiaciaes

STATE OF NEW YORK, BY ERIC T.

SCHNEIDERMAN, ATTORNEY GENERAL FOR THE STATE OF NEW YORK,

Plaintiffs ’ 17-cv-890 (LAP)

~against- OPINION & ORDER

RD LEGAL FUNDING, LLC; RD LEGAL FINANCE, LLC; RD LEGAL FUNDING PARTNERS, LP; and RONI DERSOVITZ,

Defendants.

Attorneys and Law Firms

BENJAMIN KONOP, HAI BINH T. NGUYEN, Bureau of Consumer Financial Protection, Washington, DC, JANE M. AZIA, MELVIN L. GOLDBERG, People of the State of New York by Eric T. Schneiderman, Attorney General for the State of New York, New York, NY, for Plaintiffs.

MICHAEL D. ROTH, JEFFREY M. HAMMER, DAVID K. WILLINGHAM, Boies Schiller Flexner LLP, Los Angeles, CA, ERIC T. KANEFSKY, Calcagni & Kanefsky LLP, Newark, NJ, for Defendants.

CAROLINA A. FORNOS, Pillsbury Winthrop Shaw Pittman, LLP, New York, NY, for Amicus Curiae American Legal Finance Association.

CHRISTOPHER A. SEEGER, TERRIANNE BENEDETTO, Seeger Weiss LLP, New York, NY, DIOGENES P. KEKATOS, Seeger Weiss LLP, Ridgefield Park, NJ, for Proposed Amicus Curiae Plaintiff Settlement Class in In re National Football League Players’ Concussion Injury Litigation.

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Table of Contents

I. Factual Background ......................................... 2 a. The NFL Class Members..................................... 4 b. September 11, 2001 James Zadroga Victims Compensation Fund Eligible Claimants ........................................... 5 c. The Purchase Agreements................................... 6 d. Claims Against the RD Entities............................ 7 i. CFPA Claims ............................................. 7 ii. Claims Arising Under New York Law ....................... 9 II. Procedural History ........................................ 10 III. Legal Standard........................................... 15 IV. Discussion............................................... 16 a. Federal Jurisdiction..................................... 17 i. The RD Entities as “Covered Persons” Under the CFPA .... 17 1. The NFL Concussion Litigation Settlement Agreement Claims................................................... 19 a. The NCLSA’s Anti-Assignment Provision .............. 20 b. Legal Standard Regarding the Scope of the Anti- Assignment Provision ................................... 21 c. Assignability of “Settlement Proceeds” Versus “Monetary Claims” ...................................... 24 d. Interpretation of the New York UCC ................. 27 e. The NFL-related Purchase Agreements Are Void ....... 29 2. 31 U.S.C. § 3727 Invalidates the Assignment of Compensation Awards from the VCF......................... 29 a. The Anti-Assignment Act, 31 U.S.C. § 3727 ........ 30 i. “Claim Against the United States” ................ 31 ii. Statutory Purpose ................................ 36 iii. .. The VCF-related Purchase Agreements Do Not Comply With the Anti-Assignment Act’s Requirements .......... 40 3. Eligible Claimants and NFL Class Members “Incur[red] Debt” Through the Purchase Agreements.................... 41 a. The RD Entities Extend “Credit” and “Service[] Loans” ................................................. 54 4. The RD Entities Are “Covered Persons” Under the CFPA . 56 Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 2 of 108

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b. Failure to State a Claim Fed. R. Civ. P. 12(b)(6)........ 56 i. Rule 9(b)’s Heightened Pleading Standard Does Not Apply to Non-Fraud Claims .......................................... 57 1. “Substantial Assistance” Claims Under the CFPA ....... 62 2. Specificity of Allegations Against Each Defendant Under Rule 8(a)................................................ 63 ii. “Substantial Assistance” Liability Under the CFPA ...... 67 iii. Deceptive and Abusive Conduct Under the CFPA ......... 70 1. Counts I, III, IV, V: Deceptive Acts or Practices Under the CFPA................................................. 70 a. Count I ............................................ 71 i. “Substantial Assistance” Claim Against Roni Dersovitz Under Count I .............................. 72 b. Count III .......................................... 75 i. “Substantial Assistance” Claim Against Roni Dersovitz Under Count III ........................... 76 c. Count IV ........................................... 77 i. “Substantial Assistance” Claim Against Roni Dersovitz Under Count IV ............................ 79 d. Count V ............................................ 80 i. “Substantial Assistance” Claim Against Roni Dersovitz Under Count V ............................. 81 2. Count II: Abusive Acts or Practices Under the CFPA ... 83 a. “Substantial Assistance” Claim Against Roni Dersovitz Under Count II ......................................... 85 iv. State Law Claims ....................................... 86 1. NYAG’s Jurisdiction Over the Purchase Agreements ..... 88 2. Count VI: Claims Under New York Civil and Criminal Usury Laws..................................................... 89 3. Count VIII: Violation of New York General Obligations Law § 13-101............................................. 91 4. Count IX: Violation of New York General Business Law § 349.................................................... 93 5. Count X: Violation of New York General Business Law § 350.................................................... 96 6. Count XI: New York Executive Law § 63(12) Fraud ...... 98 c. Constitutional Claims.................................... 99 i. History, Liberty, and Presidential Authority ........... 99 Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 3 of 108

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d.

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ii.CFPB’s Notice of Ratification... .. 2... ee ee ee ee

Conclusion

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Loretta A. Preska, Senior United States District Judge:

This is an action by Plaintiffs Consumer Financial Protection Bureau (the “CFPB”) and the People of the State of New York, by Eric T. Schneiderman, Attorney General for the State of New York (“NYAG” or the “Attorney General”) (collectively, the “Government”), against Defendants RD Legal Funding, LLC; RD Legal Finance, LLC; RD Legal Funding Partners, LP (collectively, the “RD Entities”); and Roni Dersovitz, the founder and owner of the RD Entities (together with the RD Entities, the “Defendants”). The Government asserts that the Defendants violated certain provisions of the Consumer Financial Protection Act (“CFPA” or the “Act”). NYAG independently asserts that the RD Entities are liable under New York law for the same actions and events that form the basis of the CFPA claims. Defendants move to dismiss the Complaint (ECF No. 1) on three principal grounds. First, Defendants argue that the CFPB is unconstitutionally structured and therefore lacks the authority to bring claims under the CFPA. Second, Defendants contend that the Court lacks federal jurisdiction because the RD Entities are not “covered persons” under the CFPA and therefore do not come within the Act’s jurisdictional purview. Third and finally, the RD Entities move to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim for relief.

Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 5 of 108

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As set out below, because the CFPB’s structure is unconstitutional, it lacks the authority to bring claims under the CFPA and is hereby terminated as a party to this action. The NYAG, however, has independent authority to bring claims under the CFPA. The Court concludes that NYAG has alleged plausibly claims under the CFPA and under New York law. Accordingly, Defendants’ motion to dismiss the Complaint is denied. (ECF No. 39.) I.

Factual Background The following facts are drawn from the Complaint, (Complaint (“Compl.”), ECF No. 1), the Assignment and Sale Agreements (hereinafter the “Purchase Agreements”) attached as exhibits to the Affidavit of Roni Dersovitz, (Affidavit of Roni Dersovitz (“Dersovitz Aff.”), Exs. A-1 to A-20, B-1 to B-5, ECF No. 41-1), and the National Football League (“NFL”) Concussion Litigation Settlement Agreement (“NCLSA”), (Dersovitz Aff. Ex. 6), which Defendants attached to their motion to dismiss. The allegations in the Complaint are accepted as true for purposes of the instant motion.1

1 As Defendants note in their motion to dismiss, “[t]he Court may consider the Zadroga Fund agreements [(Dersovitz Aff. Exs. A-1 to A-20)], and the NFL Settlement Fund agreements [(Dersovitz Aff. B-1 to B-5)], because the Complaint refers to them extensively and ‘relies heavily upon [their] terms and effect, which renders the document[s] integral to the complaint.’” Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002) (citation and some internal quotation marks omitted); Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 6 of 108

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The CFPB and NYAG bring this action against the RD Entities and their founder and owner, Roni Dersovitz. (Compl. ¶¶ 15-19.) The RD Entities are companies that offer cash advances to consumers waiting on payouts from settlement agreements or judgments entered in their favor. The Government alleges that Defendants misled these consumers into entering cash advance agreements that the Defendants represented as valid and enforceable sales but, in reality, functioned as usurious loans that were void under state law. (Compl. ¶ 19.) At issue in this case are two specific groups of consumers (collectively, the “Consumers”) with which the RD Entities transacted: (1) class members in the National Football League (“NFL”) Concussion Litigation class action (“NFL Class Members” or “Class Members”) and (2) individuals (“Eligible Claimants”)

accord Capela v. J.G. Wentworth, LLC, No. CV09-882, 2009 WL 3128003, at *1 n.2 (E.D.N.Y. Sept. 24, 2009). Furthermore, according to Defendants, the Purchase Agreements attached as exhibits to Defendants’ motion to dismiss were among the 218 contracts that Defendants produced to the CFPB pursuant to a civil investigative demand (“CID”). (Defendants’ Mot. to Dismiss (“Def. Br.”) 6, ECF No. 49.) Therefore, it is reasonable to assume that the CFPB relied on these Purchase Agreements in drafting the Complaint. The Court also notes that, all at once, the Government objects to the inclusion of the Purchase Agreements in deciding the instant motion to dismiss (Plaintiff’s Opp’n (“Pl. Opp.”) 36 n.13, ECF No. 36) but in the same breath relies on the Purchase Agreement exhibits in support of its arguments in its opposition briefing. (Pl. Opp. 35-36.) For these reasons, the Court concludes that the Purchase Agreements are “integral” to the Complaint and therefore may be considered for purposes of deciding the instant motion. Chambers, 282 F.3d at 152-53. Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 7 of 108

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who qualify for compensation under the September 11th Victim Compensation Fund of 2001 (“VCF”). 49 U.S.C. § 40101. a. The NFL Class Members On January 31, 2012, a federal multidistrict litigation was created in United States District Court for the Eastern District of Pennsylvania for lawsuits on behalf of former NFL players who suffer from mild traumatic brain injury due to playing professional football. See Settlement Agreement (hereinafter “Settlement Agreement”) Preamble, In re NFL Players’ Concussion Injury Litig., MDL No. 2323 (E.D. Pa. Feb. 13, 2015) (ECF No. 6481-1). Defendants in that case, the NFL and NFL Properties LLC, ultimately agreed that settlement of the claims in that complex putative class action was appropriate. Id. Recitals (K). Accordingly, on February 13, 2015, a federal district court in the Eastern District of Pennsylvania approved the NFL Concussion Litigation Settlement Agreement (“NCLSA”) between the Class Members, by and through class counsel, and defendants NFL and NFL Properties LLC. Id. Preamble. The NFL Class Members at issue in this case are former NFL players who have been diagnosed with neurogenerative diseases such as chronic traumatic encephalopathy (“CTE”), Alzheimer’s, or Parkinson’s disease and who have received notification of their entitlement to a settlement award under the NCLSA for these injuries. (Compl. ¶¶ 22-23.) Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 8 of 108

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b. September 11, 2001 James Zadroga Victims Compensation Fund Eligible Claimants In January 2011, President Obama signed the James Zadroga 9/11 Health and Compensation Act of 2010 (“Zadroga Act”), which served to renew the September 11th Victim Compensation Fund of 2001 (the “VCF”). 49 U.S.C. § 40101. Congress created the VCF to provide compensation to individuals and personal representatives of deceased individuals who suffered physical injury or were killed as a result of the September 11, 2001 terrorist attacks or were harmed during the removal of debris immediately following those attacks. Proposed Rule, Federal Register, Vol. 76 No. 119 (Jun. 21, 2011). The Zadroga Act authorizes a Special Master appointed by the Attorney General to carry out the administration of the VCF by enacting substantive and procedural rules, including making determinations as to what award amount an eligible individual (“Eligible Claimant”) is entitled to under the VCF. 28 C.F.R. § 104.51. According to the Complaint, the Eligible Claimants with whom the RD Entities transact have received an award letter from the VCF’s Special Master indicating the amount of compensation to which they are entitled under the VCF. (Compl. ¶¶ 22-23); 49 U.S.C. §§ 405(b)(1), 405(c), 406(a). Eligible Claimants who are entitled to compensation include individuals who suffer from respiratory illnesses and cancers related to their exposure to Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 9 of 108

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dust and debris at the World Trade Center site as well as from post-traumatic stress disorder, depression, anxiety disorder, and memory loss following the September 11th, 2001 terrorist attacks. (Compl. ¶ 22.) c. The Purchase Agreements According to the Complaint, after a Consumer has received final approval and a notice of the award amount to which he or she is entitled, the RD Entities offer to take a security interest in the Consumer’s settlement award or a portion thereof (the “Property” or “Property Amount”). (Compl. ¶ 20.) In the contracts that Defendants enter into with Consumers, the RD Entities purport to “acquire the full risks and benefits of ownership of the Property and acquire the full right, title and interest in the Property.” (Def. Br. Ex. 1.) In exchange, the RD Entities offer Consumers an immediate “lump sum” cash payment that represents a portion of the total award to which the Consumer is entitled. (Compl. ¶ 24.) In return, the Consumer agrees to repay a larger amount, i.e., the Property Amount, to the RD Entities after receiving its settlement payment. (Id.) The Purchase Agreements contain a no recourse provision that relieves the Consumer of his or her obligation to repay the RD Entities in the event that the RD Entities are unable to recover the settlement award from the Consumer’s third-party obligor, i.e., the NFL Settlement Fund or the VCF. (Def. Br. Ex. 1.) Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 10 of 108

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The RD Entities enter into two types of contracts with Consumers. Under the first, the RD Entities advance a lump sum of cash to the Consumer. The repayment amount that the Consumer owes to RD remains the same, regardless of when the Consumer receives the award from the VCF or the NFL Settlement Fund. (Compl. ¶ 31.) Under the second type of contract, the amount the Consumer repays turns on when the claims administrator disburses the Consumer’s award. The longer it takes for the Consumer to receive his or her settlement payment, the more the Consumer owes to the RD Entities. (Id.) After entering into the Purchase Agreement, Consumers are obligated immediately to forward any monies received from the NFL Claims Administrator or the VCF to the RD Entities until the Consumer has paid off the agreed-upon amount. (Compl. ¶ 26.) After the amount due under the agreement has been paid to the RD Entities, the Consumer is entitled to keep any balance in excess of that amount that he or she receives from the NFL Settlement Fund or VCF Claims Administrator. (Id.) d. Claims Against the RD Entities i.

CFPA Claims The Complaint alleges five CFPA claims against the RD Entities: (1) Count I alleges that the RD Entities engaged in deceptive acts or practices, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), by misrepresenting that the Purchase Agreements Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 11 of 108

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constituted valid and enforceable assignments and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3) (Compl. ¶ 63); (2) Count II alleges that the RD Entities engaged in abusive acts or practices, 12 U.S.C. §§ 5531(d), 5536(a)(1)(B), by misrepresenting that the Purchase Agreements constituted valid and enforceable assignments and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3) (Compl. ¶¶ 72-73); (3) Count III alleges that the RD Entities engaged in deceptive acts or practices, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), by misrepresenting that they could “cut through red tape” and expedite a Consumer’s award payment when in fact they could not and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3) (Compl. ¶ 79); (4) Count IV alleges that the RD Entities engaged in deceptive acts or practices, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), by misrepresenting when the RD Entities would deliver Consumers’ cash payments because, in some instances, the RD Entities made payment after the promised payment date, and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3), (Compl. ¶ 86); and (5) Count V alleges Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 12 of 108

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that the RD Entities engaged in deceptive acts or practices, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), by collecting on contracts that functioned as loans with usurious interest rates under state law and on which no payment was due, and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3). (Compl. ¶ 93.) ii.

Claims Arising Under New York Law The NYAG brings independently various claims arising under New York law, each of which is asserted against each of the named Defendants: Count IX asserts a claim of deceptive practices under New York General Business Law (“NY GBL”) § 349 against all of the named Defendants based on the same alleged deceptive conduct underlying Counts I, III, IV, and V of the Complaint, (Compl. ¶¶ 119-22); Count X asserts a claim of false advertising against all of the named Defendants under NY GBL § 350 based on the RD Entities’ alleged misrepresentations that the transactions at issue were sales, not loans, and that the RD Entities had the ability to expedite payment of Consumers’ awards when in fact they did not, (Compl. ¶¶ 123-26); Count XI asserts a claim under New York Executive Law § 63(12) for fraudulent conduct based on the same factual allegations underlying Counts I-V of the Complaint (Compl. ¶¶ 127-30); Counts VI and VII allege that, through the Purchase Agreements, Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 13 of 108

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Defendants charged Consumers rates of interest that violated New York’s civil and criminal usury laws, N.Y. Banking Law § 14-a, and N.Y. Penal Law §§ 190.40 and 190.42, respectively (Compl. ¶¶ 99-105, 106-10); and finally, Count VIII alleges that Defendants violated New York General Obligations Law (“NY GOL”) § 13-101 because they entered into contracts that constituted an unlawful assignment of individual claims to recover for personal injuries under New York law. N.Y. Gen. Oblig. Law § 13-101; (Compl. ¶¶ 111-18.) II.

Procedural History The instant case has a circuitous history in this Court. In January 2017, RD Legal Funding, LLC filed a complaint against the CFPB in the Southern District of New York seeking relief in the form of, inter alia, a declaration that the purchase of legal receivables from customers are true sales and that, therefore, RD Legal Funding, LLC’s business is not within the CFPB’s jurisdiction. RD Legal Funding, LLC v. Consumer Fin. Prot. Bureau, No. 17-cv-00010 (LAP) (S.D.N.Y.) (ECF No. 1); (Def. Br. 7.) According to Defendants, RD Legal Funding, LLC filed that action in response to civil investigative demands (“CID”) that the CFPB served on RD Legal Funding, LLC as well as a formal request from the CFPB to depose an RD Legal Funding, LLC representative in connection with the CFPB’s investigation of the RD Entities. (Def. Br. 6.) Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 14 of 108

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Two days after filing suit in federal court against the CFPB, RD Legal Funding Partners, LP and RD Legal Funding, LLC filed a similar suit in New York state court against NYAG seeking a declaration that the VCF Purchase Agreements are true sales. RD Legal Funding, LLC, et al. v. Schneiderman, et al., No. 17-cv-00681 (LAP) (S.D.N.Y.) (ECF No. 1). Following RD Legal Funding, LLC and RD Legal Funding Partners, LP’s actions against the CFPB and NYAG in this Court and New York state court, the CFPB and NYAG filed this enforcement action against the RD Entities on February 7, 2017. (ECF No. 1.) On May 15, 2017, the RD Entities moved to dismiss the Complaint on several grounds, including lack of federal jurisdiction due to the CFPB’s unconstitutional structure, the CFPB’s lack of jurisdiction over the RD Entities as “covered persons” under the CFPA, and for failure to state a claim on which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (ECF No. 39.) In July 2017, class counsel for the NFL Class Members requested that this Court allow it to file an amicus brief in opposition to the RD Entities’ motion to dismiss or, in the alternative, that determination of the validity of the assignment provisions in the NFL Purchase Agreements be referred to United States District Court for the Eastern District of Pennsylvania. (ECF No. 45.) Class counsel stated that it Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 15 of 108

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believed referral of this question to the Eastern District of Pennsylvania would be appropriate because that court has continuing jurisdiction over the administration and interpretation of the NCLSA. (Id.); see also Settlement Agreement § 27.1 (“The Court retains continuing and exclusive jurisdiction over this action including jurisdiction over . . . all Settlement Class Members . . . .”). Class counsel explained that referral of this question would ensure uniformity of adjudication through “a single up-or-down ruling that [would] apply not only to Defendants in this action but also to other potential lenders to class members who might assert the same defense.” (Id.) Because interpretation of the NCLSA’s terms falls squarely within “the administration and interpretation of the [NCLSA]” and referral would promote judicial economy, this Court concluded that referral of the anti-assignment clause question to the Eastern District of Pennsylvania was appropriate. (ECF No. 59.) On September 15, 2017, this Court referred the assignment question to the Honorable Anita B. Brody in the Eastern District of Pennsylvania, who was presiding over the NFL Concussion Litigation. (ECF No. 60.) On December 8, 2017, Judge Brody issued an Explanation and Order which concluded that the anti-assignment clause in the NFL Concussion Litigation Settlement Agreement “unambiguously prohibits” NFL class members “from assigning or attempting to Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 16 of 108

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assign any monetary claims [under the NFL Settlement Agreement],” thereby rendering “any such purported assignment . . . void, invalid and of no force and effect” under New York law. See Explanation and Order (hereinafter, “Explanation and Order”), In re NFL Players’ Concussion Injury Litig., No. 2:12md-2323-AB (E.D. Pa. Dec. 8, 2017) (ECF No. 9517) (citing Neuroaxis Neurosurgical Assocs., P.C. v. Costco Wholesale Co., 919 F. Supp. 2d 345, 352 (S.D.N.Y. 2013)). In New York, an anti-assignment clause is enforceable only if it contains “clear, definite and appropriate language” restricting the assignment of money due under the contract. Allhusen v. Caristo Constr. Corp., 103 N.E.2d 891, 893 (N.Y. 1952); Neuroaxis Neurosurgical, 919 F. Supp. 2d at 352. Under this framework, Judge Brody concluded that the term “relating to” in the NCLSA’s anti-assignment clause, which prohibits Class Members from assigning claims “relating to the subject matter of the Class Action Complaint,” encompassed assignment of Class Members’ claims to settlement awards under the NCLSA. See Explanation and Order at 3, 4 n.6. In reaching this conclusion, Judge Brody concluded that the phrase “relating to” in the NCLSA’s anti-assignment clause was “sufficiently express” under New York law to include assignment of Class Members’ claims to settlement awards under the NCLSA. Explanation and Order at 3-4. Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 17 of 108

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As a result of this finding, Judge Brody held that Class Members’ Purchase Agreements with the RD Entities were void. Explanation and Order at 5-6. Accordingly, she ordered the NFL Class Members to return to the RD Entities any amount that the RD Entities had already paid them. Id. On August 1, 2017, after Defendants filed the instant motion to dismiss, the American Legal Finance Association (“ALFA”) moved for leave to file an amicus curiae brief in opposition to Defendants’ motion to dismiss. The Court granted ALFA’s request, and ALFA filed its amicus curiae brief on August 15, 2017. (See Br. for ALFA as Amicus Curiae (“ALFA Br.”), ECF No. 56.) After receiving briefing from all parties on Defendants’ instant motion to dismiss, the Court requested supplemental briefing from the parties on February 23 and 28, 2018, on two legal questions pertaining to the VCF Purchase Agreements. (ECF Nos. 71, 72.) The first question asked what the effect of the underlying agreement between the Defendants and Eligible Claimants would be if the Court were to conclude that the assignments in the VCF Purchase Agreements were impermissible pursuant to the Anti-Assignment Act, 31 U.S.C. § 3727. As a follow-on to the first inquiry, the Court also asked how the effect of any such underlying agreement between Defendants and Eligible Claimants would impact the Government’s assertion of Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 18 of 108

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jurisdiction over the RD Entities as “covered persons” under the CFPA. (ECF No. 72.) On March 5, 2018, the Government filed a letter in response to the Court’s February 23 and 28 orders. (ECF No. 73.) On March 12, 2018, Defendants filed a letter in response to the Government’s March 5, 2018 letter addressing these issues. (ECF No. 74.) III. Legal Standard In considering a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), a court must “accept the material facts alleged in the complaint as true and construe all reasonable inferences in the plaintiff’s favor.” Phelps v. Kapnolas, 308 F.3d 180, 184 (2d Cir. 2002) (citation and internal quotation marks omitted). Though a court must accept all factual allegations as true, it gives no effect to “legal conclusions couched as factual allegations.” Stadnick v. Vivint Solar, Inc., 861 F.3d 31, 35 (2d Cir. 2017) (quoting Starr v. Sony BMG Music Entm’t, 592 F.3d 314, 321 (2d Cir. 2010)). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 19 of 108

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that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. This “plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (citations omitted). Deciding whether a complaint states a claim upon which relief can be granted is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Rahman v. Schriro, 22 F. Supp. 3d 305, 310 (S.D.N.Y. 2014) (quoting Iqbal, 556 U.S. at 679). In certain circumstances, the court may permissibly consider documents other than the complaint in ruling on a motion under Rule 12(b)(6). Documents that are attached to the complaint or incorporated in it by reference are deemed part of the pleading and may be considered. In addition, even if not attached or incorporated by reference, a document "upon which [the complaint] solely relies and which is integral to the complaint" may be considered by the court in ruling on such a motion.

Tolliver v. Lilley, No. 12-cv-971, 2014 U.S. Dist. LEXIS 184770, at *21–*22 (S.D.N.Y. Oct. 24, 2014) (citing Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007)).

IV.

Discussion In addressing the various arguments that Defendants assert in support of dismissal, the Court first addresses Defendants’ contention that this Court lacks federal jurisdiction to hear the CFPA claims because the RD Entities are not “covered persons” and thus do not come within the CFPA’s jurisdictional reach. Next, the Court addresses Defendants’ argument that the Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 20 of 108

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Complaint fails to state a claim on which relief can be granted pursuant to Rule 12(b)(6). In line with the doctrine of constitutional avoidance, the Court addresses Defendants’ constitutionality argument last.

a. Federal Jurisdiction i.

The RD Entities as “Covered Persons” Under the CFPA The CFPA regulates “covered person[s] or service provider[s]” who are engaged in “unfair, deceptive, or abusive act[s] or practice[s] under Federal law.” 12 U.S.C. §§ 5531(a), 5536(a). The Act defines “covered person” as “any person that engages in offering or providing a consumer financial product or service.” 12 U.S.C. § 5481(6)(A). The term “financial product or service” is defined in relevant part as “extending credit and servicing loans.” Id. § 5481(15)(A)(i). The CFPA defines “credit” as “the right granted by a person to a consumer to [1] defer payment of a debt, [2] incur debt and defer its payment, or [3] purchase property or services and defer payment for such purchase.” Id. § 5481(7).

The Government asserts four claims of deceptive acts or practices and one claim of abusive acts or practices under the CFPA against the RD Entities. Id. §§ 5531(a), 5536(a)(1)(B); Id. § 5531(d)(1), (2)(B). Defendants move to dismiss the CFPA deceptive and abusive acts or practices claims on the grounds Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 21 of 108

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that the RD Entities are not “covered person[s]” under the CFPA, Id. § 5481(6)(A), and therefore do not come within the Act’s jurisdictional reach. (Def. Br. 17.) The Government asserts that the RD Entities are “covered persons” under the CFPA because they extend “credit” and service loans. The Government alleges that the RD Entities engage in this activity because the assignments in the Purchase Agreements are void. See N.Y. U.C.C. § 9-408(d)(1); 31 U.S.C. § 3727; (Compl. ¶¶ 19, 43, 52-54, 61-69, 70-77.) In turn, these agreements do not constitute valid sales of Consumers’ interest in their settlement awards. (Compl. ¶¶ 19, 43, 61-69, 70-77.) The Government argues that the effect of this is to encumber Consumers with “debt” and an obligation to repay the RD Entities in spite of what the Purchase Agreements say. (Compl. ¶¶ 19, 34-43.) The RD Entities reject this characterization. They argue that the assignments are legally permissible and therefore effectuate true sales of Consumers’ interest in their settlement awards. (Def. Reply 5-6.) Under this approach, the Consumer incurs no repayment obligation in the event that the RD Entities are unable to collect the purchased receivable. (Def. Br. 19.) Therefore, the RD Entities assert that the consumer incurs “no debt,” “no repayment obligation,” and that “[t]here is certainly Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 22 of 108

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no right granted to defer payment of a debt” to the Consumer. (Id.) Both parties’ arguments as to the Government’s jurisdiction over Defendants as “covered persons” turns on the validity of the assignments. If the assignments are valid, as Defendants suggest, the entire basis of the Government’s jurisdictional theory under the CFPA would fall apart. Accordingly, in deciding whether the RD Entities are “covered persons” under the CFPA, the Court must first determine whether the assignments embodied in the NFL Purchase Agreements and the VCF Purchase Agreements are valid. 12 U.S.C. § 5481(6)(A).

1. The NFL Concussion Litigation Settlement Agreement Claims Following the issuance of Judge Brody’s Explanation and Order that found the assignments in the NFL Purchase Agreement void based on the NCLSA’s anti-assignment provision, Defendants filed a letter in this Court objecting to Judge Brody’s conclusion. (See ECF No. 62.) As explained below, the Court rejects Defendants’ arguments in support of these objections in all respects. Accordingly, the Court adopts the Explanation and Order’s finding that the NCLSA’s anti-assignment provision is valid, thereby rendering the assignments in the NFL-related Purchase Agreements void.

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a. The NCLSA’s Anti-Assignment Provision The express terms of the NCLSA restrict Class Members’ ability to assign their rights or claims “relating to the subject matter of the Class Action Complaint,” Explanation and Order at 2 (citing Settlement Agreement (hereinafter “Settlement Agreement”) § 30.1, In re NFL Players’ Concussion Injury Litig., MDL No. 2323 (E.D. Pa. Feb. 13, 2015) (ECF No. 6481-1)): Section 30.1 No Assignment of Claims. Neither the Settlement Class nor any Class or Subclass Representative or Settlement Class Member has assigned, will assign, or will attempt to assign, to any person or entity other than the NFL Parties any rights or claims relating to the subject matter of the Class Action Complaint. Any such assignment, or attempt to assign, to any person or entity other than the NFL Parties any rights or claims relating to the subject matter of the Class Action Complaint will be void, invalid, and of no force and effect and the Claims Administrator shall not recognize any such action.

Settlement Agreement § 30.1 (emphasis added). The Government asserts that the assignments in the NFL Purchase Agreements are void because the NCLSA’s express terms prohibit class members from assigning “any rights or claims relating to the subject matter of the Class Action Complaint,” which include their interest in their settlement award (or a portion thereof) under the NCLSA. (Compl. ¶ 35) (emphasis added). In response, the RD Entities contend that the NCLSA’s anti-assignment provision violates New York’s general Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 24 of 108

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prohibition of contractual anti-assignment clauses2 and, therefore, does not prevent the NFL Class Members from assigning their rights to settlement compensation under the NCLSA. (Def. Br. 18-21.) b. Legal Standard Regarding the Scope of the Anti-Assignment Provision First, Defendants contend that Judge Brody did not construe the anti-assignment language “narrowly” when interpreting the phrase “relating to” as required under New York law. In particular, they note that the anti-assignment provision does not specifically prohibit Class Members from assigning their right to a settlement award under the NCLSA, and therefore is not “sufficiently express” to be upheld under New York law. (ECF No. 62-4 at 10-17); C.U. Annuity Serv. Corp. v. Young, 722 N.Y.S.2d 236, 236 (N.Y. App. Div. 2001). Defendants also assert that the anti-assignment provision’s reference to “the subject matter of the Class Action Complaint” limits assignment only of Class Members’ personal injury claims, not Class Members’ rights to settlement awards stemming from a later-dated settlement agreement. (ECF No. 62-1 at 10; ECF No. 62-4 at 12-15; ECF No. 62.)

2 The NFL Concussion Litigation Settlement Agreement contains a New York choice-of-law provision.

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As a matter of policy, New York generally permits parties to assign their interests unless “the relevant provision of the contract contains ‘clear, definite, and appropriate language declaring an assignment invalid.’” Au New Haven, LLC v. YKK Corp., 210 F. Supp. 3d 549, 554 (S.D.N.Y. 2016) (quoting Purchase Partners, LLC v. Carver Fed. Sav. Bank, 914 F. Supp. 2d 480, 505 (S.D.N.Y. 2012)). To this end, New York law requires that courts construe contractual anti-assignment language “narrowly.” (ECF No. 62) (quoting Au New Haven, 210 F. Supp. 3d at 556).

It is well-settled that, in interpreting a contract’s terms, courts must give effect to the plain meaning of its words or terms. This basic principle encompasses phrases, including “relating to.” State v. Philip Morris Inc., 813 N.Y.S.2d 71, 75 (N.Y. App. Div. 2006) (“The terms ‘arising out of,’ and most particularly ‘relating to,’ certainly evince a broad arbitration clause”), aff’d, 869 N.E.2d 636 (N.Y. 2007). In relevant part, the term “relate to” is defined as “to have relationship or connection.” Relate, Merriam Webster (May 24, 2018), https://www.merriam-webster.com/dictionary/relate. In accord with its dictionary definition, courts in New York have given effect to the plain meaning of the phrase “relating to” when interpreting contracts in the past. See, e.g., Coregis Ins. Co. v. Amer. Health Found., Inc., 241 F.3d 123, 128–29 (2d Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 26 of 108

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Cir. 2001) (“The term ‘related to’ is typically defined more broadly.”); Collins & Aikman Prods. Co. v. Bldg. Sys., Inc., 58 F.3d 16, 20 (2d Cir. 1995) (discussing that, in the context of arbitration clauses, the phrase “‘arising out of or relating to th[e] agreement,’ is the paradigm of a broad clause”). Rights to settlement awards under the NCLSA indisputably “relat[e] to the subject matter of the Class Action Complaint.” As the Explanation and Order correctly notes, monetary awards under the NCLSA would not exist but for the events giving rise to the Class Action Complaint. Explanation and Order at 3-4. The “relationship” or “connection” between rights to settlement awards under the NCLSA and the “subject matter of the Class Action Complaint” is straightforward.

Defendants’ repeated reliance on Au New Haven, LLC v. YKK Corp., 210 F. Supp. 3d 549 (S.D.N.Y. 2016), does not help them. There, the Court analyzed the term “hereunder” in interpreting the scope of a contractual anti-assignment provision. Id. at 554-56. In conclusion, the Court gave effect to the “plainlanguage definition” of the word “hereunder” in finding that a patent, though the subject of the licensing agreement at issue, did not originate from the licensing agreement and therefore was not subject to the bar on assignments of any interest “hereunder.” Id. 554-55. Similarly here, the Explanation and Order gives effect to the plain meaning of the term “relating Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 27 of 108

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to” by employing the same “narrow” interpretation that the Court invoked in Au New Haven. No incongruity exists between the standard that Judge Brody used in interpreting the term “relating to” and the standard in Au New Haven. In sum, Judge Brody’s interpretation of the term “relating to” complies with New York contract law and basic principles of contract interpretation by giving meaning to the plain meaning of the phrase. Accordingly, the Court agrees with the Explanation and Order’s conclusion. The NCLSA’s terms state clearly that the anti-assignment provision validly applies to the assignment of Class Members’ claims to settlement awards under the NCLSA.

c. Assignability of “Settlement Proceeds” Versus “Monetary Claims”

Defendants also assert that Judge Brody’s Explanation and Order refers to the assignment of “monetary claims,” while the Purchase Agreements at issue purport to assign Class Members’ right to “settlement proceeds.” (ECF No. 62.) Defendants argue that the Explanation and Order’s use of the term “monetary claims” rather than “settlement proceeds” shows that Judge Brody conflated legally distinct concepts under New York law. Specifically, Defendants note that although New York law prohibits the assignment of claims, it does not similarly prohibit the assignment of settlement proceeds. For this Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 28 of 108

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reason, Defendants argue that the Explanation and Order’s findings, which use the term “monetary claims,” are inapplicable to the assignment of “settlement proceeds” at issue in the NFLrelated Purchase Agreements. (ECF No. 62); Explanation and Order at 3-4.

Defendants’ argument is a combination of mere word mincing and misconstruction of the law. As to misconstruction of the law, the assignments in the NFL-related Purchase Agreements purport to effectuate a transfer of Class Members’ full ownership rights and interest in the Property Amount to RD Legal Finance, LLC. (Dersovitz Aff. Exs. B-1 to B-7.) Through these Purchase Agreements, RD Legal Finance, LLC purports to “step into the shoes of the assignor” and obtain the full right to demand direct payment of the Property Amount from NFL Monetary Award Fund through a limited irrevocable power of attorney. (See Dersovitz Aff. Ex. B-5 at 12.) Defendants fail to note that the right to demand direct payment from the NFL Monetary Award Fund in itself is a “claim” that “clearly encompasses a cause of action for nonpayment.” Renfrew Ctr. v. Blue Cross Blue Shield of Central N.Y., Inc., No. 94-cv-1527 (RSP/GJD), 1997 WL 204309, at *4 (N.D.N.Y. Apr. 10, 1997). Although the NCLSA does not define the word “claim,” the assignment attempts to transfer all of the Class Members’ rights and interests in the Property Amount to RD Legal Funding, LLC. (See, e.g., Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 29 of 108

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Dersovitz Aff. Ex. B-5.) The RD Entities provide no basis for believing that this bundle of ownership rights includes anything less than the full benefits of ownership, and that includes the right to sue the NFL Monetary Award Fund in the event of nonpayment. Accordingly, Judge Brody’s Explanation and Order addresses squarely the scenario at issue in the NFL Purchase Agreements by analyzing the assignment of “monetary claims” under it.

Defendants’ assertion that the NFL Purchase Agreements are assignments of the “right to settlement proceeds” under the NCLSA is unavailing. Defendants cite Grossman v. Schlosser, 244 N.Y.S.2d 749, 749-50 (N.Y. App. Div. 1963), in an attempt to illustrate that the NFL Purchase Agreements involve the assignment of “settlement proceeds,” a concept that is legally distinct from the assignment of a “claim” for settlement proceeds in New York. In Grossman, the court held that the “assignment of proceeds of a [cause of action for personal injury], prior to its settlement or adjudication, [is] valid and effectual as an equitable assignment against the assignor and his attaching creditor.” Id. (emphasis added). This arrangement gives an equitable assignee “no legal estate or interest in the fund” but rather “constitute[s] an equitable lien on the property.” Matter of Hoffman, 435 N.Y.S.2d 235, 237 (N.Y. Surr. Ct. 1980); see also In re Mucelli, 21 B.R. 601, 603 Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 30 of 108

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(S.D.N.Y. 1982); United States v. Colby Academy, 524 F. Supp. 931, 934 (E.D.N.Y. 1981) (holding that settlement proceeds are assignable as “an equitable interest only” and “d[o] not become a legal assignment until the proceeds have come into existence”) (applying New York law).

Thus, New York law permits, at most, the creation of an equitable lien on future settlement proceeds. Id. “An equitable lien is ‘a right . . . to have a fund, specific property, or its proceeds, applied in whole or in part to the payment of a particular debt.’” Bank of India v. Weg & Myers, 691 N.Y.S.2d 439, 445 (N.Y. App. Div. 1999). This framework, however, still does not permit the transfer of an individual’s present ownership interest in future receivables for damages to recover for personal injury, which is what the NFL Purchase Agreements attempt to do, albeit unsuccessfully. Id. In sum, Defendants’ arguments that assignments of claims to settlement award funds under the NCLSA are valid are without merit.

d. Interpretation of the New York UCC3 New York Uniform Commercial Code (“NY UCC”) § 9-408(d)(1) establishes a general bar on anti-assignment clauses limiting

3 The Court notes that this argument was raised for the first time in Defendants’ letter objecting to the Explanation and Order’s findings, after the instant motion to dismiss was fully briefed. (ECF No. 62.) Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 31 of 108

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the transfer of “general intangibles.” N.Y. U.C.C. § 9-408(d)(1). This provision also enumerates certain exceptions to the general rule against such clauses. Id. One such exception applies to “the right to receive compensation for injuries or sickness as described in 26 U.S.C. § 104(a)(1) and (2), as amended from time to time.” Id. Section 104(a) of the Internal Revenue Code excludes certain types of compensation from gross income, including “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness[.]” 26 U.S.C. § 104(a)(2).

The RD Entities contend that because the NCLSA does not specify whether compensation from it qualifies as excludable income under Section 104, the NY UCC’s exception for restrictions on assignments of monetary claims for personal injury settlements does not save the anti-assignment provision as it relates to “proceeds” from settlement of personal injury claims. Id. § 104(a); (ECF No. 62.) It is beyond peradventure that compensation from the NFL Settlement Agreement constitutes “damages . . . received . . . on account of personal physical injuries” under Section 104 of the Internal Revenue Code. Id. § 104(a)(2). The NCLSA is rooted in the physical injuries resulting from repeated brain Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 32 of 108

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injuries that retired NFL players experienced while active in professional football. See Explanation and Order at 4 n.6. Accordingly, the NY UCC does not invalidate the NFL Settlement Agreement’s anti-assignment provision. e. The NFL-related Purchase Agreements Are Void In sum, the NCLSA validly prohibits the assignment of NFL Class Members’ monetary claims. Therefore, the assignments in the NFL Purchase Agreements are void. 2. 31 U.S.C. § 3727 Invalidates the Assignment of Compensation Awards from the VCF The RD Entities and the Government disagree over whether federal law prohibits the assignment of compensation that the VCF awards to an Eligible Claimant. On the one hand, the Government argues that the Anti-Assignment Act, 31 U.S.C. § 3727, prohibits assignment of Eligible Claimants’ rights to their award amount under the VCF. See 31 U.S.C. § 3727 (“Section 3727” or the “Anti-Assignment Act”); (Pl. Opp. 13-14.) On the other hand, the RD Entities assert that because the Anti- Assignment Act bars only the assignment of a substantive claim against the United States, not the assignment of settlement proceeds, the assignments in the Purchase Agreements are permissible. (Def. Reply 5-6.) Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 33 of 108

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Neither of the parties has cited to, and this Court has not been able to identify, a case addressing whether the Anti- Assignment Act applies to the VCF structure instituted by the Air Transportation Safety and System Stabilization Act, codified at 49 U.S.C. § 40101. For the reasons that follow, the Court concludes that it does.

a. The Anti-Assignment Act, 31 U.S.C. § 3727 Congress initially enacted the Assignment of Claims Act, now known as the Anti-Assignment Act, in 1853. United States v. Kim, 806 F.3d 1161, 1169 (9th Cir. 2015). The Anti-Assignment Act was intended to:

“(1) [T]o prevent persons of influence from buying up claims against the United States, which might then be improperly urged upon officers of the Government, (2) to prevent possible multiple payment of claims, to make unnecessary the investigation of alleged assignments, and to enable the Government to deal only with the original claimant, and (3) to save to the United States defenses which it has to claims by an assignor by way of set-off, counter claim, etc., which might not be applicable to an assignee.”

In re Ideal Mercantile Corp., 244 F.2d 828, 831 (2d Cir. 1951) (quoting United States v. Shannon, 342 U.S. 288, 291-92 (1952)). To this end, the Anti-Assignment Act, 31 U.S.C. § 3727, imposes restrictions on the assignment of claims against the United States Government. The statute defines an assignment as “a transfer or assignment of any part of a claim against the Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 34 of 108

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United States Government or of an interest in the claim” or “the authorization to receive payment for any part of the claim.” Id. Section 3727 permits assignments of a claim against the United States only after “[1] [the] claim is allowed, [2] the amount of the claim is decided, and [3] a warrant for payment of the claim has been issued.” Id.

i.

“Claim Against the United States”

The Anti-Assignment Act restricts the assignment of “claims against the United States.” Id. As an initial matter, therefore, the Court must determine whether an Eligible Claimant’s entitlement to a monetary award from the VCF is a “claim against the United States.” Kim, 806 F.3d at 1170. Although the Anti-Assignment Act does not define the term explicitly, “[w]hat is a claim against the United Stated is well understood. It is a right to demand money from the United States.” Hobbs v. McLean, 117 U.S. 567, 575 (1886). This interpretation accords with the term’s dictionary definition, which is “[t]he assertion of an existing right; any right to payment or to an equitable remedy, even if contingent or provisional . . . [a] demand for money, property, or a legal remedy to which one asserts a right.” Claim, Black’s Law Dictionary (10th ed. 2014).

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Applying this definition here, an Eligible Claimant’s monetary award from the VCF is a “claim against the United States” because it creates a “right to demand money from the United States” upon Eligible Claimants’ receipt of their award letter. Hobbs, 117 U.S. at 575; see also Kim, 806 F.3d at 1171 (“An award of statutory attorney’s fees is, at base, a right to demand money from the United States.”). Although the VCF is a unique, if not unprecedented, legal creature, the Court sees no reason why a monetary award under the VCF is not a “claim against the United States.” Hobbs, 117 U.S. at 575; see also Kim, 806 F.3d at 1171 (quoting United States v. Gillis, 95 U.S. 407, 413 (1877)) (“No language could be broader or more emphatic than these enactments. The words embrace every claim against the United States, however arising, of whatever nature it may be, and wherever and whenever presented”) (internal quotation marks omitted).

Defendants argue that the Anti-Assignment Act only restricts the assignment of substantive claims against the United States. (Def. Rep. 5.) Applying this principle here, the RD Entities contend that the VCF Purchase Agreements assign Eligible Claimants’ right to proceeds from the VCF rather than Eligible Claimants’ substantive claims. Therefore, they say, Section 3727 does not bar these assignments. (Def. Reply 5); (ECF No. 74.) Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 36 of 108

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In the same way that the RD Entities misconstrue the legal distinction between the assignment of “claims” and the assignment of “proceeds from claims” with the NFL-related Purchase Agreements, they do so once more here. Courts have held uniformly that an individual’s right to receive payment directly from the United States Government is a substantive claim that may not be assigned under the Anti-Assignment Act. See Kim, 806 F.3d at 1170-71 (citing United States v. Transocean Air Lines, Inc., 386 F.2d 79, 81 (5th Cir. 1967); Kearney v. United States, 285 F.2d 797, 800 (Ct. Cl. 1961); Pittman v. United States, 116 F. Supp. 576, 580 (Ct. Cl. 1953)). Consistent with this interpretation, the Anti-Assignment Act does not restrict a would-be assignor’s ability to create a legal obligation to pay a would-be assignee after the United States Government has paid the would-be assignor. In this situation, the would-be assignee could then “enforce[]” the agreement “by suit” if the would-be assignor did not “recognize” this agreement “after collection of the money.” Nutt v. Knut, 200 U.S. 12, 20 (1906) (emphasis added). Anti-Assignment Act jurisprudence establishes clearly that a party is free to enter into an agreement that legally obligates it with respect to a future payment from the United States Government after the party has received the funds. See, e.g., Martin v. Nat’l Sur. Co., 300 U.S. 588, 595 (1937) (emphasis added) (“After payments have Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 37 of 108

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been collected and are in the hands of the contractor or subsequent payees with notice, assignments may be heeded, at all events in equity, if they will not frustrate the ends to which the [statute] was directed.”); First Fed. Sav. & Loan Ass’n of Rochester v. United States, 58 Fed. Cl. 139, 157-58 (Ct. Cl. 2003) (“The assignee has no claim against the government. The assignments were of a right to proceeds – a contractual arrangement between private parties.”); Saint John Marine Co. v. United States, 92 F.3d 39 (2d Cir. 1996) (holding contractual obligations between private parties regarding proceeds from the United States Government enforceable but assignment as against the United States void); In re Ideal Mercantile Corp., 244 F.2d at 832 (citing McKenzie v. Irving Tr. Co., 323 U.S. 365, 369 (1945)) (emphasis added) (“[I]t seems clear that an assignment of a claim against the United States is enforceable in many cases as between parties to that assignment, or their successors in interest, after the Government has paid the claim.”). Defendants cite to Saint John Marine for the proposition that the Purchase Agreements are valid because while “the Anti- Assignment Act ‘voids the assignment as against the United States, the assignment remains enforceable as between the parties to the contract.” (ECF No. 74) (citing Saint John Marine, 92 F.3d at 45)) (emphasis added). It is nose-on-theface plain that the Court of Appeals did not mean that Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 38 of 108

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assignments like the ones at issue here, which purport to transfer all of Eligible Claimants’ present rights and interests in a portion of their VCF award, including the right to demand payment directly from the United States Government, are permissible under the Anti-Assignment Act. (See Def. Br. Sec. III(A)(1)(b)) (“The Assignments Give the RD Entities the Right to Demand Direct Payment from the Holder of the Funds.”). Rather, the Court of Appeals was reiterating a well-established legal principle in Anti-Assignment Act case law: an assignment that is void as against the United States under the Anti- Assignment Act “may amount to the creation of an equitable lien when the subject matter of the assignment has been reduced to possession and is in the hands of the assignor.” Martin, 300 U.S. at 597. This general principle comports with the Anti- Assignment Act’s underlying purpose. “The United States has no need to worry about fraud or any of the other evils associated with the assignment of claims against it once the proceeds of the claims have been reduced to the possession of the purported assignor.” Kim, 806 F.3d at 1176-77. After the United States Government has remitted payment to the purported assignor, the Act’s protective purpose “is not implicated.” Id. at 1177. Therefore, an equitable lien on funds to be received in the future from the United States Government is permissible, but Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 39 of 108

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assignment of a right to collect payment directly from the United States Government is not.

In sum, the RD Entities’ argument shows too much by arguing that Defendants purport to contract for a full ownership interest in a portion of Eligible Claimants’ award, which plainly includes the right to demand payment for that portion directly from the United States Government. (Dersovitz Aff. Ex. A-1 at 16) (letter from RD Entities to VCF Claims Processing Center demanding payment be made directly to RD Entities pursuant to Purchase Agreement); (Def. Br. Sec. III(A)(1)(b)) (“The Assignments Give the RD Entities the Right to Demand Direct Payment from the Holder of the Funds.”). “From the beginning . . . the Anti-Assignment Act has been concerned with direct payment of claims.” Kim, 806 F.3d at 1176. The Purchase Agreements purport to transfer Eligible Claimants’ right to receive payment directly from the United States Government to the RD Entities. This is precisely what the statute governs, and this is not allowed.

ii.

Statutory Purpose Having concluded that an award of compensation under the September 11th VCF constitutes a “claim” within the meaning of the Anti-Assignment Act, the Court must next determine whether application of the Anti-Assignment Act to the VCF’s enabling statute would advance the statute’s stated objectives before Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 40 of 108

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applying it. Saint John Marine, 92 F.3d at 49; See N.Y. Guardian Mortgagee Corp. v. Cleland, 473 F. Supp. 422, 434 (S.D.N.Y. 1979) (“[T]here must be some congruence between the Act and its purposes before it is applied.”). In passing the Anti-Assignment Act, Congress sought to protect the United States Government by restricting the assignment of claims against it. See Martin, 300 U.S. at 594 (“The provisions of the statute making void an assignment or power of attorney by a Government contractor are for the protection of the Government.”). As noted above, Congress sought to limit the United States Government’s exposure to three potential liabilities:

“(1) [T]o prevent persons of influence from buying up claims against the United States, which might then be improperly urged upon officers of the Government, (2) to prevent possible multiple payment of claims, to make unnecessary the investigation of alleged assignments, and to enable the Government to deal only with the original claimant, and (3) to save to the United States defenses which it has to claims by an assignor by way of set-off, counter claim, etc., which might not be applicable to an assignee.”

In re Ideal Mercantile Corp., 244 F.2d at 831 (quoting Shannon, 342 U.S. at 291-92).

In spite of the Anti-Assignment Act’s broad language, courts have held the statute inapplicable where enforcement would not advance its underlying purposes. See N.Y. Guardian, 473 F. Supp. at 433-34 (“Despite the broad language of the Act, numerous exceptions to it have been recognized when [its] Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 41 of 108

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purposes would not be served.”). For example, the Anti- Assignment Act does not bar involuntary assignments that occur by operation of law, Saint John Marine, 92 F.3d at 48, which courts have interpreted to include “corporate mergers, consolidations, and reorganizations,” First Fed. Sav. & Loan Ass’n of Rochester, 58 Fed. Cl. at 158. Voluntary assignments for the benefit of creditors, transfers imposed by judicial order, subrogation, and corporate reorganizations that result in a transfer of assets are also situations in which courts have found the Anti-Assignment Act to be inapplicable. Saint John Marine, 92 F.3d at 49 (citing Goodman v. Niblack, 102 U.S. 556 (1880); Keydata Corp. v. United States, 504 F.2d 1115 (Ct. Cl. 1974); United States v. Aetna Cas. & Sur. Co., 338 U.S. 366 (1949)).

After weighing the relevant factors, the Court concludes that application of the Anti-Assignment Act to 49 U.S.C. § 40101 would further Congress’s intent in passing the Act. See N.Y. Guardian, 473 F. Supp. at 434.

First, applying the Anti-Assignment Act to awards under the VCF would allow the United States Government the opportunity, if ever necessary, to set off an Eligible Claimant’s award amount against preexisting debts owed to the United States. See Shannon, 342 U.S. at 291-92; Kim, 806 F.3d at 1172. Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 42 of 108

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More significantly, however, application of the Anti- Assignment Act to 49 U.S.C. § 40101 limits the possibility of multiple payments of claims, preserves United States Government resources by eliminating the need for diligence to validate an alleged assignment, and streamlines the VCF’s administration by requiring the United States Government to interact with only the original claimant. See In re Ideal Mercantile Corp., 244 F.2d at 831. The Special Master of the VCF has previously stated that the potential for fraud is a primary concern in the administration of the Fund. See September 11th Victim Compensation Fund, First Annual Status Report, at 4 (Oct. 2012), https://www.vcf.gov/pdf/VCFStatusReportOct2012.pdf (“As with any government program involving compensation, it is crucial that we implement key protocols to prevent fraud.”). As the Special Master has noted, “[t]hese efforts are particularly important given the cap on the total amount of money available for the Fund.” Id. Limiting the number of individuals to whom the United States Government makes award payments under the VCF would undoubtedly minimize the potential for fraud. Accordingly, application of the Anti-Assignment Act to 49 U.S.C. § 40101 and, more specifically, to monetary awards issued under the VCF would further the purposes of the Act. Therefore, the Anti-Assignment Act applies to claims arising under 49 U.S.C. § 40101.

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iii.

The VCF-related Purchase Agreements Do Not Comply With the Anti-Assignment Act’s Requirements The Anti-Assignment Act allows a party to assign a claim against the United States only if it is made after “[1] a claim is allowed, [2] the amount of the claim is decided, and [3] a warrant for payment of the claim has been issued.” 31 U.S.C. § 3727(b).

The RD Entities appear to argue that because they entered into the Purchase Agreements with Eligible Claimants only “after the Special Master’s determination of the amount due to the seller, i.e., after the claim had been allowed,” (Def. Rep. 6), Defendants have complied with Section 3727’s requirements and the assignment is therefore permissible. Oddly, the RD Entities do not address their compliance with the Anti-Assignment Act’s two other technical requirements. 31 U.S.C. § 3727(b); Kim, 806 F.3d at 1176. However, this is of no event. The Court of Appeals for the Ninth Circuit has noted that compliance with Section 3727’s third requirement, which allows for assignment of claims only after “a warrant for payment of the claim has been issued,” is almost impossible given that “the Treasury no longer uses warrants.” See 31 U.S.C. § 3727(b); Kim, 806 F.3d at 1169. Because the Government Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 44 of 108

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may, at its choosing, “waive coverage of the Anti-Assignment Acts,” Kim, 806 F.3d at 1169 (quoting Riviera Fin. of Tex., Inc. v. United States, 58 Fed. Cl. 528, 530 (2003)), the warrant’s anachronistic character, coupled with Congress’s inaction in updating the statute’s language, gives the Government “the power to pick and choose which assignments it will accept and which it will not.” Kim, 806 F.3d at 1169-70. Here, there is no indication that the United States Government has waived coverage of the Anti-Assignment Act to 49 U.S.C. § 40101. In addition, neither party has argued that the RD Entities complied with the Anti-Assignment Act’s three requirements under Section 3727(b). Accordingly, because neither the RD Entities nor the Government have argued or alleged facts that the VCF Purchase Agreements comply with Section 3727’s requirements, these assignments are void as against the United States under 31 U.S.C. § 3727.

3. Eligible Claimants and NFL Class Members “Incur[red] Debt” Through the Purchase Agreements After addressing the preliminary issue of whether the VCF and NCLSA permit the assignment of Consumers’ claims to settlement awards, which they do not, the Court is able to turn to the crux of the jurisdictional question presented here: whether the Purchase Agreements cause Consumers to incur “debt” Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 45 of 108

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such that the RD Entities “extend[] credit” within the meaning of a “covered person” under the CFPA. 12 U.S.C. §§ 5481(6)-(7). The RD Entities argue that, even if the assignments are invalid, this fact merely renders the Purchase Agreements void and would not “transform” the Purchase Agreements into extensions of “credit.” (Def. Br. 18-21.) In its rather sparse response to this contention, the Government asserts that because the Purchase Agreements are invalid, Defendants functionally offer or provide a credit transaction in which consumers incur debt and defer the right to repay. (Compl. ¶ 19.) In spite of the puzzling paucity of case law addressing facts similar to those at issue here, the Court agrees ultimately that the assignments in the Purchase Agreements are void as against the third-party obligors, i.e., the VCF Claims Administrator and the NFL Settlement Fund, but give rise to a relationship between Defendants and Consumers in which the RD Entities “extend[] credit” and the Consumer incurs “debt” within the meaning of 12 U.S.C. § 5481(6)-(7). The CFPA defines “credit” as “the right granted by a person to a consumer to [1] defer payment of a debt, [2] incur debt and defer its payment, or [3] purchase property or services and defer payment for such purchase.” 12 U.S.C. § 5481(7). Although the CFPA does not define the term “debt,” Black’s Law Dictionary defines debt, in relevant part, as “a specific sum of Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 46 of 108

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money due by agreement or otherwise.” Debt, Black’s Law Dictionary (10th ed. 2014). Both parties rely on case law interpreting whether a transaction constitutes an extension of “credit” under the CFPA or other statutes that have substantially similar definitions of the term “credit.” See 15 U.S.C. § 1602(f) (Truth in Lending Act (“TILA”)); 15 U.S.C. § 1691(d) (Equal Credit Opportunity Act (“ECOA”)). None of those cases, however, involves an assignment that a court has declared invalid as a matter of law, as is the situation here. In Capela v. J.G. Wentworth, LLC, the court held that a transaction involving a party’s sale and assignment of its right to structured settlement payments for a personal injury claim from Allstate Settlement Corporation in exchange for an upfront, lump sum cash payment from a structured settlement company was a sale, not an extension of “credit” under TILA. No. CV09-882, 2009 WL 3128003, at *9, 10 (E.D.N.Y. Sept. 24, 2009) (citing 15 U.S.C. § 1601 et seq.). The court found that the transaction was not properly classified as a loan because the assignor “ha[d] no obligation at all to pay the settlement installments if Allstate fail[ed] to do so” under the terms of the agreement. Id. Similarly, in Reed v. Val-Chris Invs., Inc., the court found that a party’s assignment of his future interest in his father’s estate to a company called Advance Inheritance, LLC (“AI”) in exchange for an immediate lump sum cash payment from Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 47 of 108

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AI was not an extension of “credit” under TILA because, under the transaction’s terms, AI “had no recourse against Plaintiff if his potential inheritance was not sufficient to cover his assignment.” No. 11cv371, 2011 WL 6028001, at *2-3 (S.D. Cal. Dec. 5, 2011).

Capela and Reed present facts that are fundamentally different from those at issue here because the assignments in those cases were not declared invalid as a matter of law. In Capela, the purchaser of the receivables petitioned for and obtained judicial approval of the transaction pursuant to New York’s Structured Settlement Protection Act, N.Y. Gen. Oblig. Law § 5-1701, et seq., in New York Supreme Court, Suffolk County. Id. at *1. Similarly, in Reed, the assignment agreement was “filed with the state probate court” and, although not mentioned specifically in the case, would have been subject to judicial approval pursuant to California Probate Code § 11604.5(d)(1)-(h)(1) (West) (amended 2015). Unlike here, a court reviewed and approved the assignments at issue in Capela and Reed prior to those plaintiffs filing suit against the structured settlement companies. Rather, plaintiffs in Capela and Reed sought to have the disclosure and protection requirements of TILA and ECOA applied to their structured settlement agreements by having them classified as extensions of “credit” without challenging the validity of the underlying Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 48 of 108

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assignment. Capela, 2009 WL 3128003, at *2; Reed, 2011 WL 6028001, at *2. Because the assignments at issue in the NFL and VCF purchase agreements are invalid as a matter of law, the analyses in Capela and Reed have limited transferability to this case.

Here, the Court has concluded that the assignments in the VCF Purchase Agreements and the NFL Purchase Agreements are void as against the third-party obligors.4 The relevant question thus becomes whether, looking beyond the gloss of the “assignment and sale” label that the RD Entities have affixed to the Purchase Agreements, these transactions constitute an extension of “credit” under the CFPA as between the Consumers and the RD Entities.

It is well-established that contract interpretation is the domain of state law. See Capela, 2009 WL 3128003, at *10 (looking to state law to determine nature of agreement between parties); Kim, 806 F.3d at 1175 (applying California law to determine nature of underlying agreement between parties). Therefore, the Court looks to New York law in interpreting the

4 The assignability of an individual’s future interest in an estate is an evolving area of law in both California and New York. See David Horton & Andrea Cann Chandrasekher, Probate Lending, 126 Yale L. J. 102, 108 (2016) (analyzing empirical evidence on 594 probate lending transactions in California and concluding in part that the practice “raise[s] serious fairness concerns” and “violat[es] . . . [California’s] usury laws on a massive scale”).

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nature of the agreement between Consumers and the RD Entities after peeling away the invalid assignments and the “assignment and sale” labels from these transactions.5 Id. Under New York law, an assignment of litigation proceeds takes effect as an equitable lien in favor of the “assignee.” In re Minor, 482 B.R. 80, 84 (Bankr. W.D.N.Y. 2012) (quoting Williams v. Ingersoll, 89 N.Y. 508, 519 (N.Y. 1882)). “An equitable lien is ‘a right . . . to have a fund, specific property, or its proceeds, applied in whole or in part to the payment of a particular debt.’” Arbor Realty Funding, LLC v. East 51st St. Dev. Co., 907 N.Y.S.2d 98 (Sup. Ct. 2009) (quoting Bank of India v. Weg & Myers, 691 N.Y.S.2d 439, 445 (N.Y. App. Div. 1999)) (emphasis added).

Here, because the assignments are void, no ownership rights are transferred to the RD Entities under the Purchase Agreements. Rather, the RD Entities are creditors with a security interest in Consumers’ future – but already determined – settlement award amounts under the VCF or NCLSA. In re Minor, 482 B.R. at 85. By any measure, therefore, the lump sum cash advance that the RD Entities provide causes Consumers to “incur a debt and defer its payment” because it is a specific sum of

5 Defendants accept for purposes of this motion only that New York law applies for purposes of characterizing the transactions as sales or loans. (Def. Br. 26 n.10.) Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 50 of 108

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money due by agreement. See Debt, Black’s Law Dictionary (10th ed. 2014). The idea that the Consumer’s repayment obligation is legally “triggered” only upon receipt of settlement funds from the settlement administrator is illusory. (Def. Br. 19.) The repayment obligation is always with the Consumer from the moment the RD Entities disburse the lump sum cash payment to the Consumer. To that end, the Consumer “defers” payment of this debt unilaterally, in spite of Defendants’ contentions to the contrary. (Def. Br. 19) (“Cases interpreting analogous federal statutory definitions of ‘credit’ confirm that, the ‘hallmark of credit . . . is the right of one party to make deferred payment.’”) (quoting Reithman v. Berry, 287 F.3d 274, 277-79 (3d Cir. 2002)). The RD Entities’ lump sum cash advance is “‘an extension of credit, an advance, or loan . . . with the assignment held over the [Consumer] as a sort of club or collateral security’” regardless of whether the third-party obligor remits payment to the Consumer or not. Missouri ex rel. Taylor v. Salary Purchasing Co. Inc., 358 Mo. 1022, 1028 (1949) (quoting McWhite v. State, 226 S.W. 542, 543 (Tenn. 1921)). Bankruptcy courts frequently face the question of whether a transaction is properly characterized as a loan or a sale where the purchaser of a receivable must defend its rights against other creditors in the seller’s bankruptcy proceeding. Peter V. Pantaleo et al., Rethinking the Role of Recourse in the Sale of Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 51 of 108

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Financial Assets, 52 Bus. Law. 159, 160 (1996). To that end, bankruptcy courts weigh the presence or absence of certain factors in determining whether a transaction is a sale or a loan under New York law. (Def. Br. 19, 27.) Among the factors that these courts consider in this analysis is the existence of recourse. If a buyer retains recourse against the seller, this indicates that the buyer has assumed less than all of the ownership rights in a purported sale, thereby indicating that the transaction is more likely a loan. See In re Dryden Advisory Group, LLC v. Beneficial Mut. Sav. Bank, 534 B.R.612, 620-23 (Bankr. M.D. Pa. 2015) (applying New York law); Pantaleo, 52 Bus. Law. at 159 (explaining that “an issue can arise over whether to view [a] transaction as a sale or a secured loan” where recourse against the seller exists because it indicates that “less than all the risks of ownership [have been] transferred” from seller to buyer).

Courts also look to other factors in making this determination. For example, an assignee’s right to demand direct payment from the seller’s account debtor tends to indicate that a true sale has taken place. See In re Dryden Advisory Grp., 534 B.R. at 622. Conversely, a seller’s right of repurchase from the buyer tends to weigh in favor of classifying the transaction as a loan because it indicates that the seller has not fully alienated his ownership rights in the property. Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 52 of 108

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See In re Joseph Kanner Hat Co., 482 F.2d 937, 940 (2d Cir. 1973) (finding pledge of security rather than true sale where underlying asset serving as security was returned upon repayment of the advanced funds). In addition, courts may also look to the intent of the parties in effectuating a sale or a loan as indicated by the language of the contract. See Platinum Rapid Funding Grp. Ltd. v. VIP Limousine Servs., Inc., No. 604613-15, 2016 WL 4478807 (N.Y. Sup. Ct. June 8, 2016). Bearing all of these factors in mind, Defendants urge that the paramount factor in determining whether a transaction is a sale or a loan under New York law is whether the “risk of nonpayment is transferred from the seller to the buyer, not the degree of risk borne by the buyer.” (Def. Rep. 11-12.) Because the RD Entities purport to assume all of the risks of nonpayment in the Purchase Agreements, they argue that the Agreements are non-recourse and therefore are true sales. (Id.) Contrary to the RD Entities’ assertions, the instant case is not a line-drawing exercise. The assignments in the Purchase Agreements are void and thus do not transfer a single right of ownership from Consumers to the RD Entities in their monetary claims. This constitutes the beginning and end of the story. Because the assignments are invalid, the RD Entities retain recourse against the Consumer in the event of nonpayment. Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 53 of 108

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In spite of the lack of case law classifying structured settlement transactions as loans or sales where a court deems the assignment void as a matter of law against the third-party obligor, a single Missouri state court case contains significant factual parallels to the case at hand. In Missouri ex rel. Taylor v. Salary Purchasing Co. Inc., the Missouri Attorney General brought charges against a salary advance company that offered consumers a cash advance on their unearned wages. 358 Mo. 1022, 1024-25 (1949). At that time, the Missouri legislature had made transactions amounting to “payday loans” illegal. Id. (citing Mo. Rev. Stat. §§ 3226, 3227 (1939) (capping allowable interest rate at six percent if no rate specific and eight percent if stated in contract, respectively)). To circumvent this prohibition, the salary advance company structured the transactions as “sales” in which consumers would “assign” their future unearned wages to the salary advance company. Id. The assignment agreements contained exorbitant repayment terms that dictated repayment of the amount advanced plus fees that, in reality, functioned as usurious interest rates. Id. Additionally, although the salary advance company was authorized to notify and collect from the consumer’s employer, it never attempted to do this. Id. Ultimately, the Missouri Attorney General brought charges under state civil and criminal usury laws against the salary advance Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 54 of 108

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company, arguing that the assignments were actually loans with usurious interest rates. Id. In response, the salary advance company argued that the assignments were not loans subject to state usury laws, but valid sales. Id. In the alternative, the salary advance company asserted that the effect of a state statute invalidating assignments of unearned wages would not convert the assignments into loans but would only render the assignments null and void. Id. at 1026. In rejecting the salary advance company’s argument, the Supreme Court of Missouri, sitting en banc, noted that the void assignments “could be nothing but loans” because they “transferred no right or title in the unearned wages which they purported to assign.” Id. In spite of the assignments’ terms to the contrary, the transactions imposed a repayment obligation on the consumer because the salary advance company “did not intend to donate to the applicants the money which it advanced on such void assignments. It intended to create the relationship of debtor and creditor.” Id. “The assignment was . . . taken as a security for the money advanced, and as something to be held over a customer who did not make prompt settlement. . . . this is clearly an extension of credit, an advance, or loan, to the employee, with the assignment held over the employee as a sort of club or collateral security.” Id. at 1028 (quoting McWhite v. State, 226 S.W. 542, 543 (Tenn. 1921)). Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 55 of 108

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In sum, because the assignments in the Purchase Agreements are void, the RD Entities obtain, at most, an equitable lien on Consumers’ future settlement award proceeds that establishes a creditor-debtor relationship. Id. Accordingly, Defendants “extend[] credit,” and Consumers “incur[] debt” under the Purchase Agreements, and the RD Entities are therefore “covered persons” under the CFPA.

Defendants argue that the legal effect of invalidating an assignment is to “render the agreement null and void.” (Def. Rep. 7) (citing Singer Asset Fin. Co. v. Bachus, 741 N.Y.S.2d 618, 621 (N.Y. App. Div. 2002)). As discussed, the Court has determined that the assignment is void as against the thirdparty obligors in this case, i.e., the NFL Settlement Fund and the VCF Claims Administration. However, the remaining contractual arrangement between the RD Entities and Consumers created a creditor-debtor relationship separate and apart from the void assignments. To that end, although the assignment is “null and void” as against the third-party obligors, the Court refuses to look the other way when evaluating the true nature of the transactions. Therefore, to the extent these extensions of credit did not comply with state regulatory requirements governing loans at the time they were offered, the RD Entities will not be allowed simply to return to their pre-agreement positions without any penalties. See, e.g., Bouffard v. Befese, Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 56 of 108

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LLC, 976 N.Y.S.2d 510, 514 (N.Y. App. Div. 2013) (explaining that transaction must be “considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it” in determining whether it is a usurious loan).

The pre-settlement legal funding transactions referenced in ALFA’s amicus curiae brief differ in a crucial respect. (See ALFA Br.) In those transactions, the pre-settlement legal funding agreements are entered into before the claim is resolved. The ALFA Member’s right to repayment is contingent on the consumer’s ultimate success on his or her claim. (ALFA Br. 5.) ALFA notes that Regulation Z’s definition of “credit” expressly excludes “[i]nvestment plans in which the party extending capital to the consumer risks the loss of the capital advanced.” 12 C.F.R. § 1026.2(a)(14) (Supp. I 2017). The transactions that the RD Entities offer present no such risk of loss because, as a prerequisite, the RD Entities require Consumers to have a settlement award letter stating the amount to which they are entitled from their respective settlement fund. (Compl. ¶¶ 20, 24-26.) Applying this framework here, the Court concludes that the Government has alleged plausibly that the transactions at issue here functioned as extensions of “credit” in practice. Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 57 of 108

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a. The RD Entities Extend “Credit” and “Service[] Loans”

Under the CFPA, a “covered person” is one who “extend[s] credit and servic[es] loans.” 12 U.S.C. §§ 5481(6)(A); 5481(15)(A)(1). Having established that the Complaint alleges adequately that the Purchase Agreements at issue extend “credit,” the issue remains whether the RD Entities also “servic[e] loans.” The RD Entities argue that even if they extend “credit,” the Government has not alleged plausibly that they also “servic[e] loans.” 12 U.S.C. § 5481(15)(A)(1); (Def. Reply 8.) Under 12 U.S.C. § 5481(6), a “covered person” is “any person that engages in offering or providing a consumer financial product or service.” Id. (emphasis added). Adoption of the RD Entities’ interpretation of “financial product or service” to cover only entities that both “extend[] credit and servic[e] loans” would result in rendering the “or” in “financial product or service” inconsistent with the term’s definition because it would ascribe the same definition, “extend[ing] credit and servic[ing] loans,” to two distinct concepts that are separated by the term “or.” 12 U.S.C. §§ 5481(6)(A), 5481(15)(A)(1).

It is well-established that courts may interpret the term “and” to have a disjunctive effect in interpreting a statute’s Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 58 of 108

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meaning. See Peacock v. Lubbock Compress Co., 252 F.2d 892, 894 (5th Cir. 1958) (holding that “and” was disjunctive in the context of a statute that required an employer to pay overtime wages to employees “engaged in the ginning and compressing of cotton”). Here, interpreting the term “and” disjunctively does not defy common sense. Not infrequently, the party that originates or makes a loan is different from the party that services that loan. Given this fact, it would make little sense for Congress to grant the CFPA jurisdiction only over loan originators that service their own loans. Such an interpretation would not capture a large section of the market that the CFPA expressly seeks to regulate. Even if Congress did not intend the term “and” to be interpreted disjunctively, the Government has adequately pleaded that the RD Entities “servic[e] loans.” The CFPA defines the term “service provider” as one who “provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.” 12 U.S.C. § 5481(26)(A). Drawing from this statutory definition of the term “service,” which appears in the same section as the term “financial product or service,” the Court concludes that the Government has alleged adequately that the RD Entities “servic[e] loans” because they carry out “material service[s] . . . in connection with the offering or Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 59 of 108

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provision . . . of a consumer financial product or service.” 12 U.S.C. § 5481(26)(A). For one, the Complaint alleges that Roni Dersovitz has made phone calls to collect from Consumers and that Dersovitz has authority to determine whether RD should collect. (Compl. ¶ 54.) Collection on loans is a “material service” relating to the provision of a loan because, without collection, the loan would be a nullity. Accordingly, the Government need only plead that the RD Entities “extend[ed] credit” or “servic[ed] loans” to allege plausibly that they are “covered persons” under the CFPA. In the alternative, the Court concludes that, even if the Government had to allege that the RD Entities also “servic[e] loans,” the Complaint also alleges adequately that the RD Entities, by and through their founder and owner Roni Dersovitz, engaged in such activities by collecting on loans and making the decision to collect on loans.

4. The RD Entities Are “Covered Persons” Under the CFPA For the reasons stated above, the Court concludes that the Government has pleaded adequately that the RD Entities are “covered persons” under the CFPA. 12 U.S.C. § 5481(6)(a). b. Failure to State a Claim Fed. R. Civ. P. 12(b)(6) Defendants next argue that, even if the RD Entities are “covered persons” within the meaning of the CFPA, the Complaint Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 60 of 108

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should be dismissed for failure to state a claim under Rule 12(b)(6).

i.

Rule 9(b)’s Heightened Pleading Standard Does Not Apply to Non-Fraud Claims Before addressing the substantive allegations in the Complaint, Defendants argue that because the Government’s claims are all premised on an alleged unified course of fraudulent conduct and the Complaint fails to distinguish between fraud and non-fraudulent claims, Rule 9(b)’s heightened pleading standard should apply to all of the claims alleged in the Complaint. (See Def. Br. 24.) Proceeding under this assertion, the RD Entities argue that the Government’s claims fail under Rule 9(b)’s heightened pleading standard and should be dismissed. (Id.) In response, the Government asserts that fraud and deception are separate legal concepts and that Rule 9(b)’s heightened pleading standard does not apply to the Government’s deceptive conduct claims. (Pl. Opp. 19-21.) Rule 9(b) of the Federal Rules of Civil Procedure imposes a heightened pleading standard and requires that “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Fed. R. Civ. P. 9(b). Specifically, Rule 9(b)’s heightened pleading standard requires pleadings to “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 61 of 108

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speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)) (internal quotation marks omitted).

At least two courts addressing this specific issue have concluded that Rule 9(b)’s heightened pleading standard does not apply to claims of unfair, deceptive, or abusive acts or practices under the CFPA for three reasons. See CFPB v. Frederick J. Hanna & Assocs., P.C., 114 F. Supp. 3d 1342, 1372 (N.D. Ga. 2015) (concluding that claims for deception under the Fair Debt Collection Practices Act (“FDCPA”) and the CFPA should not be subject to Rule 9(b)); CFPB v. Navient Corp., 17-CV-101, 2017 WL 3380530, at *24 (M.D. Pa. Aug. 4, 2017) (same). First, “Rule 9(b) expressly applies only to claims alleging ‘fraud or mistake,’ and as the Tenth Circuit and several district courts have reasoned, consumer protection claims are not claims of fraud, even if there is a deceptive dimension to them.” Navient, 2017 WL 3380530, at *24 (quoting Frederick J. Hanna, 114 F. Supp. 3d at 1372). “Second, ‘the United States Supreme Court has consistently cautioned against extending this heightened pleading standard beyond claims for fraud or mistake.’” Id. Finally, application of Rule 9(b) “to consumer protection claims is not only inconsistent with some of the Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 62 of 108

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policy reasons for applying Rule 9(b) in the first place, but is also inconsistent with the remedial nature of consumer protection statutes.” Navient Corp., 2017 WL 3380530, at *24 (quoting Frederick J. Hanna & Assocs., 114 F. Supp. 3d at 1373- 74). In Navient, the court elaborated on this last reason by explaining that “unlike a fraud claim, the [CFPA] does not have an intent element” such that “requiring the CFPB to plead in conformity with Rule 9(b) would graft an intent requirement onto the claims under the FDCPA and [CFPA] that is not otherwise present.” Navient Corp., 2017 WL 3380530, at *25. The Court has identified no case in which this Court or the Court of Appeals has applied Rule 9(b)’s heightened pleading standard to claims of deceptive or abusive acts or practices under the CFPA. See, e.g., CFPB v. NDG Fin. Corp., No. 15-cv- 5211 (CM), 2016 WL 7188792, at *14-15 (S.D.N.Y. Dec. 2, 2016) (applying Rule 8 to claims under CFPA). Furthermore, the Court finds the Navient court’s reasoning as to why Rule 9(b)’s heightened pleading standard should not be applied to deceptive acts or practices claims under the CFPA to be persuasive. Navient, 2017 WL 3380530, at *24-25. Accordingly, the Court declines to apply Rule 9(b)’s heightened pleading standard to deceptive or abusive acts or practices claims under the CFPA. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B); Fed. R. Civ. P. 9(b). Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 63 of 108

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Similarly, the Court of Appeals has stated clearly that Rule 9(b)’s heightened pleading standard does not apply to New York General Business Law § 349. In so holding, the Court of Appeals has noted that “[Section] 349 extends well beyond common-law fraud to cover a broad range of deceptive practices” and that Section 349 claims “[do] not require proof of the same essential elements (such as reliance) as common-law fraud.” Pelman ex rel. Pelman v. McDonald’s Corp., 396 F.3d 508, 511 (2d Cir. 2005). Accordingly, Rule 8(a)’s less stringent pleading standard applies to NYAG’s claim under N.Y. Gen. Bus. Law § 349. The question of what pleading standard should apply to the NYAG’s claim under N.Y. Executive Law § 63(12) is less clear cut. New York Executive Law § 63(12) empowers the New York Attorney General to seek injunctive relief and other remedies against persons or entities that “engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business” in New York. N.Y. Exec. Law § 63(12). The statute defines the word “fraudulent” as including “any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions.” Id. The terms “persistent fraud” or “illegality” are defined to “include continuance or carrying on of any fraudulent or illegal act or Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 64 of 108

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conduct.” Id. Thus, while a claim under Section 63(12) may allege fraud and necessitate a showing of knowledge or reliance as an element of the claim, the NYAG may equally assert a cause of action under Section 63(12) that alleges “deception” or some other non-fraudulent conduct that does not include scienter as an element. See People v. Am. Motor Club, 582 N.Y.S.2d 688, 692 (N.Y. App. Div. 1992) (explaining that, under statute, “scienter is not required and false promises are sufficient” where pleadings amount to illegality under § 63(12), not fraud under § 63(12)).

Applying the same logic that the Court of Appeals has employed in determining that claims under N.Y. GBL § 349 are not subject to Rule 9(b)’s heightened pleading standards where the underlying conduct is not premised on a fraudulent scheme, the Court concludes that NYAG’s claim under N.Y. Executive Law § 63(12) is also not subject to this heightened pleading standard because the underlying conduct is premised on deceptive acts or practices that do not include intent or reliance as an element of those claims. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B). Accordingly, the Court applies Rule 8(a) in evaluating the Government’s pleading of its claim under N.Y. GBL § 349.

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1. “Substantial Assistance” Claims Under the CFPA In each of the CFPA deceptive or abusive acts or practices claims brought against Defendants, the Government alleges that Roni Dersovitz, the RD Entities’ owner and founder, is liable for substantially assisting the RD Entities in carrying out these purported acts.

Under 12 U.S.C. § 5536(a)(3), it is unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions of section 5531 of this title [including unfair, deceptive or abusive acts or practices].” Defendants argue that Rule 9(b)’s heightened pleading standard should apply to all of the Government’s claims because they are all “premised on an alleged scheme to defraud consumers.” (Def. Br. 24.) The Court concludes that the knowledge requirement for individual liability under the CFPA does not trigger Rule 9(b)’s heightened pleading requirement. As discussed, the primary violation of unfair, deceptive, or abusive acts or practices underlying the CFPA claims against Dersovitz in his individual capacity do not constitute fraud claims. See Navient, 2017 WL 3380530, at *24 (“[C]onsumer protection claims are not claims of fraud, even if there is a deceptive dimension to them”). In addition, the scienter requirements of “knowingly or recklessly” Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 66 of 108

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do not implicate automatically Rule 9(b)’s heightened pleading requirements. Courts in this Circuit have defined “reckless” as behavior that is “highly unreasonable” or represents “an egregious refusal to see the obvious, or to investigate the doubtful.” SEC v. Yorkville Advisors, LLC, ___ F. Supp. 3d ___, 2018 WL 1725555, at *14 (S.D.N.Y. Mar. 29, 2018). Such standard is distinguishable from the scienter associated with fraud, which “encompasses a particular state of mind, an element of intent or deception” that is lacking in the Complaint’s allegations. Lenartz v. Am. Superconductor Corp., 879 F. Supp. 2d 167, 191-92 (D. Mass. 2012) (internal quotation marks and citation omitted). Furthermore, the one other case that the Court has identified evaluating “substantial assistance” claims under the CFPA, 12 U.S.C. 5536(a)(3), applied Rule 8(a) in evaluating those claims on a motion to dismiss. CFPB v. Universal Debt & Payment Solutions, LLC, 15-cv-00859-RWS, 2015 WL 11439178 (N.D. Ga. Sept. 1, 2015).

Accordingly, the claims for individual liability against Dersovitz pursuant to 12 U.S.C. 5536(a)(3) are not subject to Rule 9(b)’s heightened pleading standard. 2. Specificity of Allegations Against Each Defendant Under Rule 8(a) Rule 8(a) requires that a defendant be given “fair notice of what the . . . claim is and the grounds upon which it rests.” Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 67 of 108

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Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). This threshold requirement allows an adverse party to “‘answer the complaint and prepare for trial.’” Lazarek v. Ambit Energy Holdings, LLC, 15-CV-6361-FPG, 2017 WL 4344557, at *3 (W.D.N.Y. Sept. 28, 2017) (quoting Strunk v. U.S. House of Representatives, 68 F. App’x 233, 235 (2d Cir. 2003)). The RD Entities contend that the Complaint fails to comply with Rule 8(a) because its allegations “lump” the three corporate Defendants together without adequately differentiating between and among them. (Def. Br. 38.) Defendants argue that the Government’s failure to parse the factual basis for each claim as to each corporate Defendant deprives the RD Entities of fair notice of the claims against each of them. Id.; see Ochre LLC v. Rockwell Architecture Planning & Design, P.C., No. 12 Civ. 2837, 2012 WL 6082387, at *6 (S.D.N.Y. Dec. 3, 2012). In response, Plaintiffs assert that they refer to the Defendants collectively because each Defendant engaged in the wrongdoing alleged in the Complaint. (Pl. Opp. 35.) Although the Complaint is hardly a model of best pleading practices, the Court concludes that its shortcomings do not amount to fatal “lumping” together of Defendants such that the Complaint warrants dismissal for failure to comply with Rule 8(a)’s pleading requirements. First, the Court of Appeals has held that dismissal pursuant to Rule 8 is proper when a Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 68 of 108

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complaint is “unintelligible” and does not “explain[] what conduct constituted the violations, which defendants violated which statutes . . . or how the alleged violations harmed [the plaintiff].” Vantone Grp. LLC v. Yangpu NGT Indus. Co., Ltd., No. 13-cv-7639 (LTS), 2015 WL 4040882, at *4 (S.D.N.Y. July 2, 2015) (quoting Strunk, 68 F. App’x. at 235) (internal quotation marks omitted).

Here, the Complaint states the nature of the various types of claims brought against the corporate defendants, including alleged violations of state and federal consumer protection statutes, and the conduct underlying those claims. Vantone, 2015 WL 4040882, at *4. At this stage of the proceedings, the Government is not required to plead specific details as to which entity did what during the alleged course of misconduct. See id. (quoting Hudak v. Berkley Grp., Inc., No. 13CV0089-WWE, 2014 WL 354676, at *4 (D. Conn. Jan. 23, 2014)) (“[P]rior to discovery, plaintiff need not explain the details of each defendant’s role in the planning, funding, and executing [of] defendant’s alleged joint [] scheme”). The Complaint also states adequately which Defendants are accused of violating which statutes because the Complaint avers that all three of the corporate Defendants engaged in each of the alleged violations. (Pl. Opp. 35) (“The three RD Defendants are referred to collectively because each engaged in the wrongdoing alleged in Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 69 of 108

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the Complaint”). “Nothing in Rule 8 prohibits collectively referring to multiple defendants where the complaint alerts defendants that identical claims are asserted against each defendant.” Vantone, 2015 WL 4040882, at *4 (quoting Hudak, 2014 WL 354676, at *4). Therefore, the Complaint does not warrant dismissal under Rule 8(a) for impermissibly “lumping” together Defendants.

Defendants rely on Ochre LLC v. Rockwell Architecture Planning & Design, P.C., in arguing that the Complaint “impermissibly” lumps the corporate Defendants together. No. 12 Civ. 2837, 2012 WL6082387, at *6 (S.D.N.Y. Dec. 3, 2012). In Ochre, the court concluded that the complaint failed to state a copyright-infringement claim where the plaintiff brought claims against four entirely separate entities, “a design firm, an architect, a hotel, and a procurement agent,” and failed to separate out “the key allegations against each defendant.” Aghaeepour v. N. Leasing Sys., Inc., No. 14-CV-5449 (NSR), 2015 WL 7758894, at *3 (S.D.N.Y. Dec. 1, 2015) (quoting Ochre, 2012 WL 6082387, at *6). Unlike in Ochre, where the defendants were entirely separate entities, the Complaint here avers that the three corporate defendants’ share significant characteristics: the corporate defendants share a principal places of business at the same address, (Compl. ¶¶ 15-17), Roni Dersovitz is the founder and owner of each corporate defendant, (Compl. ¶ 18), Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 70 of 108

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all three corporate defendants acted in “swoop[ing] in with a ‘deal’” while the Class Members and Eligible Claimants awaited payment of their settlement awards (Compl. ¶ 5), and that, based on the information in the Purchase Agreements, the ABA account number for wiring money is the same on all of the Purchase Agreements regardless of the corporate defendant named in the Purchase Agreement, (Pl. Opp. 36.) For these reasons, Ochre has limited applicability to the instant situation. Accordingly, because the Complaint provides each corporate defendant with “fair notice of what the . . . claim is and the grounds upon which it rests,” dismissal under Rule 8 is not warranted here. Erickson v. Pardus, 551 U.S. 89, 93 (2007). ii.

“Substantial Assistance” Liability Under the CFPA In its Complaint, the Government brings five claims of individual liability against Roni Dersovitz for “knowingly or recklessly providing substantial assistance” to a “covered person” under the CFPA – here, the RD Entities. 12 U.S.C. § 5536(a)(3); (Compl. ¶¶ 8, 69, 77, 84, 91, 98.) The Court has identified only one case interpreting 12 U.S.C. § 5536(a)(3), and that decision does not bind this Court. See CFPB v. Univ. Debt & Payment Solutions, LLC, et al., 15-CV- 00859-RWS, 2015 WL 11439178 (N.D. Ga. Sept. 1, 2015). Nevertheless, the Court finds the Universal Debt & Payment Solutions court’s analysis pertaining to the scienter Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 71 of 108

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requirement under 12 U.S.C. § 5536(a)(3) instructive for its own analysis.

In Universal Debt & Payment Solutions, the court drew on the substantially similar requirements of individual aiding and abetting liability under federal securities laws and individual liability for providing “substantial assistance” under the CFPA, 12 U.S.C. § 5536(a)(3), in interpreting the CFPA’s individual liability statute. 15 U.S.C. § 78t(e); 2015 WL 11439178, at *6. Section 20(e) imposes liability on “any person that knowingly or recklessly provides substantial assistance to another person in violation of [the securities laws].” 15 U.S.C. § 78t(e).6 The Court of Appeals has interpreted aiding and abetting liability under § 20(e) to require the Government to show “(1) the existence of a securities law violation by the primary (as opposed to the aiding and abetting) party; (2) ‘knowledge’ of this violation on the part of the aider and abettor; and (3)

6 Although the Federal Trade Commission Act (“FTCA”) and the CFPA share structural characteristics that facilitate statutory interpretation under other CFPA provisions, the FTCA’s substantial assistance provision does not contain an analogous scienter requirement and therefore has limited relevance here. See NDG Corp., 2016 WL 7188792, at *16 (noting that “courts have adopted the established meaning of other words in § 5536 [of the CFPA] from the FTCA, in acknowledgment of the two provisions’ similarity” and that “the FTCA and CFPA were . . . enacted for similar purposes”). Under the FTCA, the Federal Trade Commission (“FTC”) is authorized to prevent “persons, partnerships, or corporations . . . from using . . . unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(2).

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‘substantial assistance’ by the aider and abettor in the achievement of the primary violation.” SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009) (internal quotation marks and citation omitted).

To plead adequately the “substantial assistance” element, the Government must “establish that the aider and abettor ‘in some sort associated himself with the venture, that he participated in it as something he wished to bring about, and that he sought by his action to make it succeed.’” SEC v. DiMaria, 207 F. Supp. 3d 343, 359 (S.D.N.Y. 2016) (quoting SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009)). Courts have recognized that “although ‘a high degree of knowledge may lessen the [Government’s] burden in proving substantial assistance,’ awareness and approval, without more, do not constitute substantial assistance.” DiMaria, 207 F. Supp. 3d at 359 (quoting SEC v. Apuzzo, 689 F.3d 204, 215 (2d Cir. 2012)). As to § 20(e)’s knowledge requirement, “the plaintiff must at least demonstrate recklessness” to satisfy it. Yorkville Advisors, LLC 2018 WL 1725555 at *14. “Mere negligence does not suffice.” Id. “Recklessness sufficient to establish scienter involves conduct that is highly unreasonable and represents an extreme departure from the standards of ordinary care.” SEC v. China N.E. Petroleum Holdings Ltd., 27 F. Supp. 3d 379, 389 (S.D.N.Y. 2014) (internal quotation marks and citation omitted). Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 73 of 108

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iii.

Deceptive and Abusive Conduct Under the CFPA 1. Counts I, III, IV, V: Deceptive Acts or Practices Under the CFPA The Complaint includes four claims of deceptive acts or practices under the CFPA against all of the named Defendants. To make a prima facie case of deceptive acts or practices under the CFPA, the Complaint must allege adequately “(1) a representation, omission or practice that, (2) is likely to mislead consumers acting reasonably under the circumstances, and (3), [that] the representation, omission, or practice is material.” CFPB v. NDG Fin. Corp., 15-cv-5211 (CM), 2016 WL 7188792, at *14 (S.D.N.Y. Dec. 2, 2016) (quoting FTC v. Med. Billers Network, Inc., 543 F. Supp. 2d 283, 303 (S.D.N.Y. 2008)) (alteration in original).

In essence, the RD Entities argue that each of the Complaint’s deceptive acts or practices claims under the CFPA must fail because each is based on the conclusory allegation that the transactions at issue are loans, not sales. (Def. Br. 26.) Because, as a matter of law, the Purchase Agreements were void and functioned plausibly as extensions of credit, the Court rejects this defense and finds that the Complaint plausibly alleges that Defendants engaged in deceptive acts or practices in violation of the CFPA.

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a. Count I Count I avers that the RD Entities violated the CFPA by deceptively marketing the Purchase Agreements as sales when in fact these transactions were properly characterized as loans. (Def. Br. 25.) As discussed earlier, federal and state law, as well as the NCLSA’s express terms, prohibit consumers from assigning any of their interest in their settlement awards from the VCF and NCLSA, respectively. According to the Complaint, Defendants made false representations to Consumers that its products were valid assignments of Consumers’ interests in their anticipated settlement awards. (Compl. ¶ 38-39.) Defendants also labeled the Purchase Agreements as “assignment and sale” agreements when, in fact, the Purchase Agreements were not true sales. See FTC v. Verity Int’l, Ltd., 443 F.3d 48, 64 (2d Cir. 2006) (holding that making a representation to consumers that is false is sufficient to show that representation would likely mislead consumers acting reasonably in alleging claim under Section 5(a)(1) of the Federal Trade Act, 15 U.S.C. § 45(a)(1)). Such statements, which are false, could objectively mislead a consumer acting reasonably under the circumstances, thus satisfying the claim’s second element. Finally, the Government also alleges adequately that the misleading representation was material. “Express Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 75 of 108

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representations that are shown to be false are presumed material.” Med. Billers Network, 543 F. Supp. 2d at 304 (citing FTC v. Patriot Alcohol Testers, Inc., 798 F. Supp. 851, 856 (D. Mass. 1992)). Because the Complaint alleges adequately that the Purchase Agreements were not valid sales, representations to the contrary would be material.

Accordingly, the Government alleges adequately that Defendants engaged in deceptive acts or practices in violation of the CFPA.

i.

“Substantial Assistance” Claim Against Roni Dersovitz Under Count I The Court concludes that the Government has pleaded facts sufficient to show that Dersovitz had the requisite scienter to state a claim for individual liability under 12 U.S.C. § 5536(a)(3). As to the first element and as already established, the Government has alleged plausibly that the RD Entities engaged in deceptive acts or practices in violation of 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), which in turn alleges adequately an “actual violation” of § 5531(a), by misrepresenting that it is entering into contracts with Consumers for valid and enforceable assignments. (Compl. ¶ 63.) Turning to the scienter requirement, the Court concludes that the Complaint pleads facts sufficient to allege that Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 76 of 108

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Dersovitz exhibited an “extreme departure from the standards of ordinary care” in offering to enter into the Purchase Agreements with Consumers that Dersovitz must have known were likely not valid.

The Complaint alleges that Dersovitz has “significant responsibility for establishing RD’s policies and practices,” “substantial control over RD’s operations,” and “responsibility to [sic] dictate all the terms of [C]onsumer contracts.” (Compl. ¶¶ 18, 27.) In addition, Dersovitz is the founder and owner of each RD Entity named as a Defendant in this action. (Compl. ¶ 18.) Given Dersovitz’s role as founder and owner of the RD Entities and his authority to “dictate the terms of [C]onsumer contracts,” his conduct is at least “reckless” with respect to the NFL Settlement Agreement’s anti-assignment clause and the Anti-Assignment Act’s potential applicability to the VCF Purchase Agreements. (Compl. ¶¶ 34-36.) As to the NFL Purchase Agreements, the NCLSA contains clear and unambiguous anti-assignment language. Dersovitz’s failure to inform Class Members that this existed exhibits “highly unreasonable” conduct that “represents an extreme departure from the standards of ordinary care.” Furthermore, the allegations suggest that Dersovitz was aware of the possibility that the assignments were impermissible but decided to go ahead with the transaction in spite of this. The Purchase Agreements address Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 77 of 108

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specifically the possibility that the assignments in the Purchase Agreements will be classified as loans by a court. Similarly with the VCF Purchase Agreements, Dersovitz encountered several warning signs indicating a high risk that the RD Entities were misrepresenting the nature of these agreements to Consumers, specifically, that the VCF Claims Administrator refused to make payment directly to the RD Entities, in spite of its demands that it do so pursuant to the assignments, and the general disclaimer in the VCF Purchase Agreements that a court may find the sale to be a loan. In sum, the Complaint adequately alleges that Dersovitz acted recklessly in knowing that the assignments may well be invalid but holding them out as enforceable.

Finally, Dersovitz provided “substantial assistance” to the RD Entities in carrying out these CFPA violations. Dersovitz “associated himself” with the RD Entities as their founder and owner and “participated in [the enterprise] as something he wished to bring about” by continuing to craft the RD Entities’ policies and procedures and exercising authority over those Entities. Furthermore, Dersovitz “sought by his action to make [the RD Entities] succeed” by making offers to enter into Purchase Agreements to Consumers, (Compl. ¶ 54), being responsible for “solicit[ing] funds from investors” for cash advance payments to Consumers, (Compl. ¶ 51), and “[making] Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 78 of 108

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phone calls to at least one New York consumer to collect from that consumer,” (Compl. ¶ 54).

Accordingly, the Complaint alleges adequately a claim of “substantial assistance” liability against Roni Dersovitz in his individual capacity. 12 U.S.C. § 5536(a)(3). b. Count III Count III of the Complaint avers that Defendants violated the CFPA’s prohibition on deceptive acts or practices by making representations that Defendants could “cut through red tape” and expedite payment of Consumers’ settlement awards. (Compl. ¶¶ 44-48.) Defendants argue that this statement is not misleading because, read in the context of the entire advertisement or transaction, a reasonable Consumer would understand this to mean that the RD Entities would disburse funds more quickly than the settlement fund or claims administrator would, not that the RD Entities would actually expedite disbursements from the fund or the administrator. (Def. Br. 34.) The Court concludes that such a representation, “without appropriate disclosures . . . could deceive reasonable consumers” who are navigating a complex settlement landscape with limited knowledge of the inner workings of a settlement fund. CFPB v. Siringoringo, SACV 14-01155 JVS (AJWx), 2016 WL 102435, at *5 (C.D. Cal. Jan. 7, 2016). Such representation is also material because it could “inform the consumer’s decision Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 79 of 108

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to engage” the Defendants in securing expedited payment. Id. (citing 12 C.F.R. § 1015.3(b)(2)). Given that Defendants target individuals who may be suffering financial hardship due to delays in payment of their settlement award, representations regarding the timing of procuring settlement award payments would undoubtedly be material to Consumers’ engaging Defendants’ services.

In sum, the Complaint alleges adequately a claim of deceptive acts or practices under the CFPA for the representations described in Count III regarding the timing of payments.

i.

“Substantial Assistance” Claim Against Roni Dersovitz Under Count III The Government alleges that Roni Dersovitz is individually liable under 12 U.S.C. § 5536(a)(3) for providing “substantial assistance” to the RD Entities in engaging in deceptive acts or practices, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), by misrepresenting on the RD Entities’ website that Defendants could “speed[] up” disbursement of a Consumer’s award and “cut through red tape” to get payment from the settlement administrator sooner. (Compl. ¶¶ 79, 84.) Here, the Court has already determined that the Government alleged adequately that the RD Entities made material Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 80 of 108

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misrepresentations to Consumers in violation of 12 U.S.C. § 5536(a)(1)(B). Turning to the “knowing” or “reckless” requirement of 12 U.S.C. § 5536(a)(3), the Court also concludes that, based on the knowledge that Dersovitz had through his authority over the RD Entities and Dersovitz’s approval of the contents of RD’s website shows that he at least “recklessly” made material misrepresentations that were likely to mislead a reasonable consumer. (Compl. ¶ 46.) Futhermore, Dersovitz’s approval of a website intended to draw in business for the RD Entities alleges adequately that he provided “substantial assistance” to the RD Entities’ venture by maximizing their prospects for new business through their websites. Accordingly, the Complaint alleges adequately facts demonstrating that Dersovitz substantially assisted the RD Entities in engaging in deceptive acts or practices in violation of the CFPA.

c. Count IV Count IV, which alleges that the RD Entities acted deceptively in violation of the CFPA by making misleading statements as to when RD would pay Consumers, pleads adequately facts demonstrating that the RD Entities engaged in deceptive conduct under the CFPA. (Compl. ¶¶ 86-89.) “A claim is considered material if it involves information important to consumers and, hence, is likely to affect their Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 81 of 108

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choice of, or conduct regarding a product.” Med. Billers Network, 543 F. Supp. 2d at 304 (internal quotation marks and citation omitted). One of Consumers’ main motivations in entering into contracts with the RD Entities was to get their money sooner than they otherwise would from their third-party obligors. (Compl. ¶¶ 86-88.) Accordingly, the RD Entities’ failure to provide money to Consumers on certain dates as agreed is misleading insofar as the RD Entities made statements that turned out to be false, and those statements are also material in that they “would influence the Consumer’s decision” as to whether to enter into the Purchase Agreement or not. Med. Billers Network, 543 F. Supp. 2d at 313. The RD Entities’ argument that such grievances amount only to a breach of contract claim is undercut by the fact that the contracts do not speak to the timing of payment. (Def. Br. 36); (Pl. Opp. 27.) Therefore, the Government need not “identify[] which of the 27 contracts the RD Entities allegedly breached by failing to make timely payment.” (Def. Br. 36.) As previously noted, Rule 9(b)’s heightened pleading standard does not apply to deceptive conduct claims under the CFPA, and therefore the Government need not aver the “who,” “what,” “where,” and “when” that 9(b) requires at this stage. The Complaint avers adequately that Defendants made misleading statements, outside the four corners of the Purchase Agreements, as to the timing of Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 82 of 108

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payments that misled consumers. Accordingly, the Government has alleged plausibly that the RD Entities engaged in deceptive acts or conduct under Count IV.

i.

“Substantial Assistance” Claim Against Roni Dersovitz Under Count IV The Court concludes that the Complaint alleges adequately a claim against Roni Dersovitz for “substantially assisting” the RD Entities in carrying out deceptive acts or practices by making misstatements about when Consumers would receive payments from the RD Entities. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B); (Compl. ¶¶ 51, 90-91.) Having established that the Complaint alleges adequately a claim for the underlying violation, the Court also concludes that the Complaint alleges adequately that Dersovitz at least “recklessly” provided substantial assistance to the RD Entities in misrepresenting to Consumers when their funds would be disbursed. (Compl. ¶ 86.) The Complaint alleges that Dersovitz “has authority and responsibility to . . . determine when funds for [C]onsumers would arrive.” (Compl. ¶ 51.) As noted above, the timing of payments was crucial to Consumers, who entered into these transactions for the sole purpose of receiving expedited access to liquidity in the form of a lump sum cash payment. Incorrect statements as to the timing of disbursement of Consumers’ payments, if made, would Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 83 of 108

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constitute an “extreme departure from the standards of ordinary care” given that Dersovitz had some element of authority over when funds would arrive and given the importance of the timing to payments to these particular Consumers. (Compl. ¶ 51.) Finally, for the reasons stated earlier, including Dersovitz’s responsibility for the RD Entities’ policies and practices and his role as founder and CEO of the RD Entities, the Complaint alleges adequately that Dersovitz sought ostensibly through these misstatements “to make [the RD Entities] succeed” by drawing in Consumers who were primarily concerned with the timing of their settlement payments. DiMaria, 207 F. Supp. 3d 343, 359 (S.D.N.Y. 2016) (quoting SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009)). Accordingly, the Complaint alleges adequately a claim for “substantial assistance” liability against Dersovitz in his individual capacity.

d. Count V Under Count V, the Government alleges that the RD Entities engaged in deceptive acts or practices by “collecting on contracts that are void under state laws or, in the alternative, that function as loans with interest rates that exceed usury limits under state laws, and on which no payment is due.” (Compl. ¶¶ 93-94.) Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 84 of 108

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For the same reasons that the Court found the Government’s factual allegations to plead adequately a claim of deceptive conduct under Count I, so too here. Informing Consumers that they have an obligation to repay under a transaction in which the assignment is void or unenforceable clearly meets the materially misleading threshold under the CFPA. Collecting on loans that are void is materially misleading because it gives Consumers the impression that “borrowers were obligated to repay” the RD Entities when in reality the loan agreements were void and the borrowers were not legally obligated to pay. CFPB v. CashCall, Inc., CV 15-7522-JFW (RAOx), 2016 WL 4820635, at *10 (C.D. Cal. Aug. 31, 2016), appeal filed, No. 18-55479 (9th Cir. Apr. 12, 2018). Accordingly, the Government has alleged plausibly that Defendants engaged in deceptive acts or conduct under Count V.

i.

“Substantial Assistance” Claim Against Roni Dersovitz Under Count V As explained above, the Court concludes that the Complaint alleges adequately that the RD Entities engaged in deceptive acts or practices in violation of the CFPA by indicating to Consumers that they had an obligation to repay the RD Entities when, in fact, the loans were usurious and therefore void under state law. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B). The Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 85 of 108

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Government has also alleged adequately that Dersovitz substantially assisted the RD Entities in carrying out these deceptive acts and practices. 12 U.S.C. § 5536(a)(3). At a minimum, the Complaint and the Purchase Agreements themselves contain facts adequate to allege that Dersovitz acted “recklessly” in providing this assistance. The entire premise of the RD Entities’ business model is labeling transactions that look and function like loans as “sales” to circumvent the regulatory restrictions that would otherwise govern these transactions if they were loans.

According to the Complaint, Dersovitz “has authority and responsibility to dictate all the terms of consumer contracts” and “makes decisions on the terms of the offers or extensions of credit.” (Compl. ¶ 27.) These allegations, coupled with the fact that the Purchase Agreements reserve the right to file a UCC Financing Statement in the event a court deems the transaction a loan and Dersovitz’s position as CEO and founder of the RD Entities, allege facts sufficient to find that Dersovitz exhibited “highly unreasonable” conduct in failing to determine whether the assignments were valid before offering Purchase Agreements to Consumers. The allegations, viewed collectively, indicate that Dersovitz knew that the transactions might not be valid assignments but proceeded with them in any event in an “extreme departure from the standard of ordinary Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 86 of 108

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care.” Finally, the Complaint alleges that Dersovitz “substantially assisted” the RD Entities in carrying out this deceptive conduct in light of his role as founder and CEO of the RD Entities and his substantial involvement in the business, such as collecting on loans, drafting policies, and having the final word on the terms of the Purchase Agreements. Accordingly, the Complaint pleads facts sufficient to state a claim of individual liability against Dersovitz for substantially assisting a “covered person” under the CFPA. 2. Count II: Abusive Acts or Practices Under the CFPA The Government alleges that the RD Entities engaged in abusive conduct by undermining Consumers’ understanding of the Purchase Agreements through their misrepresentations that the contracts are for valid and enforceable assignments. (Compl. ¶¶ 72-73.) Under the CFPA, conduct is “abusive” where it “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service,” “takes unreasonable advantage of . . . a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service,” “takes unreasonable advantage of . . . the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service,” or “takes unreasonable Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 87 of 108

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advantage of . . . the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.” 12 U.S.C. § 5531(d).

Here, the Government has pleaded sufficient facts to state a claim for abusive acts or practices under the CFPA. Representations that a transaction is a sale when it does not, in fact, transfer validly any rights of ownership from the consumer to the RD Entities are materially misleading because such representations are false. To that end, the Government is correct that these false representations prevent Consumers from evaluating accurately whether this transaction is in their best interest. Defendants’ contention that they disclose adequately the risks involved in the Purchase Agreements by labeling them “complex financial transaction[s]” does not neutralize other materially misleading information. The repeated misrepresentations alleged, assuming they were made, would “create[] the ‘net impression’ that the [Purchase Agreements] were enforceable” even though that impression is “patently false” because the Purchase Agreements “were void.” CashCall, 2016 WL 4820635, at *10.

Accordingly, the Government has alleged plausibly that the RD Entities engaged in abusive practices under the CFPA.

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a. “Substantial Assistance” Claim Against Roni Dersovitz Under Count II The Government alleges plausibly that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out abusive acts or practices in violation of the CFPA. 12 U.S.C. § 5536(a)(3); 12 U.S.C. § 5531(d). Aside from alleging plausibly that the RD Entities engaged in conduct sufficient to state a claim for abusive acts or practices under 12 U.S.C. § 5531(d), the Government also alleges plausibly that Dersovitz was “reckless” and provided “substantial assistance” to the RD Entities by enabling them to engage in this conduct.

As to the scienter requirement, the Complaint alleges adequately that Dersovitz knew, would have known, or acted recklessly with a high risk that the assignments in the Purchase Agreements were prohibited. Universal Debt & Payment Solutions, 2015 WL 11439178, at *10. At a minimum, a business premised on purchasing rights to structured settlement payments should know whether the future receivables are, in fact, assignable. According to the Complaint, Dersovitz has considerable control over the terms of the consumer contracts, (Compl. ¶ 27), and exercises considerable control over the RD Entities’ practices and policies. Given all of this, failure to conduct proper due diligence on whether the assignments in the Purchase Agreements Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 89 of 108

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are permissible is “highly unreasonable” and amounts to an “an extreme departure from ordinary standards of care.” Id. at *9. For the reasons stated earlier, Dersovitz also substantially assisted the RD Entities through this conduct given his role as CEO and founder of the RD Entities, (Compl. ¶ 18), his involvement in dictating the terms of the Purchase Agreements, (Comnpl. ¶ 27), and determining when to collect from Consumers, (Compl. ¶ 54). Such allegations taken together are adequate to assert that Dersovitz “associate[d] himself with the venture” and “participate[d] in it as something [he] wished to bring about,” and “[sought] to make it succeed” by taking unreasonable advantage of the reasonable reliance by Consumers on the RD Entities. Id. at *13.

iv.

State Law Claims Defendants devote significant space in arguing that the Complaint’s CFPA claims should be dismissed because the CFPB is unconstitutionally structured and thus lacks authority to bring such claims. (Def. Br. 9-14.) Vexingly, Defendants do not address the NYAG’s independent authority to bring claims in federal district court under the CFPA, without regard to the constitutionality of the CFPB’s structure. 12 U.S.C. § 5552(a)(1) (authorizing state attorneys general to bring claims under the CFPA); (Pl. Opp. 7.) The Government has alleged adequately claims for deceptive and abusive acts or Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 90 of 108

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practices under the CFPA, and therefore federal question subject matter jurisdiction over the CFPA claims exists regardless of the constitutionality of the CFPB’s structure. A federal district court may exercise “supplemental jurisdiction over all other claims that are so related to claims in the action within [the court’s] original jurisdiction that they form part of the same case or controversy . . . .” 28 U.S.C. § 1367(a). “Federal-law and state-law claims form part of the same case or controversy where they ‘derive from a common nucleus of operative fact’ and are ‘such that [a plaintiff] would ordinarily be expected to try them all in one judicial proceeding.’” Nguyen v. Am. Express Co., 282 F. Supp. 3d 677, 683 (S.D.N.Y. 2017) (quoting Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 349 (1988)). Review of the factual allegations in the Complaint makes clear that both the federal- and state-law claims derive from the same underlying conduct and transactions, namely, Defendants’ conduct towards Consumers in offering the Purchase Agreements. These facts establish that the federaland state-law claims “arise out of the same common nucleus of operative fact” such that the exercise of supplemental jurisdiction over the NYAG’s state-law claims would be appropriate. 28 U.S.C. § 1367(a). Accordingly, the Court will exercise supplemental jurisdiction over the NYAG’s New York state law claims for violations of civil and criminal usury Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 91 of 108

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laws, New York General Obligations Law, deceptive practices, false advertising, and fraud. 28 U.S.C. § 1367(a). 1. NYAG’s Jurisdiction Over the Purchase Agreements In a single footnote, Defendants argue that the Complaint pleads insufficiently NYAG’s jurisdiction over the transactions at issue in this case because “the RD Entities’ principal place of business is New Jersey” and “NYAG has not made any allegations regarding the residences of the customers who entered the transactions at issue.” (Def. Br. 38 n.14.) As a preliminary matter, the Court pays minimal credence to an argument raised in a two-sentence footnote of a forty-page motion to dismiss regarding the NYAG’s jurisdiction over certain Consumers. See Gramercy Advisors, LLC v. Ripley, 13-cv-9070 (VEC), 2014 WL 5847444, at *3 (S.D.N.Y. Nov. 12, 2014) (“Issues adverted to in a perfunctory manner, unaccompanied by some effort at developed argumentation, are deemed waived.”) (internal quotation marks and citation omitted). To the extent that Defendants challenge NYAG’s assertion of jurisdiction over the transactions under New York General Business Law § 349 - the statute at issue in the two cases that they cite in support of this argument - NYAG has alleged adequately that the transactions have a sufficient nexus to New York under New York General Business Law § 349, because the Complaint makes Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 92 of 108

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reference to “New York consumers,” (Compl. ¶¶ 54) and loans made “in New York,” (Compl. ¶ 57). In addition, several of the contracts themselves indicate that the Consumer has a New York address, (See, e.g., Dersovitz Aff. Ex. A-2 at 20) (listing consumer as having New York residence), and that certain of the Consumers used a New York agent to seek legal advice regarding the Purchase Agreement before entering into it, (Dersovitz Aff. Ex. A-1 at 18-19) (showing New York attorney sending letters on behalf of Consumer client to RD Legal Funding Partners, LP). For purposes of New York General Business Law § 349, the relevant inquiry is whether there are New York transactions that are deceptive or that occur as a result of out-of-state deceptive conduct. New York v. Feldman, 210 F. Supp. 2d 294, 303 (S.D.N.Y. 2003).

Accordingly, the information in the Purchase Agreements as well as the allegations in the Complaint allege adequately that deceptive transactions took place in New York and, in the alternative, that these transactions took place in New York as a result of out-of-state deceptive conduct. 2. Count VI: Claims Under New York Civil and Criminal Usury Laws The Complaint alleges adequately that Defendants have charged more than the maximum usury rate under New York Banking Law § 14-a, with respect to New York’s civil usury laws, and Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 93 of 108

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under New York Penal Law §§ 190.40 and 190.42, with respect to New York’s criminal usury laws. (Compl. ¶¶ 99-105, 106-110.) Defendants’ sole argument in response to the Government’s usury claims is that the transactions at issues are sales, not loans, and therefore are not subject to state usury laws. (Def. Br. 37.) As discussed supra, the Court has concluded that Plaintiffs have alleged adequately that the transactions at issue constitute loans, not sales, and therefore Defendants’ argument here is without effect. “In New York, the civil usury statute provides that ‘[t]he maximum interest rate permissible on a loan is 16% per annum, and any interest rate in excess of that amount is usurious.’” Roopchand v. Mohammed, 62 N.Y.S.3d 514, 516 (N.Y. App. Div. 2017) (internal quotation marks and citation omitted) (citing N.Y. Gen. Oblig. Law § 5-501[a]; N.Y. Banking Law § 14(a)). Under New York’s criminal usury law, it is a felony to “knowingly charge or collect interest on a ‘loan or forbearance’ at a rate above 25% annually.” Madden v. Midland Funding, LLC, 237 F. Supp. 3d 130, 141 (S.D.N.Y. 2017) (quoting N.Y. Penal Law § 190.40). Furthermore, it is unlawful to collect interest on loans or forbearances that exceed the maximum allowable interest rate because such loans are void. (Compl. ¶¶ 101-03); N.Y. Gen. Oblig. Law § 5-501; N.Y. Banking Law § 14-a.

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Accepting the allegations in the Complaint as true and in the light most favorable to the NYAG at this stage of the proceedings, NYAG alleges facts demonstrating plausibly that at least certain of the Purchase Agreements functioned as loans that charged usurious interest rates in excess of New York’s civil and criminal usury caps, respectively. (Compl. ¶¶ 29, 32.) Accordingly, NYAG’s state law claims alleging violations of civil and criminal usury laws survive the instant motion. 3. Count VIII: Violation of New York General Obligations Law § 13-101 Defendants argue that the NYAG fails to state a claim under New York General Obligations Law § 13-101, which prohibits the sale or assignment of claims or demands to recover for personal injury, because the transactions transfer the rights to proceeds from claims for personal injury, not the personal injury claims themselves. N.Y. Gen. Oblig. Law § 13-101; (Def. Br. 37-38.) Under N.Y. Gen. Oblig. Law § 13-101(1), a party may not transfer a “claim or demand” to “recover damages for a personal injury.” With respect to the VCF Purchase Agreements, as discussed supra, Section IV(a)(i)(2), those transactions purport to transfer Eligible Claimants’ claims for settlement proceeds under the VCF.

As discussed supra, the term “claim” is defined as “[t]he assertion of an existing right; any right to payment or to an Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 95 of 108

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equitable remedy, even if contingent or provisional . . . [a] demand for money, property, or a legal remedy to which one asserts a right.” Claim, Black’s Law Dictionary (10th ed. 2014). The plain language of the Purchase Agreements indicates that Defendants sought to obtain ownership of Eligible Claimants’ “claims” to damages for injuries that they suffered following the September 11, 2001 terrorist attacks in that they sought to obtain the right to receive payment directly from the VCF. In sum, the Complaint alleges adequately facts demonstrating that the Purchase Agreements transferred a “claim or demand” to “damages for personal injury” in violation of N.Y. GBL § 13-101(1).

Similarly, the NYAG has alleged facts sufficient to state a claim under Section 13-101(1) of N.Y. GBL as to the NFL Purchase Agreements. For the reasons already explained supra, Section IV(a)(i)(1), the NFL Purchase Agreements purport to assign Class Members’ full interest in a portion of their settlement proceeds, including the right to demand payment directly from the NFL Settlement Administrator. As such, the Purchase Agreements purport to transfer a “claim or demand” to “recover damages for personal injury.” Accordingly, the NYAG has alleged facts sufficient to state a claim under N.Y. GBL § 13-101(a) regarding the NFL Purchase Agreements.

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4. Count IX: Violation of New York General Business Law § 349 “To state a claim for deceptive practices under section 349, a plaintiff must show: (1) that the act, practice, or advertisement was consumer-oriented; (2) that the act, practice, or advertisement was misleading in a material respect; and (3) that the plaintiff was injured as a result of the deceptive act, practice, or advertisement.” Pelman ex rel. Pelman v. McDonald's Corp., 396 F. Supp. 2d 439, 444 (S.D.N.Y. 2005).

Under the first prong, “consumer oriented” conduct is that which “has a broad impact on consumers at large.” Bennett v. State Farm Fire and Casualty Co., -- N.Y.S.3d --, 2018 WL 2225321, at *2 (N.Y. App Div. May 16, 2018) (citing Nafash v. Allstate Ins. Co., 28 N.Y.S.3d 381, 384 (N.Y. App. Div. 2016); JPMorgan Chase Bank, N.A. v. Hall, 996 N.Y.S.2d 309, 315 (N.Y. App. Div. 2014); Vescon Constr., Inc. v. Gerelli Ins. Agency, Inc., 948 N.Y.S.2d 636, 638 (N.Y. App. Div. 2012); Flax v. Lincoln Natl. Life Ins. Co., 864 N.Y.S.2d 559, 561 (N.Y. App. Div. 2008)). A “single shot transaction” that is customized to meet the specific demands of a particular consumer is insufficient to show that the conduct had a “broad impact on consumers.” Hall, 996 N.Y.S.2d at 315 (quoting N. State Autobahn, Inc. v. Progressive Ins. Grp. Co., 953 N.Y.S.2d 96, Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 97 of 108

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102 (N.Y. App. Div. 2012)). Rather, the conduct must amount to a “standard practice that was [or is] routinely applied to all [consumers]” who engaged with the defendant. N. State Autobahn, 953 N.Y.S.2d at 102.

Under the second prong, the New York Court of Appeals has defined the term “materially misleading” conduct using an objective standard under which “the alleged act must be ‘likely to mislead a reasonable consumer acting reasonably under the circumstances.’” Orlander v. Staples Inc., 802 F.3d 289, 300 (2d Cir. 2015) (quoting Cohen v. JP Morgan Chase & Co., 498 F.3d 111, 126 (2d Cir. 2007) (quoting Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, N.A., 647 N.E. at 745 (“Such a test . . . may be determined as a matter of law or fact (as individual cases require).” Koenig v. Boulder Brands, Inc., 995 F. Supp. 2d 274, 287 (S.D.N.Y. 2014) (quoting Oswego Laborers’ Local 214 Pension Fund, 647 N.E.2d at 745). Applying this framework to the facts of this case, NYAG has alleged facts sufficient to demonstrate that Defendants engaged in deceptive practices in violation of N.Y. GBL § 349. As to the first element, the averments in the Complaint indicate that Defendants’ conduct was “consumer-oriented” in that Defendants made similar statements and representations to all of the Consumers targeted. Oswego Laborers’ Local 214 Pension Fund, 623 N.Y.S.2d at 745 (holding conduct to be “consumer-oriented” Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 98 of 108

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where defendant Bank interacted with plaintiffs’ representative the same as any other customer opening a savings account). According to the Complaint, the RD Entities represent to Consumers that the Purchase Agreements are assignments of Consumers’ interests in their anticipated settlement payments and are not an offer of credit, (Compl. ¶ 38); label all of the Purchase Agreements as “assignment and sale” agreements, (Compl. ¶ 39-40); and do not disclose interest rates for transactions to Consumers, (Compl. ¶ 42). These allegations show that Defendants’ conduct was not limited to any particular single Consumer but rather was how Defendants interacted with all Consumers. Oswego Laborers’ Local 214 Pension Fund, 623 N.Y.S.2d at 745 (citing Genesco Entm’t v. Koch, 593 F. Supp. 743, 752 (S.D.N.Y. 1984) (finding that conduct was “consumeroriented” because it was “not unique” to the plaintiffs, was not “private in nature” and not a “single shot transaction”). Accordingly, NYAG has pled adequately facts indicating the conduct at issue was “consumer-oriented.” Turning to the second element of a claim under N.Y. GBL § 349, NYAG has also alleged adequately that the RD Entities made misrepresentations that would be “materially misleading” to a reasonable consumer. All of the Purchase Agreements contain numerous statements that the transaction is a “sale” that transfers all of the rights of ownership in the Property Amount Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 99 of 108

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to the RD Entities, but in reality, the Consumer is not entitled to assign title and ownership over the Property Amount to another. Furthermore, the Purchase Agreements entail a rate of interest that would violate New York civil and criminal usury laws in some instances, rendering the transactions void under New York law. Such allegations, if true, are likely to mislead a reasonable consumer as to the nature, terms, and obligations of the contractual arrangement in front of him or her. Accordingly, the NYAG has pleaded facts sufficient to state a claim under N.Y. GBL § 349.

5. Count X: Violation of New York General Business Law § 350 “The standard for recovery under General Business Law § 350, while specific to false advertising, is otherwise identical to Section 349.” Austin v. Albany Law School of Union Univ., 957 N.Y.S.2d 833, 843 (N.Y. Sup. Ct. 2013) (citing Denenberg v. Rosen, 897 N.Y.S.2d 391, 394 (N.Y. App. Div. 2010), lv. dismissed, 930 N.E.2d 762 (N.Y. 2010)). N.Y. GBL § 350 makes unlawful false advertising “in the conduct of any business, trade or commerce or in the furnishing of any service” in New York. N.Y. Gen. Bus. Law § 350. Because of the commonality in the elements of a claim under N.Y. GBL § 349 and § 350, the Court draws on its analysis of NYAG’s Section 349 Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 100 of 108

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claim in concluding that the NYAG has alleged facts sufficient to state a claim under N.Y. GBL § 350 for false advertising. In this Complaint, the NYAG alleges that Defendants falsely advertised their agreements as sales rather than loans and falsely advertised that they would be able to expedite Consumers’ payment of their settlement awards. As discussed earlier, such advertising is “consumer-oriented” in that the Complaint alleges that these representations were made to all those who visited Defendants’ website or transacted with Defendants through a Purchase Agreement. (Compl. ¶¶ 125-26.) Such statements are also material because they are likely to mislead a reasonable consumer into believing that the transactions are true sales or that Defendants had the ability to expedite payment from the settlement fund administrators when neither statement is true. Defendants also argue that these alleged statements pertain to the “source” of the payments, which is distinct from the timing of payments and would not be material to consumers. (Def. Br. 34.) The Court disagrees. Consumers are individuals who want their settlement awards quickly because they need access to liquidity. It does not take a grand leap of imagination to envision that Consumers may have strained relations with the claims administrators in seeking access to their settlement awards. Therefore, if Consumers were misled into believing that RD would act as a type of third-party Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 101 of 108

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facilitator between the Consumer and the claims administrator, this information would be material to the Consumer. Therefore, the Court concludes that Defendants’ argument is without merit. Accordingly, the NYAG alleges adequately facts demonstrating a claim under N.Y. GBL § 350. 6. Count XI: New York Executive Law § 63(12) Fraud Executive Law § 63(12) empowers the Attorney General to seek injunctive and other relief whenever a person or business engages in “repeated . . . or . . . persistent fraud or illegality.” “Fraud” under § 63(12) is not common-law fraud but is statutorily defined broadly as “any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions.” Conduct violates Executive Law § 63(12) if it “has the capacity or tendency to deceive” both the average consumer and “the ignorant, the unthinking, and the credulous.” Matter of People v. Applied Card Sys., Inc., 805 N.Y.S.2d 175, 176 (N.Y. App. Div. 2005) (internal quotation marks and citation omitted). Several cases have also held that proof of intent to deceive or reliance are not required to state a claim under N.Y. Executive Law § 63(12). Here, because the elements of a claim under Section 63(12) are entirely encompassed by the elements of deceptive acts or Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 102 of 108

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practices under the CFPA or NY GOL § 349 that the Government has already pled adequately, the Complaint contains sufficient allegations to state a claim under N.Y. Executive Law § 63(12) as well.

c. Constitutional Claims i.

History, Liberty, and Presidential Authority In reaching the question of the constitutionality of Title X of Dodd-Frank, which established the CFPB as an “independent bureau” within the Federal Reserve System, 12 U.S.C. § 5491(a), the Court acknowledges the en banc holding of the Court of Appeals for the District of Columbia Circuit in PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), upholding the statute. Of course, that decision is not binding on this Court.7

7 Other courts have also addressed this question. CFPB v. TCF Nat’l Bank, No. 17-166 (RHK/DTS), 2017 WL 6211033 (D. Minn. Sept. 8, 2017); CFPB v. Seila Law, LLC, No. 17-CV-01081-JLS-JEM, 2017 WL 6536586 (C.D. Cal. Aug. 25, 2017), appeal filed, No. 17- 56324 (9th Cir.); CFPB v. Navient Corp., No. 3:17-CV-101, 2017 WL 3380530 (M.D. Pa. Aug. 4, 2017); CFPB v. Future Income Payments, LLC, 252 F. Supp. 3d 961 (C.D. Cal. 2017), appeal filed, No. 17-55721 (9th Cir.); CFPB v. D & D Mktg., Inc., No. CV 15-9692 PSG (EX), 2017 WL 5974248 (C.D. Cal. Mar. 21, 2017), interlocutory appeal granted, No. 17-55709 (9th Cir.); CFPB v. CashCall, Inc., No. CV-15-7522-JFW-RAOx, 2016 WL 4820635 (C.D. Cal. Aug. 31, 2016), appeal filed, 18-55479 (9th Cir.); CFPB v. NDG Fin. Corp., No. 15-CV-5211 (CM), 2016 WL 7188792 (S.D.N.Y. Dec. 2, 2016), mot. reconsideration denied, No. 15-CV-5211 (CM), 2016 WL 7742784 (S.D.N.Y. Dec. 19, 2016); CFPB v. ITT Educ. Servs., Inc., 219 F. Supp. 3d 878 (S.D. Ind. 2015), appeal dismissed for lack of jurisdiction, 15-1761 (7th Cir. 2016); CFPB v. Frederick J. Hanna & Assocs., P.C., 114 F. Supp. 3d 1342 (N.D. Ga. 2015); CFPB v. Morgan Drexen, Inc., 60 F. Supp. 3d 1082 (C.D. Cal. 2014).

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Respectfully, the Court disagrees with the holding of the en banc court and instead adopts Sections I-IV of Judge Brett Kavanaugh’s dissent (joined in by Senior Circuit Judge A. Raymond Randolph), where, based on considerations of history, liberty, and presidential authority, Judge Kavanaugh concluded that the CFPB “is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.” Id. at 198.

Also most respectfully, the Court disagrees with Section V of Judge Kavanaugh’s opinion wherein he determined the remedy to be to “invalidate and sever the for-cause removal provision and hold that the Director of the CFPB may be supervised, directed, and removed at will by the President.” Id. at 200. Instead, the Court adopts Section II of Judge Karen LeCraft Henderson’s dissent wherein she opined that “the presumption of severability is rebutted here. A severability clause ‘does not give the court power to amend’ a statute. Nor is it a license to cut out the ‘heart’ of a statute. Because section 5491(c)(3) is at the heart of Title X [Dodd Frank], I would strike Title X in its entirety.” Id. at 163-64 (citations omitted). ii.

CFPB’s Notice of Ratification On May 11, 2018, the CFPB filed a Notice of Ratification (“Ratification”) with the Court in response to Defendants’ constitutional challenge to the for-cause removal provision of Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 104 of 108

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the CFPB’s enabling statute. In the Ratification, the CFPB attempts to ratify its decision to file this enforcement decision prior to the appointment of the CFPB’s Acting Director, Mick Mulvaney, on November 24, 2017. (Notice of Ratification (hereinafter, Ratification) 1.) Because the President may remove Mr. Mulvaney at will, the CFPB asserts that Defendants may not obtain dismissal on the grounds that the instant action was initially filed by a Director at the CFPB removable only for cause. (Ratification 3.) As Defendants note, ratification is a principle of agency law. (Defendants’ Opp’n to Ratification (“Ratif. Opp’n”) 2, ECF No. 79.) Ratification addresses situations in which an agent was without authority at the time he or she acted and the principal later approved of the agent’s prior unauthorized acts. See GDG Acquisitions LLC v. Government of Belize, 849 F.3d 1299, 1310 (11th Cir. 2017) (noting that ratification assumes that the agent “did not have actual authority at the time he acted”); Wilkes-Barre Hosp. Co. v. NLRB, 857 F.3d 364, 371 (D.C. Cir. 2017) (explaining role of principal that ratifies prior unauthorized acts of agent).

The Court agrees with Defendants that the CFPB’s Ratification does not address accurately the constitutional issue raised in this case, which concerns the structure and authority of the CFPB itself, not the authority of an agent to Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 105 of 108

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make decisions on the CFPB’s behalf. See CFPB v. Gordon, 819 F.3d 1179, 1192 (9th Cir. 2016) (holding, after invalidation of CFPB Director’s recess appointment, that the Director’s “ratification, done after he was properly appointed as Director, resolves any Appointments Clause deficiencies”); Wilkes-Barre Hosp. Co. v. NLRB, 857 F.3d 364, 371 (D.C. Cir. 2017) (holding, after invalidation of Board members’ recess appointments, that NLRB properly ratified the appointment of its Regional Director who, in turn, ratified his prior unauthorized actions); Advanced Disposal Servs. East, Inc. v. NLRB, 820 F.3d 592, 605-06 (3d Cir. 2016) (same).

Here, the constitutional issues presented by the structure of the CFPB are not cured by the appointment of Mr. Mulvaney. As Defendants point out, the relevant provisions of the Dodd- Frank Act that render the CFPB’s structure unconstitutional remain intact. (Ratification 4.) Furthermore, Mr. Mulvaney cannot serve past June 22, 2018 (210 days after the vacancy arose), unless the President nominates a new Director, and then only until the new Director is appointed. Thus, there will likely be a new Director appointed in the coming months who will be subject to the for-cause removal provision. Therefore, the Ratification does not cure the constitutional deficiencies with the CFPB’s structure as the CFPB argues. Accordingly, the Court rejects the Notice of Ratification (ECF No. 78) to the extent Case 1:17-cv-00890-LAP Document 80 Filed 06/21/18 Page 106 of 108

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the CFPB argues that the Ratification renders Defendants’ constitutional arguments moot.

Accordingly, the Court finds that the CFPB “lacks authority to bring this enforcement action because its composition violates the Constitution’s separation of powers,” and thus the CFPB’s claims are dismissed. Fed. Election Comm’n v. NRA Political Victory Fund, 6 F.3d 821, 822 (D.C. Cir. 1993).

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d. Conclusion For the foregoing reasons, Defendants’ motion (ECF No. 39) is DENIED. Because Plaintiff Consumer Financial Protection Bureau is unconstitutionally structured and lacks authority to bring claims under the CFPA, the Clerk of Court shall terminate Plaintiff Consumer Financial Protection Bureau as a party to this action.

Counsel shall confer and inform the Court by letter no later than July 9 how they propose to proceed.

SO ORDERED.

Dated:

New York, New York

June 21, 2018

_____________________________

LORETTA A. PRESKA

Senior United States District Judge

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Order

PDF of this document (5 pages)

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18-2743-cv (L) Consumer Financial Protection Bureau, People of the State of New York v. RD Legal Funding, LLC, et al. UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT SUMMARY ORDER RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT'S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION "SUMMARY ORDER"). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 30th day of October, two thousand twenty. PRESENT:

BARRINGTON D. PARKER, DENNY CHIN, Circuit Judges, JANE A. RESTANI, Judge.* - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff-Appellant-Cross Appellee, PEOPLE OF THE STATE OF NEW YORK, by Letitia James, Attorney General for the State of New York, Plaintiff-Appellant-Cross Appellee, -v- 18-2743, 18-3033, 18-2860, 18-3156 * Judge Jane A. Restani, of the United States Court of International Trade, sitting by designation.

CERTIFIED COPY ISSUED ON 10/30/2020 Case 18-2743, Document 254, 10/30/2020, 2964026, Page1 of 5 17-cv-0890(LAP)

USDC SDNY DOCUMENT ELECTRONICALLY FILED DOC #:

_________________ DATE FILED: ______________ Case 1:17-cv-00890-LAP Document 118 Filed 10/30/20 Page 1 of 5

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-2-

RD LEGAL FUNDING, LLC, RD LEGAL FUNDING PARTNERS, LP, RD LEGAL FINANCE, LLC, RONI DERSOVITZ, Defendants-Third Party Plaintiffs- Third Party Defendants-Appellees- Cross Appellants.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

FOR PLAINTIFFS-APPELLANTS- CHRISTOPHER DEAL, Senior Counsel CROSS APPELLEES:

(John R. Coleman, Deputy General Counsel, Steven Y. Bressler, Assistant General Counsel, Kristin Bateman, Senior Counsel, David A. King Jr., Counsel, on the brief), for Mary McLeod, General Counsel for the Consumer Financial Protection Bureau, Washington, D.C.

CAROLINE A. OLSEN, Assistant Solicitor General (Barbara D. Underwood, Solicitor General, Steven C. Wu, Deputy Solicitor General, and Andrew W. Amend, Senior Assistant Solicitor General, on the brief), for LETITIA JAMES, Attorney General for the State of New York, New York, New York.

FOR DEFENDANTS-APPELLEES- MICHAEL D. ROTH (David K. Willingham, CROSS APPELLANTS:

Jeffrey M. Hammer, on the brief), King & Spalding, LLP, Los Angeles, CA, and Scott E. Gant, Boies, Schiller Flexner LLP, Washington, D.C.

Appeal from the United States District Court for the Southern District of New York (Preska, J.).

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-3- UPON DUE CONSIDERATION, IT IS ORDERED, ADJUDGED, AND DECREED that the judgment of the district court is VACATED and the case is REMANDED for further proceedings consistent with this Order. Plaintiffs-appellants Consumer Financial Protection Bureau (the "CFPB") and the State of New York (the "State") appeal from a judgment of the United States District Court for the Southern District of New York entered October 29, 2018 dismissing their federal and state law claims against defendants-appellees RD Legal Funding, LLC; RD Legal Finance, LLC; RD Legal Funding Partners, LP (collectively, "RD"); and Roni Dersovitz (together with RD, "defendants"). By memorandum opinion and order entered June 21, 2018, as amended by its September 12, 2018 Order, the district court granted defendants' motion to dismiss. We assume the parties' familiarity with the underlying facts, the procedural history of the case, and the issues on appeal. We review de novo a district court's grant of a motion to dismiss. See Hernandez v. United States, 939 F.3d 191, 198 (2d Cir. 2019). The CFPB is headed by a Director, who is appointed by the President with the advice and consent of the Senate for a five-year term, during which time "[t]he President may remove the Director for inefficiency, neglect of duty, or malfeasance in office." 12 U.S.C § 5491(b)-(c) (the "forcause removal provision"). The district court held that this for-cause removal provision is unconstitutional, and that the removal provision is not severable from the remainder of the Consumer Financial Protection Act (the "CFPA") or Title X of the Dodd-Frank Case 18-2743, Document 254, 10/30/2020, 2964026, Page3 of 5 Case 1:17-cv-00890-LAP Document 118 Filed 10/30/20 Page 3 of 5

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-4-

Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). Accordingly, the district court struck the entirety of the CFPA. The district court also held that then-acting CFPB Director Mick Mulvaney's May 11, 2018 ratification of the CFPB's enforcement action against defendants failed to cure the constitutional deficiencies in the CFPB's structure or otherwise render defendants' arguments moot.

On June 29, 2020, the Supreme Court struck down the for-cause removal provision on the basis that it violates the separation of powers, but additionally held that the removal provision is severable from the remainder of the CFPA. See Seila L. LLC v. Consumer Fin. Prot. Bureau, 140 S.Ct. 2183, 2192 (2020). Following Seila, nowacting CFPB Director Kathleen L. Kraninger ratified the enforcement action on July 8, 2020.

In light of these developments, we affirm the district court's holding that the for-cause removal provision is unconstitutional, we reverse the district court's holding that the for-cause removal provision is not severable from the remainder of the CFPA, and we remand for the district court to consider in the first instance the validity of Director Kraninger's ratification of this enforcement action. See Seila, 140 S. Ct. at 2208 n.12. 1

We do not reach defendants' other arguments, including, for example, that RD Legal does not qualify as a "covered person" under the Dodd-Frank Act. Case 18-2743, Document 254, 10/30/2020, 2964026, Page4 of 5 Case 1:17-cv-00890-LAP Document 118 Filed 10/30/20 Page 4 of 5

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-5-

* * * For the foregoing reasons, we VACATE the judgment of the district court and REMAND the case for further proceedings. FOR THE COURT:

Catherine O'Hagan Wolfe, Clerk Case 18-2743, Document 254, 10/30/2020, 2964026, Page5 of 5 Case 1:17-cv-00890-LAP Document 118 Filed 10/30/20 Page 5 of 5

Complaint (Feb. 2017)

PDF of this document (23 pages)

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IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK Consumer Financial Protection Bureau and the People of the State of New York, by Eric T. Schneiderman, Attorney General for the State of New York,

Plaintiffs, v.

RD Legal Funding, LLC, RD Legal Finance, LLC, RD Legal Funding Partners, LP, and Roni Dersovitz,

Case No.

Defendants.

COMPLAINT Plaintiffs, the Consumer Financial Protection Bureau (“Bureau”) and the People of the State of New York (“State of New York”), allege as follows: INTRODUCTION 1.

Defendants are in the business of, among other things, offering to advance funds to consumers who are entitled to receive compensation under a settlement fund or judgment.

2.

Consumers who received advances from Defendants include police officers, firefighters, paramedics, and other first responders to the World Trade Center attack on September 11, 2001 and former National Football League (“NFL”) players suffering from brain injuries.

3.

These consumers, and others, are recipients of funds resulting from lawsuits or victim-compensation funds, such as the Zadroga Fund, established by the Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 1 of 23

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James Zadroga 9/11 Health and Compensation Act of 2010, which allocated billions of dollars to assist first responders with mounting medical costs and lost income. 4.

Not all the money from these sources was immediately available to eligible consumers, even after their claims had been approved and they had been notified of the amounts of their awards.

5.

While consumers await payment of their awards, RD Legal Funding, LLC, RD Legal Finance, LLC, and RD Legal Funding Partners, LP (collectively, “RD”), under the direction of Roni Dersovitz (“Dersovitz”), swoop in with a “deal”—RD provides the consumers an up-front payment, which the consumers repay when they receive their awards. The total amount consumers must repay RD is considerably larger than the upfront sums given to them by RD, often by a multiple of two or more. 6.

Although RD mischaracterizes these transactions as “assignments,” they are in fact offers to extend credit or extensions of credit for purposes of the Consumer Financial Protection Act of 2010. As a result of RD’s mischaracterizations, consumers are unable to compare the cost of RD’s products to alternatives. In addition to falsely marketing these transactions as “assignments,” RD falsely claims that it can expedite funding and “cut through red tape;” misrepresents when consumers will receive funds; and collects on contracts that are void under state laws or, in the alternative, that function as loans with interest rates that exceed state-law usury limits and on which no payment is due. RD’s misconduct thus costs consumers millions of dollars. 7.

Under New York law, RD’s transactions are loans at usurious interest rates and thus void. To the extent the transactions are deemed assignments, they are Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 2 of 23

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also void because, under New York law, they contravene public policy, constitute an unlawful sale or assignment of a personal injury claim, or both. 8.

The Bureau and the State of New York bring this action against Roni Dersovitz, RD Legal Funding, LLC, RD Legal Finance, LLC, and RD Legal Funding Partners, LP (collectively, “Defendants”) under § 1054 of the Consumer Financial Protection Act of 2010 (“CFPA”), 12 U.S.C. § 5564. The State of New York also brings this action under New York Executive Law § 63(12) and General Business Law (“GBL”) Article 22-A, §§ 349 and 350. RD engaged in deceptive and abusive acts and practices in connection with its offering or providing extensions of credit to consumers who have been awarded payouts from sources such as a statutory compensation fund or a settlement fund, but were awaiting payment from the claims administrator. See 12 U.S.C. §§ 5531, 5536(a). Dersovitz knowingly or recklessly provided substantial assistance to RD in its deceptive and abusive acts and practices, in violation of the CFPA. See 12 U.S.C. § 5536(a)(3). Dersovitz directed and controlled RD’s operations and participated in its deceptive and unlawful practices. Dersovitz, therefore, is also liable for the state-law violations alleged herein. See N.Y. Exec. Law § 63(12); N.Y. Gen. Bus. Law §§ 349, 350.

JURISDICTION AND VENUE 9.

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 U.S.C. § 1345.

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10.

This Court has supplemental jurisdiction over the State of New York’s state-law claims because they are so related to the federal claims that they form part of the same case or controversy. 28 U.S.C. § 1367(a). 11.

This Court has personal jurisdiction over Defendants because the causes of action arise from Defendants’ conduct of business in this district. 12 U.S.C. § 5564(f). 12.

Venue is proper in this district because a substantial amount of the transactions, acts, practices, and courses of conduct at issue occurred within this district and Defendants conducted business in this district. 28 U.S.C. § 1391(b)–(c); 12 U.S.C. § 5564(f).

PARTIES 13.

The Bureau is an agency of the United States charged with regulating the offering and provision of consumer-financial products and services under federal consumer-financial laws. 12 U.S.C. § 5491(a). The Bureau has independent litigating authority. See 12 U.S.C. § 5564(a)–(b).

14.

The State of New York, by its Attorney General (“NYAG”), is authorized to take action to enjoin (i) repeated and persistent fraudulent and illegal conduct under N.Y. Executive Law § 63(12), (ii) deceptive business practices under N.Y. GBL § 349, and (iii) false advertising under N.Y. GBL § 350. The NYAG also is authorized to initiate civil actions in federal district court to enforce provisions of the CFPA. See 12 U.S.C. § 5552(a)(1).

15.

RD Legal Funding, LLC is a limited-liability company. Its principal place of business is at 45 Legion Drive, Cresskill, NJ 07626. Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 4 of 23

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16.

RD Legal Finance, LLC is a limited-liability company. Its principal place of business is at 45 Legion Drive, Cresskill, NJ 07626. 17.

RD Legal Funding Partners, LP is a limited partnership. Its principal place of business is at 45 Legion Drive, Cresskill, NJ 07626. 18.

Roni Dersovitz is the founder and owner of RD Legal Funding, LLC, RD Legal Finance, LLC, and RD Legal Funding Partners, LP. Dersovitz has substantial control over and involvement in the establishment of RD’s business policies and practices. In connection with the matters alleged, Roni Dersovitz transacted business in this district.

19.

As described below, RD offers consumers extensions of credit that purport to be assignments. But RD knows or recklessly disregards that these assignments are invalid and that these transactions, in reality, function as offers or extensions of credit. These transactions were therefore consumer-financial products or services under § 1002 of the CFPA. 12 U.S.C. §§ 5481(5), 5481(7), 5481(15)(A)(i). RD is therefore a “covered person” under the CFPA. 12 U.S.C. § 5481(6)(A).

FACTS A.

Background 20.

RD has marketed products consisting of cash advances to consumers who have been approved to receive compensation for injuries from, among other sources, the Zadroga Fund and the class-action lawsuit by retired NFL players. RD offers or provides extensions of credit to consumers entitled to awards from these sources. After the fund or settlement has received final approval and the consumer has received notice of the Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 5 of 23

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amount of a forthcoming payment, RD enters into an agreement with the consumer that purports to take a security interest in the consumer’s award. 21.

Many consumers who are offered or extended credit by RD have severe injuries.

22.

Many consumers who have been approved for awards from the Zadroga Fund suffer from respiratory illnesses and cancers related to their exposure to dust and debris at the World Trade Center site. Many also report diagnoses of post-traumatic stress disorder, depression, anxiety disorder, and memory loss. 23.

Consumers who were plaintiffs in the NFL class-action lawsuit are former players who have been diagnosed with neurodegenerative diseases such as chronic traumatic encephalopathy (“CTE”), Alzheimer’s, or Parkinson’s disease. A settlement fund was approved by a court in 2015.

24.

Typically, RD enters into agreements with consumers to pay them a lump sum representing a fraction of the consumers’ awards, thereby ensuring that sufficient funds will be available to pay RD when the consumers receive their awards. In exchange, the consumers agree to repay a far larger amount than the amount advanced. 25.

For example, one consumer was awarded $65,000 from the Zadroga Fund. While she waited for her full payment from the Fund, RD advanced her $18,590. When her award payment from the Fund arrived six months later, she repaid $33,800 to RD.

26.

Consumers are obligated, under RD’s contracts, to first pay RD any amounts received from the claims administrator until the amounts owed under RD’s contracts are satisfied. If the amounts owed under RD’s contracts are fully satisfied and Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 6 of 23

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there is a balance remaining from the award payment, consumers are then entitled to keep the balance.

27.

Dersovitz has authority and responsibility to dictate all the terms of consumer contracts. Specifically, Dersovitz makes decisions on the terms of the offers or extensions of credit.

28.

RD does not disclose the costs of the transactions in a manner that allows consumers to reasonably compare the cost of RD’s product to the cost of similar products.

29.

Given the often short time from the advance of the funds to the payment of awards, RD’s transactions cost consumers amounts that are equivalent in some cases to rates over 250%.

30.

After they receive their award payments, consumers repay RD directly. 31.

RD’s contracts contain one of two types of repayment terms: (i) repayment of a lump sum that remains the same regardless of when the consumer receives her award and repays the amount advanced, or (ii) repayment of a lump sum that increases over time. With the latter option, the amount the consumer repays depends on when the consumer receives her award.

32.

The cost on a transaction under the first option may be particularly high for the consumer who receives proceeds shortly after signing an agreement with RD. For example, a severely disabled 9/11 first responder received his compensation-fund check three months after he borrowed $35,000 from RD; under the agreement, the first responder was required to repay $63,636. The additional payment of $28,636 to RD for the $35,000 advance over that brief period is equivalent to a rate over 250%. Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 7 of 23

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33.

The second repayment option involves a complicated rebate scheme, and is known as the “rebate” option. Under this option, the repayment amount increases each month by an amount determined by a pre-set, typically undisclosed rate. Moreover, RD does not clearly disclose the final repayment amount. A consumer must determine the final repayment amount on her own by subtracting the “rebate” amount, which changes each month and is set forth at the end of the contract, from the “property” amount normally listed at the beginning of the contract. B.

RD knows or recklessly disregards that its purported “assignments” are invalid.

34.

RD knows or recklessly disregards that the purported assignments are prohibited and that it is impossible to structure the transactions as assignments. 35.

For example, the NFL settlement agreement approved by a court in the Eastern District of Pennsylvania and affirmed by the Third Circuit provides that an assignment or attempted assignment of a class member’s rights “will be void, invalid, of no force and effect and the Claims Administrator shall not recognize any such action.” Class Action Settlement Agreement, As Amended, § 30.1, Turner v. Nat’l Football League, No. 2:12-md-2323-AB, ECF No. 6481-1 (E.D. Pa. filed Feb. 13, 2015). 36.

Similarly, the statute creating the Zadroga Fund provides that “the Special Master shall authorize payment to [a] claimant of the amount determined with respect to the claimant,” and defines “claimant” as “an individual filing a claim for compensation under [the statute].” 49 U.S.C. § 40101, note. And the Zadroga Fund’s policies prohibit RD from receiving payment directly from the Fund. 37.

RD even addresses the likelihood that the assignments would be invalidated, providing in its contracts that if the assignment is invalid, it may, for Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 8 of 23

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example, demand repayment “plus interest calculated at 19.562 percent per annum, or the maximum rate permitted by law.” RD also reserves the right to file a UCC financing statement if the agreement is characterized as a loan 38.

Despite its knowledge or reckless disregard that assignments are prohibited, RD falsely represents to consumers that its products are not an offer of credit but rather assignments of the consumers’ interests in their anticipated payments. 39.

For example, on its website, RD asserts that its “plaintiff funding is not a loan.”

40.

RD labels its contracts as “assignment and sale agreements.” Most of RD’s contracts with consumers do not disclose an interest rate for the transaction. 41.

Some of these contracts indicate explicitly that there is no “annual percentage fee” to disclose because “the transaction is a purchase and not a loan.” Some of RD’s contracts contain a disclosure section with a subsection labeled “annual percentage fee,” but that subsection is typically blank or labeled “Not Applicable.” 42.

Nor does RD otherwise disclose interest rates for its transactions to consumers. RD claims in communications with consumers that there is no applicable interest rate for its transactions.

43.

Because RD knows or recklessly disregards that the purported assignments are invalid, it functionally offers or provides a credit transaction in which consumers incur a debt and defer the right to repay. 12 U.S.C. § 5481(7). C.

RD falsely claims to expedite funding and “cut through red tape.” 44.

RD advertises to consumers that it will work to expedite the process of obtaining the consumers’ award payments or settlement proceeds. Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 9 of 23

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45.

For example, on its webpage specifically devoted to the Zadroga Fund, RD tells 9/11 first responders that it is “dedicated to helping you obtain your Zadroga settlement funds as quickly as possible.” The page goes on to state that “[w]e pride ourselves on working closely with our clients and look forward to assisting those with Zadroga claims in obtaining accelerated access to their second payment.” Both RD and Dersovitz tell 9/11 first responders that they will “cut through the red tape on your behalf and provide you immediate access to your funds.” 46.

Dersovitz approves the contents of RD’s website.

47.

In reality, RD does not act—nor does RD have any ability to act—on behalf of consumers to influence the Zadroga Fund or its award-distribution timeline. 48.

By the time consumers enter into an agreement with RD, they have already completed the application process and received an award-notification letter from the Zadroga Fund. In fact, RD requires that these administrative steps be completed to qualify for an advance from RD. RD does not assist consumers in completing these steps, nor does it take or have the ability to take any additional steps to obtain payments from the Zadroga Fund more quickly than they would otherwise be made.

D.

RD misrepresents when consumers will receive funds. 49.

On its website, RD promises that consumers will receive funds “within several days” after RD receives the necessary documentation to complete the consumers’ transactions. In RD’s communications with consumers who submitted applications for the product, RD routinely told consumers that it would wire funds by a specific date. Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 10 of 23

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50.

In many instances, however, RD did not deliver the funds to the consumer by the promised date. Some consumers did not receive funds from RD until months after they were promised.

51.

Dersovitz has authority and responsibility to solicit funds from investors and determine when funds for consumers would arrive. E.

RD collects where no payment is due.

52.

As set forth above, RD’s contracts include purported assignments that are void, unenforceable, and uncollectible. RD nonetheless collects on these contracts. 53.

In the alternative, RD’s contracts function as loans under state law. These loans have interest rates exceeding limits imposed by state usury laws. For example, under New York law, loans made to New York consumers are void, and thus no payment is due, if the interest rate exceeds 16%. N.Y. Gen. Oblig. Law §§ 5-501, 5-511. RD nonetheless collects on these loans.

54.

Dersovitz has authority and responsibility to determine whether RD should collect. Dersovitz himself made phone calls to at least one New York consumer to collect from that consumer.

F.

Facts Specific to Claims Asserted Only by the State of New York In support of the state-law claims asserted in Counts VI through XI, the State of New York further alleges as follows:

55.

Although RD characterizes its contracts as “sales and assignments,” the transactions are loans under New York law.

56.

Under New York law, an agreement constitutes a loan if, at the time the agreement is signed, it is virtually certain that there will be sufficient funds to repay the Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 11 of 23

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amount advanced. Here it was virtually certain at the time that the agreements were signed that the federal government would have sufficient funds available to the pay the full amounts awarded by the Zadroga Fund to consumers, let alone the substantially lower amounts purportedly assigned or sold to RD. 57.

On many of their loans in New York, RD collected an effective interest rate ranging from 18% to over 250%.

58.

These interest rates exceed New York’s civil usury cap of 16% and criminal usury cap of 25%.

59.

Loans made to New York consumers in excess of New York’s usury laws are void, and thus no payment is due. N.Y. Gen. Oblig. Law §§ 5-501, 5-511. RD nonetheless collects on these loans.

60.

To the extent RD purported to structure these transactions as assignments, they violate New York’s prohibition on assignments of personal-injury claims and contravene public policy. N.Y. Gen. Oblig. Law §§ 13-101. CAUSES OF ACTION Count I—Deception under the CFPA Asserted by the Bureau and the State of New York 61.

The allegations in paragraphs 1-54 are incorporated by reference. 62.

Under the CFPA, an act or practice is deceptive if (i) there is a representation or omission of information that is likely to mislead consumers acting reasonably under the circumstances; and (ii) that information is material to consumers. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B).

63.

RD routinely misrepresents that it is entering into contracts with consumers for valid and enforceable assignments. Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 12 of 23

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64.

In fact, the assignments in RD’s contracts are not valid and enforceable, which RD knew or recklessly disregarded.

65.

RD’s misrepresentations are likely to mislead consumers acting reasonably under the circumstances.

66.

RD’s misrepresentations are material because they would influence the decisions of a consumer acting reasonably under the circumstances. 67.

RD therefore engaged in deceptive acts in connection with an offer or extension of credit in violation of the CFPA. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B). 68.

Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 69.

Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in deceptive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

Count II—Abusiveness under the CFPA Asserted by the Bureau and the State of New York 70.

The allegations in paragraphs 1-54 are incorporated by reference. 71.

Under the CFPA, an act or practice is abusive if it (i) “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service,” (ii) “takes unreasonable advantage of . . . a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service,” or (iii) “takes unreasonable advantage of . . . the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.” 12 U.S.C. § 5531(d).

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72.

RD misrepresents that its contracts are for valid and enforceable assignments.

73.

Through this conduct, RD undermines consumers’ understanding of the offer of credit, and in particular prevents consumers from understanding the terms, costs, and conditions of RD’s offer of credit. RD’s conduct also prevents consumers from meaningfully evaluating the cost of RD’s offer of credit, from comparing the cost of the offer of credit to other alternatives that may be available to the consumers, and from determining whether RD’s offers of credit are in their interest. Because consumers are misled concerning the validity of significant terms of the transactions and the nature of the transactions, they are not able to protect their interests in entering into them. 74.

RD therefore materially interferes with consumers’ ability to understand terms and costs of RD’s offers of credit, takes unreasonable advantage of consumers’ lack of understanding of material costs or conditions of RD’s offers of credit, and takes unreasonable advantage of consumers’ inability to protect their interests in the transactions.

75.

RD therefore engaged in abusive acts in connection with an offer or extension of credit in violation of the CFPA. 12 U.S.C. § 5531(d)(1), (2)(B); 12 U.S.C. § 5536(a)(1)(B).

76.

Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 77.

Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in abusive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

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Count III—Deception under the CFPA Asserted by the Bureau and the State of New York 78.

The allegations in paragraphs 1-54 are incorporated by reference. 79.

RD claims to provide a service that speeds up the disbursement of a consumer’s award and “cuts through red tape.” In fact, it does no such thing. 80.

A reasonable consumer would likely be misled by RD’s false statement; consumers cannot be expected to know the internal administrative procedures of, for example, a victim-compensation fund administered by the United States government and to independently evaluate whether RD is, in fact, able to accelerate fund disbursement.

81.

RD’s claims regarding accelerating disbursement are material to consumers, especially, for example, consumers who are severely disabled and may have large medical costs.

82.

RD therefore engaged in deceptive acts in connection with an offer or extension of credit in violation of the CFPA. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B). 83.

Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 84.

Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in deceptive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

Count IV—Deception under the CFPA Asserted by the Bureau and the State of New York 85.

The allegations in paragraphs 1-54 are incorporated by reference. Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 15 of 23

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86.

RD misrepresents to consumers when they would receive funds from RD, often promising consumers an earlier date of disbursement than the actual disbursement. In fact, on multiple occasions, RD did not deliver funds to consumers by the promised date. Many consumers experienced funding delays, some as long as several months.

87.

Consumers acting reasonably under the circumstances would likely rely on RD’s representations regarding the date of funding and would likely be misled by RD’s false statements.

88.

RD’s misrepresentations are material because they go to the heart of consumers’ decisions about whether to use the credit product RD offers. Indeed, consumers considering transactions with RD almost by definition are those who find themselves with more immediate needs for cash than can be met by the payouts they are eventually due. When the lump sums RD offers will arrive plainly is material to these consumers’ decisions.

89.

RD therefore engaged in deceptive acts in connection with an offer or extension of credit in violation of the CFPA. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B). 90.

Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 91.

Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in deceptive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

Count V—Deception under the CFPA Asserted by the Bureau and the State of New York 92.

The allegations in paragraphs 1-54 are incorporated by reference. Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 16 of 23

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93.

RD collects on contracts that are void under state laws or, in the alternative, that function as loans with interest rates that exceed usury limits under state laws, and on which no payment is due.

94.

Collecting on contracts that are void under state laws creates the false impression that the contracts are enforceable and that borrowers are obligated to repay. This false impression is material, and reasonable consumers would not have known that the contracts are void.

95.

In the alternative, collecting on loans in amounts that exceed applicable state usury limits, and on which no payment is due, creates the false impression that the borrowers are obligated to repay usurious rates. This false impression is material, and reasonable consumers would not have known that the any repayment obligation was void.

96.

RD therefore engaged in deceptive acts in violation of the CFPA. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B).

97.

Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 98.

Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in deceptive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

Count VI—Violation of New York Civil Usury Laws Asserted by the State of New York 99.

The allegations in paragraphs 1-60 are incorporated by reference. Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 17 of 23

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100. New York Executive Law § 63(12) authorizes the NYAG to seek injunctive and other equitable relief and damages whenever an individual or entity engages in repeated or persistent illegal conduct.

101.

New York General Obligations Law § 5-501 makes it unlawful to collect interest on loans or forbearances that exceed the rate set forth in New York Banking Law § 14-a.

102.

New York Banking Law § 14-a provides that the maximum interest for loans or forbearances in an amount less than $250,000 is 16%. 103.

Contracts that charge more than the maximum usury rate under New York General Obligations Law § 5-501 and Banking Law § 14-a are void. See N.Y. Gen. Oblig. Law § 5-511.

104.

In the course of making loans in New York and to New York consumers, Defendants repeatedly charged and collected interest far in excess of 16%, in violation of New York’s civil usury laws. See N.Y. Gen. Oblig. Law § 5-501; Banking Law § 14-a. 105.

Defendants have therefore engaged in repeated and persistent illegal conduct in violation of New York Executive Law § 63(12). Count VII—Violation of New York Criminal Usury Laws Asserted by the State of New York

106.

The allegations in paragraphs 1-60 are incorporated by reference. 107.

New York Executive Law § 63(12) authorizes the NYAG to seek injunctive and other equitable relief and damages whenever an individual or entity engages in repeated or persistent illegal conduct.

108.

Pursuant to New York Penal Law §§ 190.40 and 190.42, it is illegal to knowingly charge, take, or receive any money or other property as interest on a loan or Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 18 of 23

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forbearance at a rate exceeding 25% per annum. Contracts that exceed the criminal usury cap are void under New York General Obligations Law § 5-511. 109.

In the course of making loans in New York and to New York consumers, Defendants repeatedly charged and received interest far in excess of New York’s criminal usury laws. See N.Y. Penal Law §§ 190.40 and 190.42. 110.

Defendants have therefore engaged in repeated and persistent illegal conduct in violation of New York Executive Law § 63(12). Count VIII—Violation of New York General Obligations Law § 13-101 Asserted by the State of New York

111.

The allegations in paragraphs 1-60 are incorporated by reference. 112.

New York Executive Law § 63(12) authorizes the NYAG to seek injunctive and other equitable relief and damages whenever an individual or entity engages in repeated or persistent illegal conduct.

113.

Pursuant to New York General Obligations Law § 13-101, it is unlawful to sell or assign claims or demands to recover for personal injuries. 114.

Assignments that contravene public policy are also unlawful. N.Y. Gen. Oblig. Law § 13-101(3).

115.

To the extent that the transactions at issue are deemed assignments, they constitute an unlawful assignment of individual claims to recover for personal injuries under New York General Obligations Law § 13-101. 116.

Such assignments also violate public policy by allowing Defendants to profit from funds intended to compensate victims of 9/11 and football injuries. 117.

By entering into such assignments, Defendants repeatedly violated New York General Obligations Law § 13-101.

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118.

Defendants have therefore engaged in repeated and persistent illegal conduct in violation of New York Executive Law § 63(12). Count IX—Violation of New York GBL § 349 Asserted by the State of New York 119.

The allegations in paragraphs 1-60 are incorporated by reference. 120.

GBL § 349 authorizes the NYAG to bring an action for an injunction, restitution and civil penalties when any individual has engaged or is about to engage in deceptive practices in the State of New York. 121.

Defendants have engaged in deceptive acts and practices by conduct including but not limited to: i) misrepresenting that their products are a sale or assignment; ii) misrepresenting that individuals can assign their awards for personal injuries to Defendants; iii) failing to disclose the interest rate being charged; iv) misrepresenting that the agreements are enforceable when in fact they are void under New York law; and v) misrepresenting their ability to expedite the payment of awards and the date of disbursement of funds.

122.

Defendants have therefore engaged in deceptive acts and practices in violation of GBL § 349.

Count X—Violation of New York GBL § 350 Asserted by the State of New York

123.

The allegations in paragraphs 1-60 are incorporated by reference. 124.

GBL § 350 prohibits false advertising in the State of New York, and GBL § 350-d authorizes the NYAG to obtain civil penalties for each false advertisement. Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 20 of 23

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125.

Defendants have engaged in false advertising by falsely advertising their agreements as a sale and not a loan and by falsely advertising their ability to expedite the payment of the awards.

126.

Defendants have therefore engaged in false advertising in violation of GBL § 350.

Count XI—New York Executive Law § 63(12) Fraud Asserted by the State of New York

127.

The allegations in paragraphs 1-60 are incorporated by reference. 128.

New York Executive Law § 63(12) authorizes the NYAG to seek injunctive and other equitable relief and damages whenever an individual or entity engages in repeated or persistent fraudulent conduct.

129.

Defendants have engaged in repeated and persistent fraudulent conduct including but not limited to: i) misrepresenting that their products are a sale or assignment; ii) misrepresenting that individuals can assign their awards for personal injuries to Defendants; iii) failing to disclose the interest rate being charged; iv) misrepresenting that the agreements are enforceable when in fact they are void under New York law; and v) misrepresenting their ability to expedite the payment of awards and the date of disbursement of funds.

130.

Defendants have therefore engaged in repeated and persistent fraud in violation of New York State’s Executive Law § 63(12). DEMAND FOR RELIEF Plaintiffs request that the Court:

a.

enjoin Defendants from committing future violations of the CFPA and New York law;

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b.

declare null and void contracts that violate New York law; c.

award damages or other monetary relief against Defendants; d.

order Defendants to pay redress to consumers; e.

order disgorgement of ill-gotten revenues by Defendants; f.

impose civil money penalties on Defendants under the CFPA; g.

impose civil money penalties of $5,000 for each violation of Article 22-A pursuant to GBL § 350-d;

h.

order Defendants to pay the costs incurred in connection with prosecuting this action; and i.

award additional relief as the Court may determine to be just and proper.

Respectfully submitted,

ANTHONY ALEXIS Enforcement Director JEFFREY PAUL EHRLICH Deputy Enforcement Director JOHN C. WELLS Assistant Litigation Deputy

s/Benjamin Z. Konop BENJAMIN Z. KONOP (OH 0073458) HAI BINH T. NGUYEN (CA 313503) Enforcement Attorneys Consumer Financial Protection Bureau 1700 G Street, NW Washington, D.C. 20552 Telephone (Konop): 202-435-7265 Telephone (Nguyen): 202-435-7251 Facsimile: 202-435-7722 E-mail: [email protected] E-mail: [email protected] Attorneys for Plaintiff Consumer Financial Protection Bureau

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ERIC T. SCHNEIDERMAN Attorney General of the State of New York

JANE M. AZIA (NY 1539600) Bureau Chief, Consumer Frauds and Protection Bureau MELVIN L. GOLDBERG (NY 1828284) Assistant Attorney General 120 Broadway New York, N.Y. 10271 Telephone (Azia): 212-416-8727 Telephone (Goldberg): 212-416-8296 Facsimile: 212-416-6003 E-mail: [email protected] E-mail: [email protected] Attorneys for Plaintiff State of New York Case 1:17-cv-00890 Document 1 Filed 02/07/17 Page 23 of 23

Amended complaint (Nov. 2022)

PDF of this document (23 pages)

Page 138

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

Consumer Financial Protection Bureau and the People of the State of New York, by Letitia James, Attorney General for the State of New York,

Plaintiffs,

v.

RD Legal Funding, LLC, RD Legal Finance, LLC, RD Legal Funding Partners, LP, and Roni Dersovitz,

Defendants.

Case No. 1:17-cv-00890-LAP

AMENDED COMPLAINT Plaintiffs, the Consumer Financial Protection Bureau (“Bureau”) and the People of the State of New York (“State of New York”), allege as follows: INTRODUCTION 1. Defendants are in the business of, among other things, offering to advance funds to consumers who are entitled to receive compensation under a settlement fund or judgment.

2. Consumers who received advances from Defendants include police officers, firefighters, paramedics, and other first responders to the World Trade Center attack on September 11, 2001.

3. These consumers, and others, are recipients of funds resulting from lawsuits or victim-compensation funds, such as the Zadroga Fund, established by the James Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 1 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 1 of 23

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Zadroga 9/11 Health and Compensation Act of 2010, which allocated billions of dollars to assist first responders with mounting medical costs and lost income. 4. Not all the money from these sources was immediately available to eligible consumers, even after their claims had been approved and they had been notified of the amounts of their awards.

5. While consumers await payment of their awards, RD Legal Funding, LLC, RD Legal Finance, LLC, and RD Legal Funding Partners, LP (collectively, “RD”), under the direction of Roni Dersovitz (“Dersovitz”), swoop in with a “deal”—RD provides the consumers an up-front payment, which the consumers repay when they receive their awards. The total amount consumers must repay RD is considerably larger than the upfront sums given to them by RD, often by a multiple of two or more. 6. Although RD mischaracterizes these transactions as “assignments,” they are in fact offers to extend credit or extensions of credit for purposes of the Consumer Financial Protection Act of 2010. As a result of RD’s mischaracterizations, consumers are unable to compare the cost of RD’s products to alternatives. In addition to falsely marketing these transactions as “assignments,” RD falsely claims that it can expedite funding and “cut through red tape;” misrepresents when consumers will receive funds; and collects on contracts that are void under state laws or, in the alternative, that function as loans with interest rates that exceed state-law usury limits and on which no payment is due. RD’s misconduct thus costs consumers millions of dollars. 7. Under New York law, RD’s transactions are loans at usurious interest rates and thus void. To the extent the transactions are deemed assignments, they are also void Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 2 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 2 of 23

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because, under New York law, they constitute an unlawful sale or assignment of a personal injury claim.

8. The Bureau and the State of New York bring this action against Roni Dersovitz, RD Legal Funding, LLC, RD Legal Finance, LLC, and RD Legal Funding Partners, LP (collectively, “Defendants”) under § 1054 of the Consumer Financial Protection Act of 2010 (“CFPA”), 12 U.S.C. § 5564. The State of New York also brings this action under New York Executive Law § 63(12) and General Business Law (“GBL”) Article 22-A, §§ 349 and 350. RD engaged in deceptive and abusive acts and practices in connection with its offering or providing extensions of credit to consumers who have been awarded payouts from sources such as a statutory compensation fund or a settlement fund, but were awaiting payment from the claims administrator. See 12 U.S.C. §§ 5531, 5536(a). Dersovitz knowingly or recklessly provided substantial assistance to RD in its deceptive and abusive acts and practices, in violation of the CFPA. See 12 U.S.C. § 5536(a)(3). Dersovitz directed and controlled RD’s operations and participated in its deceptive and unlawful practices. Dersovitz, therefore, is also liable for the state-law violations alleged herein. See N.Y. Exec. Law § 63(12); N.Y. Gen. Bus. Law §§ 349, 350. JURISDICTION AND VENUE 9. 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 U.S.C. § 1345.

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10. This Court has supplemental jurisdiction over the State of New York’s state-law claims because they are so related to the federal claims that they form part of the same case or controversy. 28 U.S.C. § 1367(a).

11. This Court has personal jurisdiction over Defendants because the causes of action arise from Defendants’ conduct of business in this district. 12 U.S.C. § 5564(f). 12. Venue is proper in this district because a substantial amount of the transactions, acts, practices, and courses of conduct at issue occurred within this district and Defendants conducted business in this district. 28 U.S.C. § 1391(b)–(c); 12 U.S.C. § 5564(f).

PARTIES 13. The Bureau is an agency of the United States charged with regulating the offering and provision of consumer-financial products and services under federal consumerfinancial laws. 12 U.S.C. § 5491(a). The Bureau has independent litigating authority. See 12 U.S.C. § 5564(a)–(b).

14. The State of New York, by its Attorney General (“NYAG”), is authorized to take action to enjoin (i) repeated and persistent fraudulent and illegal conduct under N.Y. Executive Law § 63(12), (ii) deceptive business practices under N.Y. GBL § 349, and (iii) false advertising under N.Y. GBL § 350. The NYAG also is authorized to initiate civil actions in federal district court to enforce provisions of the CFPA. See 12 U.S.C. § 5552(a)(1).

15. RD Legal Funding, LLC is a limited-liability company. Its principal place of business is at 45 Legion Drive, Cresskill, NJ 07626. Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 4 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 4 of 23

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16. RD Legal Finance, LLC is a limited-liability company. Its principal place of business is at 45 Legion Drive, Cresskill, NJ 07626. 17. RD Legal Funding Partners, LP is a limited partnership. Its principal place of business is at 45 Legion Drive, Cresskill, NJ 07626. 18. Roni Dersovitz is the founder and owner of RD Legal Funding, LLC, RD Legal Finance, LLC, and RD Legal Funding Partners, LP. Dersovitz has substantial control over and involvement in the establishment of RD’s business policies and practices. In connection with the matters alleged, Roni Dersovitz transacted business in this district. 19. As described below, RD offers consumers extensions of credit that purport to be assignments. But RD knows or recklessly disregards that these assignments are invalid and that these transactions, in reality, function as offers or extensions of credit. These transactions were therefore consumer-financial products or services under § 1002 of the CFPA. 12 U.S.C. §§ 5481(5), 5481(7), 5481(15)(A)(i). RD is therefore a “covered person” under the CFPA. 12 U.S.C. § 5481(6)(A).

FACTS A.

Background 20. RD has marketed products consisting of cash advances to consumers who have been approved to receive compensation for injuries from, among other sources, the Zadroga Fund. RD offers or provides extensions of credit to consumers entitled to awards from these sources. After the fund or settlement has received final approval and the consumer has received notice of the amount of a forthcoming payment, RD enters Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 5 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 5 of 23

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into an agreement with the consumer that purports to take a security interest in the consumer’s award.

21. Many consumers who are offered or extended credit by RD have severe injuries. 22. Many consumers who have been approved for awards from the Zadroga Fund suffer from respiratory illnesses and cancers related to their exposure to dust and debris at the World Trade Center site. Many also report diagnoses of post-traumatic stress disorder, depression, anxiety disorder, and memory loss. 23. Typically, RD enters into agreements with consumers to pay them a lump sum representing a fraction of the consumers’ awards, thereby ensuring that sufficient funds will be available to pay RD when the consumers receive their awards. In exchange, the consumers agree to repay a far larger amount than the amount advanced. 24. For example, one consumer was awarded $65,000 from the Zadroga Fund. While she waited for her full payment from the Fund, RD advanced her $18,590. When her award payment from the Fund arrived six months later, she repaid $33,800 to RD. 25. Consumers are obligated, under RD’s contracts, to first pay RD any amounts received from the claims administrator until the amounts owed under RD’s contracts are satisfied. If the amounts owed under RD’s contracts are fully satisfied and there is a balance remaining from the award payment, consumers are then entitled to keep the balance.

26. Dersovitz has authority and responsibility to dictate all the terms of consumer contracts. Specifically, Dersovitz makes decisions on the terms of the offers or extensions of credit.

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27. RD does not disclose the costs of the transactions in a manner that allows consumers to reasonably compare the cost of RD’s product to the cost of similar products.

28. Given the often short time from the advance of the funds to the payment of awards, RD’s transactions cost consumers amounts that are equivalent in some cases to rates over 250%.

29. After they receive their award payments, consumers repay RD directly. 30. RD’s contracts contain one of two types of repayment terms: (i) repayment of a lump sum that remains the same regardless of when the consumer receives her award and repays the amount advanced, or (ii) repayment of a lump sum that increases over time. With the latter option, the amount the consumer repays depends on when the consumer receives her award.

31. The cost on a transaction under the first option may be particularly high for the consumer who receives proceeds shortly after signing an agreement with RD. For example, a severely disabled 9/11 first responder received his compensation-fund check three months after he borrowed $35,000 from RD; under the agreement, the first responder was required to repay $63,636. The additional payment of $28,636 to RD for the $35,000 advance over that brief period is equivalent to a rate over 250%. 32. The second repayment option involves a complicated rebate scheme and is known as the “rebate” option. Under this option, the repayment amount increases each month by an amount determined by a pre-set, typically undisclosed rate. Moreover, RD does not clearly disclose the final repayment amount. A consumer must determine the Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 7 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 7 of 23

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final repayment amount on her own by subtracting the “rebate” amount, which changes each month and is set forth at the end of the contract, from the “property” amount normally listed at the beginning of the contract.

B.

RD knows or recklessly disregards that its purported “assignments” are invalid.

33. RD knows or recklessly disregards that the purported assignments are prohibited and that it is impossible to structure the transactions as assignments. 34. For example, the statute creating the Zadroga Fund provides that “the Special Master shall authorize payment to [a] claimant of the amount determined with respect to the claimant,” and defines “claimant” as “an individual filing a claim for compensation under [the statute].” 49 U.S.C. § 40101, note. And the Zadroga Fund’s policies prohibit RD from receiving payment directly from the Fund. 35. RD even addresses the likelihood that the assignments would be invalidated, providing in its contracts that if the assignment is invalid, it may, for example, demand repayment “plus interest calculated at 19.562 percent per annum, or the maximum rate permitted by law.” RD also reserves the right to file a UCC financing statement if the agreement is characterized as a loan.

36. Despite its knowledge or reckless disregard that assignments are prohibited, RD falsely represents to consumers that its products are not an offer of credit but rather assignments of the consumers’ interests in their anticipated payments. 37. For example, on its website, RD asserts that its “plaintiff funding is not a loan.” 38. RD labels its contracts as “assignment and sale agreements.” Most of RD’s contracts with consumers do not disclose an interest rate for the transaction. Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 8 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 8 of 23

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39. Some of these contracts indicate explicitly that there is no “annual percentage fee” to disclose because “the transaction is a purchase and not a loan.” Some of RD’s contracts contain a disclosure section with a subsection labeled “annual percentage fee,” but that subsection is typically blank or labeled “Not Applicable.” 40. Nor does RD otherwise disclose interest rates for its transactions to consumers. RD claims in communications with consumers that there is no applicable interest rate for its transactions.

41. Because RD knows or recklessly disregards that the purported assignments are invalid, it functionally offers or provides a credit transaction in which consumers incur a debt and defer the right to repay. 12 U.S.C. § 5481(7). C.

RD falsely claims to expedite funding and “cut through red tape.” 42. RD advertises to consumers that it will work to expedite the process of obtaining the consumers’ award payments or settlement proceeds. 43. For example, on its webpage specifically devoted to the Zadroga Fund, RD tells 9/11 first responders that it is “dedicated to helping you obtain your Zadroga settlement funds as quickly as possible.” The page goes on to state that “[w]e pride ourselves on working closely with our clients and look forward to assisting those with Zadroga claims in obtaining accelerated access to their second payment.” Both RD and Dersovitz tell 9/11 first responders that they will “cut through the red tape on your behalf and provide you immediate access to your funds.”

44. Dersovitz approves the contents of RD’s website. Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 9 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 9 of 23

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45. In reality, RD does not act—nor does RD have any ability to act—on behalf of consumers to influence the Zadroga Fund or its award-distribution timeline. 46. By the time consumers enter into an agreement with RD, they have already completed the application process and received an award-notification letter from the Zadroga Fund. In fact, RD requires that these administrative steps be completed to qualify for an advance from RD. RD does not assist consumers in completing these steps, nor does it take or have the ability to take any additional steps to obtain payments from the Zadroga Fund more quickly than they would otherwise be made. D.

RD misrepresents when consumers will receive funds. 47. On its website, RD promises that consumers will receive funds “within several days” after RD receives the necessary documentation to complete the consumers’ transactions. In RD’s communications with consumers who submitted applications for the product, RD routinely told consumers that it would wire funds by a specific date. 48. In many instances, however, RD did not deliver the funds to the consumer by the promised date. Some consumers did not receive funds from RD until months after they were promised.

49. Dersovitz has authority and responsibility to solicit funds from investors and determine when funds for consumers would arrive.

E.

RD collects where no payment is due.

50. As set forth above, RD’s contracts include purported assignments that are void, unenforceable, and uncollectible. RD nonetheless collects on these contracts. Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 10 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 10 of 23

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51. In the alternative, RD’s contracts function as loans under state law. These loans have interest rates exceeding limits imposed by state usury laws. For example, under New York law, loans made to New York consumers are void, and thus no payment is due, if the interest rate exceeds 16%. N.Y. Gen. Oblig. Law §§ 5-501, 5-511. RD nonetheless collects on these loans.

52. Dersovitz has authority and responsibility to determine whether RD should collect. Dersovitz himself made phone calls to at least one New York consumer to collect from that consumer.

F.

Facts Specific to Claims Asserted Only by the State of New York

53. Although RD characterizes its contracts as “sales and assignments,” the transactions are loans under New York law.

54. Under New York law, an agreement constitutes a loan if, at the time the agreement is signed, it is virtually certain that there will be sufficient funds to repay the amount advanced. Here it was virtually certain at the time that the agreements were signed that the federal government would have sufficient funds available to the pay the full amounts awarded by the Zadroga Fund to consumers, let alone the substantially lower amounts purportedly assigned or sold to RD. 55. On many of their loans in New York, RD collected an effective interest rate ranging from 18% to over 250%.

56. These interest rates exceed New York’s civil usury cap of 16% and criminal usury cap of 25%.

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57. Loans made to New York consumers in excess of New York’s usury laws are void, and thus no payment is due. N.Y. Gen. Oblig. Law §§ 5-501, 5-511. RD nonetheless collects on these loans.

58. To the extent RD purported to structure these transactions as assignments, they violate New York’s prohibition on assignments of personal-injury claims. N.Y. Gen. Oblig. Law §§ 13-101.

CAUSES OF ACTION

Count I—Deception under the CFPA Asserted by the Bureau and the State of New York

59. The allegations in paragraphs 1-58 are incorporated by reference. 60. Under the CFPA, an act or practice is deceptive if (i) there is a representation or omission of information that is likely to mislead consumers acting reasonably under the circumstances; and (ii) that information is material to consumers. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B).

61. RD routinely misrepresents that it is entering into contracts with consumers for valid and enforceable assignments.

62. In fact, the assignments in RD’s contracts are not valid and enforceable, which RD knew or recklessly disregarded.

63. RD’s misrepresentations are likely to mislead consumers acting reasonably under the circumstances.

64. RD’s misrepresentations are material because they would influence the decisions of a consumer acting reasonably under the circumstances. Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 12 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 12 of 23

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65. RD therefore engaged in deceptive acts in connection with an offer or extension of credit in violation of the CFPA. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B). 66. Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 67. Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in deceptive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

Count II—Abusiveness under the CFPA Asserted by the Bureau and the State of New York

68. The allegations in paragraphs 1-58 are incorporated by reference. 69. Under the CFPA, an act or practice is abusive if it (i) “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service,” (ii) “takes unreasonable advantage of . . . a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service,” or (iii) “takes unreasonable advantage of . . . the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.” 12 U.S.C. § 5531(d).

70. RD misrepresents that its contracts are for valid and enforceable assignments. 71. Through this conduct, RD undermines consumers’ understanding of the offer of credit, and in particular prevents consumers from understanding the terms, costs, and conditions of RD’s offer of credit. RD’s conduct also prevents consumers from meaningfully evaluating the cost of RD’s offer of credit, from comparing the cost of the offer of credit to other alternatives that may be available to the consumers, and from Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 13 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 13 of 23

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determining whether RD’s offers of credit are in their interest. Because consumers are misled concerning the validity of significant terms of the transactions and the nature of the transactions, they are not able to protect their interests in entering into them. 72. RD therefore materially interferes with consumers’ ability to understand terms and costs of RD’s offers of credit, takes unreasonable advantage of consumers’ lack of understanding of material costs or conditions of RD’s offers of credit, and takes unreasonable advantage of consumers’ inability to protect their interests in the transactions.

73. RD therefore engaged in abusive acts in connection with an offer or extension of credit, in violation of the CFPA. 12 U.S.C. § 5531(d)(1), (2)(B); 12 U.S.C. § 5536(a)(1)(B). 74. Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 75. Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in abusive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

Count III—Deception under the CFPA Asserted by the Bureau and the State of New York

76. The allegations in paragraphs 1-58 are incorporated by reference. 77. RD claims to provide a service that speeds up the disbursement of a consumer’s award and “cuts through red tape.” In fact, it does no such thing. 78. A reasonable consumer would likely be misled by RD’s false statement; consumers cannot be expected to know the internal administrative procedures of, for example, a victim-compensation fund administered by the United States government Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 14 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 14 of 23

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and to independently evaluate whether RD is, in fact, able to accelerate fund disbursement.

79. RD’s claims regarding accelerating disbursement are material to consumers, especially, for example, consumers who are severely disabled and may have large medical costs.

80. RD therefore engaged in deceptive acts in connection with an offer or extension of credit in violation of the CFPA. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B). 81. Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 82. Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in deceptive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

Count IV—Deception under the CFPA Asserted by the Bureau and the State of New York

83. The allegations in paragraphs 1-58 are incorporated by reference. 84. RD misrepresents to consumers when they would receive funds from RD, often promising consumers an earlier date of disbursement than the actual disbursement. In fact, on multiple occasions, RD did not deliver funds to consumers by the promised date. Many consumers experienced funding delays, some as long as several months. 85. Consumers acting reasonably under the circumstances would likely rely on RD’s representations regarding the date of funding and would likely be misled by RD’s false statements.

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86. RD’s misrepresentations are material because they go to the heart of consumers’ decisions about whether to use the credit product RD offers. Indeed, consumers considering transactions with RD almost by definition are those who find themselves with more immediate needs for cash than can be met by the payouts they are eventually due. When the lump sums RD offers will arrive plainly is material to these consumers’ decisions.

87. RD therefore engaged in deceptive acts in connection with an offer or extension of credit, in violation of the CFPA. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B). 88. Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 89. Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in deceptive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

Count V—Deception under the CFPA Asserted by the Bureau and the State of New York

90. The allegations in paragraphs 1-58 are incorporated by reference. 91. RD collects on contracts that are void under state laws or, in the alternative, that function as loans with interest rates that exceed usury limits under state laws, and on which no payment is due.

92. Collecting on contracts that are void under state laws creates the false impression that the contracts are enforceable and that borrowers are obligated to repay. This false impression is material, and reasonable consumers would not have known that the contracts are void.

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93. In the alternative, collecting on loans in amounts that exceed applicable state usury limits, and on which no payment is due, creates the false impression that the borrowers are obligated to repay usurious rates. This false impression is material, and reasonable consumers would not have known that the any repayment obligation was void.

94. RD therefore engaged in deceptive acts in violation of the CFPA. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B).

95. Dersovitz has significant responsibility for establishing RD’s policies and practices, and he has substantial control over RD’s operations. 96. Dersovitz knowingly or recklessly provided substantial assistance to RD, a covered person engaged in deceptive acts and practices, in violation of the CFPA, 12 U.S.C. § 5536(a)(3).

Count VI—Violation of New York Civil Usury Laws Asserted by the State of New York

97. The allegations in paragraphs 1-58 are incorporated by reference. 98. New York Executive Law § 63(12) authorizes the NYAG to seek injunctive and other equitable relief and damages whenever an individual or entity engages in repeated or persistent illegal conduct.

99. New York General Obligations Law § 5-501 makes it unlawful to collect interest on loans or forbearances that exceed the rate set forth in New York Banking Law § 14-a. 100.

New York Banking Law § 14-a provides that the maximum interest for loans or forbearances in an amount less than $250,000 is 16%. Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 17 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 17 of 23

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101.

Contracts that charge more than the maximum usury rate under New York General Obligations Law § 5-501 and Banking Law § 14-a are void. See N.Y. Gen. Oblig. Law § 5-511.

102.

In the course of making loans in New York and to New York consumers, Defendants repeatedly charged and collected interest far in excess of 16%, in violation of New York’s civil usury laws. See N.Y. Gen. Oblig. Law § 5-501; Banking Law § 14-a. 103.

Defendants have therefore engaged in repeated and persistent illegal conduct in violation of New York Executive Law § 63(12). Count VII—Violation of New York Criminal Usury Laws Asserted by the State of New York 104.

The allegations in paragraphs 1-58 are incorporated by reference. 105.

New York Executive Law § 63(12) authorizes the NYAG to seek injunctive and other equitable relief and damages whenever an individual or entity engages in repeated or persistent illegal conduct.

106.

Pursuant to New York Penal Law §§ 190.40 and 190.42, it is illegal to knowingly charge, take, or receive any money or other property as interest on a loan or forbearance at a rate exceeding 25% per annum. Contracts that exceed the criminal usury cap are void under New York General Obligations Law § 5-511. 107.

In the course of making loans in New York and to New York consumers, Defendants repeatedly charged and received interest far in excess of New York’s criminal usury laws. See N.Y. Penal Law §§ 190.40 and 190.42. 108.

Defendants have therefore engaged in repeated and persistent illegal conduct in violation of New York Executive Law § 63(12). Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 18 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 18 of 23

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Count VIII—Violation of New York General Obligations Law § 13-101 Asserted by the State of New York

109.

The allegations in paragraphs 1-58 are incorporated by reference. 110.

New York Executive Law § 63(12) authorizes the NYAG to seek injunctive and other equitable relief and damages whenever an individual or entity engages in repeated or persistent illegal conduct.

111.

Pursuant to New York General Obligations Law § 13-101, it is unlawful to sell or assign claims or demands to recover for personal injuries. 112.

To the extent that the transactions at issue are deemed assignments, they constitute an unlawful assignment of individual claims to recover for personal injuries under New York General Obligations Law § 13-101. 113.

By entering into such assignments, Defendants repeatedly violated New York General Obligations Law § 13-101.

114.

Defendants have therefore engaged in repeated and persistent illegal conduct in violation of New York Executive Law § 63(12). Count IX—Violation of New York GBL § 349 Asserted by the State of New York 115.

The allegations in paragraphs 1-58 are incorporated by reference. 116.

GBL § 349 authorizes the NYAG to bring an action for an injunction, restitution and civil penalties when any individual has engaged or is about to engage in deceptive practices in the State of New York. 117.

Defendants have engaged in deceptive acts and practices by conduct including but not limited to: i) misrepresenting that their products are a sale or Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 19 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 19 of 23

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assignment; ii) misrepresenting that individuals can assign their awards for personal injuries to Defendants; iii) failing to disclose the interest rate being charged; iv) misrepresenting that the agreements are enforceable when in fact they are void under New York law; and v) misrepresenting their ability to expedite the payment of awards and the date of disbursement of funds.

118.

Defendants have therefore engaged in deceptive acts and practices in violation of GBL § 349.

Count X—Violation of New York GBL § 350 Asserted by the State of New York 119.

The allegations in paragraphs 1-58 are incorporated by reference. 120.

GBL § 350 prohibits false advertising in the State of New York, and GBL §350-d authorizes the NYAG to obtain civil penalties for each false advertisement. 121.

Defendants have engaged in false advertising by falsely advertising their agreements as a sale and not a loan and by falsely advertising their ability to expedite the payment of the awards.

122.

Defendants have therefore engaged in false advertising in violation of GBL § 350.

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Count XI—New York Executive Law § 63(12) Fraud Asserted by the State of New York 123.

The allegations in paragraphs 1-58 are incorporated by reference. 124.

New York Executive Law § 63(12) authorizes the NYAG to seek injunctive and other equitable relief and damages whenever an individual or entity engages in repeated or persistent fraudulent conduct.

125.

Defendants have engaged in repeated and persistent fraudulent conduct including but not limited to: i) misrepresenting that their products are a sale or assignment; ii) misrepresenting that individuals can assign their awards for personal injuries to Defendants; iii) failing to disclose the interest rate being charged; iv) misrepresenting that the agreements are enforceable when in fact they are void under New York law; and v) misrepresenting their ability to expedite the payment of awards and the date of disbursement of funds.

126.

Defendants have therefore engaged in repeated and persistent fraud in violation of New York State’s Executive Law § 63(12). DEMAND FOR RELIEF Plaintiffs request that the Court:

a. enjoin Defendants from committing future violations of the CFPA and New York law;

b. declare null and void contracts that violate New York law; c. award damages or other monetary relief against Defendants; d. order Defendants to pay redress to consumers; e. order disgorgement of ill-gotten revenues by Defendants; Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 21 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 21 of 23

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f. impose civil money penalties on Defendants under the CFPA; g. impose civil money penalties of $5,000 for each violation of Article 22-A pursuant to GBL § 350-d;

h. order Defendants to pay the costs incurred in connection with prosecuting this action; and i. award additional relief as the Court may determine to be just and proper. Respectfully submitted, ERIC HALPERIN Enforcement Director CARA PETERSEN Deputy Enforcement Director KARA K. MILLER Assistant Litigation Deputy

s/Benjamin Z. Konop

BENJAMIN Z. KONOP (OH 0073458) HAI BINH T. NGUYEN (CA 313503) Enforcement Attorneys Consumer Financial Protection Bureau 1700 G Street, NW Washington, D.C. 20552 Telephone (Konop): 202-435-7265 Telephone (Nguyen): 202-435-7251 Facsimile: 202-435-7722 E-mail: [email protected] E-mail: [email protected] Attorneys for Plaintiff Consumer Financial Protection Bureau

LETITIA JAMES Attorney General of the State of New York

JANE M. AZIA (NY 1539600) Bureau Chief, Consumer Frauds and Protection Bureau MELVIN L. GOLDBERG (NY 1828284) Assistant Attorney General 28 Liberty Street Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 22 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 22 of 23

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New York, N.Y. 10005 Telephone (Azia): 212-416-8727 Telephone (Goldberg): 212-416-8296 Facsimile: 212-416-6003 E-mail: [email protected] E-mail: [email protected] Attorneys for Plaintiff State of New York Case 1:17-cv-00890-LAP Document 180-1 Filed 06/27/22 Page 23 of 23 Case 1:17-cv-00890-LAP Document 183 Filed 07/13/22 Page 23 of 23

Stipulation (Dec. 2022)

PDF of this document (3 pages)

Page 161

CRE GORSPLAP Dotter 21 Heal 11725122 Pedge'Pbe's

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

Consumer Financial Protection Bureau and the People of the State of New York, by Letitia James, Attorney General for the State of New York, Civil Action No. 1:17-CV-00890-LAP

Plaintiffs, ; .

-fPrepesed} Stipulated Final Judgment Vv. and Order

RD Legal Funding, LLC, RD Legal Finance, LLC, RD Legal Funding Partners, LP, and Roni Dersovitz,

Defendants.

~Propesed} Stipulated Final Judgment and Order The Consumer Financial Protection Bureau (“Bureau”) and the People of the State of

New York (“State of New York” or “NYAG”) (together “Plaintiffs”) commenced this civil action against Defendants RD Legal Funding, LLC, RD Legal Finance, LLC, RD Legal Funding Partners, LP, and Roni Dersovitz. By this Stipulated Judgment and Order (the “Order”), without adjudication of any issue of fact or law, the Parties agree to resolve all matters in dispute arising from the conduct alleged in this action on the following terms.

1. The Court has personal jurisdiction over the parties and subject matter jurisdiction of this action.

2. Defendants! neither admit nor deny any allegations in the Amended Complaint.

3. The Parties waive all rights to seek judicial review or otherwise challenge or contest the

validity of this Order and Defendants waive any claim they may have under the Equal Access to

1“Nefendants” means RD Legal Funding, LLC, RD Legal Finance, LLC, RD Legal Funding Partners, LP, and Roni Dersovitz, and their successors and assigns, individually, collectively, or in any combination.

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Justice Act, 28 U.S.C. § 2412, concerning the prosecution of this action to the date of this Order. 4. As the Amended Complaint in this action alleges, Affected Individuals” were harmed in the amount of the payments they made to Defendants in excess of the funds that they received from Defendants.

5. The Parties agree that entry of this Order is in the best interest of all Parties and agree that in order to resolve all matters in dispute arising from the conduct alleged in this action:

a. Defendants, whether acting directly or indirectly, shall refrain from participating in, or Assisting Others? in participating in Victim Compensation Fund Funding,’ including, but not limited to, offering, brokering, or providing credit or advances of funds to individuals entitled to payments from the Zadroga Fund; and

b. Defendants shall not take any action to collect any unpaid or future amounts owed by Affected Individuals, which totals at least $600,000.00. If Defendants sua sponte

receive any such payment from an Affected Individual or on behalf of an Affected

2 “A ffected Individuals” means any of the twelve individuals who received monetary compensation from the Zadroga Fund and received money from any of the Defendants.

3 “Assisting Others” includes, but is not limited to: i. consulting in any form whatsoever; ii. providing paralegal or administrative support services; iii. performing customer service functions, including but not limited to, receiving or responding to consumer complaints; iv. 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 or advertisement; v. 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 addresses or domain name registration for any Internet websites, affiliate-marketing services, or media-placement services; vi. providing names of, or assisting in the generation of, potential customers; vii. performing marketing, billing, or payment services of any kind; and

vili. acting or serving as an owner, officer, director, manager, or principal of any entity.

4 “Victim Compensation Fund Funding” means advancing funds or providing money to any individual who has applied to or is awaiting payment from the Zadroga Fund (a governmentally created victim-compensation fund intended to compensate victims of 9/11) or other governmentally created victim-compensation fund intended to compensate victims of 9/11.

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Individual, Defendants hereby agree to reject such payment if they are able, or, if they are not able to reject such payment, Defendants will promptly return the payment to the relevant Affected Individual.

6. Defendants must pay a civil money penalty of $1.00, which will be paid within 10 days of this Order by wire transfer to the Bureau or to the Bureau’s agent in compliance with the Bureau’s wiring instructions.

7. All pending motions are hereby denied as moot.

- 8. Each party agrees to bear its own costs and expenses, including, without limitation, attorneys’ fees.

9. This Order is not intended for use by any third party in any other proceeding and is not intended, and should not be construed, as an admission of liability by Defendants.

10. The Court will retain jurisdiction of this matter for purposes of construction,

modification, and enforcement of this Order.

IT IS SO ORDERED.

Dated: V/ 2 7 re

United States District Judge

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