The closure of American Financial Support Services by the FTC has been going on for a while now. The court-appointed Receiver has just submitted another interim report on activities.
Most notably was this section:
“The Receiver determined that all of the vehicles in Receivership Entities’ names were leased as opposed to owned. The Court authorized the Receiver to return any leased vehicles in which there was no equity, including, but not limited to, (i) a 2020 BMW 750i, (ii) a 2019 Lamborghini Urus, (iii) a 2018 Mercedes G63, (iv) a 2019 Rolls Royce Cullinan, (v) a 2018 Toyota RAV4 (black), and (vi) a 2018 Toyota RAV4 (white). The Receiver had the vehicles returned to their respective lessors.”
That is some fancy transportation for a student loan assistance company.
Other corporate entities included American Financial Support Services, Arete Financial Group, Arete Financial Freedom, CBC Conglomerate, 1file.org, Diamond Choice, Interest Rate Solutions, J&L Enterprise, Premier Solutions Servicing, La Casa Bonita Investments, Education Loan Network, Edunet, and US Financial Freedom Center.
The most recent Receiver report provides the following updates:
“On November 4, 2019, this court entered a Temporary Restraining Order (ECF No. 41) (“TRO”) and appointed Thomas W. McNamara as temporary receiver for the Receivership Entities. Defendants used the Receivership Entities to operate two discrete businesses: a student loan debt relief business, which Defendants began in 2014, and a consumer debt settlement business, which became the focus of their operations beginning in July 2019. See ECF No. 57-1 at 1-2. Though both businesses operated out of the same locations, the express terms of the TRO were limited to the student loan debt relief business. Consequently, the Receiver neither assumed control over the debt settlement business, nor made any determination as to its lawfulness. Id. He did feel compelled, however, to maintain exclusive control over the business locations in order to protect the Documents and Assets of the Receivership Entities, especially since the student loan business was still running (albeit in a diminished capacity).
The Receiver’s Preliminary Report (ECF No. 57), which was filed on November 14, 2019, focused on the student loan debt relief business. Individual Defendants Ruddy Palacios, Carey Howe, and Shunmin “Mike” Hsu claimed that new student loan debt relief enrollments had ceased around July 2019, but admitted that they continued to charge monthly recertification fees (i.e., unlawful advance fees) for existing student loan debt relief customers. The Receiver’s preliminary investigation indicated that Defendants had made a deliberate push to separate Arete from the student loan debt relief business throughout the summer of 2019, and that by July 2019, student loan activity was primarily limited to recertifications for existing customers.
Elements of the student loan business lingered, however, even setting aside the recertifications. At Defendants’ Bolsa Avenue location, 1file.org was processing student loan business generated by an Indian call room under contract with two entities owned by Individual Defendant Jay Singh – American Financial Support Services, Inc. (“American Financial”) and US Financial Freedom Center, Inc. (“US Financial”) – with Arete covering the cost of consumer refunds. At Defendants’ Sky Park location, Syed Gilani (one of Arete’s co-owners) ran his student loan business, “Student Loan Pro,” which was selling and processing student loan services while receiving substantial funding from Arete.”
Receivership Activities
Following the entry of the TRO, the Receiver moved quickly to effect its mandate that he “take all steps necessary to secure and take exclusive custody” of the locations from which Defendants operated their business: 1261 East Dyer Road, Suites 100, 200, and 250, Santa Ana, CA (“Dyer”); 5772 Bolsa Avenue, Suite 220, Huntington Beach, CA (“Bolsa”); 18001 Sky Park Circle, Suites L-M, Irvine, CA (“Sky Park”); and 500 Ygnacio Valley Road, Suite 430, Walnut Creek, CA (“Ygnacio”). See ECF No. 41 (TRO) at 16-17. The Receiver changed the locks and secured the premises.
After securing the sites, the Receiver moved to wind down operations and minimize costs to the Receivership Estate. The TRO and PI directed and authorized the Receiver to “conserve, hold, manage, and prevent the loss of all Assets of the Receivership Entities, and perform all acts necessary or advisable to preserve the value of those Assets.” PI § XII.D. Accordingly, on December 23, 2019, the Receiver asked the Court to enter an order authorizing him to liquidate or abandon Receivership Estate assets, vacate the leased premises, and return any leased vehicles to the lessors. See ECF No. 83. The Court granted the Receiver’s application, and with the Court’s authorization, the Receiver proceeded to take the following actions:
- Conduct a thorough investigation of the documents on site, and provide access to counsel and other representatives of the FTC for similar review.
- Preserve all business records, including hard copy documents and electronic materials (i.e., hard drives, servers, etc.) which were originally located at the Receivership sites by relocating them to a secure storage site controlled by the Receiver.
- Preserve any electronic materials stored offsite or in the cloud (most notably the RingCentral call recordings).
- Retain a document destruction company to destroy the documents located in the shred bins.
- Contact a number of liquidation and estate sale companies, before accepting one liquidator’s offer to pay $5,000 for the electronics and furniture and to remove the cubicles and any trash.3
- Once the premises were clear, vacate the four Receivership sites and return the premises to the respective landlords.
The Receiver worked diligently to clear the Receivership sites, but the size of the sites and the volume of documents stored on the premises delayed the Receiver’s exit. The properties were vacated and the keys were returned to the landlords on the following dates: Ygnacio on January 7, 2020; Bolsa on January 21, 2020; and Dyer and Sky Park on January 22, 2020.
Arete’s Debt Settlement Business
The Receiver did not assess Defendants’ debt settlement business in his Preliminary Report, determining that it fell outside his mandate as expressed in the TRO and PI and that he lacked the authority to prevent Defendants from continuing operation of that business. See ECF No. 95-1 at 2. The Receiver subsequently concluded, however, that whether or not the operations violated any of the Prohibited Practices of the TRO and the PI, and whether or not Defendants made any effort to continue that business, the debt settlement business was an “Asset” of Arete under the terms of the PI and TRO. See id. at 2-3.
While Arete’s operations were effectively paused (given the asset freeze), the business was essentially a wasting asset – the longer it sat untended, the more customers it would lose and the less it would be worth. Given the Receiver’s determination that the debt settlement business qualified as a Receivership Asset and his duty to “conserve, hold, manage, and prevent the loss of all Assets of the Receivership Entities, and perform all acts necessary or advisable to preserve the value of those Assets,” see PI § XII.D, the Receiver determined it was in the best interests of the Receivership Estate to sell the debt settlement portfolio, see ECF No. 95-1 at 3. The Receiver also determined that a sale would protect Arete’s debt settlement customers. See id.
The Individual Defendants who ran Arete’s debt settlement business opposed the Receiver’s ex parte application to approve its sale, and the Court ultimately denied the Receiver’s motion to sell the debt settlement business. See ECF No. 99. Following two status conferences and briefing, the FTC and Individual Defendants Howe, Hsu, Palacios, and Pomazi jointly submitted a proposed order regarding the debt settlement business. See ECF No. 115. On January 27, 2020, the Court entered an order enabling Arete to resume debt settlement operations for already-existing clients. See ECF No. 116. The order instructed the Receiver to restore the Arete Defendants’ access to any CRM databases necessary to service Arete’s existing clients, see id. at 3, and the Receiver also continues to forward mail he receives which is addressed to Arete.
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