At the heart of the case that continued to the Supreme Court of Washington was the matter if Global Client Solutions was culpable as a debt adjuster even though they portrayed themselves as a third party escrow company. Additionally, the point was raised that Global Client Solutions aided and abetted companies to take advantage of consumers.
Yesterday the rulings came down and they are brutal against both Global Client Solutions and Rocky Mountain bank & Trust.
This case illustrates the creativity of businesses attempting to circumvent
regulation. As cats are drawn to cream, many for-profit debt adjusters will be attracted to the most unsophisticated of consumers. Despite the recent federal rule, I fear that until the Washington legislature prohibits debt adjusting for profit, consumers in Washington will continue to suffer. In my view, the chronic and systemic abuses in the Washington debt adjusting industry deserve the attention of the Washington State Legislature. – Justice Tom Chambers
Justice Chambers went on to say:
I fully concur with Justice Fairhurst’s measured, well reasoned majority opinon. I write separately, however, to stress that the same evils our legislature sought to avoid in decades past by regulating the debt adjustment industry still lurk.
As our legislature knew long ago, debt adjusting “is noted for its historic abuse and questionable practice and is outlawed or regulated in most States.” Wash. Legis. Budget Comm., Performance Audit: Debt Adjusting, Licensing and Regulatory Activities, Report No. 77-13, at 3 (Jan. 20, 1978) (on file with Wash.State Archives, H.B. 86, 46th Leg., Reg. Sess. (Wash. 1979)). Abuse of debtors has been so troubling historically that when the original 1967 legislation was set to sunset, then Attorney General Slade Gorton’s consumer protection and antitrust division counseled the legislature that
[i]t is our considered opinion that debt adjusting for profit in this state should not be regulated but rather should be prohibited. While it is highly unusual for this office to recommend such a step in view of our strong support for competition and free enterprise with a minimum of regulation, our experience in this area indicates that this field, even with regulation, is open to abuse.
Wash. Legis. Budget Comm., Sunset Audit Program and Fiscal Review of Debt Adjusting, Licensing and Regulatory Activities app. 1 (Preliminary Report Sept. 17, 1977) (on file with Wash. State Archives, Substitute H.B. 564, 45th Leg., 1st Ex. Sess. (Wash. 1977)). The same sunset audit noted that “[a]n estimated 50 percent of clients signing up for a program never complete it.” Id. at 18.
Time has seemed to only make these numbers worse. According to the debt settlement industry’s own statistics, the dropout rate is almost 66 percent. Of that 66 percent, 65 percent leave the programs with no settlements. Telemarketing Sales Rule, 75 Fed. Reg. 48,458, 48,472-73 (Aug. 10, 2010). As the Federal Trade Commission (FTC) recently observed:
[D]ebt settlement is a high-risk financial product that requires consumers simultaneously to pay significant fees, save hundreds or thousands of dollars for potential settlements, and meet other obligations such as mortgage payments. Failure leads to grave consequences — increased debt, impaired credit ratings, and lawsuits that result in judgments and wage garnishments.
Id. at 48,484. “Consumers drop out of debt relief programs for many reasons, but the record shows that providers’ practice of charging substantial advance fees is a significant cause.” Id. at 48,485. Because of this, and because of the “deceptive and abusive practices of debt relief service providers,” the FTC has banned advanced fees for debt settlement companies, reducing the incentive and opportunity for debtor abuse. Id. at 48,465; 16 C.F.R. § 310.4. Those who enter a debt adjustment program but eventually drop out are generally much worse off than if they had not participated in the program at all. Not only have they paid substantial fees to a debt adjuster, but their debt problems continue to grow and spiral out of control. – Source
The full court opinion, in which all the Justices agreed, came to the conclusion that:
GCS is a debt adjuster, and GCS is not exempt under RCW 18.28.010(2)(b) because GCS is not a bank or another listed entity. Debt settlement companies that work with GCS and RMBT are likely subject to the debt adjusting statute’s fee limitations, depending on whether they are debt adjusters providing debt adjusting services. Because RCW 18.28.185 makes aiding and abetting violation of the debt adjusting statute an unfair or deceptive act or practice in the conduct of trade or commerce under the CPA, we need not consider whether an implied cause of action for such conduct also exists. – Source
The court spared no effort to be clear in its opinion. “We note that an aider and abettor may be criminally and civilly liable under the debt adjusting statute even if exempt under RCW 18.28.010(2) from the statute’s primary requirements for “‘[d]ebt adjusters,’” such as fee limits and disclosure rules. For example, while RMBT is likely exempt from the debt adjusting statute’s primary requirements under RCW 18.28.010(2)(b) because it is a bank, RMBT still commits a crime and an unfair or deceptive act or practice in the conduct of trade or commerce if it aids and abets a debt adjuster in violating those requirements.” – Source
Freedom Debt Relief was a named party and the one that had sold the debt settlement program to the consumers that involved Global Client Solutions. Wisely, Freedom had settled their part of the case earlier and extricated themselves from this later action.
The ruling of the Supreme Court focused on four questions:
- Is a for-profit business engaged in “debt adjusting” as defined in RCW 18.28.010(1) when, in collaboration with debt settlement companies, it: a) establishes and maintains a custodial bank account in its name; b) solicits debtors’ establishment of a sub-account to receive and hold periodic payments to be used to pay debt settlement fees and pay settlements with creditors as negotiated by a debt settlement company; and c) as custodian for the debtor, receives and holds the debtor’s periodic payments in a sub-account, paying from that account debt settlement fees and negotiated settlements with creditors?
The court said “It is unreasonable to suggest that the legislature intended to allow companies whose activities fit the broad statutory definition of “debt adjusting” to nonetheless escape regulation by splitting the traditional functions of a debt adjuster between multiple entities.”
Noteworld attempted to come to the aid of Global Client Solutions in this matter by filing an amicus brief to help Global Client Solutions.
“GCS and amicus NoteWorld LLC also argue that GCS is not engaging in debt adjusting because new Federal Trade Commission (FTC) rules implementing the Telemarketing and Consumer Fraud and Abuse Prevention Act (15 U.S.C. §§ 6101-6108) distinguish between debt relief services and account administrators. 16 C.F.R. § 310. Given that the plain language of the debt adjusting statute is unambiguous and that the statute’s legislative history reinforces the plain language interpretation, we need not look beyond Washington law in our interpretation. We also decline to address the possibility of preemption, as it is beyond the scope of the district court’s certified question.”
- Does the exclusion found at RCW 18.28.010(2)(b) apply to a for-profit business described in Question No. 1?
Washington maintains a list of entities that would be exempt as debt adjusters under their statue and both Global Client Solutions and Noteworld made the point they, by extension, should be exempt because they either act as agents of a bank or are money transmitters which are subject to federal regulation under the Bank Secrecy Act.
The exempted entities in Washington are:
[a]ny person, partnership, association, or corporation doing business under and as permitted by any law of this state or of the United States relating to banks, consumer finance businesses, consumer loan companies, trust companies, mutual savings banks, savings and loan associations, building and loan associations, credit unions, crop credit associations, development credit corporations, industrial development corporations, title insurance companies, or insurance companies.
The Court found “On the record before us, it appears the exemption in RCW 18.28.010(2)(b) does not apply to GCS. GCS is not a bank. It does not matter if GCS is a bank’s agent or if it is subject to limited FDIC authority or the rules of a private organization like NACHA. Unless GCS is one of the 13 entities listed, it is subject to the debt adjusting statute.”
- Do the fee limitations set forth in RCW 18.28.080 apply to for-profit debt settlement companies engaged in soliciting the participation of debtors in a debt management program involving: a) monthly set aside and accumulation of a debtor’s funds in a custodial account for the purposes of facilitating negotiated settlement of specified credit card debts; and b) negotiations by the debt settlement company, on behalf of the debtor, to secure compromise settlement of the debtor’s credit card debt, to be paid from the custodial account?
This question essentially asks whether the debt settlement companies that work with GCS and RMBT, such as Freedom, are subject to the debt adjusting statute’s fee limitations.
The Court ruled “Here, the debt settlement companies described in certified question three appear to be providing debt adjusting services because they manage and, if successful, eventually settle consumer debt. The fact that the legislature may not have contemplated the precise business model used by these debt settlement companies does not prevent their activities from being classified as “‘[d]ebt adjusting’” if the activities fit within the plain language of RCW 18.28.010(1).”
- Does the [d]ebt [a]djusting statute provide for an implied civil action against an alleged “aider and abettor” where aiding or abetting a violation of the [d]ebt [a]djusting statute is expressly made a crime pursuant to RCW 18.28.190?
And here is where Global Client Solutions really got nailed by the Supreme Court and labels their activity and participation with debt adjustment companies and not just a civil mater but a criminal matter as well.
“RCW 18.28.190 makes it a gross misdemeanor to aid and abet violation of the debt adjusting statute. By criminalizing aiding and abetting, the debt adjusting statute establishes that aiding and abetting its violation is wrongful conduct. RCW 18.28.185 provides an express civil remedy for violation of the debt adjusting statute: “a violation of this chapter constitutes an unfair or deceptive act or practice in the conduct of trade or commerce under [the Consumer Protection Act (CPA),] chapter 19.86 RCW.” Because the debt adjusting statute explicitly makes it a wrongful, criminal act to aid and abet violations of the statute’s primary requirements for debt adjusters, such as fee limits and disclosure rules, “a violation of this chapter,” as used in RCW 18.28.185, includes such aiding and abetting violations. The plaintiffs need not establish an implied civil cause of action to recover for aiding and abetting violations, as RCW 18.28.185 provides them a direct civil remedy for this conduct under the CPA”
This ruling by the Supreme Court of Washington may be a pivotal moment in for-profit debt settlement services if the third parties, Noteworld and Global Client Solutions may be liable for aiding and abetting criminal behavior that leads to consumers. The critical issue here is if the escrow companies are just as liable for the actions of the underlying debt settlement companies and combined the fees must fall within the state statutes, where does this leave the viability of the escrow companies to continue to process these types of accounts.
We will have to see how this will play out in other states but I would imagine Noteworld and Global Client Solutions will be looking very carefully at their exposure and liability in other states.
It will also be interesting to see if this exposure and ruling impacts the relationship between Global Client Solutions and attorney model debt settlement firms like Legal Helpers Debt Resolution since the LHDR fees in Washington far exceed the legal limits specified under debt adjusting.
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