Court Issues Unfavorable Decision to FTC in Debt Settlement Performance Claims Suit

A court in Texas a just issued an opinion that appears to fly in the face of the FTC Telemarketing sales rules claims about debt settlement program performance statements.

On March 12, 2012, Judge David Godbey issued the following opinion in the case involving Freedom Financial Processing, Debt Professionals of America, Debt Consultants of America, Robert Creel, Corey Butcher, and Nikki Creel.

At the heart of the complaint the FTC filed was the following facts:

“In both radio and television advertisements, Defendants make or have made claims such as, “You could save thousands of dollars in interest” and “Stop late fees, hidden charges and outrageous interest rates.” Defendants also frequently promise to help consumers “eliminate 30 to 60% of [their] credit card debt” and “avoid bankruptcy, save thousands and get more cash back in [their] pocket every month.” Defendants’ radio and television advertisements urge interested consumers to call a toll-free number for a free consultation and to enroll in their debt relief services.

Defendants’ Web sites represent or have represented that consumers can “Reduce credit card debt 40%-60%” and “Get out of debt in 18-36 months.” Defendants’ Web sites further have represented that “Our programs will lower your monthly payments up to 50% and save you literally thousands of dollars.” On their Web sites, Defendants claim to have “established relationships” with creditors that enable Defendants to obtain the best possible settlements for their clients.

The Agreement is a single-spaced document in approximately eight-point font. The Agreement contains provisions that are often contrary to the representations made in the sales call or are not addressed in the sales call. For example, the Agreement contains the following statement in an attempt to disclaim the savings claims made to consumers in the advertisements and sales calls: “DCA’s [or DPA’s] expressions about the outcome of any matter are its best professional estimates only, and are limited by present policies, cash advances, balance transfer and Client’s financial resources at the time negotiations are obtained with Client’s Creditors (estimated savings do not include fees).” – Source

The Federal Trade Commission summarized their position:

Contrary to Defendants’ representations that consumers will pay off their debts in 18 to 36 months at 40 to 60 percent savings, Defendants rarely negotiate settlements for all accounts entered into the debt relief services by consumers. Moreover, even when Defendants succeed in negotiating a settlement on one or more of the consumers’ several accounts, in numerous instances, consumers’ account balances increase from the time of enrollment to the time of settlement due to creditors’ additional late fees, finance charges, and other charges. Therefore, the total aggregate amount consumers are required to pay is, in numerous instances, higher than 60 percent of the total amount the consumers owed to their creditors at the time of enrollment. In numerous instances, consumers have not obtained the 40 to 60 percent savings on their debt and do not have their debts paid off in 18 to 36 months as promised by Defendants.

Few consumers who enroll in Defendants’ debt relief services ever complete the services and receive the promised results. In numerous instances, consumers cancel or drop out of Defendants’ debt relief services before any debt is negotiated because they cannot afford to pay Defendants’ substantial fees and also accumulate money to payoff their debts. Other consumers cancel or drop out because of harassment and escalating collection attempts by their creditors. Consumers who cancel or drop out before any debts are settled forfeit most or all fees paid to Defendants.

The Judge ruled against the FTC in this action and issued the following position statement.

“Defendant Financial Freedom Processing, Inc., d/b/a Financial Freedom of America (“FFA”) engaged in assisting consumers to negotiate debt obligations. Defendants Corey Butcher (“Butcher”) and Brent Butcher were involved in the operations of FFA. Defendants Debt Consultants of America, Inc. (“DCA”) and Debt Professionals of America, Inc. (“DPA”) engaged in assisting consumers to negotiate debt obligations. Defendants Butcher and Robert Creel were involved in the operations of DCA. Defendant Nikki Vrla (formerly Nikki Creel) was Secretary of DCA, though she never performed any duties in that capacity.

It is not unusual for consumers to incur more debt than they can service. In that circumstance, there are various alternatives for the consumer, other than simply paying the debt as due. These alternatives include bankruptcy, credit counseling, and debt negotiation. In debt negotiation, consumers pay a fee to a third party, such as FFA or DCA, to negotiate on their behalf a reduced payment with their creditors.

In the fall of 2005, Butcher became interested in the debt negotiation industry. In the course of his research, he spoke with Debra Rojas, Kevin Watts, and Johnny Robles, who were then employees of Debt Relief of America, Inc. (“DRA”). They advised Butcher regarding industry practices and DRA’s business model and results. Eventually Rojas, Watts, and Robles agreed with Butcher to start FFA, which was formed in December 2005. FFA used the same business model and negotiation process as DRA.

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Butcher initially approached Creel about investing in FFA. Creel declined. FFA became successful in 2006, causing Creel to reconsider his earlier decision. In Augist 2006, Butcher and Creel formed DCA, which was essentially a clone of FFA and copied its scripts, forms, and business model. By July 2008, DCA was outgrowing its office space. Rather than expanding DCA into new space, Butcher and Creel formed another company, DPA, which was likewise a clone of DCA. The Court will refer to FFA, DCA, and DPA collectively as the “Companies.”

Butcher attempted to ensure that his business practices were legitimate and complied with all applicable rules and regulations. Before starting FFA, he spoke with others in the industry, he investigated FTC policies and publications, he spoke with representatives of the industry trade association, and he consulted legal counsel. Butcher and the other individual defendants acted in good faith in the operation of the Companies.

The Companies obtained customers primarily through radio advertisements. They also operated substantially similar web sites, though less than 1% of their clients came from the web sites. The radio ads and web sites encouraged prospective clients to call the respective company’s toll-free phone lines. Following some initial screening, the callers were forwarded to sales staff. The Companies instructed the sales staff to follow scripts with the prospective clients. The Companies monitored calls to ensure the scripts were followed. FFA terminated sales staff who materially varied from the scripts. The Companies’ sales staff followed the scripts in the vast majority of instances.

If the prospective clients were still interested after the initial phone call, the Companies sent them an enrollment package, including a written agreement to review and sign. The actual moment a consumer decided to enroll as a client was when the consumer mailed the agreement back to the company. Thus the contents of the agreement were conveyed to the potential client to review in the privacy of his or her home before that person decided to become a customer. The contents of the enrollment package should be considered as part of the information disclosed to the consumer during the sales process.

Creditors have no reason to settle debt at a discount if the debtor is current on his or her payments. Thus the program of debt negotiation used by the Companies called for the client first to quit paying his or her creditors. The client would then begin to make monthly payments to the company. The monthly payments would first go to the company’s fees. Once the fees were paid, the company would accumulate the payments until there was sufficient money available to offer a lump sum settlement payment to one of the client’s creditors. As the monthly payments accumulated, the company would settle with additional creditors.

The difficulty with this strategy is that the Companies typically did not settle any of the clients’ debt until the client had been in the program for about six months. In the interim, the client was subject to creditors’ collection efforts, including phone calls, dunning letters, and lawsuits. For this reason, as well as others, a large number of clients dropped out of the programs before completion; many dropped out before any debts were settled. The primary source of client dissatisfaction with the Companies was that clients who dropped out usually did not receive a refund of fees paid; this dissatisfaction had nothing to do with the representations at issue in this case.

The FTC complains of two types of representations. The FTC claims that FFA made representations regarding saving 30 to 60% of debt, and DCA and DPA made representations regarding saving 40 to 60% of debt (the “Savings Claims”). The FTC also claims that the Companies represented consumers could complete the program in 18 to 36 months (the “Timing Claim”). The FTC complains that the Savings Claims and the Timing Claim are both false and unsubstantiated. This turns in large part on how the claims are interpreted.

The initial point of dispute is whether the Savings Claims and the Timing Claims include dropouts. A reasonable consumer would interpret both the Savings Claims and the Timing Claim not to include dropouts.

The second point of dispute is whether the Savings Claims include or exclude fees paid to the Companies. In determining the percentage of debt saved, one must determine the percentage of debt paid. If the percentage paid computation includes the fees paid to the Companies as well as the amount paid to creditors to settle debts, that has the effect of increasing the percentage paid and reducing the percentage saved. A reasonable consumer would interpret the Savings Claims to exclude fees paid to the Companies.

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The third point of dispute is whether the Savings Claims are based on amount of debt at time of enrollment or amount of debt at time of settlement (which would include interest and penalties that accrued between enrollment and settlement). A reasonable consumer would interpret the Savings Claims to be based on the amount of debt at time of settlement.

The Savings Claims and the Timing Claim were true for a majority of the customers of the Companies who completed the program.

FFA initially based its Savings Claim and Timing Claim on the experience of its founders at DRA, as well as industry results. DCA initially based its Savings Claim and Timing Claim on the experience of FFA’s founders at DRA, the experience of FFA, as well as industry results. DPA initially based its Savings Claim and Timing Claim on the experience of FFA’s founders at DRA, the experience of FFA, the experience of DCA, as well as industry results. The Companies had a reasonable basis for their respective Savings Claims and Timing Claim at the time those representations were initially made.

The parties have some ancillary disputes regarding slight variations on the representations and when various permutations were made. In view of the Court’s main findings, these ancillary disputes are immaterial and it is unnecessary for the Court to address them.

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Any of the foregoing findings of fact that are more properly viewed as conclusions of law are also adopted by the Court as conclusions of law.


The FTC seeks relief from the Companies pursuant to sections 5(a) and 13(b) of the FTC Act. 15 U.S.C. §§ 45(a), 53(b). The Court has jurisdiction over the parties and subject matter of this dispute. 28 U.S.C. §§ 1331.

The FTC originally brought two separate cases: Federal Trade Commission v. Financial Freedom Processing, Inc., et al., Civil Action No. 3:10-CV-2446-N, and Federal Trade Commission v. Debt Consultants of America, Inc., et al., Civil Action No. 3:10-CV-2447-N. By Order dated April 1, 2011, the Court consolidated both actions under the 2446 cause number.

The Savings Claims and Timing Claim were true with respect to a majority of the clients of the Companies who completed the program. See FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502, 529 (S.D.N.Y. 2000). The Savings Claims and Timing Claim were not likely to mislead consumers acting reasonably under the circumstances. The Savings Claims and Timing Claim do not violate section 5 of the FTC Act. The FTC failed to establish by a preponderance of the evidence that any Defendant violated section 5(a) of the FTC Act by making a misleading representation.

The Companies each had a reasonable basis for the Savings Claims and Timing Claim at the time those representations were made. The Savings Claims and Timing Claim were substantiated. The FTC failed to establish by a preponderance of the evidence that any Defendant violated Section 5(a) of the FTC Act by making a representation that was not substantiated.” – Source

Damon Day - Pro Debt Coach

Update: 3-13-2012 5:17 PM

See FTC to Appeal Debt Settlement Case Loss in Texas.

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