Hummingbird Credit Counseling and Education has filed suit against Attorney General Eric Holder, Department of Justice, and Executive Office of United States Trustee. This suit asks for a declaratory judgment and injunctive relief.
This case caught my attention because it’s not often you see a credit counseling company suing the USA and it appears this is yet another debt relief industry case that involves a personal conflict between insiders which causes an unfortunate impact to consumers.
According to court documents, Hummingbird Credit Counseling is a taxable non-profit North Carolina corporation who has provided pre-bankruptcy counseling and was approved as such a provider by the Executive Office of the United States Trustee (EOUST).
Since 2006, Hummingbird Credit Counseling has provided approved services to consumers but on December 18, 2013 the the EOUST issued a Notice of Removal of Hummingbird as an Approved Provider of Personal Financial Instructional Course.
“The EOUST Notice of Removal does not allege any failure by Hummingbird to provide consumers with quality financial education in compliance with applicable law and regulation, but alleges only that Hummingbird failed to establish that it was in compliance with all state and federal laws and regulations regarding certain aspects of its corporate dealings. Specifically, the Notice of Removal asserts that (l) Hummingbird is “effectively controlled” by a individual who is neither a member of the Board of Directors nor an officer, and is not otherwise listed in Hummingbird’s Articles of Incorporation, in violation of N.C. Gen. Stat. 55A-8-01(ab) and (c); (2) that Hummingbird conferred a “private benefit” on such individual and several entities in violation of its Articles of Incorporation and Bylaws and N.C. Gen. Stat. 55A-l-40(17); and (3) that Hummingbird impermissibly paid distributions to that individual as an “insider” in violation of N.C. Gen. Stat. 554-1-40(17). Based on these allegations, the EOUST concluded that Hummingbird has failed to comply with “all applicable laws and regulation of the United States and each state” in which Hummingbird operates, in violation of 28 C.F.R. 58.33(a) which is incorporated into 28 C.F.R. 58.32(b).” – Source
The Hummingbird complaint alleges the information that lead to this mess came “largely on the unsworn allegations of the principal of a competitor who tried to acquire Hummingbird on three (3) separate occasions, and the company’s former Director of Counseling Services/Compliance Officer/Staff Attorney, who contacted the EOUST immediately following his termination with Hummingbird to begin making wild allegations against Hummingbird that appeared largely to be an attempt by him to try and distance himself from some highly questionable behavior on his own part while employed by Hummingbird.”
Documentation from the EOUST states this individual was Michael Paul, who has told the EOUST that the alleged controlling party, Robert Brasco, had “repeatedly asked him to lie about the ownership of NIBRC, Core, and Counselor-Soft, contrary to his earlier representations to EOUST and the Massachusetts Attorney General’s office that he did not know the ownership of those entities.” – Source
Robert Brasco lays out a number of issues surrounding Michael Paul in his affidavit. In addition to the issues created by Paul with EOUST, he claims Paul also “made claims which triggered an investigation against all my companies with the United States Department of Labor causing a great deal of administrative time and labor to respond.” – Source
The EOUST stated it was not the nonprofit status of Hummingbird that created a problem, but the alleged problems with transactions between Mr. Brasco which did not comply with North Carolina nonprofit statues.
Complicating the issue further was information provided by Brian Sunderland, the executive director of Cricket Debt Counseling. According to the EOUST, Sunderland stated Mr. Brasco “appeared on multiple occasions as Hummingbird’s representative at meetings of the National Association of Consumer Bankruptcy Attorneys, that it was apparent to him and other members of the credit counseling industry that Mr. Brasco controlled Hummingbird operations, and that Mr. Brasco presented himself publicly as the head of Hummingbird.”
But Robert Brasco has a different recollection of the encounter with Sunderland. Brasco says, “I never portrayed myself [as the head of Hummingbird]. I always introduced myself as the Hummingbird Administrator when anyone asked.”
Having pursued the administrative opportunities to fix this mess, Hummingbird must have felt they had not other opportunity but to sue the government.
The complaint filed by Hummingbird stated, “On April 3, 2015, after reviewing the materials provided by Hummingbird in connection with its Request For A Review, and a Response to same filed by the EOUST, the Director of the EOUST issued a Final Agency Action, finding that the evidence in the record failed to persuade him that Hummingbird should be removed as an Approved Provider and its pending Request For Re-Approval denied based on the first or third grounds cited by the EOUST in its Notice of Removal. However, the Director affirmed the action of the EOUST with respect to the second ground, i.e., violation of N.C. Gen. Stat. 55A-8-01(b).”
A copy of this EOUST determination letter can be found here. The final conclusion of that letter from Clifford White III, Director, EOUST, was, “Based on my review of the record, and all of the foregoing reasons, I affirm the USTP’s decision to remove Hummingbird from the list of approved debtor education providers and to deny its Application for re-approval on the ground that Hummingbird allowed an individual who is not an officer, director, or employee to exercise its corporate power and authority.”
The impact to Hummingbird would be huge if removed as a provider. Hummingbird Credit Counseling says they have a vendor relationship with 820 bankruptcy offices across the United States and competitor credit counseling providers are “fiercely competing” to capture the Hummingbird business.
This situation could essentially force Hummingbird Credit Counseling out of business while it is attempted to be resolved since “providing debtor education is Hummingbird’s sole source of revenues. Without those revenues, Hummingbird will have no choice but to shutter its offices and let go all of the employees who work on Hummingbird’s behalf, with obviously no guarantee that any of them would return at any point in the future.”
The debtor education Hummingbird Credit Counseling provides to consumer consists of a two hour video and an online test to be able to get the required credit counseling certificate to proceed with a bankruptcy filing. In May 2014, Hummingbird issued 1,237 such completion certificates.
But statements from Mr. Brasco seem to appear that level of issued certificates was creating a financial issue for Hummingbird. He stated, “In April 2013, the minimum cost of providing Hummingbird UST-CC services started to exceed the amount of income Hummingbird was generating with all four product lines. Hummingbird was falling behind on its bills and it was evident that should bankruptcy filings and market share continue to decline, Hummingbird would be out of business.” Brasco also did not understand why Michael Paul would want to hide his relationship with the agency. He stated, “Michael clearly wanted to avoid the issue of my name and corporate ownership and expressed concern. “We discussed several options, but I never understood why it was a problem to mention my name (I had not been convicted of anything).”