Recently I wrote about filings by the Consumer Financial Protection Bureau (CFPB) in the Morgan Drexen case. The CFPB said, “Aside from going to great lengths to continue Morgan Drexen’s debt relief scheme and collect fees from Affected Consumers, the Attorneys engaged in numerous tactics designed to ensure consumers would—at a minimum—be confused about their rights, if not misinformed.” – Source
On August 21, 205, Howard Law filed a court document which responds to the multiple claims made by the CFPB against them.
Howard Law said, “Prior to entry of the judgment against Morgan Drexen, the Law Firms had active attorney-client relationships with over ten thousand individuals (the “Clients”). The range of legal services that the Law Firms provide to these Clients includes, but is not limited to advising and assisting them with the resolution of debt, insolvency and bankruptcy-related issues, and advising and assisting them with litigation matters related thereto. (RJN, Ex. 7, P. 118, ¶ 6).
Each of these attorney-client relationships is documented by a separate retainer agreement that details the services that will be provided and the fees payable therefore. (RJN, Ex. 7, P. 118, ¶ 6).
Due the significant number of Clients that the Law Firms represent, they outsourced a number of clerical, paralegal and accounting and marketing services to Morgan Drexen (prior to June 18, 2015), pursuant to a written contract. (RJN, Ex. 7, P. 118-119, ¶ 6-7).
One of the administrative/accounting services that Morgan Drexen provided under the Morgan Drexen-Contract was to account for and forward the payments due from the Clients under the terms of the various debt-settlement plans negotiated with the Clients’ creditors. (RJN, Ex. 7, P. 119, ¶ 9). The accounts from which these payments were made are held solely in the name of the Law Firms.
This client base has been dramatically reduced during the last month due to the letters that were transmitted to the Law Firms’ clients by Morgan Drexen’s Chapter 7 trustee and by the CFPB.
They are not held in the name of Morgan Drexen. Morgan Drexen merely had the right to make certain withdrawals from these accounts when directed by the Law Firms.
On August 20, 2013, the CFPB filed the Action against Morgan Drexen and Ledda and alleged therein that these parties had violated certain provisions of the Consumer Financial Protection Act of 2010, the Telemarketing and Consumer Fraud and Abuse Prevention Act, and the Telemarketing Sales Rule relating to the offering “debt relief” services. (RJN, Ex. 1).
The CFPB did not name any of the Law Firms or the Clients in the Complaint, it did not provide notice to the Law Firms and the Clients of the pendency of the Action, and it did not seek any relief in the Complaint against Law Firms or the Clients. To the contrary, as explained above, when one of the attorneys using Morgan Drexen’s services sought to intervene in the Action to protect her rights (RJN, Ex. 2), the CFPB opposed this intervention and argued that the putative intervenor would not be adversely affected by the relief sought in the case. (RJN, Ex. 3) (The CFPB claimed specifically: “[The attorney] does not have any property interest at stake. Nor would a ruling against Morgan Drexen necessarily affect her.”) (emphasis added)). Based upon, inter alia, this opposition, the District Court denied intervention. (RJN, Ex. 4).
On October 7, 2014, the CFPB filed a motion seeking summary judgment on all counts alleged in the Complaint. (RJN, Ex. 5). On November 25, 2014, this Court denied this motion on the grounds that there were genuine issues of material fact in dispute that barred summary adjudication. Id. On April 21, 2015, this Court issued terminating sanctions against Morgan Drexen based upon, inter alia, the CFPB’s contention that Morgan Drexen had fabricated evidence in response to the CFPB’s discovery requests. (RJN Ex. 6). Once this order was entered, all further rulings against Morgan Drexen were defaults.
On April 30, 2015, Morgan Drexen filed a petition under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Central District of California initiating In re Morgan Drexen, Inc., Case No. 8:15-bk-12278-CB (the “Bankruptcy Case”). Jeffrey I. Golden serves as Morgan Drexen’s Chapter 7 trustee (the “Trustee”). Morgan Drexen ceased operations on June 18, 2015.
After Morgan Drexen’s closure, the Law Firms attempted to obtain the files of their Clients that were maintained on Morgan Drexen’s servers, a right provided for under the Morgan Drexen Administrative Services Contract, and to obtain the software, which they had a license to use through December 31, 2015, that allowed access to these (the “MDIS Software”). (RJN, Ex. 7).
Although the Trustee was willing to accommodate the Law Firms’ demands, he was unwilling to do so absent an order from this Court, due to the broad scope of the prohibitions in the Injunction. Id. On June 26, 2015 (the “Ex Parte Motion”), the Law Firms filed an ex parte motion before this Court seeking, inter alia, an order authorizing the Trustee to honor the Attorneys’ contractual right to recover their Clients’ files, and allowing the Trustee to provide them a copy of the MDIS Software. (RJN, Ex. 7). The Trustee concurrently filed a motion seeking authority to provide the Law Firms the files, but not the MDIS Software needed to read the client files.
The CFPB filed an opposition to the Law Firms’ Ex Parte Motion wherein it concurrently argued that a) the Injunction did in fact bind the Law Firms, despite the fact that the CFPB had previously represented to the Court that rulings in the Action would not affect them as non-parties, and b) since the Law Firms were not named as parties in the underlying Action, they were bound, but had no procedural remedy. This exact “we want it both ways” tactic was rejected by the Ninth Circuit in the case of In re Estate of Ferdinand Marcos Human Rights Litig., 94 F.3d 539, 544 (9th Cir. 1996) (“Hilao seems to want to have it both ways. On the one hand, it asserts that the Republic has no standing to appeal because it has not been harmed by the injunction.
On the other hand, it contended at oral argument that the Republic could be cited for contempt if it were to violate the injunction.”)
On July 6, 2015, this Court entered an order addressing both the Law Firms’ Ex Parte Motion and the Trustee’s concurrently filed motion. In this ruling, this Court stated: The Court recognizes that the Attorneys are not parties in this action, and thus the Court has not made any finding that the Attorneys themselves have violated the TSR or CFPA. The Court’s permanent injunction order also does not specifically name or enjoin the Attorneys.
As a result of the fee-sharing arrangement and contractual relationship between the Attorneys and Morgan Drexen, it appears to the Court that the Attorneys were in “active concert or participation with” Morgan Drexen while Morgan Drexen was collecting illegal up-front fees from Affected Consumers. The majority of the Court’s injunction not only binds Morgan Drexen, but also those “in active concert or participation with” Morgan Drexen. Accordingly, because the Attorneys appear to have been in “active concert or participation” with Morgan Drexen and thus fit within one of Rule 65’s categories of non-parties that are bound by a permanent injunction, the majority of the Court’s permanent injunction order applies equally to the Attorneys as it does to Morgan Drexen. (RJN, Ex. “8”) (the “July 6 Order”) (emphasis added). The Law Firms have filed an appeal with respect to the July 6 Order.
As more fully explained in the Legal Authorities cited herein, to the extent that the July 6 Order holds that the language in Federal Rule of Civil Procedure 65(d) can be relied upon to drag the Law Firms within the reach of the Injunction, this is error. It is well established that this language was intended to bar the enjoined party from evading the injunction through the agency of others under its control, and to bar third parties from aiding and abetting the enjoined party in effecting such a violation. The language in this rule does not allow the issuing court to enjoin actions taken by nonparties independently, even if these actions would have violated the injunction had they been taken by the enjoined party.”
“At the heart of the CFPB’s Application is the assumption that somehow the federal rules, and the due process concepts inherent therein do not apply to this agency. Under the CFPB’s view of the world, it was not required to name the Law Firms in the Action, it was not required to serve the Law Firms with the summons and complaint, and it was not required to provide them with notice of any of the hearings or the depositions set in the Action, in order to subject the Law Firms to the injunctive relief obtained in the June 18, 2015 judgment. Respectfully, this position is as untenable as it is astounding. The Application should be denied.” – Source
Time will tell how this all plays out.
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