On May 30, 2017, the Honorable Josephine Staton, of the Central District of California, denied a Motion to Dismiss filed by three law firms, and their principals, in a case filed by the Consumer Financial Protection Bureau (“CFPB”).
The CFPB sued the law firms based on their long-standing relationship with a debt relief client. The client was sued by the CFPB for violations of the Telemarketing and Consumer Fraud and Abuse Prevention Act, and the Federal Trade Commission’s Telemarketing Sales Rule, 16 C.F.R. §§ 310.4(a)(5)(i)(A), (B) (“TSR”). The client advertised its debt relief services as having “$0 up-front fees,” but would immediately begin making monthly withdrawals from a consumer’s account after the consumer signed the services contract. The CFPB then sued the client, and the client claimed these fees were used to pay for bankruptcy proceedings. Right before the case went to trial, it was discovered that the bankruptcy pleadings the client produced during discovery were fabricated. The court then issued terminating sanctions.
After the litigation began, 50-60 staff members from the client’s company began operating under the law firm’s name, and conducting the same activities. The complaint against the law firm alleges the law firm violated 16 C.F.R. § 310.4(a)(5)(i), 310.3(a)(2)(ii), (x), and 310.3(b) for charging upfront fees for debt relief services, engaging in misleading debt relief practices, assisting the client in its violations of the TSR.
The law firm, in its Motion to Dismiss, claimed that the CFPB’s allegations did not meet the heightened pleading standard of Rule 9(b) of the Federal Rules of Civil Procedure. Judge Staton found that “there is no basis for applying Rule 9(b)’s heightened pleadings standard . . . because a substantial assistance claim under the TSR does not sound in fraud.”