Certification From the United States Dist. Court For the Eastern Dist. of Wash. In Chad M. Carlsen v. Global Client Solutions Llc, 84855–6.

• Decision Date: 12 May 2011
• Docket Number: No. 84855–6.,84855–6.
• Citation: 171 Wash.2d 486,256 P.3d 321
• Court: Washington Supreme Court
• Parties: Certification from the United States District Court for the Eastern District of Washington in Chad M. CARLSEN and Shasta Carlsen, husband and wife, individually and on behalf of a class of similarly situated Washington families; and Carl Popham and Mary Popham, husband and wife, individually and on behalf of a class of similarly situated Washington families, Plaintiffs,v.GLOBAL CLIENT SOLUTIONS, LLC, an Oklahoma limited liability company; Global Holdings, LLC, an Oklahoma limited liability company; Rocky Mountain Bank & Trust, a Colorado financial institution; Robert Merrick, a resident of Oklahoma; Michael Hendrix, a resident of Oklahoma; and John and Jane Does A–F, Defendants.

171 Wash.2d 486

256 P.3d 321

Certification from the United States District Court for the Eastern District of Washington in Chad M. CARLSEN and Shasta Carlsen, husband and wife, individually and on behalf of a class of similarly situated Washington families; and Carl Popham and Mary Popham, husband and wife, individually and on behalf of a class of similarly situated Washington families, Plaintiffs,

v.GLOBAL CLIENT SOLUTIONS, LLC, an Oklahoma limited liability company; Global Holdings, LLC, an Oklahoma limited liability company; Rocky Mountain Bank & Trust, a Colorado financial institution; Robert Merrick, a resident of Oklahoma; Michael Hendrix, a resident of Oklahoma; and John and Jane Does A–F, Defendants.

No. 84855–6.

Supreme Court of Washington.

Argued March 15, 2011.Decided May 12, 2011.

Darrell W. Scott, Matthew John Zuchetto, The Scott Law Group, PS, Spokane, WA, Timothy W. Durkop, Attorney at Law, Spokane Valley, WA, for Plaintiffs.Sally Gustafson Garratt, Gregory Eugene Jackson, Freimund Jackson Tardif & Benedict Garratt, Olympia, WA, Richard W. Epstein, Haas A. Hatic, Rebecca F. Bratter, Greenspoon Marder, P.A., Fort Lauderdale, FL, for Defendants.Robert Alan Lipson, Office of the Attorney General, Seattle, WA, amicus counsel for Attorney General of Washington.Paul J. Lawrence, Jessica Anne Skelton, Pacifica Law Group LLP, Todd Lawrence Nunn, K & L Gates LLP, Seattle, WA, amicus counsel for NoteWorld, LLC.FAIRHURST, J.

[171 Wash.2d 490] ¶ 1 Washington residents who were consumers of allegedly illegal debt adjustment programs filed a class action against Global Client Solutions LLC (GCS) and Rocky Mountain Bank and Trust (RMBT), companies that respectively managed and held special purpose accounts, a key feature of the programs. The United States District Court for the Eastern District of Washington has certified to us four questions regarding Washington's debt adjusting statute, chapter 18.28 RCW.

I. FACTUAL HISTORY

¶ 2 Heavily indebted Washington consumers, including plaintiffs Chad M. and Shasta Carlsen and Carl and Mary Popham, sought debt relief from companies like Freedom Debt Relief LLC (Freedom). Freedom advertised a debt relief program under which consumers would stop paying their unsecured creditors and instead authorize that monthly payments automatically be made into “special purpose accounts.” Document (Doc.) 83, at 10 ¹ (Am. Class Action Compl. & Jury Demand). The consumers also authorized the automatic payment of large fees from the special purpose accounts to Freedom. When enough money accumulated in a consumer's special purpose account, Freedom would attempt to use the funds to negotiate settlements with creditors on terms favorable to the consumer.

¶ 3 The plaintiffs' special purpose accounts were held at RMBT and were structured as subaccounts of a large custodial account in GCS's name. The custodial account allowed debt settlement companies like Freedom to view the balance and transaction history in each of their customers' accounts. The plaintiffs could access their special purpose accounts on line and terminate them at any time by sending written notice. But on a practical level, the plaintiffs did not need to access their accounts because they had signed blanket authorizations upon entering the debt relief program that established automatic (1) monthly transfers from the plaintiffs' primary bank accounts to their special purpose accounts, (2) monthly payments from the special purpose accounts to the debt settlement company, (3) monthly and one-time payments from the special purpose accounts to GCS for banking services, and (4) disbursements from the special purpose accounts to creditors when the debt settlement company negotiated a settlement. In its role as “processor” for the special purpose accounts, GCS initiated all these automatic transfers. Doc. 70–7 (Decl. of Richard P. Epstein, Welcome to Global Client Solutions letter).

¶ 4 GCS charged consumers various fees for its processing services. For example, plaintiffs Carl and Mary Popham agreed to pay a one-time account setup fee of $9.00, a monthly service charge of $9.85, and various fees per service, such as $15.00 per wire transfer. The plaintiffs authorized these fees by signing a special purpose account application when they signed up for the debt relief program.

¶ 5 According to the plaintiffs, GCS's custodial account at RMBT contained over 600,000 special purpose accounts. To obtain these accounts, GCS contracted with over 500 different debt settlement companies like Freedom. Although GCS had contracts with these debt settlement companies, it generally did not receive fees from them. Rather, GCS's earnings came from the fees charged directly to special purpose account holders like the plaintiffs. RMBT did not receive fees from GCS or the plaintiffs, but it benefited by holding the plaintiffs' money without paying interest.

¶ 6 In 2009, the Federal Deposit Insurance Corporation (FDIC) issued a cease and desist order requiring drastic reformation of RMBT's banking practices. The order included a requirement that RMBT “provide adequate and effective oversight over the Bank's third-party relationships, specifically focusing on monitoring the activities of third-party payment processors and their customers, who are referred to herein as Debt Settlement Companies.” Doc. 58–13, at 378 (Decl. of Darrell W. Scott, Order to Cease and Desist). GCS subsequently stopped opening new accounts at RMBT and transferred the majority of its existing special purpose accounts to a new custodial account in its name at an Oklahoma bank.

II. PROCEDURAL HISTORY

¶ 7 In 2009, the Carlsens and the Pophams filed in the United States District Court for the Eastern District of Washington a class action complaint against GCS and RMBT on behalf of all Washington consumers who had special purpose accounts with GCS. GCS and RMBT each moved to dismiss under Fed.R.Civ.P. 12(b)(6). The court stayed the Fed.R.Civ.P. 12(b)(6) motions pending certification to this court of questions of first impression regarding Washington's debt adjusting statute, “for which legislative history and relevant case law are essentially non-existent.” Certification to Washington State Supreme Court (Certification) at 2–3. To assist it in formulating the certified questions, the court ordered limited discovery on “the precise nature of GCS and RMBT, and what they do in conjunction with each other, and in conjunction with debt settlement companies.” Doc. 40, at 8 (Order Den. Mots. to Compel Arbitration, inter alia).

¶ 8 The plaintiffs brought a separate class action suit against Freedom and similar debt settlement companies, and the United States District Court for the Eastern District of Washington certified to us three questions regarding that case. Carlsen v. Freedom Debt Relief LLC, No. 84858–1. That case has been stayed because the parties reached a settlement.

III. ANALYSIS

¶ 9 Certified questions from federal court are questions of law that we review de novo. Bradburn v. N. Cent. Reg'l Library Dist., 168 Wash.2d 789, 799, 231 P.3d 166 (2010). We consider the legal issues not in the abstract but based on the certified record provided by the federal court. Id. (citing RCW 2.60.030(2)).

QUESTION NO. 1: 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?

Certification at 3. This question describes actions taken by GCS, not by RMBT, in conjunction with debt settlement companies.

¶ 10 In interpreting a statute, we look first to the statute's plain meaning. Dep't of Ecology v. Campbell & Gwinn, LLC, 146 Wash.2d 1, 11–12, 43 P.3d 4 (2002). RCW 18.28.010(1) defines “ ‘[d]ebt adjusting’ ” as “the managing, counseling, settling, adjusting, prorating, or liquidating of the indebtedness of a debtor, or receiving funds for the purpose of distributing said funds among creditors in payment or partial payment of obligations of a debtor.” (Emphasis added.) Here, GCS is engaged in “debt adjusting” under the plain language of this definition's last prong because GCS receives funds into a custodial account in its own name and, after a company like Freedom negotiates a settlement, GCS distributes money to the creditor in payment or partial payment of the consumer's debt.

¶ 11 GCS argues it is not truly “receiving” the funds because the plaintiffs had full control over their special purpose accounts and authorized every transaction. “[R]eceive” means “to take possession or delivery of” or “to knowingly accept.” Webster's Third New International Dictionary 1894 (2002). The fact that plaintiffs had management powers does not change the fact that GCS took possession and delivery of the funds by accepting them into a custodial account established and maintained in its own name. The custodial account structure allowed GCS and debt settlement companies to view the balances and transaction histories of the special purpose accounts. Thus, in practice, as well as based on title alone, GCS “received” the plaintiffs' money.

[171 Wash.2d 495] ¶ 12 GCS also argues it is not a debt adjuster because a 1978 legislative audit of the debt adjusting statute described debt adjusters' basic model of operation as involving direct contact with debtors and creditors, which GCS does not have. GCS & RMBT's Answering Br. at 22–23 (quoting Performance Audit: Debt Adjusting, Licensing and Regulatory Activities, Report No. 77–13, Jan. 20, 1978, at 7 ...