Consumer Fin. Prot. Bureau v. Morgan Drexen, Inc.

• Decision Date: 10 January 2014
• Docket Number: Case No. SACV 13–1267–JLS JEMx.
• Citation: Consumer Fin. Prot. Bureau v. Morgan Drexen, Inc., 60 F.Supp.3d 1082 (C.D. Cal. 2014)
• Court: U.S. District Court — Central District of California
• Parties: CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff, v. MORGAN DREXEN, INC., et al., Defendants.

60 F.Supp.3d 1082

CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff

v.MORGAN DREXEN, INC., et al., Defendants.

Case No. SACV 13–1267–JLS JEMx.

United States District Court, C.D. California.

Signed Jan. 10, 2014.

Jan E. Singelmann, R. Gabriel D. O'Malley, Shirley T. Chiu, Kristin L. Bateman, Nandan M. Joshi, Consumer Financial Protection Bureau, Washington, DC, Kent A. Kawakami, Office of U.S. Attorney, Los Angeles, CA, for Plaintiff.

Gerald A. Klein, Klein & Wilson, Newport Beach, CA, Jeffrey Allen Katz, Morgan Drexen, Costa Mesa, CA, Nicholas M. Depalma, Randall K. Miller, Venable LLP, Tyson Corner, VA, Celeste M. Brecht, Venable LLP, Los Angeles, CA, Randal M. Shaheen, Venable LLP, Washington, DC, for Defendants.

ORDER DENYING DEFENDANTS' MOTION TO DISMISS

JOSEPHINE L. STATON, District Judge.

Before the Court is a Motion to Dismiss (“Motion”) filed by Defendants Morgan Drexen, Inc. (“Morgan Drexen”) and Walter Ledda. (Doc. 22.) Plaintiff Consumer Financial Protection Bureau (“CFPB”) filed an Opposition, and Defendants replied. (Opp'n, Doc. 25; Reply, Doc. 27.) Having considered the papers and supporting documentation submitted by the parties, heard oral argument, and taken the matter under submission, the Court DENIES Defendants' Motion.

I. BACKGROUND

A. The CFPB

In 2010, Congress passed and the President signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd–Frank Act”). Pub.L. No. 111–203, July 21, 2010. The Dodd–Frank Act created the CFPB as an independent agency in the Federal Reserve System, and tasked the agency with “regulat[ing] the offering and provision of consumer financial products or services under the Federal consumer financial laws.” 12 U.S.C. § 5491(a). Those laws include 18 pre-existing consumer-protection statutes and Title X of the Dodd–Frank Act. Id. § 5481(14), (12). Title X prohibits a “covered person” or “service provider” from engaging in any “unfair, deceptive, or abusive act or practice.” Id. §§ 5531(a), 5536(a)(1).

The CFPB is led by a Director, who is appointed to a five-year term by the President with the advice and consent of the Senate. Id. § 5491(a) -(b). The President may remove the Director only “for inefficiency, neglect of duty, or malfeasance in office.” Id. § 5491(c)(3). The CFPB receives its funding from the earnings of the Federal Reserve System. Id. § 5497(a)(1). Each year, the CFPB receives the amount the Director determines to be reasonably necessary to carry out the responsibilities of the CFPB. Id. § 5497(a)(1). The allocation is capped at a percentage of the total operating expenses of the Federal Reserve in 2009—12% for 2013 and thereafter, adjusted for inflation.Id. § 5497(a)(2).

The CFPB is empowered to promulgate rules to implement the federal consumer financial laws, and to enforce those laws through investigation, adjudication, and the commencement of civil litigation. Id. §§ 5512, 5531(b), 5561–5565. Pursuant to its enforcement powers, the CFPB commenced the present action against Defendants on August 20, 2013. (Compl., Doc. 1.)

B. The Complaint

Defendant Morgan Drexen is a Nevada corporation offering debt relief services. (Id. ¶ 5.)¹ Defendant Walter Ledda is the President and CEO of Morgan Drexen. (Compl. ¶ 6.) Morgan Drexen employs the “Attorney Model” of debt relief services. (Id. ¶ 8.) Under this model, a consumer contracts with an attorney affiliated with Morgan Drexen for debt relief services, but Morgan Drexen, not the attorney, actually performs the debt relief work and receives the majority of the fees. (Id. )

Morgan Drexen advertises debt relief services through television commercials, radio advertisements, and the internet. (Id. ¶ 15.) In its commercials, Morgan Drexen claims it can help consumers eliminate their debt through debt relief programs supported by attorneys. (Id. ¶ 17.) Morgan Drexen's commercials also claim that the advertised services require no up-front fees, and are a way for consumers to avoid bankruptcy. (Id. ¶¶ 19–20.)

When a consumer calls Morgan Drexen, the consumer often hears a recorded testimonial that emphasizes the benefits of avoiding bankruptcy. (Id. ¶ 27.) One testimonial recites, “I thought I was going to have to claim bankruptcy, but I really didn't want to do that, so I decided to take a chance on the program I saw advertised.... I'm debt free now.” (Id. ¶ 27.) After Morgan Drexen obtains information about a consumer's income and debt, the consumer is transferred to a “Legal Intake Specialist.” (Id. ¶ 29.) The Legal Intake Specialist follows a script when speaking with the consumer. (Id. ¶ 29.) The script states that Morgan Drexen will work with an attorney to allow the consumer “to pay back the debt at a reduced amount, without the scar of filing for bankruptcy.” (Id. )

As the final step of an intake call, a Morgan Drexen employee asks the consumer to access a web portal and electronically sign two contracts, an Attorney/Client Agreement—Debt Resolution Representation (“Debt Relief Contract”) and an Attorney/Client Bankruptcy Fee Agreement (“Bankruptcy Contract”). (Id. ¶ 34.) Most consumers contact Morgan Drexen to inquire about debt relief services, not bankruptcy related services.

(Id. ¶ 55.) Nevertheless, the vast majority of customers seeking debt relief services sign both the Debt Relief Contract and the Bankruptcy Contract. (Id. ¶ 37.)

These contracts are four or five pages long, contain many legal terms, and are written in small, single spaced font. (Id. ¶ 35.) The Debt Relief Contract does not require the payment of up-front fees, but the Bankruptcy Contract requires an engagement fee of between $1,000 and $1,500, a $450 bankruptcy filing fee, and a flat monthly servicing fee of $50. (Id. ¶¶ 41, 48.) The Debt Relief Contract commits an attorney affiliated with Morgan Drexen to represent the consumer in attempting to settle the consumer's debt. However, Morgan Drexen, not an attorney, “performs virtually all of the debt resolution work.” (Id. ¶ 42.) When Morgan Drexen reaches a settlement with a creditor, it emails an attorney, who must choose one of four options, “cancel,” “accept,” “accept without comments,” or “deny.” (Id. ¶ 45.) If the attorney does not respond within 24 hours, the proposal is automatically deemed approved. (Id. ¶ 45.)

The Bankruptcy Contract limits an attorney affiliated with Morgan Drexen to counseling the consumer with respect to preparation for possibly filing a bankruptcy petition, and with respect to pre- and post-filing claims by creditors. (Id. ¶ 50.) Morgan Drexen and affiliated attorneys rarely perform any bankruptcy-related work for consumers. (Id. ¶ 60.)

Based on these and other allegations, the Complaint asserts six counts, four for violations of both the Telemarketing Sales Rule (“TSR”), 16 C.F.R. § 310, and the Consumer Financial Protection Act (“CFPA”), 12 U.S.C. §§ 5531, 5536(a)(1) (counts 1–4), and two solely for violations of the CFPA (counts 5–6). (Compl. at 15–19.)

II. DISCUSSION

A. Whether the CFPB is Constitutional

Defendants argue that the Complaint must be dismissed because the CFPB is unconstitutional. (Defs' Mem. at 3–4, Doc. 22–1.) Specifically, Defendants argue that five structural features of the CFPB, in combination, render the agency unconstitutional under the separation of powers principles of Articles I, II, and III:

(1) The President may remove the Director of the CFPB only for cause (12 U.S.C. § 5491(c)(3) );

(2) The CFPB is led by a Director, not a multi-member commission (id. § 5491(b)(1) );

(3) The CFPB is funded from the earnings of the Federal Reserve System, and not by regular congressional appropriations (id. § 5497(a)(1));

(4) The CFPB may take action to prevent “unfair, deceptive, or abusive act[s] or practice[s] under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service” (id. § 5531(a)); and

(5) The CFPB's interpretations of federal consumer financial laws are afforded deference as if the CFPB were the only agency authorized to interpret those laws (id. § 5512(b)(4)(B)). (See Defs' Mem. at 6–21.)

“Our Constitution divided the ‘powers of the new Federal Government into three defined categories, Legislative, Executive, and Judicial.’ ”

Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 130 S.Ct. 3138, 3146, 177 L.Ed.2d 706 (2010) (quoting I.N.S. v. Chadha, 462 U.S. 919, 951, 103 S.Ct. 2764, 77 L.Ed.2d 317 (1983) ). The Court addresses the structure of the CFPB in relation to each of these categories of constitutionally defined powers.

1. Executive Power

Article II provides that “executive Power shall be vested in a President,” who “shall take Care that the Laws be faithfully executed.” U.S. Const. art. II, § 1, cl. 1, § 3. “[T]he Constitution provides for executive officers to ‘assist the supreme Magistrate in discharging the duties of his trust,’ ” and also “empower[s] the President to keep these officers accountable—by removing them from office, if necessary.” Free Enter. Fund, 130 S.Ct. at 3146 (quoting 30 Writings of George Washington 334 (J. Fitzpatrick ed.1939)). This authority is not unlimited, however, and “Congress can, under certain circumstances, create independent agencies run by principal officers appointed by the President, whom the President may not remove at will but only for good cause.” Free Enter. Fund, 130 S.Ct. at 3146–47.

Defendants assert that the Dodd–Frank Act impermissibly restricts the President's executive power by providing for removal of the Director of the CFPB only for cause. (Defs' Mem. at 8.) Defendants rely principally on Myers v. United States, 272 U.S. 52, 47 S.Ct. 21, 71 L.Ed. 160 (1926). (Defs' Mem. at 8.) In Myers, the Supreme Court invalidated a statutory provision that provided for removal of a postmaster only with the advice and consent of the Senate. 272 U.S. at 107, 176, 47 S.Ct. 21.

Not long after Myers, however, the Court revisited congressional restrictions on the...