Consumer Fin. Prot. Bureau v. Manseth
| Docket Number | 22-CV-29-LJV |
| Decision Date | 22 August 2023 |
| Parties | CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff, v. CRAIG MANSETH, et al., Defendants. |
| Court | U.S. District Court — Western District of New York |
DECISION & ORDER
On January 10, 2022, the Consumer Financial Protection Bureau (“CFPB”) commenced this action against United Debt Holding LLC (“UDH”); JTM Capital Management LLC (“JTM”); UHG, LLC (“UHG”)[1]; and three executives of those companies Jacob Adamo, Craig Manseth, and Darren Turco. See Docket Item 1 (complaint); see also Docket Item 16 (amended complaint). The CFPB alleges that UDH, JTM, and UHG violated the Consumer Financial Protection Act (“CFPA”) and the Fair Debt Collection Practices Act (“FDCPA”) by purchasing defaulted consumer debt and then placing that debt with, or selling that debt to, debt collection companies that “used threats and misrepresentations to coerce payments from consumers.” See Docket Item 16 at ¶¶ 2, 169-201. The CFPB also says that Manseth, Adamo, and Turco, as executives of UDH, JTM, and UHG, are liable for the companies' unlawful conduct. See id. at ¶ 3.
After the CFPB amended its complaint, see Docket Item 16 the defendants moved to dismiss the amended complaint under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), Docket Items 30 and 31. On April 21, 2022, the CFPB responded to the motions to dismiss, Docket Item 37, and about three weeks later, the defendants replied, Docket Items 40 and 41. The CFPB then asked for leave to file a sur-reply to address arguments raised in the defendants' reply briefs, see Docket Item 42, and the defendants opposed that motion, Docket Item 44.
On January 12, 2023, this Court heard oral argument on the motions to dismiss. Docket Item 50. At oral argument, the Court granted the CFPB's motion for leave to file a sur-reply and accepted the defendants' response to that motion as a sur-sur-reply. See id. The parties then submitted additional briefing on whether vicarious liability is available under the CFPA. Docket Items 52, 55, 56.
For the reasons that follow, the defendants' motions to dismiss are denied.
FACTUAL BACKGROUND[2]
UDH, JTM, and UHG are limited liability companies that purchase defaulted consumer debt. Docket Item 16 at ¶ 1. Although UDH, JTM, and UHG now “operate[] as a single entity,” see id. at ¶ 125, the three companies initially were distinct, see id. at ¶¶ 111-12.
UDH, JTM, and UHG all employ the same basic business model: The companies purchase “portfolios of defaulted consumer debt worth millions of dollars for a small fraction of their outstanding balance” and “then place[] the portfolios with or s[ell] them to other” debt collection companies. Id. at ¶¶ 16, 29, 45. The debt collectors with whom the debt is placed or to whom it is sold then collect the debt on the defendantcompanies' behalf. Id. at ¶¶ 17, 30, 46. And those placement debt collectors sometimes placed debts with other companies, who then would collect on UDH's, JTM's, or UHG's behalf.[3] Id. at ¶ 127.
Manseth founded UDH in 2008, and he served as its Chief Executive Officer and President. Id. at ¶¶ 56-57. Turco served as UDH's Executive Vice President, “where he reported to Manseth and assisted with managing compliance issues relating to debt collectors.” Id. at ¶ 87.
“Beginning in or before 2014, UDH's primary lines of business were placing consumer debt with and selling consumer debt to” other debt collection companies. Id. at ¶ 98. In some cases, UDH would “place[] its debt with debt collectors called ‘master servicers,' who then placed it with other debt collectors that collected the debts on UDH's behalf and with UDH's knowledge.”[4] Id. at ¶ 99. Those collectors and master servicers would “remit a percentage of the amount collected from each consumer to UDH.” Id. at ¶ 100. “UDH also sold debt to debt collectors and entered into agreements with some debt collectors that required the debt collectors to make ongoing payments to UDH.” Id. at ¶ 101. “UDH had the authority to repurchase or recall any debts, to terminate its contracts with any sub-agencies, and to stop master servicers from placing any UDH debt with specific debt collectors due to compliance concerns, at any time.” Id. at ¶ 102.
One such “master servicer” with whom UDH placed debts was JTM. UDH began working with JTM as a “master servicer” in 2015. Id. at ¶ 103. Adamo founded JTM, and he has had managerial responsibility over JTM since 2014. Id. at ¶¶ 73-74. Adamo also “monitored debt collectors' activities and compliance, which included handling escalated complaints” about those collectors. Id. at ¶ 75.
According to the CFPB, however, JTM did not always comply with federal consumer protection laws. In fact, “[f]rom 2015 through January 2017, UDH's compliance staff reviewed recorded phone calls from JTM's debt collectors and found that many contained major violations of the FDCPA or the CFPA's prohibition against unfair, deceptive, or abusive acts and practices.” Id. at ¶ 105. And UDH received complaints in 2015 and 2016 “from consumers whose accounts were placed by or with JTM, complaining that they had been threatened with arrest, jail, or a lawsuit if they did not pay.” Id. at ¶ 106.
Although UDH's compliance officer “told Manseth and Turco that UDH should stop using JTM” as a master servicer, UDH instead “increased its reliance on JTM to collect its debts.” Id. at ¶¶ 107-08. By 2017, UDH “was using JTM almost exclusively as its master servicer,” and UDH “placed more than 380,000 accounts with JTM.” Id. at ¶ 109. UDH continued to use JTM as a master servicer “through mid-2018.” Id. at ¶ 110.
In May 2017, Adamo, Manseth, and Turco founded UHG. Id. at ¶ 111. Soon after that, UDH and JTM “began transitioning nearly all aspects of their business to UHG.” Id. at ¶ 112. UDH and JTM both “signed [] written agreement[s]” with UHG that “obligat[ed] UHG to handle all or almost all of [UDH's and JTM's] business affairs in exchange for all or most of the profit derived from [them].” Id. at ¶¶ 113-14.
Although UDH and JTM were at that point folded into UHG, the CFPB says that UHG retained much of JTM's and UDH's internal structure and business. JTM and UDH employees “became employees of UHG,” and UHG took over JTM's and UDH's office space. Id. at ¶¶ 117-18. UHG “continued to use the same policies and procedures as UDH,” as well as “the same technology, the same software systems, and the same vendors pursuant to the same contracts as UDH.” Id. at ¶¶ 121-22. UHG also “continued to use JTM's and UDH's portfolios, consumer data, account details, and performance statistics to obtain new financing and business[] and to collect on existing portfolios.” Id. at ¶ 123. And UHG “continued to use the same complaints-management system as JTM and UDH.” Id. at ¶ 124. Since JTM, UDH, and UHG joined together, the three companies “have operated as a single entity under the control of” Adamo, Manseth, and Turco. Id. at ¶ 125.
As noted above, UDH, JTM, and UHG share similar business models, and each “contracted with debt collectors to collect debt on [their] behalf . . ., either directly or through another debt collector.” Id. at ¶ 127. “UDH, JTM, and UHG provided the debt collectors collecting on their behalf with consumers' contact information, personal identifying information, and account details related to the debt the consumers allegedly owed.” Id. at ¶ 128. The debt collectors then would use that information to contact the consumers and attempt to collect the unpaid debts. Id. at ¶¶ 129-30. And the debt collectors would “remit[] a percentage of the amount collected from each consumer to UDH, JTM, and UHG, pursuant to their agreements” with the three companies. Id. at ¶ 133.
UDH, JTM, and UHG all “provided written guidance to the debt collectors,” which “required certain conduct standards, audits, testing, and training of staff.” Id. at ¶ 135. Moreover, UDH, JTM, and UHG-as well as Adamo, Manseth, and Turco-all “had the authority to instruct debt collectors about how to handle consumer complaints, whether to discipline collection employees, and how to change collection behavior.” Id. at ¶ 136. The defendants also “had the authority to remove accounts from debt collectors and to refuse to send additional accounts to debt collectors.” Id. at ¶ 137.
Those debt collection companies did not always use lawful tactics to collect on the unpaid debt, however. In fact, UDH, JTM, and UHG placed debts with debt collectors that falsely told consumers that they would be sued for the unpaid debts. Id. at ¶¶ 138-46. Those collectors would, for example, tell consumers that their calls were the “final step before ‘the client' would file suit” or would represent that the consumers' “status or account was pre-legal, in mediation, or in arbitration.” Id. at ¶¶ 139, 141-42. But “[n]one of the debt collectors . . . were authorized by UDH, JTM, or UHG to sue consumers”; none of the debt collectors in fact sued consumers; and UDH, JTM, and UHG had no “imminent plan[s] to sue the consumers threatened by the debt collectors when the[] statements were made.” Id. at ¶¶ 144-46.
What is more, “[s]ome of the debt collectors with wh[om] UDH JTM, or UHG placed debt, or their downstream debt collectors, made representations that consumers' credit scores or credit histories would be impacted positively if they paid the debt or, conversely, would be impacted negatively if they did not pay the debt.” Id. at ¶ 147. But “UDH, JTM, and UHG did not furnish information to credit-reporting agencies regarding the[ consumers'] debts,” and the debt collectors likewise did not supply that information to credit agencies. I...
To continue reading
Request your trial