People v. Debt Resolve, Inc., 18-cv-9812 (AJN)

• Decision Date: 03 July 2019
• Docket Number: 18-cv-9812 (AJN)
• Citation: 387 F.Supp.3d 358
• Parties: The PEOPLE of the State of New York, Plaintiff, v. DEBT RESOLVE, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

387 F.Supp.3d 358

The PEOPLE of the State of New York, Plaintiff,

v.DEBT RESOLVE, INC., et al., Defendants.

18-cv-9812 (AJN)

United States District Court, S.D. New York.

Signed July 03, 2019

Elizabeth Mary Lynch, Melvin L. Goldberg, Jane M. Azia, Laura Levine, Stewart Chenault Dearing, Office of the New York Attorney General, New York, NY, for Plaintiffs.

Jeremi L. Chylinski, Gordon Rees Scully Mansukhani LLP, New York, NY, Matthew P Gallo, Randolph Andrew Scott, Peter George Siachos, Gordon Rees Scully Mansukhani LLP, Florham Park, NJ, Adel James Chareq, Allen Denson, Lucy E Morris, Hudson Cook, LLP, Washington, DC, David J. Libowsky, Bressler, Amery & Ross, PC, New York, NY, for Defendants.

OPINION & ORDER

ALISON J. NATHAN, United States District Judge

The Attorney General of the State of New York brings this civil enforcement action on behalf of the People of the State of New York ("Plaintiff") against ten entities and two individuals (collectively, "Defendants") who are involved in an allegedly fraudulent and deceptive scheme targeted at consumers with student loan debt. According to Plaintiff, Defendants' actions in marketing, selling, and financing programs that purportedly provide debt relief services violate numerous provisions of state and federal consumer protection law. Ten of the twelve Defendants¹ have moved to dismiss the Second Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the following reasons, Defendants' motions to dismiss are DENIED.

I. FACTUAL BACKGROUND

The Court takes the following facts, which are assumed to be true for the purposes of this motion, from the operative complaint in this action. See, e.g. , LaFaro v. N.Y. Cardiothoracic Grp., PLLC , 570 F.3d 471, 475 (2d Cir. 2009).

Defendants are ten entities and two individuals who market, sell, and finance programs that "claim to help student loan borrowers struggling with debt reduce or eliminate their federal student loan debt." Dkt. No. 41 ¶ 4. According to the Complaint, these programs are offered for free from the federal government, but Defendants charge hundreds of dollars in fees in exchange for enrollment in the programs. Id. ¶ 6. The Complaint alleges that, in order to induce consumers to purchase these services, Defendants make numerous misrepresentations, including claims that "borrowers cannot apply on their own" for the services, that Defendants are "loan experts," and/or are affiliated with the federal government, and "that the fees paid by borrowers will be applied to pay their student loan balances." Id. ¶¶ 5–6. In addition, the Complaint alleges, Defendants provide "incomplete and harmful advice" concerning available options, sometimes worsening borrowers' financial situations. Id. ¶ 6. When borrowers agree to purchase debt relief services from Defendants, they are required to pay a fee upfront. Id. ¶ 9. In some cases, borrowers are directed to enter into financing contracts with interest rates of as high as 21% in order to pay the fees. Id. ¶ 11. As alleged, these financing agreements "claim[ ] to provide open-ended credit," but in fact are closed-end credit plans. Id. ¶ 14. This conduct has been the subject of hundreds of consumer complaints to the Better Business Bureau ("BBB") and the Consumer Financial Protection Bureau ("CFPB"). Id. ¶¶ 47, 205.

In the Complaint, Plaintiff groups the Defendants by their roles in this allegedly fraudulent scheme. Debt Resolve, Inc. ("Debt Resolve") and Hutton Ventures, LLC ("Hutton Ventures") are categorized as "Owner Defendants." Debt Resolve is the majority owner of Defendants Progress Advocates, LLC ("Progress Advocates"), and Student Loan Care, LLC ("Student Loan Care"). Dkt. No. 41 ¶ 20. Hutton Ventures co-owns Defendant Student Loan Care. Id. Defendants Progress Advocates, LLC ("Progress Advocates"), Progress Advocates Group, LLC ("Progress Advocates Group"), Student Loan Care, LLC ("Student Loan Care"), Student Loan Support LLC ("Student Loan Support"), and Student Advocates Team, LLC ("Student Advocates Team") are "Contracting Defendants," who enter into contracts with borrowers for student loan debt-relief services. Id. ¶¶ 24–29. The "Marketing Defendants," which include Student Advocates, LLC ("Student Advocates"), Student Advocates Group, LLC ("Student Advocates Group"), Student Advocates Team, and Student Loan advertise the debt-relief services to consumers on behalf of Contracting Defendants. Id. ¶¶ 30–35. The two "Individual Defendants," Bruce Bellmare ("Bellmare") and Stanley E. Freimuth ("Freimuth"), have occupied various leadership positions in Debt Resolve, Student Loan Care and Progress Advocates. Id. ¶¶ 49–51. Finally, Defendant Equitable Acceptance Corporation ("Equitable") is the "Financing Defendant."

Equitable drafts the financing plan agreements that borrowers enter into to pay the fees charged by Contracting Defendants, and then purchases these agreements from Contracting Defendants. Id. ¶¶ 36–48.

Plaintiff further alleges that the Owner Defendants, Contracting Defendants, and Marketing Defendants, many of which share almost identical names, are interrelated companies. See Dkt. No. 41 ¶¶ 19–51. Notably, eight of the Defendants share a principle place of business with at least one other Defendant. Defendants Debt Resolve and Student Loan Care share a principle place of business. Id. ¶ 19. Student Advocates Team, Progress Advocates Group, Student Loan Support, Student Advocates Group, and Student Advocates all have the same principle place of business, which they share with Progress Advocates, whose majority owner is Debt Resolve. Id. In addition, with the exception of Student Loan Care, each Contracting Defendant and Marketing Defendant either provided or received marketing services from no fewer than three other Defendants. Id. ¶¶ 24–35.

The Complaint alleges that the Individual Defendants are personally involved with the management and day-to-day operations of several of the corporate Defendants. Defendant Bellmare, who is the CEO of Debt Resolve, is alleged to have "reviewed the operations of Debt Resolve's majority-owned Progress Advocates and Student Loan Care and the representations that its Student Loan Advisors were instructed to make to borrowers." Dkt. No. 41 ¶ 202. Bellmare also "determined that Debt Resolve should...continue to enter into Equitable Credit Plans with borrowers." Id. ¶ 203. In addition, Bellmare "responded to individual borrower complaints forwarded to him by the CFPB or State Attorneys General concerning deceptive practices by Student Loan Care." Defendant Freimuth is the former CEO of both Debt Resolve and Progress Advocates. Id. ¶ 50. Freimuth personally signed a Master Dealer Agreement with Equitable during his tenure as CEO of Progress Advocates. Id. ¶ 209. This agreement "set the terms for Equitable's purchases of the Equitable Credit Plans that Progress Advocates entered into with...borrowers." Id.

II. PROCEDURAL BACKGROUND

Plaintiff filed this action in state court on September 20, 2018. See Dkt. No. 1. On October 24, 2018, Defendant Equitable removed the case to this Court with the consent of all Defendants. Id. Three groups of Defendants subsequently moved to dismiss, Dkt. Nos. 27, 34, 35, and Plaintiff filed an amended complaint on December 12, 2018, Dkt. No. 36. The operative complaint in this action is the Second Amended Complaint ("the Complaint"), which Plaintiff filed on December 24, 2018. Dkt. No. 41.

The Complaint contains 18 counts against a total of 12 Defendants—ten entities and two individuals. See id. Plaintiff alleges that Defendants were engaged in a deceptive scheme to sell debt-relief services to individuals with student loans in violation of New York Executive Law ("Exec. Law") § 63(12) ; New York General Business Law ("GBL") §§ 349 –50; and the Credit Repair Organizations Act ("CROA"), 15 U.S.C. § 1679. In addition, Plaintiff alleges that Defendants used selling tactics that violate the Telemarketing Sales Rule, 16 C.F.R. § 310, and § 399 of the GBL, and enter into contracts with purchasers that violated New York Banking Law ("Banking Law") § 14-a ; New York General Obligations Law ("GOL") § 5-501 ; GBL Art. 28-BB; and the Truth in Lending Act ("TILA"), 15 U.S.C. 1601 et seq. Finally, according to the Complaint, Defendants failed to secure certain New York state licenses, as required by Banking Law §§ 340, 492 and New York Personal Property Law ("PPL") §§ 402 or 413

On January 25, 2019, two groups of Defendants moved to dismiss the Complaint in full; one motion was filed by Debt Resolve, Inc., Bruce Bellmare, and Stanley E. Freimuth, Dkt. No. 57, and one motion was filed by Progress Advocates, LLC and Student Loan Care, LLC, Dkt. No. 60. On February 5, 2019, Defendant Equitable Acceptance Corp. filed a motion to dismiss. Dkt. No. 65. A fourth and final motion to dismiss was filed on March 8, 2019, by Defendants Progress Advocates Group, LLC, Student Advocates Group, LLC, Student Advocates Team, LLC, and Student Loan Support, LLC. Dkt. No. 80. All four motions to dismiss were fully briefed as of May 1, 2019, and the Court held oral argument on May 15, 2019.

III. LEGAL STANDARD

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court accepts the allegations in the Complaint as true and draws all reasonable inferences in favor of the non-moving party. McCarthy v. Dun & Bradstreet Corp. , 482 F.3d 184, 191 (2d Cir. 2007). To survive a motion to dismiss, the complaint must include "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In other words, "the complaint's factual allegations must be...