Polacsek v. Debticated Consumer Counseling, Inc., CIV. PJM 04-631.

• Decision Date: 23 November 2005
• Docket Number: No. CIV. PJM 04-631.,CIV. PJM 04-631.
• Citation: 413 F.Supp.2d 539
• Parties: Alyssa POLACSEK, et al. Plaintiffs v. DEBTICATED CONSUMER COUNSELING, INC., et al. Defendants
• Court: U.S. District Court — District of Maryland

Page 539

413 F.Supp.2d 539

Alyssa POLACSEK, et al. Plaintiffs v. DEBTICATED CONSUMER COUNSELING, INC., et al. Defendants

No. CIV. PJM 04-631.

United States District Court, D. Maryland.

November 23, 2005.

David James Vendler, Morris Polich and Purdy LLP, Los Angeles, CA, for Plaintiffs.

Gregory Scott Duncan, Law Office of Gregory S. Duncan, Gary Wheeler Kendall Garrett Minor Smith, Michie Hamlett Lowry Rasmussen and Tweel PLLC, Charlottesville, VA, for Plaintiff/Intervenor Plaintiffs.

Kevyn D. Orr, Thomas Ryan McCarthy, Jones Day, Gary C. Adler, Robert M. Adler, O'Connor and Hannan LLP, Washington, DC, Rachel Sima Shujman, Loeb and Loeb LLP, Los Angeles, CA, for Defendants.

Judy Johnson, Honesdale, PA, pro se.

Abdul Akbor Jamil, Essex, MD, pro se.

Artie Taylor, Columbus, OH, pro se.

Robert E. Grant, Furey Doolan and Abell LLP, Chevy Chase, MD, Geoffrey Smith Irwin, John Buchanan Williams, for Defendants/Intervenor Defendants.

OPINION

MESSITTE, District Judge.

I.

A key question in this case is whether a credit counseling agency (CCA) is subject to the Credit Repair Organizations Act (CROA), 15 U.S.C. § 1679 et seq. The Court holds that, depending on the circumstances, it may be.¹

The Court further holds, as a matter of law, that Debticated Consumer Counseling, Inc. (Debticated), the only CCA Defendant in this case, will be subject to CROA if it is determined at trial that, directly or indirectly, it operated de facto as a for-profit corporation. The fact that Debticated or any CCA may have been organized as a non-profit corporation or that it may have been granted tax-exempt status by the Internal Revenue Service is not dispositive.

Thus, to the extent that Debticated is held subject to CROA, it may be held liable for such violations of the Act as may be demonstrated at trial, including the making of untrue or misleading representations with respect to its services, engaging in actual or attempted fraud or deception in connection with the offer or sale of their services, receiving improper payments in advance of their services, and furnishing contracts and notices lacking in requisite information.

II.

According to a report prepared by the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs of the United States Senate, the practice known as "credit counseling" was initiated by banks and credit card companies in the mid-1960s to deal with the problem of personal bankruptcies.² The companies providing the counseling were typically community-based, non-profit organizations offering a full range of counseling. Trained counselors advised consumers about how to deal with their current financial situation, counseled them on budget planning, and educated them on how to avoid debt problems in the future.

A popular credit counseling option was the Debt Management Plan (DMP), in which the credit counselor would contact a consumer's unsecured creditors and negotiate lower monthly payments, lower interest rates, and the waiver of outstanding late fees. The consumer's lower payments would then be consolidated into a single payment and the consumer would send the single payment to the credit counseling agency, which would then distribute payments to each of the consumer's creditors.

These credit counseling agencies typically relied on contributions from creditors or small fees from consumers to cover operational costs.

Over time, a different business model developed, one in which non-profit CCAs authorized for-profit affiliates to take over so-called "back-office" services previously handled by the CCAs themselves, i.e. advertising, marketing, executive salaries, and any other activities apart from actual credit counseling services. These back-office processing companies collected revenues from the non-profit CCAs for their services.

Beginning in or about 1996, Defendant Andris Pukke and his wife Defendant Pamela Pukke were associated with a nonprofit CCA known as AmeriDebt, Inc. In 1999, ArneriDebt became one of the nonprofit CCAs that spun off its back-office and DMP processing functions to a for profit entity, in this case DebtWorks, Inc., which was wholly owned by Andris Pukke. Among other things AmeriDebt and Debt-Works used the same law firm for legal services and for a time at least had common or adjoining office space.

While at first AmeriDebt was Debt-Works' sole client, eventually AmeriDebt officers, directors and employees fanned out to establish other CCAs, each of which entered into "fulfillment contracts" with DebtWorks to provide DMP processing services. Among the other non-profit CCAs that came into existence and were serviced by DebtWorks were Debticated Consumer Counseling, Inc. and a number of CCAs that are not defendants in this case: A Better Way Credit Counseling, Inc., CrediCure, Inc., Mason Credit Counseling Inc., Nexum Credit Counseling, Inc., Neway, Inc./Debtscape, Inc., The Credit Network, Inc., Visual Credit Counseling, Inc., PreActiv, Inc., FairStream, Inc., and DebtServe, Inc. (hereinafter the non-Defendant CCAs). DebtWorks reported gross revenues from its activities of $2.1 million dollars in 1999, $15.4 million dollars in 2000, $38.0 million dollars in 2001, and $53.1 million dollars in 2002.

The evidence suggests that these CCAs were linked in various ways apart from their common connection with DebtWorks. Several of the CCAs used the same legal counsel and had access to start-up loans from Defendant Infinity Resources Group, Inc., a private lending institution wholly owned and operated by Andris Pukke. The CCAs also referred their consumers to Infinity for possible debt consolidation loans. Consumers paid Infinity a fee to have these loans processed and Infinity received interest on the loans it made.

At the end of 2002, Andris Pukke formed The Ballenger Group, LLC which purchased the DMP accounts and other assets of DebtWorks. In 2003 Ballenger reported gross receipts of $37.4 million dollars, most if not all of which traced back to "contributions" made by consumers who enrolled in DMPs through the non-profit CCAs.

In the Fall of 2001, Plaintiff Alyssa Polacsek (Polacsek), who was concerned about her credit situation, placed a phone call to Debticated. She was immediately directed to Debticated's web pages on the Internet which she promptly accessed. These web pages identified Debticated as a non-profit organization that could offer lower interest rates, eliminate over-the-limit fees, re-age past due accounts, improve credit ratings, and provide debt consolidation loans. Among the materials eventually mailed to Polacsek was a benefits sheet indicating, in capital letters, that Debticated's program could "IMPROVE [HER] CREDIT."

Polacsek submits that she was reassured by the fact that she would be working with a non-profit as opposed to a profit-making organization. She understood that the "counseling contribution" Debticated asked her to make—equivalent to one payment on the Debt Management Plan—would be used to cover the "operational costs involved in setting up her account and negotiating with her creditors." She also understood that the monthly contribution solicited by Debticated "would be used to cover the cost involved in handling your creditors on a monthly basis." Polacsek did not understand from Debticated that her entire first payment would go to Debticated rather than her creditors.

In October 2001 Polacsek completed her application forms and sent them in to Debticated. She was never told that Debticated would be immediately transferring her file to DebtWorks or to any for-profit corporation for servicing, which in fact was what Debticated immediately did. When Polacsek called to inquire about issues concerning her account, DebtWorks employees, not Debticated employees, answered the phone. It was not until a few weeks after she had sent her initial payment to Debticated that Polacsek learned that the payment had been kept by Debticated and not sent to creditors.

Debticated and the non-Defendant CCAs operated in a fashion substantially similar to one another. Plaintiffs-in-Intervention Sarah Leoni and Greg Cavataio dealt with Debticated. Plaintiff-in-Intervention Felicia Robinson dealt with Neway and Debtscape.

In the present litigation, Plaintiffs collectively allege that the core deception of Debticated and the non-Defendant CCAs was that they operated as non-profit corporations and that the consumers'"voluntary contributions" were going to cover the cost of setting up and negotiating consumer plans as set forth in the contracts between CCAs and their clients. Debticated in particular advertised that its program was "free" and that there was "no fee." Plaintiffs also contend that the CCAs were misrepresenting their services when they claimed that they would "negotiate" with creditors on behalf of consumers and would "attempt to secure" debt consolidation loans which, according to Plaintiffs, were all but worthless.

Additionally, Plaintiffs allege that Debticated charged and received money for services before the services were fully performed and that Plaintiffs failed to receive the contracts or notices they were entitled to under CROA.

III.

Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R.Civ.P. 56; see also Celotex v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The burden is on the moving party to demonstrate the absence of any material issue of fact. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. Once the moving party satisfies his initial burden, the non-moving party "may not rest upon his allegations," but must present evidence demonstrating the existence of a genuine issue of material fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106...