Consumer Financial Protection Bureau v. Morgan Drexen, Inc., 101 F. Supp. 3d 856

Background

Morgan Drexen, a debt-settlement/bankruptcy services company, and its CEO Walter Ledda were sued by the CFPB alleging illegal up-front fees for debt relief disguised as bankruptcy services; the Court earlier denied summary judgment relying in part on defendants’ representations that bankruptcy petitions were prepared at client intake.
The CFPB moved for sanctions after discovery showed many bankruptcy petitions produced in response to the Bureau’s request had metadata creation dates in June–July 2014, suggesting they were created after litigation began.
A former COO/board member (Augusta) testified that General Counsel Katz and others directed staff in June 2014 to create or augment bankruptcy petitions, run means tests, and to use processing accounts/methods that hid those actions from file logs.
Defendants conceded they generated petitions to assemble and redact materials for production, but claimed petitions were generated only for production/efficiency and denied intent to falsify; some employees denied log-deletions and blamed Augusta for improper steps.
The Court found Defendants willfully manufactured and altered evidence, repeatedly deceived the Court and opposing counsel, and that lesser sanctions were inadequate; it entered default judgment against Morgan Drexen but ordered supplemental briefing on Ledda’s personal liability.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether defendants manufactured/altered evidence in discovery (spoliation)	Defendants created/backfilled hundreds of bankruptcy petitions and altered logs to hide work done after the litigation began, showing bad-faith spoliation	Petition generation was a legitimate means to extract and redact data from internal systems for production; no intent to deceive or destroy evidence	Court held defendants willfully falsified and manufactured evidence in bad faith and that misconduct undermined the integrity of proceedings (spoliation established)
Whether terminating sanctions (default judgment) are warranted for spoliation	Default is appropriate because conduct was willful, prejudiced CFPB, caused delays, impeded docket, and lesser sanctions would be futile	Terminating sanctions are too severe; no evidence destroyed and trial on merits should proceed	Court weighed Anheuser-Busch factors and granted default judgment against Morgan Drexen as lesser sanctions were inadequate
Whether defendants’ misrepresentations affected prior summary judgment rulings	CFPB: defendants’ earlier claims that petitions were prepared at intake were false and tainted prior rulings and litigation conduct	Defendants asserted earlier statements reflected business practices; petitions were stored in databases and produced in readable form later	Court concluded defendants’ changing story and falsified documents undermined the Court’s prior reliance and threatened trial integrity
Whether Walter Ledda should be held personally liable and default entered against him	CFPB: Ledda knew of and was involved in the document-production scheme; seek default against him too	Ledda: limited role (tech/redaction/compensation); claims he expected disclosure and did not direct concealment	Court found existing submissions insufficient to decide Ledda’s personal liability; ordered supplemental briefing on personal liability and possible default against Ledda

Key Cases Cited

Leon v. IDX Sys. Corp., 464 F.3d 951 (9th Cir.) (court may sanction spoliation and explains preservation duty and consequences)
Wyle v. R.J. Reynolds Indus., Inc., 709 F.2d 585 (9th Cir.) (default judgment/termination allowed when party willfully deceives court)
Anheuser-Busch, Inc. v. Natural Beverage Distributors, 69 F.3d 337 (9th Cir.) (factors for imposing terminating sanctions and analysis of prejudice)
Phoceene Sous-Marine, S.A. v. U.S. Phosmarine, Inc., 682 F.2d 802 (9th Cir.) (courts have inherent power to dismiss or enter default to protect integrity of proceedings)
Halaco Eng’g Co. v. Costle, 843 F.2d 376 (9th Cir.) (termination is a harsh sanction reserved for extraordinary circumstances)