Estrella v. FREEDOM FINANCIAL NETWORK, LLC
778 F. Supp. 2d 1041
N.D. Cal.2011Background
- Plaintiffs challenge a debt reduction program operated by Freedom Debt Relief, Inc. and related Network defendants (Freedom Financial Network, Freedom Debt Relief LLC, and officers) as unlawful under California and federal law.
- The program involves enrolling consumers, setting up a Special Purpose Account (SPA), and withdrawing fees from the SPA after funds accumulate to negotiate settlements with creditors.
- Fees total about 15% of the existing debt (roughly 10% service fee and 5% retainer), deducted over the first four and next fifteen months.
- California prorater statute Cal. Fin.Code §§ 12000–12404 forms the basis for alleged prorating liability under the Check Sellers, Bill Payers, and Proraters regulations; the CDOC previously issued and then withdrew a Desist and Refrain order related to prorating.
- The parties filed cross-motions for summary judgment on whether FDR is a prorater, with issues focusing on constructive control of client funds and whether FDR acts ‘in part’ as a prorater.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FDR is a prorater under Cal. Fin.Code § 12002.1 | Plaintiffs: FDR has constructive control over funds and thus prorates. | Defendants: FDR lacks actual/constructive control over client funds. | Denial of summary judgment on prorater status |
| Whether FDR is engaged in prorating ‘in part’ under §12002.1 | Plaintiffs: the arrangement with Global and RMBT makes FDR part of the prorating scheme. | Defendants: no basis to find FDR prorating merely as part of a broader network. | Denied |
| Whether the Network defendants other than FDR are entitled to summary adjudication on prorating claims | Plaintiffs argue the other entities are alter egos and thus liable. | Defendants: only FDR offered debt settlement services; others should be dismissed. | Denied |
| Whether the Network defendants’ request to adjudicate each prorating factor separately is appropriate | Not separately addressed; broader prorater question controls. | Desire for granular, element-by-element adjudication. | Denied |
Key Cases Cited
- Nationwide Asset Services, Inc. v. DuFauchard, 164 Cal. App. 4th 1121 (Cal. App. 4th 2008) (constructive receipt/possession of funds as prorater factor)
- Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal.4th 163 (Cal. 1999) (UCL actionable when underlying law violated)
- Nationwide Asset Services, Inc. v. DuFauchard, 164 Cal. App. 4th 1123 (Cal. App. 4th 2008) (interpretation of prorater statute and constructive control considerations)
- Thornhill Publishing Co. v. GTE Corp., 594 F.2d 730 (9th Cir. 1979) (summary judgment standards and burden shifting)
- Kaiser Cement Corp. v. Fischbach & Moore, Inc., 793 F.2d 1100 (9th Cir. 1986) (summary judgment burden on moving party with/without ultimate burden of proof)