I. Factual Background...746
a. The NFL Class Members...746
b. September 11, 2001 James Zadroga Victims Compensation Fund Eligible Claimants...747
c. The Purchase Agreements...747
d. Claims Against the RD Entities...748
i. CFPA Claims...748
ii. Claims Arising Under New York Law...748
II. Procedural History...749
III. Legal Standard...751
IV. Discussion...751
a. Federal Jurisdiction...752
i. The RD Entities as "Covered Persons" Under the CFPA...752
1. The NFL Concussion Litigation Settlement Agreement Claims...752
a. The NCLSA's Anti-Assignment Provision...753
b. Legal Standard Regarding the Scope of the Anti-Assignment Provision...753
c. Assignability of "Settlement Proceeds" Versus "Monetary Claims"...755
d. Interpretation of the New York UCC...756
e. The NFL-related Purchase Agreements Are Void...756
2.31 U.S.C. § 3727 Invalidates the Assignment of Compensation Awards from the VCF...756
a. The Anti-Assignment Act,31 U.S.C. § 3727 ...757
i. "Claim Against the United States"...757
ii. Statutory Purpose...759
iii. .. The VCF-related Purchase Agreements Do Not Comply With the Anti-Assignment Act's Requirements...761
3. Eligible Claimants and NFL Class Members "Incur[red] Debt" Through the Purchase Agreements ...761
a. The RD Entities Extend "Credit" and "Service[ ] Loans"...766
4. The RD Entities Are "Covered Persons" Under the CFPA...766
b. Failure to State a Claim Fed. R. Civ. P. 12(b)(6)...767
i. Rule 9(b)'s Heightened Pleading Standard Does Not Apply to Non-Fraud Claims...767
1. "Substantial Assistance" Claims Under the CFPA...769
2. Specificity of Allegations Against Each Defendant Under Rule 8(a)...770ii. "Substantial Assistance" Liability Under the CFPA...771
iii. Deceptive and Abusive Conduct Under the CFPA...772
1. Counts I, III, IV, V: Deceptive Acts or Practices Under the CFPA...772
a. Count I...773
i. "Substantial Assistance" Claim Against Roni Dersovitz Under Count I...773
b. Count III...774
i. "Substantial Assistance" Claim Against Roni Dersovitz Under Count III...775
c. Count IV...775
i. "Substantial Assistance" Claim Against Roni Dersovitz Under Count IV...776
d. Count V...776
i. "Substantial Assistance" Claim Against Roni Dersovitz Under Count V...777
2. Count II: Abusive Acts or Practices Under the CFPA...777
a. "Substantial Assistance" Claim Against Roni Dersovitz Under Count II...778
iv. State Law Claims...779
1. NYAG's Jurisdiction Over the Purchase Agreements...779
2. Count VI: Claims Under New York Civil and Criminal Usury Laws...780
3. Count VIII: Violation of New York General Obligations Law § 13-101...781
4. Count IX: Violation of New York General Business Law § 349...781
5. Count X: Violation of New York General Business Law § 350...783
6. Count XI: New York Executive Law § 63(12) Fraud...783
c. Constitutional Claims...784
i. History, Liberty, and Presidential Authority...784
ii. CFPB's Notice of Ratification...784
d. Conclusion...785
This is an action by Plaintiffs Consumer Financial Protection Bureau (the "CFPB") and the People of the State of New York, by Eric T. Schneiderman, Attorney General for the State of New York ("NYAG" or the "Attorney General") (collectively, the "Government"), against Defendants RD Legal Funding, LLC; RD Legal Finance, LLC; RD Legal Funding Partners, LP (collectively, the "RD Entities"); and Roni Dersovitz, the founder and owner of the RD Entities (together with the RD Entities, the "Defendants"). The Government asserts that the Defendants violated certain provisions of the Consumer Financial Protection Act ("CFPA" or the "Act"). NYAG independently asserts that the RD Entities are liable under New York law for the same actions and events that form the basis of the CFPA claims. Defendants move to dismiss the Complaint (ECF No. 1) on three principal grounds. First, Defendants argue that the CFPB is unconstitutionally structured and therefore lacks the authority to bring claims under the CFPA. Second, Defendants contend that the Court lacks federal jurisdiction because the RD Entities are not "covered persons" under the CFPA and therefore do not come within the Act's jurisdictional purview. Third and finally, the RD Entities move to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim for relief.
As set out below, because the CFPB's structure is unconstitutional, it lacks the authority to bring claims under the CFPA and is hereby terminated as a party to this action. The NYAG, however, has independent
I. Factual Background
The following facts are drawn from the Complaint, (Complaint ("Compl."), ECF No. 1), the Assignment and Sale Agreements (hereinafter the "Purchase Agreements") attached as exhibits to the Affidavit of Roni Dersovitz, (Affidavit of Roni Dersovitz ("Dersovitz Aff."), Exs. A-1 to A-20, B-1 to B-5, ECF No. 41-1), and the National Football League ("NFL") Concussion Litigation Settlement Agreement ("NCLSA"), (Dersovitz Aff. Ex. 6), which Defendants attached to their motion to dismiss. The allegations in the Complaint are accepted as true for purposes of the instant motion.
The CFPB and NYAG bring this action against the RD Entities and their founder and owner, Roni Dersovitz. (Compl. ¶¶ 15-19.) The RD Entities are companies that offer cash advances to consumers waiting on payouts from settlement agreements or judgments entered in their favor. The Government alleges that Defendants misled these consumers into entering cash advance agreements that the Defendants represented as valid and enforceable sales but, in reality, functioned as usurious loans that were void under state law. (Compl. ¶ 19.)
At issue in this case are two specific groups of consumers (collectively, the "Consumers") with which the RD Entities transacted: (1) class members in the National Football League ("NFL") Concussion Litigation class action ("NFL Class Members" or "Class Members") and (2) individuals ("Eligible Claimants") who qualify for compensation under the September 11th Victim Compensation Fund of 2001 ("VCF").
a. The NFL Class Members
On January 31, 2012, a federal multidistrict litigation was created in United States District Court for the Eastern District of Pennsylvania for lawsuits on behalf of former NFL players who suffer from mild traumatic brain injury due to playing professional football. See Settlement Agreement (hereinafter "Settlement Agreement") Preamble,
The NFL Class Members at issue in this case are former NFL players who have been diagnosed with neurogenerative diseases such as chronic traumatic encephalopathy ("CTE"), Alzheimer's, or Parkinson's disease and who have received notification of their entitlement to a settlement award under the NCLSA for these injuries. (Compl. ¶¶ 22-23.)
b. September 11, 2001 James Zadroga Victims Compensation Fund Eligible Claimants
In January 2011, President Obama signed the James Zadroga 9/11 Health and Compensation Act of 2010 ("Zadroga Act"), which served to renew the September 11th Victim Compensation Fund of 2001 (the "VCF").
According to the Complaint, the Eligible Claimants with whom the RD Entities transact have received an award letter from the VCF's Special Master indicating the amount of compensation to which they are entitled under the VCF. (Compl. ¶¶ 22-23);
c. The Purchase Agreements
According to the Complaint, after a Consumer has received final approval and a notice of the award amount to which he or she is entitled, the RD Entities offer to take a security interest in the Consumer's settlement award or a portion thereof (the "Property" or "Property Amount"). (Compl. ¶ 20.) In the contracts that Defendants enter into with Consumers, the RD Entities purport to "acquire the full risks and benefits of ownership of the Property and acquire the full right, title and interest in the Property." (Def. Br. Ex. 1.) In exchange, the RD Entities offer Consumers an immediate "lump sum" cash payment that represents a portion of the total award to which the Consumer is entitled. (Compl. ¶ 24.) In return, the Consumer agrees to repay a larger amount, i.e., the Property Amount, to the RD Entities after receiving its settlement payment. (Id. ) The Purchase Agreements contain a no recourse provision that relieves the Consumer
The RD Entities enter into two types of contracts with Consumers. Under the first, the RD Entities advance a lump sum of cash to the Consumer. The repayment amount that the Consumer owes to RD remains the same, regardless of when the Consumer receives the award from the VCF or the NFL Settlement Fund. (Compl. ¶ 31.) Under the second type of contract, the amount the Consumer repays turns on when the claims administrator disburses the Consumer's award. The longer it takes for the Consumer to receive his or her settlement payment, the more the Consumer owes to the RD Entities. (Id. )
After entering into the Purchase Agreement, Consumers are obligated immediately to forward any monies received from the NFL Claims Administrator or the VCF to the RD Entities until the Consumer has paid off the agreed-upon amount. (Compl. ¶ 26.) After the amount due under the agreement has been paid to the RD Entities, the Consumer is entitled to keep any balance in excess of that amount that he or she receives from the NFL Settlement Fund or VCF Claims Administrator. (Id. )
d. Claims Against the RD Entities
i. CFPA Claims
The Complaint alleges five CFPA claims against the RD Entities: (1) Count I alleges that the RD Entities engaged in deceptive acts or practices,
ii. Claims Arising Under New York Law
The NYAG brings independently various claims arising under New York law, each
II. Procedural History
The instant case has a circuitous history in this Court. In January 2017, RD Legal Funding, LLC filed a complaint against the CFPB in the Southern District of New York seeking relief in the form of, inter alia, a declaration that the purchase of legal receivables from customers are true sales and that, therefore, RD Legal Funding, LLC's business is not within the CFPB's jurisdiction. RD Legal Funding, LLC v. Consumer Fin. Prot. Bureau, No. 17-cv-00010 (LAP) (S.D.N.Y.) (ECF No. 1); (Def. Br. 7.) According to Defendants, RD Legal Funding, LLC filed that action in response to civil investigative demands ("CID") that the CFPB served on RD Legal Funding, LLC as well as a formal request from the CFPB to depose an RD Legal Funding, LLC representative in connection with the CFPB's investigation of the RD Entities. (Def. Br. 6.)
Two days after filing suit in federal court against the CFPB, RD Legal Funding Partners, LP and RD Legal Funding, LLC filed a similar suit in New York state court against NYAG seeking a declaration that the VCF Purchase Agreements are true sales. RD Legal Funding, LLC, et al. v. Schneiderman, et al., No. 17-cv-00681 (LAP) (S.D.N.Y.) (ECF No. 1).
Following RD Legal Funding, LLC and RD Legal Funding Partners, LP's actions against the CFPB and NYAG in this Court and New York state court, the CFPB and NYAG filed this enforcement action against the RD Entities on February 7, 2017. (ECF No. 1.) On May 15, 2017, the RD Entities moved to dismiss the Complaint on several grounds, including lack of federal jurisdiction due to the CFPB's unconstitutional structure, the CFPB's lack of jurisdiction over the RD Entities as "covered persons" under the CFPA, and for failure to state a claim on which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (ECF No. 39.)
In July 2017, class counsel for the NFL Class Members requested that this Court allow it to file an amicus brief in opposition to the RD Entities' motion to dismiss or, in the alternative, that determination of the validity of the assignment provisions in the NFL Purchase Agreements be referred to
On December 8, 2017, Judge Brody issued an Explanation and Order which concluded that the anti-assignment clause in the NFL Concussion Litigation Settlement Agreement "unambiguously prohibits" NFL class members "from assigning or attempting to assign any monetary claims [under the NFL Settlement Agreement]," thereby rendering "any such purported assignment ... void, invalid and of no force and effect" under New York law. See Explanation and Order (hereinafter, "Explanation and Order"), In re NFL Players' Concussion Injury Litig., No. 2:12-md-2323-AB (E.D. Pa. Dec. 8, 2017) (ECF No. 9517) (citing Neuroaxis Neurosurgical Assocs., P.C. v. Costco Wholesale Co.,
As a result of this finding, Judge Brody held that Class Members' Purchase Agreements with the RD Entities were void. Explanation and Order at 5-6. Accordingly, she ordered the NFL Class Members to return to the RD Entities any amount that the RD Entities had already paid them.
On August 1, 2017, after Defendants filed the instant motion to dismiss, the American Legal Finance Association ("ALFA") moved for leave to file an amicus curiae brief in opposition to Defendants' motion to dismiss. The Court granted ALFA's request, and ALFA filed its amicus curiae brief on August 15, 2017. (See Br. for ALFA as Amicus Curiae ("ALFA Br."), ECF No. 56.)
On March 5, 2018, the Government filed a letter in response to the Court's February 23 and 28 orders. (ECF No. 73.) On March 12, 2018, Defendants filed a letter in response to the Government's March 5, 2018 letter addressing these issues. (ECF No. 74.)
III. Legal Standard
In considering a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), a court must "accept the material facts alleged in the complaint as true and construe all reasonable inferences in the plaintiff's favor." Phelps v. Kapnolas,
In certain circumstances, the court may permissibly consider documents other than the complaint in ruling on a motion under Rule 12(b)(6). Documents that are attached to the complaint or incorporated in it by reference are deemed part of the pleading and may be considered. In addition, even if not attached or incorporated by reference, a document "upon which [the complaint] solely relies and which is integral to the complaint" may be considered by the court in ruling on such a motion.
Tolliver v. Lilley, No. 12-cv-971,
IV. Discussion
In addressing the various arguments that Defendants assert in support of dismissal, the Court first addresses Defendants' contention that this Court lacks federal
a. Federal Jurisdiction
i. The RD Entities as "Covered Persons" Under the CFPA
The CFPA regulates "covered person[s] or service provider[s]" who are engaged in "unfair, deceptive, or abusive act[s] or practice[s] under Federal law."
The Government asserts four claims of deceptive acts or practices and one claim of abusive acts or practices under the CFPA against the RD Entities.
The Government asserts that the RD Entities are "covered persons" under the CFPA because they extend "credit" and service loans. The Government alleges that the RD Entities engage in this activity because the assignments in the Purchase Agreements are void. See
The RD Entities reject this characterization. They argue that the assignments are legally permissible and therefore effectuate true sales of Consumers' interest in their settlement awards. (Def. Reply 5-6.) Under this approach, the Consumer incurs no repayment obligation in the event that the RD Entities are unable to collect the purchased receivable. (Def. Br. 19.) Therefore, the RD Entities assert that the consumer incurs "no debt," "no repayment obligation," and that "[t]here is certainly no right granted to defer payment of a debt" to the Consumer. (Id. )
Both parties' arguments as to the Government's jurisdiction over Defendants as "covered persons" turns on the validity of the assignments. If the assignments are valid, as Defendants suggest, the entire basis of the Government's jurisdictional theory under the CFPA would fall apart.
Accordingly, in deciding whether the RD Entities are "covered persons" under the CFPA, the Court must first determine whether the assignments embodied in the NFL Purchase Agreements and the VCF Purchase Agreements are valid.
1. The NFL Concussion Litigation Settlement Agreement Claims
Following the issuance of Judge Brody's Explanation and Order that found
a. The NCLSA's Anti-Assignment Provision
The express terms of the NCLSA restrict Class Members' ability to assign their rights or claims "relating to the subject matter of the Class Action Complaint," Explanation and Order at 2 (citing Settlement Agreement (hereinafter "Settlement Agreement") § 30.1, In re NFL Players' Concussion Injury Litig., MDL No. 2323 (E.D. Pa. Feb. 13, 2015) (ECF No. 6481-1) ):
Section 30.1 No Assignment of Claims. Neither the Settlement Class nor any Class or Subclass Representative or Settlement Class Member has assigned, will assign, or will attempt to assign, to any person or entity other than the NFL Parties any rights or claims relating to the subject matter of the Class Action Complaint. Any such assignment, or attempt to assign, to any person or entity other than the NFL Parties any rights or claims relating to the subject matter of the Class Action Complaint will be void, invalid, and of no force and effect and the Claims Administrator shall not recognize any such action.
Settlement Agreement § 30.1 (emphasis added).
The Government asserts that the assignments in the NFL Purchase Agreements are void because the NCLSA's express terms prohibit class members from assigning "any rights or claims relating to the subject matter of the Class Action Complaint," which include their interest in their settlement award (or a portion thereof) under the NCLSA. (Compl. ¶ 35) (emphasis added). In response, the RD Entities contend that the NCLSA's anti-assignment provision violates New York's general prohibition of contractual anti-assignment clauses
b. Legal Standard Regarding the Scope of the Anti-Assignment Provision
First, Defendants contend that Judge Brody did not construe the anti-assignment language "narrowly" when interpreting the phrase "relating to" as required under New York law. In particular, they note that the anti-assignment provision does not specifically prohibit Class Members from assigning their right to a settlement award under the NCLSA, and therefore is not "sufficiently express" to be upheld under New York law. (ECF No. 62-4 at 10-17); C.U. Annuity Serv. Corp. v. Young,
As a matter of policy, New York generally permits parties to assign their interests unless "the relevant provision of the contract contains 'clear, definite, and appropriate language declaring an assignment invalid.' " Au New Haven, LLC v. YKK Corp.,
It is well-settled that, in interpreting a contract's terms, courts must give effect to the plain meaning of its words or terms. This basic principle encompasses phrases, including "relating to." State v. Philip Morris Inc.,
In relevant part, the term "relate to" is defined as "to have relationship or connection." Relate, Merriam Webster (May 24, 2018), https://www.merriam-webster.com/dictionary/relate. In accord with its dictionary definition, courts in New York have given effect to the plain meaning of the phrase "relating to" when interpreting contracts in the past. See, e.g., Coregis Ins. Co. v. Amer. Health Found., Inc.,
Rights to settlement awards under the NCLSA indisputably "relat[e] to the subject matter of the Class Action Complaint." As the Explanation and Order correctly notes, monetary awards under the NCLSA would not exist but for the events giving rise to the Class Action Complaint. Explanation and Order at 3-4. The "relationship" or "connection" between rights to settlement awards under the NCLSA and the "subject matter of the Class Action Complaint" is straightforward.
Defendants' repeated reliance on Au New Haven, LLC v. YKK Corp.,
In sum, Judge Brody's interpretation of the term "relating to" complies with New York contract law and basic principles of contract interpretation by giving meaning to the plain meaning of the phrase. Accordingly, the Court agrees with the Explanation and Order's conclusion. The NCLSA's terms state clearly that the anti-assignment provision validly applies to the
c. Assignability of "Settlement Proceeds" Versus "Monetary Claims"
Defendants also assert that Judge Brody's Explanation and Order refers to the assignment of "monetary claims," while the Purchase Agreements at issue purport to assign Class Members' right to "settlement proceeds." (ECF No. 62.) Defendants argue that the Explanation and Order's use of the term "monetary claims" rather than "settlement proceeds" shows that Judge Brody conflated legally distinct concepts under New York law. Specifically, Defendants note that although New York law prohibits the assignment of claims, it does not similarly prohibit the assignment of settlement proceeds. For this reason, Defendants argue that the Explanation and Order's findings, which use the term "monetary claims," are inapplicable to the assignment of "settlement proceeds" at issue in the NFL-related Purchase Agreements. (ECF No. 62); Explanation and Order at 3-4.
Defendants' argument is a combination of mere word mincing and misconstruction of the law. As to misconstruction of the law, the assignments in the NFL-related Purchase Agreements purport to effectuate a transfer of Class Members' full ownership rights and interest in the Property Amount to RD Legal Finance, LLC. (Dersovitz Aff. Exs. B-1 to B-7.) Through these Purchase Agreements, RD Legal Finance, LLC purports to "step into the shoes of the assignor" and obtain the full right to demand direct payment of the Property Amount from NFL Monetary Award Fund through a limited irrevocable power of attorney. (See Dersovitz Aff. Ex. B-5 at 12.) Defendants fail to note that the right to demand direct payment from the NFL Monetary Award Fund in itself is a "claim" that "clearly encompasses a cause of action for nonpayment." Renfrew Ctr. v. Blue Cross Blue Shield of Central N.Y., Inc., No. 94-cv-1527 (RSP/GJD),
Defendants' assertion that the NFL Purchase Agreements are assignments of the "right to settlement proceeds" under the NCLSA is unavailing. Defendants cite Grossman v. Schlosser,
Thus, New York law permits, at most, the creation of an equitable lien on future settlement proceeds. Id."An equitable lien is 'a right ... to have a fund, specific property, or its proceeds, applied in whole or in part to the payment of a particular debt.' " Bank of India v. Weg & Myers,
In sum, Defendants' arguments that assignments of claims to settlement award funds under the NCLSA are valid are without merit.
d. Interpretation of the New York UCC
New York Uniform Commercial Code ("NY UCC") § 9-408(d)(1) establishes a general bar on anti-assignment clauses limiting the transfer of "general intangibles."
The RD Entities contend that because the NCLSA does not specify whether compensation from it qualifies as excludable income under Section 104, the NY UCC's exception for restrictions on assignments of monetary claims for personal injury settlements does not save the anti-assignment provision as it relates to "proceeds" from settlement of personal injury claims.
It is beyond peradventure that compensation from the NFL Settlement Agreement constitutes "damages ... received ... on account of personal physical injuries" under Section 104 of the Internal Revenue Code.
Accordingly, the NY UCC does not invalidate the NFL Settlement Agreement's anti-assignment provision.
e. The NFL-related Purchase Agreements Are Void
In sum, the NCLSA validly prohibits the assignment of NFL Class Members' monetary claims. Therefore, the assignments in the NFL Purchase Agreements are void.
2.
The RD Entities and the Government disagree over whether federal law prohibits
Neither of the parties has cited to, and this Court has not been able to identify, a case addressing whether the Anti-Assignment Act applies to the VCF structure instituted by the Air Transportation Safety and System Stabilization Act, codified at
a. The Anti-Assignment Act,
Congress initially enacted the Assignment of Claims Act, now known as the Anti-Assignment Act, in 1853. United States v. Kim,
"(1) [T]o prevent persons of influence from buying up claims against the United States, which might then be improperly urged upon officers of the Government, (2) to prevent possible multiple payment of claims, to make unnecessary the investigation of alleged assignments, and to enable the Government to deal only with the original claimant, and (3) to save to the United States defenses which it has to claims by an assignor by way of set-off, counter claim, etc., which might not be applicable to an assignee."
In re Ideal Mercantile Corp.,
To this end, the Anti-Assignment Act,
i. "Claim Against the United States"
The Anti-Assignment Act restricts the assignment of "claims against the United States."
Although the Anti-Assignment Act does not define the term explicitly, "[w]hat is a claim against the United Stated is well understood. It is a right to demand money from the United States." Hobbs v. McLean,
Applying this definition here, an Eligible Claimant's monetary award from the VCF is a "claim against the United States" because
Defendants argue that the Anti-Assignment Act only restricts the assignment of substantive claims against the United States. (Def. Rep. 5.) Applying this principle here, the RD Entities contend that the VCF Purchase Agreements assign Eligible Claimants' right to proceeds from the VCF rather than Eligible Claimants' substantive claims. Therefore, they say, Section 3727 does not bar these assignments. (Def. Reply 5); (ECF No. 74.)
In the same way that the RD Entities misconstrue the legal distinction between the assignment of "claims" and the assignment of "proceeds from claims" with the NFL-related Purchase Agreements, they do so once more here. Courts have held uniformly that an individual's right to receive payment directly from the United States Government is a substantive claim that may not be assigned under the Anti-Assignment Act. SeeKim,
Consistent with this interpretation, the Anti-Assignment Act does not restrict a would-be assignor's ability to create a legal obligation to pay a would-be assignee after the United States Government has paid the would-be assignor. In this situation, the would-be assignee could then "enforce[ ]" the agreement "by suit" if the would-be assignor did not "recognize" this agreement "after collection of the money." Nutt v. Knut,
Defendants cite to Saint John Marine for the proposition that the Purchase Agreements are valid because while "the Anti-Assignment Act 'voids the assignment as against the United States, the assignment remains enforceable as between the parties to the contract.' " (ECF No. 74) (citing Saint John Marine,
In sum, the RD Entities' argument shows too much by arguing that Defendants purport to contract for a full ownership interest in a portion of Eligible Claimants' award, which plainly includes the right to demand payment for that portion directly from the United States Government. (Dersovitz Aff. Ex. A-1 at 16) (letter from RD Entities to VCF Claims Processing Center demanding payment be made directly to RD Entities pursuant to Purchase Agreement); (Def. Br. Sec. III(A)(1)(b) ) ("The Assignments Give the RD Entities the Right to Demand Direct Payment from the Holder of the Funds."). "From the beginning ... the Anti-Assignment Act has been concerned with direct payment of claims." Kim,
ii. Statutory Purpose
Having concluded that an award of compensation under the September 11th VCF constitutes a "claim" within the meaning of the Anti-Assignment Act, the Court must next determine whether application of the Anti-Assignment Act to the VCF's enabling statute would advance the statute's stated objectives before applying it. Saint John Marine,
In passing the Anti-Assignment Act, Congress sought to protect the United States Government by restricting the assignment of claims against it. See Martin,
"(1) [T]o prevent persons of influence from buying up claims against the United States, which might then be improperly urged upon officers of the Government, (2) to prevent possible multiple payment of claims, to make unnecessary the investigation of alleged assignments, and to enable the Government to deal only with the original claimant, and (3) to save to the United States defenses which it has to claims by an assignor by way of set-off, counter claim, etc., which might not be applicable to an assignee."
In re Ideal Mercantile Corp.,
In spite of the Anti-Assignment Act's broad language, courts have held the statute inapplicable where enforcement would not advance its underlying purposes. See N.Y. Guardian,
After weighing the relevant factors, the Court concludes that application of the Anti-Assignment Act to
First, applying the Anti-Assignment Act to awards under the VCF would allow the United States Government the opportunity, if ever necessary, to set off an Eligible Claimant's award amount against preexisting debts owed to the United States. See Shannon,
More significantly, however, application of the Anti-Assignment Act to
Accordingly, application of the Anti-Assignment Act to
iii. The VCF-related Purchase Agreements Do Not Comply With the Anti-Assignment Act's Requirements
The Anti-Assignment Act allows a party to assign a claim against the United States only if it is made after "[1] a claim is allowed, [2] the amount of the claim is decided, and [3] a warrant for payment of the claim has been issued."
The RD Entities appear to argue that because they entered into the Purchase Agreements with Eligible Claimants only "after the Special Master's determination of the amount due to the seller, i.e., after the claim had been allowed," (Def. Rep. 6), Defendants have complied with Section 3727's requirements and the assignment is therefore permissible.
Oddly, the RD Entities do not address their compliance with the Anti-Assignment Act's two other technical requirements.
Accordingly, because neither the RD Entities nor the Government have argued or alleged facts that the VCF Purchase Agreements comply with Section 3727's requirements, these assignments are void as against the United States under
3. Eligible Claimants and NFL Class Members "Incur[red] Debt" Through the Purchase Agreements
After addressing the preliminary issue of whether the VCF and NCLSA permit the assignment of Consumers' claims to settlement awards, which they do not, the Court is able to turn to the crux of the jurisdictional question presented here: whether the Purchase Agreements cause Consumers to incur "debt" such that the RD Entities "extend[ ] credit" within the meaning of a "covered person" under the CFPA.
In spite of the puzzling paucity of case law addressing facts similar to those at issue here, the Court agrees ultimately that the assignments in the Purchase Agreements are void as against the third-party obligors, i.e., the VCF Claims Administrator and the NFL Settlement Fund, but give rise to a relationship between Defendants and Consumers in which the RD Entities "extend[ ] credit" and the Consumer incurs "debt" within the meaning of
The CFPA defines "credit" as "the right granted by a person to a consumer to [1] defer payment of a debt, [2] incur debt and defer its payment, or [3] purchase property or services and defer payment for such purchase."
In Capela v. J.G. Wentworth, LLC, the court held that a transaction involving a party's sale and assignment of its right to structured settlement payments for a personal injury claim from Allstate Settlement Corporation in exchange for an upfront, lump sum cash payment from a structured settlement company was a sale, not an extension of "credit" under TILA. No. CV09-882,
Capela and Reed present facts that are fundamentally different from those at issue here because the assignments in those cases were not declared invalid as a matter of law. In Capela, the purchaser of the receivables petitioned for and obtained judicial approval of the transaction pursuant to New York's Structured Settlement Protection Act,
Here, the Court has concluded that the assignments in the VCF Purchase Agreements and the NFL Purchase Agreements are void as against the third-party obligors.
It is well-established that contract interpretation is the domain of state law. See Capela,
Under New York law, an assignment of litigation proceeds takes effect as an equitable lien in favor of the "assignee." In re Minor,
Here, because the assignments are void, no ownership rights are transferred to the RD Entities under the Purchase Agreements. Rather, the RD Entities are creditors with a security interest in Consumers' future-but already determined-settlement award amounts under the VCF or NCLSA. In re Minor,
Bankruptcy courts frequently face the question of whether a transaction is properly characterized as a loan or a sale where the purchaser of a receivable must defend its rights against other creditors in the seller's bankruptcy proceeding. Peter V. Pantaleo et al., Rethinking the Role of Recourse in the Sale of Financial Assets, 52 Bus. Law. 159, 160 (1996). To that end, bankruptcy courts weigh the presence or absence of certain factors in determining whether a transaction is a sale or a loan under New York law. (Def. Br. 19, 27.) Among the factors that these courts consider in this analysis is the existence of recourse. If a buyer retains recourse against the seller, this indicates that the buyer has assumed less than all of the ownership rights in a purported sale, thereby indicating that the transaction is more likely a loan. See In re Dryden Advisory Group, LLC v. Beneficial Mut. Sav. Bank,
Courts also look to other factors in making this determination. For example, an assignee's right to demand direct payment from the seller's account debtor tends to indicate that a true sale has taken place. See In re Dryden Advisory Grp.,
Bearing all of these factors in mind, Defendants urge that the paramount factor in determining whether a transaction is a sale or a loan under New York law is whether the "risk of non-payment is transferred from the seller to the buyer, not the degree of risk borne by the buyer." (Def. Rep. 11-12.) Because the RD Entities purport to assume all of the risks of nonpayment in the Purchase Agreements, they argue that the Agreements are non-recourse and therefore are true sales. (Id. )
Contrary to the RD Entities' assertions, the instant case is not a line-drawing exercise. The assignments in the Purchase Agreements are void and thus do not transfer a single right of ownership from
In spite of the lack of case law classifying structured settlement transactions as loans or sales where a court deems the assignment void as a matter of law against the third-party obligor, a single Missouri state court case contains significant factual parallels to the case at hand. In Missouri ex rel. Taylor v. Salary Purchasing Co. Inc., the Missouri Attorney General brought charges against a salary advance company that offered consumers a cash advance on their unearned wages.
In rejecting the salary advance company's argument, the Supreme Court of Missouri, sitting en banc, noted that the void assignments "could be nothing but loans" because they "transferred no right or title in the unearned wages which they purported to assign."
In sum, because the assignments in the Purchase Agreements are void, the RD Entities obtain, at most, an equitable lien on Consumers' future settlement award proceeds that establishes a creditor-debtor relationship.
Defendants argue that the legal effect of invalidating an assignment is to "render
The pre-settlement legal funding transactions referenced in ALFA's amicus curiae brief differ in a crucial respect. (See ALFA Br.) In those transactions, the pre-settlement legal funding agreements are entered into before the claim is resolved. The ALFA Member's right to repayment is contingent on the consumer's ultimate success on his or her claim. (ALFA Br. 5.) ALFA notes that Regulation Z's definition of "credit" expressly excludes "[i]nvestment plans in which the party extending capital to the consumer risks the loss of the capital advanced."
Applying this framework here, the Court concludes that the Government has alleged plausibly that the transactions at issue here functioned as extensions of "credit" in practice.
a. The RD Entities Extend "Credit" and "Service[ ] Loans"
Under the CFPA, a "covered person" is one who "extend[s] credit and servic[es] loans."
Under
It is well-established that courts may interpret the term "and" to have a disjunctive effect in interpreting a statute's meaning. See Peacock v. Lubbock Compress Co.,
Even if Congress did not intend the term "and" to be interpreted disjunctively, the Government has adequately pleaded that the RD Entities "servic[e] loans." The CFPA defines the term "service provider" as one who "provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service."
Accordingly, the Government need only plead that the RD Entities "extend[ed] credit" or "servic[ed] loans" to allege plausibly that they are "covered persons" under the CFPA. In the alternative, the Court concludes that, even if the Government had to allege that the RD Entities also "servic[e] loans," the Complaint also alleges adequately that the RD Entities, by and through their founder and owner Roni Dersovitz, engaged in such activities by collecting on loans and making the decision to collect on loans.
4. The RD Entities Are "Covered Persons" Under the CFPA
For the reasons stated above, the Court concludes that the Government has pleaded adequately that the RD Entities are "covered persons" under the CFPA.
b. Failure to State a Claim Fed. R. Civ. P. 12(b)(6)
Defendants next argue that, even if the RD Entities are "covered persons" within the meaning of the CFPA, the Complaint should be dismissed for failure to state a claim under Rule 12(b)(6).
i. Rule 9(b)'s Heightened Pleading Standard Does Not Apply to Non-Fraud Claims
Before addressing the substantive allegations in the Complaint, Defendants argue that because the Government's claims are all premised on an alleged unified course of fraudulent conduct and the Complaint fails to distinguish between fraud and non-fraudulent claims, Rule 9(b)'s heightened pleading standard should apply to all of the claims alleged in the Complaint. (See Def. Br. 24.) Proceeding under this assertion, the RD Entities argue that the Government's claims fail under Rule 9(b)'s heightened pleading standard and should be dismissed. (Id. ) In response, the Government asserts that fraud and deception are separate legal concepts and that Rule 9(b)'s heightened pleading standard
Rule 9(b) of the Federal Rules of Civil Procedure imposes a heightened pleading standard and requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). Specifically, Rule 9(b)'s heightened pleading standard requires pleadings to "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Rombach v. Chang,
At least two courts addressing this specific issue have concluded that Rule 9(b)'s heightened pleading standard does not apply to claims of unfair, deceptive, or abusive acts or practices under the CFPA for three reasons. See CFPB v. Frederick J. Hanna & Assocs., P.C.,
The Court has identified no case in which this Court or the Court of Appeals has applied Rule 9(b)'s heightened pleading standard to claims of deceptive or abusive acts or practices under the CFPA. See, e.g., CFPB v. NDG Fin. Corp., No. 15-cv-5211 (CM),
Similarly, the Court of Appeals has stated clearly that Rule 9(b)'s heightened pleading standard does not apply to New York General Business Law § 349. In so holding, the Court of Appeals has noted that "[ Section] 349 extends well beyond common-law fraud to cover a broad range of deceptive practices" and that Section 349 claims "[do] not require proof of the
The question of what pleading standard should apply to the NYAG's claim under
Applying the same logic that the Court of Appeals has employed in determining that claims under
1. "Substantial Assistance" Claims Under the CFPA
In each of the CFPA deceptive or abusive acts or practices claims brought against Defendants, the Government alleges that Roni Dersovitz, the RD Entities' owner and founder, is liable for substantially assisting the RD Entities in carrying out these purported acts.
Under
The Court concludes that the knowledge requirement for individual liability under the CFPA does not trigger Rule 9(b)'s heightened pleading requirement. As discussed, the primary violation of unfair, deceptive, or abusive acts or practices underlying the CFPA claims against Dersovitz in his individual capacity do not constitute fraud claims. See Navient,
Accordingly, the claims for individual liability against Dersovitz pursuant to 12 U.S.C. 5536(a)(3) are not subject to Rule 9(b)'s heightened pleading standard.
2. Specificity of Allegations Against Each Defendant Under Rule 8(a)
Rule 8(a) requires that a defendant be given "fair notice of what the ... claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly,
The RD Entities contend that the Complaint fails to comply with Rule 8(a) because its allegations "lump" the three corporate Defendants together without adequately differentiating between and among them. (Def. Br. 38.) Defendants argue that the Government's failure to parse the factual basis for each claim as to each corporate Defendant deprives the RD Entities of fair notice of the claims against each of them. Id.; see Ochre LLC v. Rockwell Architecture Planning & Design, P.C., No. 12 Civ. 2837,
Although the Complaint is hardly a model of best pleading practices, the Court concludes that its shortcomings do not amount to fatal "lumping" together of Defendants such that the Complaint warrants dismissal for failure to comply with Rule 8(a)'s pleading requirements. First, the Court of Appeals has held that dismissal pursuant to Rule 8 is proper when a complaint is "unintelligible" and does not "explain[ ] what conduct constituted the violations, which defendants violated which statutes ... or how the alleged violations harmed [the plaintiff]." Vantone Grp. LLC v. Yangpu NGT Indus. Co., Ltd., No. 13-cv-7639 (LTS),
Here, the Complaint states the nature of the various types of claims brought against the corporate defendants, including alleged violations of state and federal consumer protection statutes, and the conduct underlying those claims.
Defendants rely on Ochre LLC v. Rockwell Architecture Planning & Design, P.C., in arguing that the Complaint "impermissibly" lumps the corporate Defendants together. No. 12 Civ. 2837,
Accordingly, because the Complaint provides each corporate defendant with "fair notice of what the ... claim is and the grounds upon which it rests," dismissal under Rule 8 is not warranted here. Erickson v. Pardus,
ii. "Substantial Assistance" Liability Under the CFPA
In its Complaint, the Government brings five claims of individual liability against Roni Dersovitz for "knowingly or recklessly providing substantial assistance" to a "covered person" under the CFPA-here, the RD Entities.
The Court has identified only one case interpreting
In Universal Debt & Payment Solutions, the court drew on the substantially similar requirements of individual aiding and abetting liability under federal securities laws and individual liability for providing "substantial assistance" under the CFPA,
The Court of Appeals has interpreted aiding and abetting liability under § 20(e) to require the Government to show "(1) the existence of a securities law violation by the primary (as opposed to the aiding and abetting) party; (2) 'knowledge' of this violation on the part of the aider and abettor; and (3) 'substantial assistance' by the aider and abettor in the achievement of the primary violation." SEC v. DiBella,
To plead adequately the "substantial assistance" element, the Government must "establish that the aider and abettor 'in some sort associated himself with the venture, that he participated in it as something he wished to bring about, and that he sought by his action to make it succeed.' " SEC v. DiMaria,
As to § 20(e)'s knowledge requirement, "the plaintiff must at least demonstrate recklessness" to satisfy it. Yorkville Advisors, LLC
iii. Deceptive and Abusive Conduct Under the CFPA
1. Counts I, III, IV, V: Deceptive Acts or Practices Under the CFPA
The Complaint includes four claims of deceptive acts or practices under the CFPA against all of the named Defendants. To make a prima facie case of deceptive acts or practices under the CFPA, the Complaint must allege adequately "(1) a representation, omission or practice that, (2) is likely to mislead consumers acting reasonably under the circumstances, and
In essence, the RD Entities argue that each of the Complaint's deceptive acts or practices claims under the CFPA must fail because each is based on the conclusory allegation that the transactions at issue are loans, not sales. (Def. Br. 26.) Because, as a matter of law, the Purchase Agreements were void and functioned plausibly as extensions of credit, the Court rejects this defense and finds that the Complaint plausibly alleges that Defendants engaged in deceptive acts or practices in violation of the CFPA.
a. Count I
Count I avers that the RD Entities violated the CFPA by deceptively marketing the Purchase Agreements as sales when in fact these transactions were properly characterized as loans. (Def. Br. 25.)
As discussed earlier, federal and state law, as well as the NCLSA's express terms, prohibit consumers from assigning any of their interest in their settlement awards from the VCF and NCLSA, respectively. According to the Complaint, Defendants made false representations to Consumers that its products were valid assignments of Consumers' interests in their anticipated settlement awards. (Compl. ¶ 38-39.) Defendants also labeled the Purchase Agreements as "assignment and sale" agreements when, in fact, the Purchase Agreements were not true sales. See FTC v. Verity Int'l, Ltd.,
Finally, the Government also alleges adequately that the misleading representation was material. "Express representations that are shown to be false are presumed material." Med. Billers Network,
Accordingly, the Government alleges adequately that Defendants engaged in deceptive acts or practices in violation of the CFPA.
i. "Substantial Assistance" Claim Against Roni Dersovitz Under Count I
The Court concludes that the Government has pleaded facts sufficient to show that Dersovitz had the requisite scienter to state a claim for individual liability under
Turning to the scienter requirement, the Court concludes that the Complaint pleads facts sufficient to allege that Dersovitz exhibited an "extreme departure from the standards of ordinary care" in offering to enter into the Purchase Agreements
The Complaint alleges that Dersovitz has "significant responsibility for establishing RD's policies and practices," "substantial control over RD's operations," and "responsibility to [sic] dictate all the terms of [C]onsumer contracts." (Compl. ¶¶ 18, 27.) In addition, Dersovitz is the founder and owner of each RD Entity named as a Defendant in this action. (Compl. ¶ 18.) Given Dersovitz's role as founder and owner of the RD Entities and his authority to "dictate the terms of [C]onsumer contracts," his conduct is at least "reckless" with respect to the NFL Settlement Agreement's anti-assignment clause and the Anti-Assignment Act's potential applicability to the VCF Purchase Agreements. (Compl. ¶¶ 34-36.)
As to the NFL Purchase Agreements, the NCLSA contains clear and unambiguous anti-assignment language. Dersovitz's failure to inform Class Members that this existed exhibits "highly unreasonable" conduct that "represents an extreme departure from the standards of ordinary care." Furthermore, the allegations suggest that Dersovitz was aware of the possibility that the assignments were impermissible but decided to go ahead with the transaction in spite of this. The Purchase Agreements address specifically the possibility that the assignments in the Purchase Agreements will be classified as loans by a court.
Similarly with the VCF Purchase Agreements, Dersovitz encountered several warning signs indicating a high risk that the RD Entities were misrepresenting the nature of these agreements to Consumers, specifically, that the VCF Claims Administrator refused to make payment directly to the RD Entities, in spite of its demands that it do so pursuant to the assignments, and the general disclaimer in the VCF Purchase Agreements that a court may find the sale to be a loan. In sum, the Complaint adequately alleges that Dersovitz acted recklessly in knowing that the assignments may well be invalid but holding them out as enforceable.
Finally, Dersovitz provided "substantial assistance" to the RD Entities in carrying out these CFPA violations. Dersovitz "associated himself" with the RD Entities as their founder and owner and "participated in [the enterprise] as something he wished to bring about" by continuing to craft the RD Entities' policies and procedures and exercising authority over those Entities. Furthermore, Dersovitz "sought by his action to make [the RD Entities] succeed" by making offers to enter into Purchase Agreements to Consumers, (Compl. ¶ 54), being responsible for "solicit[ing] funds from investors" for cash advance payments to Consumers, (Compl. ¶ 51), and "[making] phone calls to at least one New York consumer to collect from that consumer," (Compl. ¶ 54).
Accordingly, the Complaint alleges adequately a claim of "substantial assistance" liability against Roni Dersovitz in his individual capacity.
b. Count III
Count III of the Complaint avers that Defendants violated the CFPA's prohibition on deceptive acts or practices by making representations that Defendants could "cut through red tape" and expedite payment of Consumers' settlement awards. (Compl. ¶¶ 44-48.) Defendants argue that this statement is not misleading because, read in the context of the entire advertisement or transaction, a reasonable Consumer would understand this to mean that the RD Entities would disburse funds more quickly than the settlement fund or claims administrator would, not that the RD Entities would actually expedite disbursements from the
In sum, the Complaint alleges adequately a claim of deceptive acts or practices under the CFPA for the representations described in Count III regarding the timing of payments.
i. "Substantial Assistance" Claim Against Roni Dersovitz Under Count III
The Government alleges that Roni Dersovitz is individually liable under
Here, the Court has already determined that the Government alleged adequately that the RD Entities made material misrepresentations to Consumers in violation of
Accordingly, the Complaint alleges adequately facts demonstrating that Dersovitz substantially assisted the RD Entities in engaging in deceptive acts or practices in violation of the CFPA.
c. Count IV
Count IV, which alleges that the RD Entities acted deceptively in violation of the CFPA by making misleading statements as to when RD would pay Consumers, pleads adequately facts demonstrating that the RD Entities engaged in deceptive conduct under the CFPA. (Compl. ¶¶ 86-89.)
"A claim is considered material if it involves information important to consumers and, hence, is likely to affect their choice of, or conduct regarding a product." Med. Billers Network,
The RD Entities' argument that such grievances amount only to a breach of contract claim is undercut by the fact that the contracts do not speak to the timing of payment. (Def. Br. 36); (Pl. Opp. 27.) Therefore, the Government need not "identify[ ] which of the 27 contracts the RD Entities allegedly breached by failing to make timely payment." (Def. Br. 36.) As previously noted, Rule 9(b)'s heightened pleading standard does not apply to deceptive conduct claims under the CFPA, and therefore the Government need not aver the "who," "what," "where," and "when" that 9(b) requires at this stage. The Complaint avers adequately that Defendants made misleading statements, outside the four corners of the Purchase Agreements, as to the timing of payments that misled consumers. Accordingly, the Government has alleged plausibly that the RD Entities engaged in deceptive acts or conduct under Count IV.
i. "Substantial Assistance" Claim Against Roni Dersovitz Under Count IV
The Court concludes that the Complaint alleges adequately a claim against Roni Dersovitz for "substantially assisting" the RD Entities in carrying out deceptive acts or practices by making misstatements about when Consumers would receive payments from the RD Entities.
Finally, for the reasons stated earlier, including Dersovitz's responsibility for the RD Entities' policies and practices and his role as founder and CEO of the RD Entities, the Complaint alleges adequately that Dersovitz sought ostensibly through these misstatements "to make [the RD Entities] succeed" by drawing in Consumers who were primarily concerned with the timing of their settlement payments. DiMaria,
d. Count V
Under Count V, the Government alleges that the RD Entities engaged in deceptive acts or practices by "collecting on contracts that are void under state laws or, in the alternative, that function as loans with interest rates that exceed usury limits under
For the same reasons that the Court found the Government's factual allegations to plead adequately a claim of deceptive conduct under Count I, so too here. Informing Consumers that they have an obligation to repay under a transaction in which the assignment is void or unenforceable clearly meets the materially misleading threshold under the CFPA. Collecting on loans that are void is materially misleading because it gives Consumers the impression that "borrowers were obligated to repay" the RD Entities when in reality the loan agreements were void and the borrowers were not legally obligated to pay. CFPB v. CashCall, Inc., CV 15-7522-JFW (RAOx),
i. "Substantial Assistance" Claim Against Roni Dersovitz Under Count V
As explained above, the Court concludes that the Complaint alleges adequately that the RD Entities engaged in deceptive acts or practices in violation of the CFPA by indicating to Consumers that they had an obligation to repay the RD Entities when, in fact, the loans were usurious and therefore void under state law.
According to the Complaint, Dersovitz "has authority and responsibility to dictate all the terms of consumer contracts" and "makes decisions on the terms of the offers or extensions of credit." (Compl. ¶ 27.) These allegations, coupled with the fact that the Purchase Agreements reserve the right to file a UCC Financing Statement in the event a court deems the transaction a loan and Dersovitz's position as CEO and founder of the RD Entities, allege facts sufficient to find that Dersovitz exhibited "highly unreasonable" conduct in failing to determine whether the assignments were valid before offering Purchase Agreements to Consumers. The allegations, viewed collectively, indicate that Dersovitz knew that the transactions might not be valid assignments but proceeded with them in any event in an "extreme departure from the standard of ordinary care." Finally, the Complaint alleges that Dersovitz "substantially assisted" the RD Entities in carrying out this deceptive conduct in light of his role as founder and CEO of the RD Entities and his substantial involvement in the business, such as collecting on loans, drafting policies, and having the final word on the terms of the Purchase Agreements. Accordingly, the Complaint pleads facts sufficient to state a claim of individual liability against Dersovitz for substantially assisting a "covered person" under the CFPA.
2. Count II: Abusive Acts or Practices Under the CFPA
The Government alleges that the RD Entities engaged in abusive conduct by undermining Consumers' understanding of
Here, the Government has pleaded sufficient facts to state a claim for abusive acts or practices under the CFPA. Representations that a transaction is a sale when it does not, in fact, transfer validly any rights of ownership from the consumer to the RD Entities are materially misleading because such representations are false. To that end, the Government is correct that these false representations prevent Consumers from evaluating accurately whether this transaction is in their best interest. Defendants' contention that they disclose adequately the risks involved in the Purchase Agreements by labeling them "complex financial transaction[s]" does not neutralize other materially misleading information. The repeated misrepresentations alleged, assuming they were made, would "create[ ] the 'net impression' that the [Purchase Agreements] were enforceable" even though that impression is "patently false" because the Purchase Agreements "were void." CashCall,
Accordingly, the Government has alleged plausibly that the RD Entities engaged in abusive practices under the CFPA.
a. "Substantial Assistance" Claim Against Roni Dersovitz Under Count II
The Government alleges plausibly that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out abusive acts or practices in violation of the CFPA.
Aside from alleging plausibly that the RD Entities engaged in conduct sufficient to state a claim for abusive acts or practices under
As to the scienter requirement, the Complaint alleges adequately that Dersovitz knew, would have known, or acted recklessly with a high risk that the assignments in the Purchase Agreements were prohibited. Universal Debt & Payment Solutions,
iv. State Law Claims
Defendants devote significant space in arguing that the Complaint's CFPA claims should be dismissed because the CFPB is unconstitutionally structured and thus lacks authority to bring such claims. (Def. Br. 9-14.) Vexingly, Defendants do not address the NYAG's independent authority to bring claims in federal district court under the CFPA, without regard to the constitutionality of the CFPB's structure.
A federal district court may exercise "supplemental jurisdiction over all other claims that are so related to claims in the action within [the court's] original jurisdiction that they form part of the same case or controversy ...."
1. NYAG's Jurisdiction Over the Purchase Agreements
In a single footnote, Defendants argue that the Complaint pleads insufficiently NYAG's jurisdiction over the transactions at issue in this case because "the RD Entities' principal place of business is New Jersey" and "NYAG has not made any allegations regarding the residences of the customers who entered the transactions at issue." (Def. Br. 38 n.14.)
As a preliminary matter, the Court pays minimal credence to an argument raised in a two-sentence footnote of a forty-page motion to dismiss regarding the NYAG's jurisdiction over certain Consumers. See Gramercy Advisors, LLC v. Ripley, 13-cv-9070 (VEC),
Accordingly, the information in the Purchase Agreements as well as the allegations in the Complaint allege adequately that deceptive transactions took place in New York and, in the alternative, that these transactions took place in New York as a result of out-of-state deceptive conduct.
2. Count VI: Claims Under New York Civil and Criminal Usury Laws
The Complaint alleges adequately that Defendants have charged more than the maximum usury rate under New York Banking Law § 14-a, with respect to New York's civil usury laws, and under New York Penal Law §§ 190.40 and 190.42, with respect to New York's criminal usury laws. (Compl. ¶¶ 99-105, 106-110.) Defendants' sole argument in response to the Government's usury claims is that the transactions at issues are sales, not loans, and therefore are not subject to state usury laws. (Def. Br. 37.)
As discussed supra, the Court has concluded that Plaintiffs have alleged adequately that the transactions at issue constitute loans, not sales, and therefore Defendants' argument here is without effect. "In New York, the civil usury statute provides that '[t]he maximum interest rate permissible on a loan is 16% per annum, and any interest rate in excess of that amount is usurious.' " Roopchand v. Mohammed,
Accepting the allegations in the Complaint as true and in the light most favorable to the NYAG at this stage of the proceedings, NYAG alleges facts demonstrating plausibly that at least certain of the Purchase Agreements functioned as loans that charged usurious interest rates in excess of New York's civil and criminal usury caps, respectively. (Compl. ¶¶ 29,
3. Count VIII: Violation of New York General Obligations Law § 13-101
Defendants argue that the NYAG fails to state a claim under New York General Obligations Law § 13-101, which prohibits the sale or assignment of claims or demands to recover for personal injury, because the transactions transfer the rights to proceeds from claims for personal injury, not the personal injury claims themselves.
Under
As discussed supra, the term "claim" is defined as "[t]he assertion of an existing right; any right to payment or to an equitable remedy, even if contingent or provisional ... [a] demand for money, property, or a legal remedy to which one asserts a right." Claim, Black's Law Dictionary (10th ed. 2014). The plain language of the Purchase Agreements indicates that Defendants sought to obtain ownership of Eligible Claimants' "claims" to damages for injuries that they suffered following the September 11, 2001 terrorist attacks in that they sought to obtain the right to receive payment directly from the VCF. In sum, the Complaint alleges adequately facts demonstrating that the Purchase Agreements transferred a "claim or demand" to "damages for personal injury" in violation of
Similarly, the NYAG has alleged facts sufficient to state a claim under Section 13-101(1) of N.Y. GBL as to the NFL Purchase Agreements. For the reasons already explained supra, Section IV(a)(i)(1), the NFL Purchase Agreements purport to assign Class Members' full interest in a portion of their settlement proceeds, including the right to demand payment directly from the NFL Settlement Administrator. As such, the Purchase Agreements purport to transfer a "claim or demand" to "recover damages for personal injury." Accordingly, the NYAG has alleged facts sufficient to state a claim under
4. Count IX: Violation of New York General Business Law § 349
"To state a claim for deceptive practices under section 349, a plaintiff must show: (1) that the act, practice, or advertisement was consumer-oriented; (2) that the act, practice, or advertisement was misleading in a material respect; and (3) that the plaintiff was injured as a result of the deceptive act, practice, or advertisement." Pelman ex rel. Pelman v. McDonald's Corp.,
Under the first prong, "consumer oriented" conduct is that which "has a broad impact on consumers at large." Bennett v. State Farm Fire and Casualty Co.,
Under the second prong, the New York Court of Appeals has defined the term "materially misleading" conduct using an objective standard under which "the alleged act must be 'likely to mislead a reasonable consumer acting reasonably under the circumstances.' " Orlander v. Staples Inc.,
Applying this framework to the facts of this case, NYAG has alleged facts sufficient to demonstrate that Defendants engaged in deceptive practices in violation of
Turning to the second element of a claim under
5. Count X: Violation of New York General Business Law § 350
"The standard for recovery under General Business Law § 350, while specific to false advertising, is otherwise identical to Section 349." Austin v. Albany Law School of Union Univ.,
In this Complaint, the NYAG alleges that Defendants falsely advertised their agreements as sales rather than loans and falsely advertised that they would be able to expedite Consumers' payment of their settlement awards. As discussed earlier, such advertising is "consumer-oriented" in that the Complaint alleges that these representations were made to all those who visited Defendants' website or transacted with Defendants through a Purchase Agreement. (Compl. ¶¶ 125-26.) Such statements are also material because they are likely to mislead a reasonable consumer into believing that the transactions are true sales or that Defendants had the ability to expedite payment from the settlement fund administrators when neither statement is true. Defendants also argue that these alleged statements pertain to the "source" of the payments, which is distinct from the timing of payments and would not be material to consumers. (Def. Br. 34.) The Court disagrees. Consumers are individuals who want their settlement awards quickly because they need access to liquidity. It does not take a grand leap of imagination to envision that Consumers may have strained relations with the claims administrators in seeking access to their settlement awards. Therefore, if Consumers were misled into believing that RD would act as a type of third-party facilitator between the Consumer and the claims administrator, this information would be material to the Consumer. Therefore, the Court concludes that Defendants' argument is without merit.
Accordingly, the NYAG alleges adequately facts demonstrating a claim under
6. Count XI: New York Executive Law § 63(12) Fraud
Executive Law § 63(12) empowers the Attorney General to seek injunctive and other relief whenever a person or business engages in "repeated ... or ... persistent fraud or illegality." "Fraud" under § 63(12) is not common-law fraud but is statutorily defined broadly as "any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions." Conduct violates Executive Law § 63(12) if it "has the capacity or tendency to deceive" both the average consumer and "the ignorant, the unthinking, and the credulous." Matter of People v. Applied Card Sys., Inc.,
Here, because the elements of a claim under Section 63(12) are entirely encompassed by the elements of deceptive acts or practices under the CFPA or NY GOL § 349 that the Government has already pled adequately, the Complaint contains sufficient allegations to state a claim under
c. Constitutional Claims
i. History, Liberty, and Presidential Authority
In reaching the question of the constitutionality of Title X of Dodd-Frank, which established the CFPB as an "independent bureau" within the Federal Reserve System,
Also most respectfully, the Court disagrees with Section V of Judge Kavanaugh's opinion wherein he determined the remedy to be to "invalidate and sever the for-cause removal provision and hold that the Director of the CFPB may be supervised, directed, and removed at will by the President."
ii. CFPB's Notice of Ratification
On May 11, 2018, the CFPB filed a Notice of Ratification ("Ratification") with the Court in response to Defendants' constitutional challenge to the for-cause removal provision of the CFPB's enabling statute. In the Ratification, the CFPB attempts to ratify its decision to file this enforcement decision prior to the appointment of the CFPB's Acting Director, Mick Mulvaney, on November 24, 2017. (Notice
As Defendants note, ratification is a principle of agency law. (Defendants' Opp'n to Ratification ("Ratif. Opp'n") 2, ECF No. 79.) Ratification addresses situations in which an agent was without authority at the time he or she acted and the principal later approved of the agent's prior unauthorized acts. See GDG Acquisitions LLC v. Government of Belize,
The Court agrees with Defendants that the CFPB's Ratification does not address accurately the constitutional issue raised in this case, which concerns the structure and authority of the CFPB itself, not the authority of an agent to make decisions on the CFPB's behalf. See CFPB v. Gordon,
Here, the constitutional issues presented by the structure of the CFPB are not cured by the appointment of Mr. Mulvaney. As Defendants point out, the relevant provisions of the Dodd-Frank Act that render the CFPB's structure unconstitutional remain intact. (Ratification 4.) Furthermore, Mr. Mulvaney cannot serve past June 22, 2018 (210 days after the vacancy arose), unless the President nominates a new Director, and then only until the new Director is appointed. Thus, there will likely be a new Director appointed in the coming months who will be subject to the for-cause removal provision. Therefore, the Ratification does not cure the constitutional deficiencies with the CFPB's structure as the CFPB argues. Accordingly, the Court rejects the Notice of Ratification (ECF No. 78) to the extent the CFPB argues that the Ratification renders Defendants' constitutional arguments moot.
Accordingly, the Court finds that the CFPB "lacks authority to bring this enforcement action because its composition violates the Constitution's separation of powers," and thus the CFPB's claims are dismissed. Fed. Election Comm'n v. NRA Political Victory Fund,
d. Conclusion
For the foregoing reasons, Defendants' motion (ECF No. 39) is DENIED. Because Plaintiff Consumer Financial Protection Bureau is unconstitutionally structured and lacks authority to bring claims under the CFPA, the Clerk of Court shall terminate Plaintiff Consumer Financial Protection Bureau as a party to this action.
Counsel shall confer and inform the Court by letter no later than July 9 how they propose to proceed.
SO ORDERED.
Notes
As Defendants note in their motion to dismiss, "[t]he Court may consider the Zadroga Fund agreements [ (Dersovitz Aff. Exs. A-1 to A-20) ], and the NFL Settlement Fund agreements [ (Dersovitz Aff. B-1 to B-5) ], because the Complaint refers to them extensively and 'relies heavily upon [their] terms and effect, which renders the document[s] integral to the complaint.' " Chambers v. Time Warner, Inc.,
The NFL Concussion Litigation Settlement Agreement contains a New York choice-of-law provision.
The Court notes that this argument was raised for the first time in Defendants' letter objecting to the Explanation and Order's findings, after the instant motion to dismiss was fully briefed. (ECF No. 62.)
The assignability of an individual's future interest in an estate is an evolving area of law in both California and New York. See David Horton & Andrea Cann Chandrasekher, Probate Lending,
Defendants accept for purposes of this motion only that New York law applies for purposes of characterizing the transactions as sales or loans. (Def. Br. 26 n.10.)
Although the Federal Trade Commission Act ("FTCA") and the CFPA share structural characteristics that facilitate statutory interpretation under other CFPA provisions, the FTCA's substantial assistance provision does not contain an analogous scienter requirement and therefore has limited relevance here. See NDG Corp.,
Other courts have also addressed this question. CFPB v. TCF Nat'l Bank, No. 17-166 (RHK/DTS),