MEMORANDUM AND ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT AND DEFENDANTS’ MOTION TO WITHDRAW ADMISSIONS (Dkt. Nos. 187, 198,200, & 232)
I. INTRODUCTION
In November 2003, Plaintiffs Andrew
This court initially allowed a motion to dismiss the Zimmermans’ federal claims in June 2004.
Zimmerman v. Cambridge Credit Counseling Corp.,
The Zimmermans then filed an amended complaint in October 2005, charging Defendants with violations of CROA (Count I) and unfair or deceptive acts or practices in violation of the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A (Count II).
2
(Dkt. No. 65, Am. Compl.1ffl 187-233.) Both Plaintiffs and Defendants have moved for summary judgment on these claims. (Dkt.Nos.187, 198, 200.) Additionally, Defendants seek to withdraw admissions resulting from their failure to respond to requests for admissions served by Plaintiffs in 2005. (Dkt. No. 232.) For the reasons stated below, Defendants’ motion to withdraw their admissions will be denied, as will their motion for summary judgment, and
II. FACTS 3
A. The Credit Repair Organizations Act
The Credit Repair Organizations Act (“CROA”), 15 U.S.C. §§ 1679
el seq.,
was passed in 1996 in response to the growing trend whereby “credit repair” companies used abusive and misleading practices to take advantage of debtors seeking to improve their credit records.
See
15 U.S.C. § 1679(a);
Fed’l Trade Comm’n v. Gill,
In support of those purposes, Congress developed a scheme to subject credit repair organizations (“CROs”) to certain ex ante disclosure requirements in dealing with consumers and to prohibit them from engaging in deceptive practices injurious to the public. See id. §§ 1679b-1679e. This case presents the issue of whether any Defendant was acting as a credit repair organization and was therefore subject to the requirements and penalties of CROA. As will be seen, the undisputed facts confirm that all Defendants were either acting as CROs or were intertwined in the Puccios’ credit repair business and that the federal statute is fully applicable.
B. Factual Background
1. The Puccio Companies.
John and Richard Puccio are brothers who founded Cambridge Credit Counseling Corporation (“CCCC”) in 1996 as a Massachusetts corporation. They filed papers to register CCCC as a nonprofit entity under Massachusetts law and as a 26 U.S.C. § 501(c)(3) nonprofit entity under federal law. The IRS form accompanying CCCC’s application for § 501(c)(3) status,
CCCC was staffed by personnel from John Puccio’s previous New York businesses Brighton Credit Corporation (“BCC”) and Cambridge Credit Corporation (“CCC”), 4 which had been ordered to cease operating by the New York Banking Department in October 1996, and it provided the same services as BCC and CCC. CCCC also purchased the New York companies’ “intangible assets,” described as the goodwill in their trademarks and copyrights, for $14.1 million. Significantly, neither BCC nor CCC had been issued any trademarks or copyrights at the time, of the purchase. Moreover, no negotiations regarding the purchase took place and CCCC did not have independent representation. John Puccio signed the sale agreement on behalf of CCCC and both he and Richard Puccio signed it on behalf of CCC and BCC.
John Puccio managed the day-to-day operations of CCCC. While he did so, CCCC paid large sums of money to other companies that he owned, despite their not having rendered any services to CCCC. For example, John and Richard Puccio owned JRJ Associates, Inc., which received $150,000 from CCCC without having done any work for it.
After BCC and CCC ceased operating, John Puccio started Cambridge/Brighton Budget Planning Corporation (“CBBPC”) in New York as a so called “credit counseling” agency and served as its president. CBBPC advertised its not-for-profit status on its website and on its service agreements. Puccio also created Brighton Credit Management Corporation (“BCMC”) as a Florida nonprofit entity, and was its sole officer and director. All of these companies used virtually identical service agreements, and CCCC, CBBPC, and BCMC publicized their affiliation with each other.
A major service advertised by the Pucc-ios’ credit companies was the development of individualized Debt Management Plans (“DMPs”) for clients. After gathering information about a customer’s debts, the business would devise a plan setting a single monthly payment to be remitted to it by the client for disbursement to his or her creditors. CCCC’s 2001, 2002, and 2003 tax returns described “the principal objectives of the Corporation’s Debt Management Program” as including “improv[ing] a consumer’s credit rating over time by establishing a consistent payment history ...” Customers were charged an initial up-front “Design Fee” for the development of this DMP.
The credit companies would also negotiate with a client’s creditors for better terms on their debt, for example seeking the reduction of interest rates on debt or a decrease in the debt principal. They would additionally attempt to “re-age” the customer’s accounts by contacting a creditor to whom a customer owed late payments and convincing the creditor to relabel the account current (thus avoiding late fees and a negative report by the creditor to credit bureaus), in exchange for the customer committing to payments on that account for a set amount of time. (See Dkt. No. 224, Ex. 10, Wobig Dep. 155:6-164:18.)
Brighton Credit Corporation of Massachusetts (“BC Mass”), also known as Brighton Debt Management Services (“Brighton DMS”) and First Consumers Credit Management Corp. (“First Consumers”), 5 provided “back-office support” for the other three companies’ customers. BC Mass would design DMPs for customers, service their accounts, and keep the requisite records. It would also communicate with creditors in order to achieve “re-aging” of accounts. BC Mass did not have clients of its own.
John Puccio was the president, treasurer, and half-owner of BC Mass. Richard Puccio was BC Mass’ vice president and other half-owner. When BC Mass changed its name to Brighton DMS in 2003, John Puccio transitioned to a position as its president and sole shareholder. He remained as president when Brighton DMS became First Consumers.
John Puccio created and controlled CCCC, BCMC, CBBPC, BC Mass, Brighton DMS, and Debt Relief Clearinghouse, Ltd. (“DRC”). 6 Until he left the board of CCCC, he also determined the terms of all contracts and business dealings among CCCC, BCC, BCMC, DRC, Brighton DMS, BC Mass, Cypress Advertising and Promotions, Inc. (“Cypress”), 7 Southfork Asset Management Corp. (“Southfork”), and First Consumers.
All of these businesses shared employees and office space, and the managers of one of them would supervise employees of others. John and Richard Puccio would charge expenses for one company to the credit card of another and then pay that credit card bill with a check from a third of their corporations. At least one person who had worked for CCCC, BC Mass, and Brighton DMS at different times directly received bank statements of CCCC and other Puccio-owned companies while not employed by them and would write checks to - pay those bills. CCCC purchased equipment for BC Mass and Brighton DMS, and the Puccios would even use corporate funds for personal items, including on one occasion a yacht charter. John Puccio approved payment of all credit card bills.
The Puccios’ companies advertised their ability to improve a client’s credit. CCCC’s website announced that “by taking advantage of our Debt Management Program, we can help you ... Restablish Your Credit.” (Dkt. No. 204, Ex. 28, at 10-11.) Similarly, the promotional materials of CCCC, BCMC, and CBBPC made
Once a consumer had enrolled in a DMP, BC Mass would mail them a “welcome package.” The package would include a section entitled “A Fresh Start,” stating “[tjhat is exactly what you have received by joining our program.” (Dkt. No. 214, Ex. F.) This section listed “an improved credit profile” among “the life benefits you receive by using our program.”
Customers of CCCC, BCMC, and CPPBC would speak to BC Mass employees when they called any of those companies. The BC Mass staff were trained to speak about the benefits of re-aging accounts, while CCCC, BCMC, CBBPC, and BC Mass personnel were all coached to answer questions regarding how joining a DMP might affect a customer’s credit score. The standardized sales scripts used by these entities directed employees to tell callers that with respect to enrolling in a DMP,
You’re already behind with the bills so this can only help your credit. By making your payments on time to us we will be able to bring your accounts back to a current status, plus establish a credit reference to back you up when you apply for future financing.
(Dkt. No. 204, Ex. 21, at 3.) Alternatively (depending on how far behind in payments a customer was), the script instructed staff to say, “So long as you follow through with the program it can only help not hurt.” (Id.)
CCCC staff were trained to follow their script closely and evaluated on how well they adhered to it. The script described monthly fees as covering the company’s overhead costs and contained an explanation of the initial fee, paid before the company performed the service of contacting the client’s creditors.
If a customer inquired into the possibility of settling his or her accounts (and thus ending the relationship with the company), the script for BCMC, CCCC, and CBBPC prescribed a message that
settlements can damage your credit almost as much as a bankruptcy ... Our program is designed to get you out of debt and protect your credit rating.... Over the course of the program your credit rating will improve, making it easier to qualify for financing in the future.
(Dkt. No. 204, Ex. 22, at 00086.) Further persistence by a customer in asking about debt settlement would trigger the response:
If you settle your debts, your credit rating will fall a lot further than it is now.
Our program is designed to help you get out of debt and improve your credit rating. You will reestablish a good payment history and improve your debt to income ratio. Over the course of the program your credit rating will improve ....
(Id. (emphasis in original).)
None of the Puccio companies complied with CROA. They did not provide custom
Between its creation and December 31, 2004, CCCC received $185,736,640 of income from customers. Clients’ initial upfront payments accounted for $70,494,408 of that amount, with the rest coming from monthly fees. From November 3, 1998 to December 31, 2004, BCMC earned $63,057,703 from customer payments and CBBPC earned $10,291,640.
From 1997 through 2003, BC Mass grossed $47,365,448 based on its services to CCCC, BCMC, and CBBPC, with a net profit of $10,663,281. Brighton DMS was paid $31,548,091 for its services in 2003 and 2004, with a profit of $9,572,189. DRC earned $44,7000,684 in revenue from 2001 to 2004, primarily from CCCC and CCBPC.
John and Richard Puccio received salaries from their corporations. CCCC paid each of them $624,000 in 2001 and again in 2003. In 2004, John Puccio’s salary from CCCC was $648,000. In the period from 1996 to 2004, John Puccio’s salary from his credit companies totaled $30,987,572, while Richard Puccio’s aggregate compensation was $21,719,908.
2. The Zimmermans.
Andrew and Kelly Zimmerman, a married couple, learned of CCCC in late 2001 through radio, television, and Internet advertisements in which the company offered to “[assist with] debt consolidation, [help debtors] pay down debt more quickly, [and] reage accounts.” (Dkt. No. 201, Ex. A, Andrew Zimmerman Dep. 71:23-72:7.) Andrew Zimmerman, who handled all subsequent communications with CCCC, called the company’s toll-free number in December 2001 to find out more about its debt counseling services. He was attracted in part by its advertised nonprofit status.
After speaking with a CCCC representative, the Zimmermans received a five-page service agreement from CCCC. The Service Agreement provided that CCCC would consolidate Plaintiffs’ monthly payments into a single payment, use its best efforts to reduce the amount of monthly payments and lower the interest rate on payments, and pay the customer a portion of creditor contributions obtained through CCCC’s Good Payer Program. 8 (Dkt. No. 181, Ex. B, ¶¶ 1-4.) Additionally, the contract contained the following disclaimers:
VIII. DEBTOR’S CREDIT RATING AND ACCOUNTS
The CLIENT understands that CAMBRIDGE makes no representation about any aspect of the CLIENT’S credit rating. Creditors will sometimes report participation in CAMBRIDGE’S program as a “consumer credit counseling” item on your credit report. Persons with perfect credit histories may have their credit record adversely affected. CAMBRIDGE has no control overreporting or interpretation, as it is strictly a creditor and lender decision. The CLIENT’S credit rating is outside of the scope of this Agreement, however, at the CLIENT’S request, CAMBRIDGE will provide CLIENT with credit references based upon CLIENT’S payment history with CAMBRIDGE....
IX. NO OTHER REPRESENTATIONS
CAMBRIDGE has not authorized any person or other company to make representations on its behalf concerning fees, credit, any services to be performed by CAMBRIDGE or any other matter. In the event you were referred to CAMBRIDGE by another company, you understand that the other company was not authorized to make any representations about CAMBRIDGE or its services. You agree that all the representations concerning fees, credit, refinancing or any services to be performed by CAMBRIDGE that were made by CAMBRIDGE or relied upon by you when you signed this Service Agreement are set forth in this Agreement. ... All the obligations of CAMBRIDGE are set forth in this agreement.
(Id,., Parts VIII, IX.)
In return for these services, CCCC charged a “Design Fee” equivalent to one monthly payment, due upon Plaintiffs’ acceptance of the DMP designed by CCCC, as well as a monthly payment processing fee of ten percent or twenty-five dollars, whichever was greater.
Approximately seven days after receiving the service agreement, Andrew and Kelly Zimmerman signed the document and returned it to CCCC. 9 Once CCCC received the Zimmermans’ financial information, it offered them a proposed DMP with a monthly payment of $798. Plaintiffs enrolled in the DMP and paid their $798 up-front fee.
At this point, the Zimmermans’ account was transferred to BC Mass, a for-profit company, although they were not informed of the transfer. BC Mass mailed Plaintiffs a welcome packet, which they did not read. In the course of Plaintiffs’ participation in the DMP, BC Mass negotiated a reduction in the interest rate on some of their debts, the elimination of some of their late charges and fees, and a decrease in the minimum payments on some of their accounts. None of these efforts involved the company contacting a credit reporting agency on behalf of the Zimmermans.
After approximately nine months, the Zimmermans terminated their relationship with CCCC. Andrew Zimmerman based this decision on the facts that some of the couple’s accounts had not been re-aged, some of their creditors refused to participate in their DMP, and some of their account balances and interest rates were increasing. In 2003, Plaintiffs declared bankruptcy.
3. The Ongoing Litigation.
Plaintiffs brought suit against CCCC in two parallel cases. They filed their com
Limpert culminated in a settlement between CCCC and the plaintiff class, including the Zimmermans, in August 2006. (Dkt. No. 191, Ex. 6, Stipulation and Agreement of Settlement.) As a result of that settlement, CCCC was dismissed from this case by joint motion in February 2007. (See Dkt. No. 159.)
One matter at issue in the motions before the court is the fate of certain requests for admissions (“RFAs”) served along with requests for production of documents on October 28, 2005, to attorney Paul M. Kaplan, who was at that time representing the Puccios and former Defendant CCCC. (Dkt. No. 204, Exs. 1-1, 1-2, CCCC RFAs.) On the same date Plaintiffs sent similar requests to attorney Brian J. Davis, who represented Defendants CBBPC, BCMC, and BC Mass (with copies to Kaplan as he was then also counsel of record for these three companies). (Dkt. No. 204, Ex. 2, CBBPC, BCMC, BC Mass RFAs.) For almost two years, neither CCCC nor CBBPC, BCMC, and BC Mass responded to the RFAs, though Kap-lan did respond to the accompanying document production requests served on his clients John and Richard Puccio and CCCC.
III. DISCUSSION
A. Withdrawal of Admissions
Federal Rule of Civil Procedure 36(a) provides that if a party serves a written request for admission as to a particular matter upon another party, that matter is admitted unless the receiving party furnishes a written answer or objection within thirty days. Here, Defendants concede that their response to Plaintiffs’ October 28, 2005, set of RFAs was untimely (and in fact was not provided until September 12, 2007). (See Dkt. No. 226.) Attorney Brian Davis, who currently represents the Corporate Defendants in this case, has submitted a declaration to the court stating that “I received the subject ‘Notices to Admit,’ but through unintentional inadvertence ... I overlooked the papers and I never presented the papers to my clients for their consideration.” (Dkt. No. 232, Deck of Brian J. Davis, Esq.) Given this history, under the usual operation of Rule 36 the RFAs would be deemed admitted.
Defendants have requested that the court allow them to withdraw those admissions pursuant to Rule 36(b), which states that a court may
permit withdrawal or amendment [of an admission] when the presentation of the merits of the action will be subserved thereby and the party who obtained the admission fails to satisfy the court that withdrawal or amendment will prejudice that party in maintaining the action or defense on the merits.
This withdrawal provision “emphasizes the importance of having the action resolved on the merits, while at the same time assuring each party that justified reliance on an admission in preparation for trial will not operate to his prejudice.” Fed. R.Civ.P. 36(b), Advisory Committee’s Note.
Though the factors of subservience to the merits and prejudice to the opposing party generally dominate a Rule 36(b) inquiry, the rule also provides that withdrawal of admissions is “subject to the provision of Rule 16 governing amendment of a pre-trial order.” Fed.R.Civ.P. 36(b). In this case, the extraordinarily long delay in responding to the RFAs makes the con
“Rule 16(b)’s ‘good cause’ standard emphasizes the diligence of the party seeking the amendment.... ‘Indifference’ by the moving party ‘seals off this avenue of relief irrespective of prejudice because such conduct is incompatible with the showing of diligence necessary to establish good cause.”
O’Connell v. Hyatt Hotels,
The good cause requirement nullifies Defendants’ argument that a party’s excuse, or lack thereof, for failure to respond to requests for admission is irrelevant to a Rule 36(b) inquiry. The case they cite for that proposition,
Federal Deposit Insurance Corp. v. Prusia,
In this case, Defendants’ neglect of their obligations under Rule 36 was conspicuous. Though chalking up their initial failure to respond to the RFAs to Attorney Davis’ “inadvertence,” they do not explain the lack of response by Paul Kaplan, who was then acting as counsel for CCCC and the Puccios as well as co-counsel for CBBPC, BCMC, and BC Mass. Kaplan’s lack of response is especially puzzling given that he did respond to the document production requests and interrogatories that were sent under the same cover letter as the RFAs.
The court also cannot ignore the fact that the two attorneys left their lapse uncorrected for seventeen months, exacerbating the initial harm caused by their failure to answer the RFAs.
11
See Branch Banking & Trust Co. v. Deutz-Allis Corp.,
Most egregiously, Defendants still failed to address the issue of the admissions for another five months after Plaintiffs explicitly stated in March 2007 their intent to treat the RFAs as admitted for purposes of their class certification motion, with no explanation for the further delay.
12
(See
Dkt. No. 170, Decl. of Garrett M. Smith ¶¶ 3-7; Dkt. No. 171, Mem. in Support of Pl.’s Mot. for Class Certification at 8, 28.) As of August 27, 2007, Attorney Davis stated that he “did not forward or discuss the ‘Notices to Admit’ ... up to the time when plaintiffs referred to the ‘notices’ a few weeks ago on their summary judgment motion.” (Dkt. No 218, Def.’s Mem. in Opp’n to PL’s Mot. for Summ. J. at 10-11.) This added delay in the face of Plaintiffs’ reliance on the RFAs provides further reason for the court to deem Defendants bound by their inaction.
Cf. Thornhill v. Perry,
No. 04-0947,
Even ignoring Defendants’ extreme negligence and its catastrophic impact on the management of this case, and focusing only on the goals of facilitating the presentation of the merits and avoiding prejudice to the opposing party, the court finds more than sufficient reason to deny Defendants’ motion to withdraw their admissions. It is true that allowing the admissions to stand will prevent the Corporate Defendants from contesting the key issues of whether they are “credit repair organizations” and whether they have failed to comply with CROA’s requirements for such entities.
(See
Dkt. No. 204, Ex. 2, Tab A, RFAs 1-6, 11-18.) This impact offers some justification for allowing withdrawal, since the First Circuit has noted that “ ‘the first half of the test is clearly satisfied [where] the effect of upholding the admissions would be to practically eliminate any presentation of the merits.’ ”
Siguel v. Allstate Life Ins. Co.,
No. 94-1392,
Any concern about subverting the presentation of the merits vanishes in this case, however, in the face of strong evidence (current counsel’s claims of negligence notwithstanding) that the decision not to respond to the RFAs was deliberate and constituted a tactical decision to focus on other issues, which Defendants now wish to repudiate.
See Coca-Cola Bottling Co. v. Coca-Cola Co.,
After the First Circuit rejected their argument that they fit within an exception to CROA as'registered nonprofit companies, Zim
merman v. Cambridge Credit Counseling Corp.,
Aside from a
pro forma
denial of Plaintiffs’ allegation that the Corporate Defendants are CROs in their answer to Plaintiffs’ amended complaint, the record for the time period between the serving of the RFAs and Plaintiffs’ filing of their motion for summary judgment contains no indication that Defendants were pressing the argument that they do not qualify as credit repair organizations.
{See
they do not Dkt No. 72, Answer ¶¶ 94-102,188-89.)
15
This suggests that Defendants’ failure to respond to the RFAs signaled deliberate intent to abandon this theory after its unsue-cessful initial presentation to the court in 2005, but that they seek to revive the argument now that somewhat more favorable case law is available.
See, e.g., Hillis v. Equifax Consumer Servs., Inc.,
Even if Defendants did intend to continue denying their CRO status, their failure to respond to Plaintiffs’ RFAs on that point prevented Plaintiffs from shaping their discovery accordingly.
{See
Dkt. No. 224, Ex. 4, Deck of Garrett M. Smith in Opp. to Rule 36(b) Mot. ¶ 20.) If Defendants’ attempt to withdraw their admissions is, as it appears, a change in litigation strategy by Defendants, it would betray the underlying purpose of Rule 36 to allow withdrawal of these admissions when discovery has been conducted and motions have been prepared in reliance on a particular legal theory.
Cf. Banos v. City of Chicago,
Were Defendants able to demonstrate an unfair denial of their right to litigate the merits (which they cannot), and thus satisfy the first prong of the Rule 36(b) standard, Plaintiffs’ showing of prejudice would still be sufficient on this record to forestall the withdrawal of Defendants’ admissions. The First Circuit has explained that
[t]he prejudice contemplated by [Rule 36(b) ] is not simply that the party who initially obtained the admission will now have to convince the fact finder of its truth. Rather, it relates to the difficulty a party may face in proving its case, e.g., caused by the unavailability of key witnesses, because of the sudden need to obtain evidence with respect to the questions previously answered by the admissions.
Brook Vill. N. Assocs. v. Gen. Elec. Co.,
The danger of prejudice resulting from the withdrawal of admissions is a special matter for concern where discovery has already run its course based on the premise that the admissions are valid.
Cf. Armstrong v. Executive Office of the President,
Plaintiffs’ situation is particularly critical since their belief that the RFAs had been admitted was confirmed when Defendants made no objection to their reliance on those admissions in their motion for class certification in March 2007.
Cf. Tidwell v. Daley,
No. 00-1646,
Additionally, Plaintiffs describe specific instances of their detrimental reliance on Defendants’ admissions. (See Dkt. No. 224, Exs. 4, 5.) For example, Request No. 10' relates to the training of BC Mass employees. In order to obtain that information at this point, Plaintiffs would have to track down the employees of a New York business that dissolved four years ago, in 2003. Plaintiffs also allege that they decided against filing a motion to compel answers from Richard Puccio after his deposition testimony proved unresponsive, assuming that they could rely on the subject admissions. (See generally Dkt. No. 224, Ex. 11, Richard Puccio Dep.) Presumably the Zimmermans would now have to re-depose Richard Puccio on several issues in order to bolster their arguments.
The prejudice prong of Rule 36(b) was meant to avert just such rushed and arduous efforts to procure evidence.
See Coca-Cola Bottling Co. v. Cocar-Cola Co.,
As an alternative to wholesale withdrawal of their admissions, Defendants seek to selectively deny those admissions as to which they argue rescission will not prejudice the Zimmermans’ ability to present their case. (See Dkt. No. 226.) However, a plaintiff cannot be required to demonstrate individual prejudice, admission by admission, in order to prevent withdrawal of a set of admissions. It is enough, particularly after such a long delay, that Plaintiffs have effectively argued that withdrawal of a significant portion of these admissions will force them to undertake substantial additional discovery efforts before trial.
Whether attributable to negligence or affirmative intent, Defendants’ failure to answer properly served requests for admission until almost two years after the fact cannot be excused. Their original inaction may perhaps have been inadvertent, but Defendants offer no explanation of their continuing lack of response that can satisfy the good cause standard of Rule 16(b).
Cf. Ruiz-Rivera v. Internal Revenue Serv.,
B. Liability of Defendants Other Than CCCC
Defendants have moved for summary judgment on the ground that the Zimmer-mans cannot bring suit against them because they only dealt with CCCC and thus any CROA violations were committed only by CCCC, a company which, as noted above, has been dismissed from the case subsequent to the New York settlement with the Zimmermans. (See Dkt. No. 144, Ex. 1.) In support of their position, Defendants point to the Limpert court’s decision to dismiss CROA claims against certain Defendants in that case where they had not made statements relating to credit repair or contracted with plaintiffs. (Dkt. No. 191, Ex. 5, at 8-9.)
The court expressed its disapproval of a related argument, when Defendants cited it in opposition to Plaintiffs’ motion for class certification, and confirms that position here. (See Dkt. No. 194.) The Lim-pert decision, occurring early on at the motion to dismiss stage, did not take into account two compelling grounds for permitting Plaintiffs to pursue their claims against the non-CCCC defendants.
First, Plaintiffs have brought suit against Defendants in part as “persons” under § 1679b(a)(4) of CROA, which does not predicate liability on CRO status but rather broadly applies to “any person” who
engage[s], directly or indirectly, in any act, practice, or course of business that constitutes or results in the commission of, or an attempt to commit, a fraud or deception on any person in connection with the' offer or sale of the services of the credit repair organization.
15 U.S.C. § 1679b(a)(4). The Puccios were certainly engaged in a “course of business ... in connection with” CCCC. Plaintiffs have alleged that the Corporate Defendants were also part of CCCC’s “course of business,” with the Puccios utilizing their individual credit companies as component parts of a larger scheme to defraud debtors.
Cf. Hillis v. Equifax Consumer Servs., Inc.,
Second, in a related argument, Plaintiffs contend that CCCC,' BC Mass, and the other Corporate Defendants served as alter egos of the Puccios and thus may be held directly liable for
Massachusetts law permits piercing of the corporate veil under the alter ego doctrine where:
“there is active and direct participation by the representatives of one corporation, apparently exercising some form of pervasive control, in the activities of another and there is some fraudulent or injurious consequence of the intercorpo-rate relationship” or when “there is a confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting.” ... In such circumstances, courts may allow a plaintiff to pierce the corporate veil of limited liability in order to “provide a meaningful remedy for injuries and to avoid injustice.”
In re Ontos, Inc.,
Under this inquiry, there is ample evidence for the court to find that the Puccios’ credit companies did not function as separate corporations. All were controlled in large part by John and Richard Puccio, without independent representatives active in protecting their individual corporate interests. As CCCC’s purchase of BCC’s and CCC’s dubious “intangible assets” and its payments to Puccio-owned companies that had not provided it with any valuable services demonstrate, this exclusive joint control allowed John Puccio to set the terms of dealing among these companies almost entirely unilaterally. The corporations also shared employees and promotional and informational materials, and marketed themselves as affiliated entities. BC Mass handled CCCC, BCMC, and CBBPC clients without those customers being aware of that fact. The Puccios liberally commingled the finances of the various companies, using the funds of one to pay the bills of others and even their own personal expenses. These facts and others detailed above overwhelmingly demonstrate that the Puccios did not observe the financial, legal, and practical formalities necessary for them to now claim the corporate form as a shield from liability-
For all these reasons, Defendants’ claim of entitlement to judgment because Plaintiffs dealt only with CCCC is without merit.
C. Credit Repair Organizations Act Claim (Count I)
1. Definition of a Credit Repair Organization,
CROA defines a “credit repair organization” as:
any person who uses any instrumentality of interstate commerce or the mails to sell, provide, or perform (or represent that such person can or will sell, provide, or perform) any service, in return for the payment of money or other valuable consideration, for the express or implied purpose of—
(i) improving any consumer’s credit record, credit history, or credit rating; or
(ii) providing advice or assistance to any consumer with regard to any activity or service described in clause (i)....
15 U.S.C. § 1679a(3)(A). Defendants argue that they do not fall within this broad category.
Defendants’ Rule 36 admissions utterly undercut this argument, since the admissions concede that the Corporate Defendants did “representf ] to consumers that [they] could sell, provide, or perform a service in the return for the payment of money for the express or implied purpose of improving the consumer’s credit record, credit history, or credit rating.” 17 (See Dkt. No. 204, Ex. 1-1, CCCC RFAs at 8 (RFA 17); Dkt. No. 204, Ex. 2, CBBPC/ BCMC/BC Mass RFAs at 10, 27, 39 (CBBPC RFA 17, BCMC RFA 17, BC Mass RFA 8).) Even setting aside Defendants’ admissions, a brief examination of the undisputed record makes clear that Plaintiffs’ motion for summary judgment must be allowed on substantive grounds in any case.
a. Representations.
First, Defendants contend that they did not make any suspect representation to Plaintiffs. They base this argument on the disclaimers contained in the service agreement signed by the Zimmermans. The contract stated that CCCC made no representations regarding a client’s credit rating, which was outside the scope of the contract, and that all representations made and services offered by CCCC were set forth in the agreement. (Dkt. No. 181, Ex. B, Parts VIII, IX.) Defendants claim they cannot be held responsible under CROA for any representations made by CCCC or the Corporate Defendants outside of the four corners of the agreement. The contract itself, the argument runs, promised only that CCCC would consolidate Plaintiffs’ debt, use its best efforts to reduce their monthly payments and lower the interest rate on payments, and pay the customer a portion of creditor contributions. (Id. ¶¶ 1-4.)
However, Defendants’ citation of contract law in support of the idea that these written provisions obviate other negotiations or communications between the parties is inapposite. The plain language of CROA demonstrates that Congress intended to cast a wide net in determining what behavior might trigger liability under the statute. Section 1679a covers
“any
person who uses
any
instrumentality of interstate commerce or the mails” not only to actually provide, but even to
“represent
that such person can or will sell, provide, or perform” the targeted types of service. 15 U.S.C. § 1679a(3)(A) (emphasis added). CROA contains no hint that the legislature intended this definition to be limited to representations cognizable under contract law, and affirmatively contradicts the notion that only those representations contained in the instrumentality of a written and signed agreement can serve as a basis for statutory liability.
See also Fed’l
b. Services Provided.
Defendants next argue that they did not provide or represent that they would provide any service “for the express or implied purpose of ... improving any consumer’s credit record, credit history, or credit rating .... ” However, their advertisements, employees, and informational materials undisputedly and repeatedly made statements to consumers indicating that their debt management services would “restore your credit rating” and “improve your credit.” 18 These representations were unequivocal, including comments such as the one in the script used to discourage settlement of debts indicating that a DMP “can only help your credit.”
Defendants contend that, even though they did make such statements, they cannot be considered credit repair organizations because these services and representations did not qualify them as CROs under the existing interpretation of that statutory term. In support of this argument, Defendants cite a few district court decisions that have imposed judicial limitations on the definition of a “credit repair organization,” out of concern that CROA’s plain language would otherwise sweep in certain entities whose coverage would not serve the statute’s purpose.
See Hillis v. Equifax Consumer Servs., Inc.,
Yet, as
Limpert
recognized, “there is a fine line, in advertising and soliciting for credit counseling services to an unsophisticated audience of lower-income debtors, between promising future rewards for creditworthiness, and implying that existing bad credit records may be prematurely expunged.”
Id. (quoted in Helms v. Consumerinfo.com, Inc.,
Given the additional undisputed factual evidence now available to this court on summary judgment, it is clear that Defendants crossed the boundary from credit counseling into credit repair with their continued and insistent representations to consumers that their services could only help
improve
clients’ credit. Defendants trespassed into the forbidden territory of offering hope that their services could somehow allow a “fresh start” despite a past history of poor credit that, by law, could not be erased.
Cf. Helms v. Consumerinfo.com, Inc.,
By contrast, the entities in the cases cited by Defendants made it very clear that they could not help debtors prematurely circumvent their accurate credit history.
Hillis,
discussing a service that allowed customers to simulate the effect of certain actions on their credit histories, emphasized that the defendants’ advertisements focused on the benefits of their service as an educational tool regarding how credit works rather than a failsafe method for improving credit.
20
Wojcik
involved a used car dealership that happened to arrange purchase financing for some customers, but did not advertise or otherwise represent that such financing would lead to improved credit aside from a single statement by one employee that making payments on time would help customers build a good credit record.
Plattner v. Edge Solutions, Inc.
is perhaps the most relevant case, since it also dealt with a company providing debt management services. There, however, the court held that the defendant was not acting as a CRO because it prominently communicated the fact that a customer’s credit was outside the control or scope of its services and that it could not guarantee particular results from any of its services.
Based on this record, even without their admissions, the court would be compelled to find that the Puccios operated CCCC, BCMC, CBBPC, and BC Mass as CROs.
Cf. Polacsek v. Debticated Consumer Counseling,
2. Nonprofít Status.
Despite qualifying as a CRO, an entity is not subject to the requirements of CROA if it is a “nonprofit organization ... exempt from taxation under section 501(c)(3)” of the tax code. 15 U.S.C. § 1679a(3)(B)(i). In order to fit within this exception, the First Circuit has held that a CRO “must actually operate as a nonprofit organization
and
be exempt from taxation under section 501(c)(3).”
Zimmerman v. Cambridge Credit Counseling Corp.,
CCCC is registered as a 501(c)(3) organization with the IRS, making it potentially eligible for the statutory exemption. However, Plaintiffs claim that CCCC did not, in fact and as a matter of law, operate as a nonprofit, disqualifying it from this defense.
23
The court agrees. For example, the Puccios arranged in a non-arms-length transaction for CCCC to pay over $14 million for the dubious intangible assets of BCC and CCC, thus tunneling that money to John Puccio as founder and president of the for-profit BCC and CCC.
Cf. Church of Scientology v. Comm’r,
On top of this evidence, Plaintiffs have submitted to this court an Internal Revenue Service report detailing the myriad ways in which CCCC’s behavior was not that of a nonprofit and recommending that its 501(c)(3) status be revoked. 24 (Dkt. No. 208, App’x, Ex. M, G. Smith Decl., Ex. 4, IRS Revocation Letter.) Whatever deference may be due to the legal conclusions of that report, its factual content facilitates an independent finding by this court that CCCC did not operate as a nonprofit organization because it disbursed profits to the Puccios through suspect transactions with their other, for-profit companies.
3. CROA Violations.
a. CEO Violations.
Once it is established that CCCC, BCMC, CBBPC, and BC Mass do qualify as “credit repair organizations,” their violations of the specific statutory requirements of CROA are clear. The Act imposes a number of obligations on credit repair organizations in dealing with consumers. Defendants did not comply with any of these requirements. They did not:
(1) provide consumers with the disclosure statement required by 15 U.S.C. § 1679c(a);
(2) include certain items in their service agreement as mandated by 15 U.S.C. § 1679d, such as “the total amount of all payments to be made by the consumer to the” CRO, “a full and detailed description of the services to be performed,” and a “conspicuous statement” regarding cancellation rights; and (3) give consumers a separate cancellation form along with the service agreement, 15 U.S.C. § 1679e(b).
Additionally, the CROs violated 15 U.S.C. § 1679b(b) by charging up-front fees to customers before they had fully performed the promised services, in the form of a “Design Fee” assessed upon enrollment in a DMP. 25
CROA also more broadly bars “any person” from
(3) mak[ing] or us[ing] any untrue or misleading representation of the services of the credit repair organization; or
(4) engaging], directly or indirectly, in any act, practice, or course of business that constitutes or results in the commission of, or an attempt to commit, a fraud or deception on any person in connection with the offer or sale of the services of the credit repair organization.
Id. § 1679b (a)(3), (4).
In
Federal Trade Commission v. Gill,
a Central District
of
California court analogized the task of assessing such representations to the interpretation of advertisements, looking to the “ ‘overall net impression made by the advertisement’ ” and whether it was, “taken as a whole, ... misleading as a matter of law.”
Here, Plaintiffs have demonstrated as a matter of law that Defendants communicated the representation that CCCC was a nonprofit entity. This was a material matter since this factor could reasonably sway a consumer in the decision whether to retain a company, especially in the perilous world of credit services, and appears to have done so in the case of Plaintiffs. It is a matter of record that once Plaintiffs enrolled in a DMP, their account was serviced by BC Mass, a for-profit entity. CCCC’s representation in numerous advertising venues that it was a nonprofit would lead any consumer, sophisticated or not, to believe that the credit counseling services they received would be rendered by a nonprofit. Andrew Zimmerman testified that he did in fact rely on that representation. Defendants betrayed Plaintiffs’ trust when, as was its policy for all CCCC clients, it transferred Plaintiffs’ account to BC Mass, straightforwardly violating § 1679b(a)(3).
b. Non-CRO Violations.
Those Defendants that are not themselves CROs within the meaning of CROA—namely, John and Richard Puccio, DRC, CCC, BCC, and Cypress — are still liable for the above violations. As the court has already noted, two theories support this liability: CROA’s “course of business” provision and the “alter ego” doctrine. Together these companies, run by the Puccios, engaged in a single overarching scheme to attract customers using CCCC’s nonprofit status, charge them upfront fees and otherwise behave in contravention of CROA, and funnel the resulting profits to the Puccios through their entwined finances. Thus the related entities are jointly and severally liable for the damages directly inflicted by CCCC, CBBPC, BCMC, and BC Mass. 27
C. Chapter 93A (Count II)
Since the court holds that, as a matter of law on the undisputed facts, Defendants violated several provisions of CROA, Plaintiffs are also entitled to summary judgment on their claim under the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A. Chapter 93A prohibits “unfair or deceptive acts or practices in the conduct of any trade or commerce.” Mass. Gen. Laws ch. 93A, § 2(a). Massachusetts regulations expressly categorize any act or practice that “violates the Federal Trade Commission Act, the Federal Consumer Credit Protection Act or other Federal consumer protection statutes” as a violation of this statute. 940 Mass.Code Regs. 3.16(4). Congress clearly enacted CROA with consumer protection in mind, declaring one of its two statutory purposes to be “protecting] the public from unfair or deceptive advertising and business practices” and mandating that a CROA violation be considered a violation of the Federal Trade Commission Act. 15 U.S.C. § 1679(b)(2); 15 U.S.C. § 1679h. Therefore Defendants’ noncompliance with CROA’s provisions makes them per se liable under Chapter 93A.
D. Damages
Plaintiffs have requested actual and punitive damages under CROA, as well as injunctive relief and monetary damages under Mass. Gen. Laws ch. 93A. These issues will be the subject of further pro
IV. CONCLUSION
For the foregoing reasons, Defendants’ motion to withdraw admissions (Dkt. No. 232) and motions for summary judgment (Dkt.Nos.187, 198) are hereby DENIED, except as to Defendant Southfork. As to this Defendant alone, the motions are ALLOWED. Plaintiffs’ motion for summary judgment (Dkt. No. 200) as to liability on their CROA and Chapter 93A claims is hereby ALLOWED as to all Defendants except Southfork. The court has previously allowed Plaintiffs’ motion for class certification. The clerk will set the case for a status conference to address a timetable for proceedings regarding the issue of damages.
It is So Ordered.
Notes
. Plaintiffs' filings indicate that their surname is in fact spelled “Zimmermann.” However, since previous decisions in this case have inadvertently misspelled their name ''Zimmerman''
see Zimmerman v. Cambridge Credit Counseling Corp.,
. Plaintiffs included three other claims in their amended complaint of October 21, 2005 (Dkt. No. 65): unjust enrichment; breach of fiduciary duty with the remedy of a constructive trust; and violation of the Virginia Consumer Protection Act, Va.Code Ann. § 59.1-196 et seq. As neither party addresses those claims in the memoranda supporting their cross-motions for summary judgment or any other filings besides the complaint, the court will treat them as waived. (See Dkt. Nos. 188, 209.)
. Except where otherwise noted, these facts are drawn from the following documents: Dkt. No. 190, Defs.’ Rule 56.1 Statement; Dkt. No. 219, Ex. 1, Pis.’ Resp. to Defs.’ Local Rule 56.1 Statement; Dkt. No. 210, Pis.' Local Rule 56.1 Statement of Uncontroverted Facts; and Dkt. No. 220, Defs.’ Resp. to Pis.’ Rule 56.1 Statement. Since the court is faced with cross-motions for summary judgment, all factual disputes are construed in this summary in the light most favorable to the relevant non-moving party.
It must be noted that Defendants failed properly to dispute many of Plaintiffs' proffered facts. Although Defendants lodged objections to a number of statements in Plaintiffs' 56.1 statement, they often did not cite any record evidence to support their disagreement despite the requirement of Local Rule 56.1 that in opposing a motion for summary judgment a party must "include a concise statement of the material facts of record as to which it is contended that there exists a genuine issue to be tried, with page references to affidavits, depositions and other documentation." (Compare, e.g., Dkt. No. 210, Pls.' Local Rule 56.1 Statement of Uncontroverted Facts ¶ 15 with Dkt. No. 220, Defs.’ Resp. to Pis.' Rule 56.1 Statement ¶ 15.) In such instances, the court has taken the Plaintiffs' account as true. As the First Circuit recently stated:
The purpose of [Local Rule 56.1] ... is to require the parties to focus the district court’s attention on what is, and what is not, genuinely controverted.... Otherwise, the parties improperly shift the burden of organizing the evidence presented in a given case to the district court.... Given [the rule's] important purpose, this Court has repeatedly upheld its enforcement, stating that litigants ignore it “at their peril.”
Mariani-Colon v. Dep’t of Homeland Security,
. John Puccio formed and served as president of both BCC and CCC.
. Despite these name changes, Defendants conceded that "the businesses were essentially the same from Brighton Credit of Mass to Brighton DMS to First Consumers.” (Dkt. No. 201, Ex. B, BC Mass/Brighton DMS/First Consumers 30(b)(6) Dep. 63:13-18.) For convenience's sake, the court will generally refer to all incarnations of this entity as BC Mass.
. John and Richard Puccio owned and controlled DRC. The company acted as a marketing unit, helping CCCC, BCMC, and CBBPC obtain leads on potential customers. It advertised that these companies could improve customers’ credit. DRC earned $130 per client lead from CCCC in January 2000. CCCC's board increased that fee to $750 as of January 2002 upon the motion of John Puc-cio.
.Cypress placed advertisements for the Puc-cio credit companies, complementing DRC's marketing services. (See Dkt. No. 201, Ex. E, DRCH/Cypress 30(b)(6) Dep. 67:7-70:12, 173:11-174:1.)
. The Good Payer program allowed Plaintiffs to receive a "bonus” for each six months of payments according to their plan, equal to half of the amount of contributions obtained from their creditors by CCCC.
. Defendants contend that the Zimmermans "admitted that ... there were no representations made by CCCC not contained in the Service Agreement.” (Dkt. No. 190, Defs.' Rule 56.1 Statement ¶ 19.) This assertion is not, however, supported by the cited portions of Andrew Zimmerman's deposition. (Dkt. No. 219, Ex. A, Andrew Zimmerman Dep. 150-152.) Zimmerman merely stated that he could not recall whether there were any such representations. Furthermore, elsewhere in his deposition Zimmerman mentioned several representations made by CCCC in advertisements that he saw or heard before signing the service agreement. (See Dkt. No. 191, Ex. 3, Andrew Zimmerman Dep. 71:25-73:15, 114:7-13, 114:21-115:7, 249:25-250:19.)
. At least some courts have questioned whether the Rule 36(b) test should even apply where a party has failed outright to answer requests for admission, given that the usual standard governing motions to permit an action under the Federal Rules of Civil Procedure after the relevant time period has expired is the more rigorous Rule 6(b)(2) “excusable neglect” standard.
See Sea-Land. Serv. v. Citihope Int’l,
. As Plaintiffs suggest, this blunder may to some extent be traceable to Defendants' repeated replacement of counsel during this litigation. (See Dkt. Nos. 43, 109, 114, 148.) However, Defendants cannot escape being held responsible for the actions, or in this case inaction, of their chosen legal representatives. See
Irwin v. Dep’t of Veterans Affairs,
. While it is not a substantial factor in this decision, the court does also note that Defendants did not even bother to contradict the admissions with citations to facts on the record when Plaintiffs cited the RFAs in their Statement of Uncontroverted Facts (Dkt. No. 210), despite the requirement of Local Rule 56.1 that they do so in disputing Plaintiffs' version of the facts on summary judgment. Furthermore, Defendants did not provide any response to the admissions at all until after oral argument on their motion to withdraw them, and then only at the court's request. (See Dkt. No. 226.)
. The court also cannot entirely ignore the Defendants' lack of compliance with other procedural requirements in this litigation and in the parallel case
Limpert v. Cambridge Credit Counseling Corp.,
No. 03-5986,
Rules such as [Rule 56.1] "were developed by the district courts in this circuit in response to this court’s concern that, absent such rules, summary judgment practice could too easily become a game of cat-and-mouse, giving rise to the 'specter of district court judges being unfairly sandbagged by unadvertised factual issues.’ Such rules are a distinct improvement — and parties ignore them at their peril.”
Gosselin v. Webb,
. Plaintiffs correctly note that
Siguel
is an unpublished opinion and thus cannot be cited as binding precedent under Local Rule 32.3(a). However, the court may consider the opinion for its persuasive value, which in this case has some force since the
Siguel
decision reflects a view held in several circuits.
See, e.g., Conlon v. United States,
. As will be seen below, even without the admissions the undisputed facts of record malte it crystal clear that several of Defendants are, in fact, credit repair organizations subject to CROA.
. Additionally, although reliance on admissions in preparing a summary judgment motion is not on its own enough to support a finding of prejudice under Rule 36(b),
Fed. Deposit Ins. Corp. v. Prusia,
. "Admissions made under Rule 36, even default admissions, can serve as the factual predicate for summary judgment.”
United States v. Kasuboski,
. Defendants object that the Zimmermans have not testified that they were exposed to all of the advertising materials discussed here. However, the court may still consider those advertisements in determining Defendants’ CRO status since CROA does not require reli-anee on an entity’s representations in order for it to be considered a credit repair organization.
See
15 U.S.C. § 1679a(3)(A);
Helms v. Consumerinfo.com, Inc.,
. As the
Helms
court was careful to make clear, it is irrelevant to the CRO determination whether an organization’s representations that its services may improve a consumer's credit are true or false.
Helms,
. In inferring that Congress only intended CROA to apply to backward-looking services relating to a debtor’s past credit record rather than forward-looking programs designed to help them build creditworthy behavior,
Hillis
focused on the specific practices mentioned by Congress in enacting CROA, whereby companies would falsely claim that they could legally eliminate adverse information from customers’ credit reports, even if it were true, or create new identities for clients with a blank slate as to credit history.
Notably, only the Hillis court suggests such a restrictive interpretation of CROA’s scope. Both the Wojcik and Plattner opinions, though concerned with excluding clearly legitimate credit counseling entities from CROA liabilty, gave no indication that their approach was meant to support a general rule exempting any company that managed to veil its deceptive representations regarding its ability to improve credit in the language of forward-looking credit counseling. Hillis itself cited a statement by the Federal Trade Commission that warned with respect to a proposed exemption from CROA for credit bureaus (which was never adopted) that "the breadth of the exemption could allow fraudulent credit repair firms to evade the CROA.” Id. at 515 n. 25. A broad exception for companies offering facially forward-looking services poses the same danger of opening loopholes in the statute's coverage.
.
Plattner,
like
Limpert,
also recognized a finer distinction between credit counseling and credit repair rather than relying on the rough differentiation between forward- and backward-looking behavior enunciated in
Hillis. Plattner
discussed the more nuanced difference between "entities whose focus is the improvement or repair of a consumer's credit record, credit history or credit rating, expressly or implicitly, not entities whose activities are aimed at assisting consumers in developing 'creditworthy behavior' ... which
. The First Circuit reserved the question of which party bears the burden of proof on the issue of nonprofit status, citing conflicting precedent from several circuits.
Zimmerman,
. Notably, Defendants do not oppose the contention that the nonprofit exception does not apply to CCCC in their opposition to Plaintiffs' motion for summary judgment.
. Prominently, CCCC purchased leads and marketing services from other Puccio-owned, for-profit entities, and turned over the task of servicing clients to BC Mass, another Puccio-owned for-profit business. There is no indication of attempts to conduct these interactions at arms length (e.g., by soliciting other companies to perform these services at a lower cost), even when the Puccios engaged in activity such as moving for CCCC to increase the fees it paid to DRC, their marketing company. Moreover, the Puccios received generous salaries of hundreds of thousands of dollars from each of their companies, including CCCC, BC Mass, and DRC, while arranging for these transactions among them. CCCC also paid the sum it owed to BCC and CCC under the intangible asset sale agreement at a far quicker pace than it was required to by contract, at a time when BCC and CCC were giving the Puccios substantial salaries.
Cf. United Cancer Council v. Comm’r,
. Plaintiffs also argue that the disclaimer in the Service Agreement stating that "[t]he CLIENT’S credit rating is outside of the scope of this Agreement” constituted an attempt to get consumers to waive their CROA protections in contravention of 15 U.S.C. § 1679f(b). The court declines to decide this issue since Defendants’ other violations are more than sufficient to establish statutory liability.
.
But see Helms,
. The “odd man out” with respect to this network of credit companies is Southfork. Plaintiffs have not provided the court with any evidence suggesting that this company, which was apparently involved in equipment resales, had any significant role in the Pucc-ios' credit repair business. Therefore, the court will grant Defendants’ motion for summary judgment as to Southfork and dismiss it from the case.