Consumer's Credit Repair Agreement Becomes Issue in Collection Dispute

In an opinion published earlier this week, a federal judge in New York pulls open the curtain to shed light on the practices and relationship between credit repair organization Credit Shield 360 (CS360) and the New Jersey-based law firm RC Law Group, PLLC. The case is Taylor-Burns v. AR Resources, Inc. (Case No. 16-cv-1259, U.S.D.C. Southern District of New York.

A copy of the court’s opinion can be found here.  

Background 

Plaintiff Tonya Taylor-Burns filed a lawsuit against AR Resources, Inc. (ARR) on January 11, 2016. The lawsuit was removed to federal court on February 18, 2016. The suit alleges that ARR failed to list an account as disputed after she purportedly sent a letter to ARR disputing the debt. She alleges that ARR's failure to report the debt as disputed violates multiple provisions of the FDCPA. She is requesting actual damages, statutory damages, attorney’s fees, and costs. 

Plaintiff was deposed on September 13, 2016. During her deposition, she identified the purported dispute letter (Letter) that was dated June 5, 2015. Plaintiff testified at her deposition that she did not write, send, or sign the Letter. She testified that CS360 sent it. The Letter was sent via facsimile from 1-303-991-7930, which is a Denver, Colorado area code. Plaintiff was not in Denver, Colorado on June 5, 2015; she resides in Manhattan.

CS360, the entity that sent the letter, is a credit repair agency. Plaintiff contacted CS360 around May of 2015 to obtain credit repair services. Plaintiff and CS360 produced an undated copy of a Collection Shield 360 Service Agreement (CS360 Agreement) with Plaintiff's purported electronic signature. The CS360 Agreement states that Plaintiff is not responsible to pay CS360 for the deletion of collection accounts. However, CS360 is entitled to "receive a fee of $150.00 per Deleted Collection account only from FDCPA settlement funds collected for Client in excess of $200.00."

The CS360 Agreement provides that it shall only receive payment from FDCPA settlement funds. 

The CS360 Agreement also authorizes CS360 "to share any info [sic] that could be a potential claim against such companies with RC Law Group so that it may pursue such claims on my behalf." CS360 and RC Law Group, the firm representing Plaintiff in this action, both do business at 7150 Parsons Avenue, Flushing, NY. 

Plaintiff testified that she did not sign any fee agreement with RC Law Group. But, after her deposition, Plaintiff also produced an undated Retainer Agreement with RC Law Group (RC Law Agreement) bearing her purported electronic signature. The RC Law Agreement states that Plaintiff retained RC Law Group" to provide legal advice and services for suits and issues that may arise under the Fair Debt Collection Practices Act." The RC Law Agreement also states that "the Client 's agents should also be treated as clients, including Collection Shield 360." 

Finally, Plaintiff stated in her deposition that she did not sustain any actual damages. 

The RC Law Agreement provides that the Plaintiff would receive 20% of the settlement amount on a FDCPA statutory award up to $1,000, but her portion of the settlement would not be less than $200. As such, RC Law Group would retain 80% of a $1,000 statutory FDCPA award. Further, RC Law Group is entitled to retain 45% of any actual damages recovered under the FDCPA, and all attorney's fees and costs awarded under the FDCPA. The Agreement also states that it "is to be interpreted in accordance with the laws of the State of New York and with the ethical requirements of that jurisdiction."

During the course of discovery, ARR took the deposition of David Bergida, who was the corporate designee of CS360. He stated that he did not think that CS360 would receive any payment from RC Law Group if RC Law Group was successful in recovering money for the Plaintiff in the instant action. However, Bergida testified that RC Law Group compensates CS360 for referring clients to RC Law Group.

After discovery, Defendant moved for summary judgment to dismiss the complaint on April 5, 2017.  

Editor’s Note:  A motion for summary judgment is based upon a claim by one party (or, in some cases, both parties) that contends that all necessary factual issues are settled or so one-sided they need not be tried. The summary judgment is appropriate when the court determines there no factual issues remaining to be tried, and therefore a cause of action or all causes of action in a complaint can be decided upon certain facts without trial. 

The Court’s Opinion 

The CS360 Agreement 

ARR did not dispute that it received the Letter, or that it did not report the debt as disputed; rather, ARR argued that the Letter was written and sent without actual or apparent authority because CS360 is a credit repair organization, subject to the Credit Repair Organizations Act ("CROA"), 15 U.S.C. § 1679 et seq., and the contract between the Plaintiff and CS360 did not meet the CROA requirements. Thus, the issue is whether ARR, the debt collector, received a valid dispute of the debt. 

The CROA requires a written contract between the client and the organization to include several mandatory terms and disclosures. The CROA makes any contract not in compliance with the CROA void and unenforceable.

The court found that the CS360 Agreement failed to comply with seven different requirements of the CROA and therefore void and unenforceable. 

The Honorable Robert W. Sweet, U.S. District Court Judge wrote:

“The lack of a CROA- compliant contract between CS360 and Plaintiff - and therefore the lack of a valid contract between CS360 and Plaintiff - means that CS360 had no authority to send the Letter on Plaintiff's behalf. 

As previously noted, the Plaintiff testified that she did not prepare, sign, or send the Letter. She contacted CS360, which sent the Letter on her behalf. Therefore, no valid dispute was made, ARR cannot be liable for an alleged failure to report the debt as disputed, and the ARR motion for summary judgment dismissing the Complaint is granted.” 

The RC Law Agreement 

The court then addressed the issue of whether the RC Law Agreement violates New York's champerty laws and ethical rules.

Editor’s Note: The Merriam Webster dictionary defines champerty as follows: “a proceeding by which a person not a party in a suit bargains to aid in or carry on its prosecution or defense in consideration of a share of the matter in suit.” 

Judge Sweet wrote: 

“New York adopted the prohibition against champerty by statute, providing: 

An attorney or counselor shall not:

Directly or indirectly, buy, take an assignment of or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, with the intent and for the purpose of bringing an action thereon.           

The facts set forth above establish that CS360 identifies potential individuals to act as plaintiffs in consumer protection lawsuits filed by RC Law Group. The CS360 Agreement states that CS360 provides free credit repair services to clients, and CS360 receives payment of $150.00 "from FDCPA settlement funds collected for Client in excess of $200.00." However, CS360 is not a law firm and cannot represent clients in FDCPA lawsuits. The CS360 Agreement further provides that CS360 is authorized "to share any info that could be a potential claim against such companies with RC Law Group so that it may pursue such claims on my behalf." RC Law Group identifies CS360 as a client in its fee agreement. As evidenced by the CS360 Agreement, the RC Law Agreement, and the deposition of Bergida, CS360 and RC Law Group are intertwined entities, generating revenue through the filing of lawsuits such as this one.

The CS360 Agreement and the RC Law Agreement show that these entities' operations depend upon clients signing over the majority of their interests in their lawsuits to CS360 and RC Law Group, allowing the entities to pursue FDCPA claims as they please and share in the majority of any recovery. 

Given that there is no evidence of actual damages in this case, Plaintiff therefore stands to recover at most $200, and likely only $50 after payment of CS360's $150 fee for a successful FDCPA claim. Through the RC Law Agreement and CS360 Agreement, RC Law Group has directly or indirectly taken over an interest in the Burns' cause of action, which is prohibited by the champerty laws of New York. 

Lastly, the opinion also discusses three potential violations of the New York Rules of Professional Conduct: 

“Rule 1.8 (i) of New York Rules of Professional Conduct prohibits a lawyer from acquiring a proprietary interest in a lawsuit. By taking an 80% contingent fee on statutory damages and 45% contingent fee on actual damages, in addition to all attorney's fees and costs, RC Law Group took a proprietary interest in this lawsuit. 

Rule 5.4 prohibits a lawyer from sharing legal fees with a non-lawyer. The CS360 Agreement states that RC Law Group pays CS360 $150.00 out of FDCPA settlements that RC Law Group obtains on behalf of clients such as Burns. 

Rule 7.2 prohibits a lawyer from compensating a person or organization to recommend or obtain employment by a client. During Bergida's deposition, he testified that RC Law Group compensates CS360 for referring clients to RC Law Group. 

Based on the violations of the New York Rules of Professional Conduct, and the champerty laws discussed above, ARR's motion for summary judgment is granted and the Plaintiff's claim for attorney's fees is dismissed.” 

insideARM Perspective

The opinion paints a disturbing picture for the ARM industry. ARM firms are dealing with high volumes of dispute letters from “credit repair” organizations throughout the United States. Some reputable, some not. 

It is impossible to know whether the sender has an agreement that is in compliance with the CROA. Therefore, it would not be prudent policy to ignore all disputes from a credit repair organization based upon the court’s opinion in this case. 

Is the fact situation described in this matter an anomaly? Who is to know? Who wants to spend money in attorney fees to find out in a specific case? On the other hand, defendants in a FDCPA suit that clearly originated from a credit repair organization would be wise to conduct discovery similar to the discovery in this case to dig into the relationships between a consumer, a credit repair organization, and a law firm. 

Finally, for those interested, the CS360 website can be found here. The RC Law Group website can be found here.