credit counseling article AUGUST 2010 Appeals Court Decision Opens - PDF document

credit counseling article AUGUST 2010 Appeals Court Decision Opens Appeals Court Decision Opens services must performed under a written contract that is accompanied with a separate disclosure statement. Door to More Credit Repair Class Door to More Credit Repair Class CROA can be enforced by the Federal Trade Commission (“FTC”), state Attorneys General, and by private plaintiffs in court (including as class actions). Consumers can sue Action Litigation against Credit Action Litigation against Credit to recover the greater of the amount paid or actual damages, punitive damages, costs, and attorney's fees for Counseling Agencies Counseling Agencies violations of CROA. In 2001, Andrew and Kelly Zimmerman, husband and wife, by Jonathan L. Pompan, Esq. and enrolled in a debt management plan (“DMP”) with Jeffrey S. Tenenbaum, Esq. Cambridge Credit Counseling Corporation, a tax-exempt Venable LLP, Washington, D.C. nonprofit credit counseling agency, after learning about Cambridge through radio, television and Internet The United States Court of Appeals for the First Circuit advertisements. In 2003, the Zimmermans accused recently found in Zimmerman v. Puccio that a tax-exempt, Cambridge Credit Counseling Corporation, its founders nonprofit credit counseling agency operated as a “credit John and Richard Puccio, and several other affiliated repair organization” within the meaning of the Credit corporate entities of violating CROA, a statute which Repair Organizations Act (“CROA”), 15 U.S.C. §§ 1679- generally regulates those offering “credit repair” services, 1679j, and that certain principals of the organization were especially “credit repair organizations,” as well as the personally liable under CROA. Zimmerman v. Puccio , No. state consumer protection law. 09-1416 (1 st Cir. 2010). The district court initially granted the defendants’ motion The Zimmerman decision adopts a sweeping to dismiss the Zimmermans’ federal claims, finding that, interpretation of CROA that equates credit counseling as a nonprofit entity, the credit counseling agency was agencies with credit repair organizations. As a result, we exempt from CROA. On appeal of that judgment, the First are likely to see an increase in credit repair class action Circuit Court vacated the district court’s dismissal of the lawsuits, which can be crippling to nonprofit credit plaintiffs’ federal claims and remanded the case for counseling agencies, especially those that offer or reconsideration. Zimmerman v. Cambridge Credit provide services to renegotiate, settle, reduce, or Counseling Corp., 409 F.3d 473 (1 st Cir. 2005). The First otherwise alter the terms of consumer debts. Circuit concluded that the statutory exception to CROA liability for “any nonprofit organization which is exempt Background from taxation under section 501(c)(3)” of the Internal Revenue Code, 15 U.S.C. § 1679(a)(3)(B)(i), did not apply Under CROA, a credit repair organization is defined as to the defendants simply because they had been any person, including an attorney, who uses interstate recognized by the Internal Revenue Service as being commerce or the mail to sell or provide services for the exempt from federal income taxation under section express or implied purpose of improving any consumer’s 501(c)(3) entities. Zimmerman , 409 F.3d at 475-77. credit history. 15 U.S.C. § 1679a(3). CROA prohibits a Instead, the First Circuit held that in order to qualify for number of acts and practices, including: the statutory exemption, an entity “must actually operate misrepresentations of services a credit repair as a nonprofit organization and be exempt from taxation organization can provide, 15 U.S.C. § 1679b(a)(3); and under section 501(c)(3) [of the Internal Revenue Code].” engaging in or attempting to commit a fraud or deception Id. at 478 (emphasis in original). As a result, the First on any person in connection with the services of a credit Circuit ruling was reading far more into the statute than repair organization, Id . § 1679b(a)(4), among others. Congress had intended, potentially requiring credit Credit repair organizations may not receive payments before any promised service is fully performed. Such

counseling agencies to prove in court that they were, in defendants made misleading representations to clients fact, operating as nonprofit organizations. that they would be retaining a nonprofit credit counseling agency when, in fact, their accounts were transferred to a After the First Circuit’s remand, the case went back to the for-profit corporation. The district court entered a final district court. This time, the district court certified an judgment against the Puccios, awarding damages to the entire class of DMP customers, giving the Zimmermans plaintiffs on behalf of the certified class, in the amount of plenty of company at the plaintiff’s table in this class $256,527,000, which reflected only compensatory action. For almost two years, the parties conducted damages; rather than punitive damages, which are then discovery, which concluded with both parties filing cross trebled under CROA. motions for summary judgment. In January 2008, the district court considered these opposing motions and Appeal and First Circuit Decision granted summary judgment for the plaintiffs. The Puccios appealed the grant of summary judgment; In granting summary judgment for the plaintiffs - the the remaining corporate defendants did not appeal. The opposite of its ruling in 2004 - the court found that the Puccios based their appeal on the argument that they did credit counseling agency and various other corporate not fall within the ambit of CROA because their credit defendants, including a back-office processor and counseling enterprise was not a “credit repair marketing company operated by the Puccios, operated as organization” as defined by the statute. They also argued credit repair organizations within the meaning of CROA that the district court erred in piercing the corporate veil because they “crossed the boundary from credit when it found them liable for engaging in fraud under counseling into credit repair with their continued and Section 1679b(a)(4). Finally, in their primary argument insistent representations to consumers that their directed at their substantive liability under Section services could only help improve clients’ credit.” 1679b(a)(3), the Puccios argued that the district court Zimmerman , 529 F. Supp. 2d 254 at 275 (D. Mass. 2008). did not, in fact, find them liable under the “misleading The court held that the credit counseling agency, which representation” provision, Id. § 1679b(a)(3). has since settled the case with the plaintiffs and remains Alternatively, if the district court did find them liable tax exempt, was not exempt under CROA’s provision for under (a)(3), the Puccios argued that the district court nonprofit organizations because it did not, at the time of again erred in piercing the corporate veil. the transactions with the plaintiffs, “in fact and as a matter of law, operate as a nonprofit.” Id . at 277. The First Circuit affirmed the district court’s grant of summary judgment to the plaintiffs, concluding that The district court determined that, as credit repair “credit counseling aimed at improving future organizations, the credit counseling agency and creditworthy behavior is the quintessential credit repair corporate defendants had not complied with any of service.” In doing so, it rejected Hillis v. Equifax CROA’s requirements. Id. at 278. Specifically, they did Consumer Servs., Inc. , 237 F.R.D. 491 (N.D. Ga. 2006). In not provide consumers with a required disclosure Hillis , the district court (located in the 11 th Circuit) drew statement, did not include certain required items in their a distinction between purporting to repair or service agreements, and did not give consumers a retroactively fix past credit problems and purporting to separate mandatory cancellation form along with the improve credit in the future, and because the definition of service agreement. Id . at 278-79. Additionally, the district credit repair organization refers to services whose court found that the defendants violated CROA by purpose is to improve a consumer’s credit record, credit charging up-front fees to consumers before they had fully history, or credit rating, CROA’s requirements applicable performed the promised services. Id. at 279. to credit repair organizations did not apply to services that offer “only prospective credit advice to consumers In addition, with regard to the provisions of CROA or provide information to consumers so that they can directed not just at credit repair organizations but at “any take steps to improve their credit in the future.” Id . at person,” the court found that the Puccios and the 514. corporate defendants were liable for “mak[ing] or us[ing] . . . misleading representation[s] of the services of [a] The First Circuit in Zimmerman considered the Hillis credit repair organization” under 15 U.S.C. § 1679b(a)(3) distinction and found it “unsupportable.” Instead, the and for “engag[ing] . . . [in a] course of business that First Circuit quoted the district court in stating, constitutes or results in . . . an attempt to commit…a fraud or deception on any person in connection with the [t]he ostensibly forward-looking offer or sale of the services of the credit repair orientation” of representations about organization” under 15 U.S.C. § 1679b(a)(4). Id . at 279-80. improving clients’ credit “does not As examples, the court found that the corporate mitigate the obvious message to debtors 2