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Consumer Financial Protection Bureau v. RD Legal Funding LLC

United States District Court, S.D. New York

June 21, 2018

CONSUMER FINANCIAL PROTECTION BUREAU and THE PEOPLE OF THE STATE OF NEW YORK, BY ERIC T. SCHNEIDERMAN, ATTORNEY GENERAL FOR THE STATE OF NEW YORK, Plaintiffs,
v.
RD LEGAL FUNDING, LLC; RD LEGAL FINANCE, LLC; RD LEGAL FUNDING PARTNERS, LP; and RONI DERSOVITZ, Defendants.

          Attorneys and Law Firms BENJAMIN KONOP, HAI BINH T. NGUYEN, Bureau of Consumer Financial Protection, Washington, DC, JANE M. AZIA, MELVIN L. GOLDBERG, People of the State of New York by Eric T. Schneiderman, Attorney General for the State of New York, New York, NY, for Plaintiffs.

          MICHAEL D. ROTH, JEFFREY M. HAMMER, DAVID K. WILLINGHAM, Boies Schiller Flexner LLP, Los Angeles, CA, ERIC T. KANEFSKY, Calcagni & Kanefsky LLP, Newark, NJ, for Defendants.

          CAROLINA A. FORNOS, Pillsbury Winthrop Shaw Pittman, LLP, New York, NY, for Amicus Curiae American Legal Finance Association.

          CHRISTOPHER A. SEEGER, TERRIANNE BENEDETTO, Seeger Weiss LLP, New York, NY, DIOGENES P. KEKATOS, Seeger Weiss LLP, Ridgefield Park, NJ, for Proposed Amicus Curiae Plaintiff Settlement Class in In re National Football League Players' Concussion Injury Litigation.

          OPINION & ORDER

          LORETTA A. PRESKA SENIOR UNITED STATES DISTRICT JUDGE

         Table of Contents

         I. Factual Background ......................................... 2

         a. The NFL Class Members ..................................... 4

         b. September 11, 2001 James Zadroga Victims Compensation Fund Eligible Claimants ........................................... 5

         c. The Purchase Agreements ................................... 6

         d. Claims Against the RD Entities ............................ 7

         i. CFPA Claims ............................................. 7

         ii. Claims Arising Under New York Law ....................... 9

         II. Procedural History ........................................ 10

         III. Legal Standard ........................................... 15

         IV. Discussion ............................................... 16

         a. Federal Jurisdiction ..................................... 17

         i. The RD Entities as “Covered Persons” Under the CFPA .... 17

         1. The NFL Concussion Litigation Settlement Agreement Claims ................................................... 19

         a. The NCLSA's Anti-Assignment Provision .............. 20

         b. Legal Standard Regarding the Scope of the Anti-Assignment Provision ................................... 21

         c. Assignability of “Settlement Proceeds”

         v. “Monetary Claims” ...................................... 24

         d. Interpretation of the New York UCC ................. 27

         e. The NFL-related Purchase Agreements Are Void ....... 29

         2. 31 U.S.C. § 3727 Invalidates the Assignment of Compensation Awards from the VCF ......................... 29

         a. The Anti-Assignment Act, 31 U.S.C. § 3727 ........ 30

         i. “Claim Against the United States” ................ 31

         ii. Statutory Purpose ................................ 36

         iii. .. The VCF-related Purchase Agreements Do Not Comply With the Anti-Assignment Act's Requirements .......... 40

         3. Eligible Claimants and NFL Class Members “Incur[red] Debt” Through the Purchase Agreements .................... 41

         a. The RD Entities Extend “Credit” and “Service[] Loans” ................................................. 54

         4. The RD Entities Are “Covered Persons” Under the CFPA . 56

         b. Failure to State a Claim Fed.R.Civ.P. 12(b)(6) ........ 56

         i. Rule 9(b)'s Heightened Pleading Standard Does Not Apply to Non-Fraud Claims .......................................... 57

         1. “Substantial Assistance” Claims Under the CFPA ....... 62

         2. Specificity of Allegations Against Each Defendant Under Rule 8(a) ................................................ 63

         ii. “Substantial Assistance” Liability Under the CFPA ...... 67

         iii. Deceptive and Abusive Conduct Under the CFPA ......... 70

         1. Counts I, III, IV, V: Deceptive Acts or Practices Under the CFPA ................................................. 70

         a. Count I ............................................ 71

         i. “Substantial Assistance” Claim Against Roni Dersovitz Under Count I .............................. 72

         b. Count III .......................................... 75

         i. “Substantial Assistance” Claim Against Roni Dersovitz Under Count III ........................... 76

         c. Count IV ........................................... 77

         i. “Substantial Assistance” Claim Against Roni Dersovitz Under Count IV ............................ 79

         d. Count V ............................................ 80

         i. “Substantial Assistance” Claim Against Roni Dersovitz Under Count V ............................. 81

         2. Count II: Abusive Acts or Practices Under the CFPA ... 83

         a. “Substantial Assistance” Claim Against Roni Dersovitz Under Count II ......................................... 85

          iv. State Law Claims ....................................... 86

         1. NYAG's Jurisdiction Over the Purchase Agreements ..... 88

         2. Count VI: Claims Under New York Civil and Criminal Usury Laws ..................................................... 89

         3. Count VIII: Violation of New York General Obligations Law § 13-101 ............................................. 91

         4. Count IX: Violation of New York General Business Law § 349 .................................................... 93

         5. Count X: Violation of New York General Business Law § 350 .................................................... 96

         6. Count XI: New York Executive Law § 63(12) Fraud ...... 98

         c. Constitutional Claims .................................... 99

         i. History, Liberty, and Presidential Authority ........... 99

         ii. CFPB's Notice of Ratification ......................... 100

         d. Conclusion .............................................. 104

          Loretta A. Preska, Senior United States District Judge

         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 authority to bring claims under the CFPA. The Court concludes that NYAG has alleged plausibly claims under the CFPA and under New York law. Accordingly, Defendants' motion to dismiss the Complaint is denied. (ECF No. 39.)

         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.[1]

         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”). 49 U.S.C. § 40101.

         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, In re NFL Players' Concussion Injury Litig., MDL No. 2323 (E.D. Pa. Feb. 13, 2015) (ECF No. 6481-1). Defendants in that case, the NFL and NFL Properties LLC, ultimately agreed that settlement of the claims in that complex putative class action was appropriate. Id. Recitals (K). Accordingly, on February 13, 2015, a federal district court in the Eastern District of Pennsylvania approved the NFL Concussion Litigation Settlement Agreement (“NCLSA”) between the Class Members, by and through class counsel, and defendants NFL and NFL Properties LLC. Id. 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”). 49 U.S.C. § 40101. Congress created the VCF to provide compensation to individuals and personal representatives of deceased individuals who suffered physical injury or were killed as a result of the September 11, 2001 terrorist attacks or were harmed during the removal of debris immediately following those attacks. Proposed Rule, Federal Register, Vol. 76 No. 119 (Jun. 21, 2011). The Zadroga Act authorizes a Special Master appointed by the Attorney General to carry out the administration of the VCF by enacting substantive and procedural rules, including making determinations as to what award amount an eligible individual (“Eligible Claimant”) is entitled to under the VCF. 28 C.F.R. § 104.51.

         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); 49 U.S.C. §§ 405(b)(1), 405(c), 406(a). Eligible Claimants who are entitled to compensation include individuals who suffer from respiratory illnesses and cancers related to their exposure to dust and debris at the World Trade Center site as well as from post-traumatic stress disorder, depression, anxiety disorder, and memory loss following the September 11th, 2001 terrorist attacks. (Compl. ¶ 22.)

         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 of his or her obligation to repay the RD Entities in the event that the RD Entities are unable to recover the settlement award from the Consumer's third-party obligor, i.e., the NFL Settlement Fund or the VCF. (Def. Br. Ex. 1.)

         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, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), by misrepresenting that the Purchase Agreements constituted valid and enforceable assignments and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3) (Compl. ¶ 63); (2) Count II alleges that the RD Entities engaged in abusive acts or practices, 12 U.S.C. §§ 5531(d), 5536(a)(1)(B), by misrepresenting that the Purchase Agreements constituted valid and enforceable assignments and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3) (Compl. ¶¶ 72-73); (3) Count III alleges that the RD Entities engaged in deceptive acts or practices, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), by misrepresenting that they could “cut through red tape” and expedite a Consumer's award payment when in fact they could not and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3) (Compl. ¶ 79); (4) Count IV alleges that the RD Entities engaged in deceptive acts or practices, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), by misrepresenting when the RD Entities would deliver Consumers' cash payments because, in some instances, the RD Entities made payment after the promised payment date, and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3), (Compl. ¶ 86); and (5) Count V alleges that the RD Entities engaged in deceptive acts or practices, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), by collecting on contracts that functioned as loans with usurious interest rates under state law and on which no payment was due, and that Dersovitz knowingly or recklessly provided substantial assistance to the RD Entities in carrying out these violations, 12 U.S.C. § 5536(a)(3). (Compl. ¶ 93.)

         ii. Claims Arising Under New York Law

         The NYAG brings independently various claims arising under New York law, each of which is asserted against each of the named Defendants: Count IX asserts a claim of deceptive practices under New York General Business Law (“NY GBL”) § 349 against all of the named Defendants based on the same alleged deceptive conduct underlying Counts I, III, IV, and V of the Complaint, (Compl. ¶¶ 119-22); Count X asserts a claim of false advertising against all of the named Defendants under NY GBL § 350 based on the RD Entities' alleged misrepresentations that the transactions at issue were sales, not loans, and that the RD Entities had the ability to expedite payment of Consumers' awards when in fact they did not, (Compl. ¶¶ 123-26); Count XI asserts a claim under New York Executive Law § 63(12) for fraudulent conduct based on the same factual allegations underlying Counts I-V of the Complaint (Compl. ¶¶ 127-30); Counts VI and VII allege that, through the Purchase Agreements, Defendants charged Consumers rates of interest that violated New York's civil and criminal usury laws, N.Y. Banking Law § 14-a, and N.Y. Penal Law §§ 190.40 and 190.42, respectively (Compl. ¶¶ 99-105, 106-10); and finally, Count VIII alleges that Defendants violated New York General Obligations Law (“NY GOL”) § 13-101 because they entered into contracts that constituted an unlawful assignment of individual claims to recover for personal injuries under New York law. N.Y. Gen. Oblig. Law § 13-101; (Compl. ¶¶ 111-18.)

         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 United States District Court for the Eastern District of Pennsylvania. (ECF No. 45.) Class counsel stated that it believed referral of this question to the Eastern District of Pennsylvania would be appropriate because that court has continuing jurisdiction over the administration and interpretation of the NCLSA. (Id.); see also Settlement Agreement § 27.1 (“The Court retains continuing and exclusive jurisdiction over this action including jurisdiction over . . . all Settlement Class Members . . . .”). Class counsel explained that referral of this question would ensure uniformity of adjudication through “a single up-or-down ruling that [would] apply not only to Defendants in this action but also to other potential lenders to class members who might assert the same defense.” (Id.) Because interpretation of the NCLSA's terms falls squarely within “the administration and interpretation of the [NCLSA]” and referral would promote judicial economy, this Court concluded that referral of the anti-assignment clause question to the Eastern District of Pennsylvania was appropriate. (ECF No. 59.) On September 15, 2017, this Court referred the assignment question to the Honorable Anita B. Brody in the Eastern District of Pennsylvania, who was presiding over the NFL Concussion Litigation. (ECF No. 60.)

         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., 919 F.Supp.2d 345, 352 (S.D.N.Y. 2013)). In New York, an anti-assignment clause is enforceable only if it contains “clear, definite and appropriate language” restricting the assignment of money due under the contract. Allhusen v. Caristo Constr. Corp., 103 N.E.2d 891, 893 (N.Y. 1952); Neuroaxis Neurosurgical, 919 F.Supp.2d at 352. Under this framework, Judge Brody concluded that the term “relating to” in the NCLSA's anti-assignment clause, which prohibits Class Members from assigning claims “relating to the subject matter of the Class Action Complaint, ” encompassed assignment of Class Members' claims to settlement awards under the NCLSA. See Explanation and Order at 3, 4 n.6. In reaching this conclusion, Judge Brody concluded that the phrase “relating to” in the NCLSA's anti-assignment clause was “sufficiently express” under New York law to include assignment of Class Members' claims to settlement awards under the NCLSA. Explanation and Order at 3-4.

         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. Id.

         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.)

         After receiving briefing from all parties on Defendants' instant motion to dismiss, the Court requested supplemental briefing from the parties on February 23 and 28, 2018, on two legal questions pertaining to the VCF Purchase Agreements. (ECF Nos. 71, 72.) The first question asked what the effect of the underlying agreement between the Defendants and Eligible Claimants would be if the Court were to conclude that the assignments in the VCF Purchase Agreements were impermissible pursuant to the Anti-Assignment Act, 31 U.S.C. § 3727. As a follow-on to the first inquiry, the Court also asked how the effect of any such underlying agreement between Defendants and Eligible Claimants would impact the Government's assertion of jurisdiction over the RD Entities as “covered persons” under the CFPA. (ECF No. 72.)

         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, 308 F.3d 180, 184 (2d Cir. 2002) (citation and internal quotation marks omitted). Though a court must accept all factual allegations as true, it gives no effect to “legal conclusions couched as factual allegations.” Stadnick v. Vivint Solar, Inc., 861 F.3d 31, 35 (2d Cir. 2017) (quoting Starr v. Sony BMG Music Entm't, 592 F.3d 314, 321 (2d Cir. 2010)). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. This “plausibility standard is not akin to a ‘probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted ...


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