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Consumer Financial Protection Bureau v. Access Funding, LLC

United States District Court, D. Maryland

September 13, 2017




         Plaintiff Consumer Financial Protection Bureau ("CFPB") files suit against defendants Access Funding, LLC, Access Holding, LLC, Reliance Funding. LLC, Lee Jundanian, Raffi Boghosian, and Michael Borkowski (collectively the "Access Funding Defendants") and attorney Charles Smith ("Smith"), seeking a permanent injunction, damages, disgorgement, and payment of redress, civil penalties, and costs for violation of various provisions of the Consumer Financial Protection Act of 2010 C'CFPA"), 12 U.S.C. § 5481 et. seq., relating to the transfers of structured settlements. Now pending are the defendants' motions for Burford abstention and a stay, or in the alternative, to dismiss. The parties have fully briefed the issues, and no oral argument is necessary. See Local Rules 105.6, For the reasons set forth below, the motions for Burford abstention and a stay are denied. The motions to dismiss are granted as to Counts I-IV, but denied as to Count V.[1]


         At the motion to dismiss stage, this court accepts as true the facts alleged in the complaint. See Aziz v. Alcolac, 658 F.3d 388, 390 (4lh Cir. 2001). Plaintiff CFPB is an "agency of the United States charged with regulating the offering and providing of consumer-financial products and services" under certain federal statutes, including the CFPA (ECF No. 1, ¶ 5). Defendant Access Funding, LLC is a limited-liability company with a principal place of business in Chevy Chase, Maryland that purchased payment streams from structured settlement holders- a practice known as "structured settlement factoring"-from December 2012 to November 2015. Id. at ¶ 6. Defendant Access Holding, LLC is the "sole and managing member of Access Funding and is legally responsible for the liabilities of Access Funding." Id. at ¶ 8. Defendant Reliance Funding, LLC is a "successor in interest to Access Funding, " as Access Funding sold all of its assets to Reliance Funding upon being notified of the CFPB investigation that forms the basis for this matter. Id. at ¶ 9. Defendant Michael Borkowski ("Borkowski") is the CEO of Access Funding and has been since May 2014. Id. at 12. Prior to becoming CEO, Borkowski was the CFO and COO of Access Funding. Id. Defendant Raffi Boghosian ("Boghosian") is the COO of Access Funding and has been since May 2014. Id. at ¶ 11. Defendant Lee Jundanian ("Jundanian") was the CEO of Access Funding from February 2013 to May 2014 and an advisor to Access Funding thereafter. Id. at ¶ 10. Jundanian, Boghosian, and Borkowski each have "an ownership interest in Access Funding and [each] helped develop Access Funding's business model and manages its business." Id. at ¶ 10-12. Defendant Charles Smith is "a Maryland-based attorney who provided purportedly independent professional advice for almost all Maryland consumers who made structured-settlement transfers to Access Funding." Id. at ¶ 13.

         This dispute involves the sale of structured settlements. Structured settlements are "'established by legal judgments or settlements of tort claims to provide recipients with an arrangement for periodic payment of damages for personal injuries" and are "often used to ensure the financial well-being of victims who have suffered long-term physical or cognitive harm." Id. at ¶ 19. From its founding in December 2012 until November 2015, Access Funding's principal business was structured-settlement-factoring. Id. at ¶ ¶ 14, 18. Structured settlement factoring is the offering to "'recipients of structured settlements the opportunity to transfer a portion of their future payment streams in exchange for a discounted immediate lump sum." Id. at ¶ 20. Access Funding conducted approximately seventy percent of its transfers in Maryland. Id. at ¶ 31.

         Maryland is one of forty-nine states that have enacted Structured Settlement Protection Acts ("SSPAs") in order to protect individuals who have suffered long-term physical or cognitive harm from entering into transactions that are not in their best interest. Id. at ¶ 21. Maryland's SSPA requires structured settlement factoring companies to obtain court approval before purchasing a payment stream. Id. at ¶ 22. It also requires the court to "find that the consumer has consulted with an independent professional advisor ("IPA") before it can approve a structured-settlement transfer." Id. at ¶ 29. "'During the relevant period, Maryland's SSPA required that an IPA advise [each consumer] on the financial, legal, and tax implications of a transfer. Md. Cts. & Jud. Proc. §§ 5-1102(b)(3)(2000)." Id. at ¶ 32.

         The complaint alleges that Access Funding aggressively pursued structured settlement holders in the hopes of purchasing their settlements. Their aggressive business practices included searching court records to identify consumers who had previously transferred a portion of their structured settlements, then contacting those consumers and enticing them to transfer the remainder of their settlements to Access Funding: searching court records for pending filings by other structured-settlement-factoring companies, then contacting the consumers named in those filings and enticing them to back out of the impending transfers and enter into deals with Access Funding instead; pressuring individuals who had already entered into transactions with Access Funding to transfer to Access Funding all of their remaining expected payments; and more generally pursuing structured settlement holders via aggressive phone and mail solicitations. Id. at ¶ ¶ 23-26. It is not this general pattern of aggressive business practices, however, that forms the basis for the complaint.

         The complaint is based instead on two of Access Funding's specific business practices. First, the complaint alleges that Access Funding violated the CFPA by abusing consumers with respect to the payment of advances. It alleges that after contacting consumers and offering to purchase their settlements. Access Funding entered into advance agreements with many of them, pursuant to which it advanced their lump sum payments while they waited to complete their paperwork and finalize their transfers. Id. at ¶ 41. "These advances often consisted of $500 for signing a contract, $1, 000 when a court date was set, and another $1, 000 when a judge approved the sale." Id. The advance agreements notified the consumers that they would be liable to repay the advances if they did not ultimately go through with the transaction, and that in order to keep the advances they would have to cooperate fully with the company in obtaining court approval for the transaction. Id. at ¶ ¶ 43, 78. Specifically, the complaint alleges that ''consumers who could not otherwise repay the advances were told that they were obligated to go forward with the transfer even if they realized it was not in their best interest." Id. at ¶ 79. It further alleges that the consumers, many of whom were "lead-poisoning victims with cognitive impairments, " id. at ¶ 28, "did not understand the risks or conditions of the advances, including that the advances did not bind them to complete the transactions." Id. at ¶ 80. Jundanian, Boghosian. and Borkowski each allegedly "participated in establishing Access Funding's policies related to advances, including the terms of the advances and how they were presented to consumers, and dictated when Access Funding would issue advances to consumers." Id. at ¶ 42.

         The second basis for the complaint is Smith's conduct as an IPA. The complaint alleges that Access Funding used Smith as the IPA for "almost all of its Maryland transactions." Id. at ¶ 33. Although Smith was supposed to be an independent advisor, he in fact had both personal and professional ties to Access Funding. Id. at ¶ 34. Specifically, Access Funding paid him $200 for each IPA letter he provided. Id. at ¶ 39. Access Funding would email Smith, "telling him when and at which phone number to contact consumers" and would "courier[] to consumers prepaid cell phones that Smith used to contact the consumers." Id. at ¶ 36. Smith would then get on the phone with consumers to provide what was supposed to be "independent professional advice" regarding the "legal, tax, and financial implications" of the transfers. Id. at ¶ 46. In fact, the calls would last only a few minutes and involved Smith doing little more than reciting the terms of the contract and asking the consumers whether they understood them. Id. at ¶ 37. Afterwards, Smith would send an affidavit to the consumers for them to sign, which stated that they had been "advised to seek independent professional advice in connection with the transfer" and in fact had received such advice and still desired to proceed with the transfer. Id. at ¶ 54. Although the consumers did not know that Smith had ties to Access Funding, Jundanian, Boghosian, and Borkowski were aware of this arrangement. Id. at ¶ 35.

         On November 21, 2016, the CFPB filed a complaint in this court alleging three violations of the CFPA by Smith and two violations of the CFPA by the Access Funding Defendants. Each of the claims against Smith and one of the claims against the Access Funding Defendants arise out of Smith's conduct as an IPA. Specifically, the CFPB alleges that Smith engaged in unfair (Count I), deceptive (Count II), and abusive (Count III) acts and practices, in violation of 12 U.S.C. §§ 5531 (a), (b), and (d) and that the Access Funding Defendants substantially assisted Smith's unfair, deceptive, and abusive acts (Count IV), in violation of 12 U.S.C. § 5536(a)(3). The fifth claim arises out of the Access Funding Defendants' conduct with respect to the advances. Specifically, the CFPB alleges that the Access Funding Defendants engaged in abusive acts and practices, in violation of 12 U.S.C. § 5531(d)(2)(a). On January 30, 2017, defendants Access Funding, Borkowski, and Smith, each filed a motion for Burford abstention and a stay, or in the alternative, to dismiss each of the five counts for failure to state a claim upon which relief can be granted.


         I. Prudential and Jurisdictional Bars

         Before turning to defendants' motions to dismiss the complaint for failure to state a claim upon which relief can be granted, I must determine whether a federal court has jurisdiction to hear this case. Jones v. American Postal Workers Union, 192 F.3d417, 422(4th Cir. 1999). Plaintiff bears the burden of establishing jurisdiction. Demetres v. East West Const., Inc., 776 F.3d 271, 272 (4th Cir. 2015). In determining whether plaintiff has carried that burden, the court "presumes that genera! allegations embrace those specific facts that are necessary to support the claim" and "accept as true.. .allegations for which there is sufficient factual matter to render them plausible on their face." Beck v. McDonald, 848 F.3d 262, 270 (4th Cir. 2017). And here, before determining the jurisdictional question raised by defendants' invocation of the collateral attack doctrine, I address their contentions that the prudential bars of Burford abstention and issue preclusion preclude me from hearing this case. See Cioca v. Rumsfeld, 720 F.3d 505 n.4 (4th Cir. 2013) (noting that prudential bars such as abstention represent the kind of threshold questions that may be resolved before addressing jurisdiction). Courts should exercise their discretion to abstain from deciding a case under Burford in a '"narrow range of circumstances" in which "federal adjudication would unduly intrude upon complex state administrative processes." Martin v. Stewart, 499 F.3d 360, 364, quoting Ouackenbush v. Allstate Ins. Co., 517 U.S. 706, 726 (1996). The proponent of issue preclusion bears the burden of establishing its elements. Sedlack v. Braswell Services Group, Inc., 134 F.3d 2!9, 224 (4th Cir. 1998).

         II. Failure to State a Claim

         To adequately state a claim under Rule 12(b)(6), a complaint, relying on only well-pled factual allegations, must state at least a "plausible claim for relief." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). The "mere recital of elements of a cause of action, supported only by conclusory statements, is not sufficient to survive a motion made pursuant to Rule 12(b)(6)." Walters v. McMahen, 684 F.3d 435, 439 (4th Cir. 2012). To determine whether the CFPB's claim has crossed "the line from conceivable to plausible, " the court must employ a "context-specific inquiry." drawing on the court's "experience and common sense." Iqbal, 556 U.S. at 680. When performing this inquiry, the court accepts "all well-pled facts as true and construes these facts in the light most favorable to the plaintiff in weighing the legal sufficiency of the complaint." Nemet Chevrolet, Ltd. v., Inc., 591 F.3d 250, 255 (4th Cir. 2009). The court need not, however, accept unsupported legal allegations, Revene v. Charles Cnly. Comm'rs, 882 F.2d 870, 873 (4th Cir. 1989), nor must it agree with legal conclusions couched as factual allegations, Iqbal, 556 U.S. at 678, or conclusory factual allegations devoid of any reference to actual events, United Black Firefighters v. Hirst, 604 F.2d 844, 847 (4th Cir. 1979); see also Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009).


         I. Prudential and Jurisdictional Bars

         Defendants argue that there are both prudential bars and a jurisdictional bar to the court hearing this case. First, defendants argue that the abstention doctrine set forth in Barford v. Sun Oil, 319 U.S. 315 (1943), mandates that the court dismiss the CFPB's claims for equitable remedies and stay its claims for damages. Second, defendants argue that the doctrine of issue preclusion bars the CFPB from re-litigating the issues at the heart of its complaint-namely, whether Smith gave independent professional advice and whether the Access Funding transfers were fair and reasonable. Third, defendants argue that the collateral attack doctrine bars the CFPB from challenging final judgments of the Maryland state courts. For the reasons that follow, I find none of these three arguments persuasive and therefore determine that there is neither a prudential nor a jurisdictional bar to the court hearing this case.

         a. Burford Abstention

         Defendants first argue that the court should abstain from hearing this case under Burford because the CFPB asks this court to come to a decision that would conflict with decisions of the Maryland state courts. The CFPB argues that this case is not one of the few in which the Burford abstention doctrine applies. I agree with the CFPB.

         Federal courts have a "virtually unflagging obligation ... to exercise the jurisdiction given them" by Congress. Colorado River Water Conservation Dist. v. U.S., 424 U.S. 800, 817 (1976). The Burford doctrine relaxes this obligation, allowing federal courts to abstain from hearing cases in two very limited circumstances. First, courts may abstain where there are "difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar." Id. at 814. Second, they may abstain where the "exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern. Id. "Abstention is the exception, not the rule." Id. at 813.

         Neither of the circumstances in which Burford is appropriate is present here. First, there are no difficult questions of state law before the court. In fact, there are no questions of state law before the court. The only question before the court is how to interpret the Consumer Financial Protection Act of 2010, which is a question of federal law. (ECF No. 1. ¶ 1). Of the three cases defendants cite in support of their argument for Burford abstention, two involved federal courts that were asked to interpret state law. See Johnson v. Collins Entertainment Co., Inc., 199 F.3d 710, 715 (4th Cir. 1999) ("The district court granted the injunction based on its interpretation of state law and ruled in plaintiffs favor on a question of state unfair competition law. In doing so, however, the district court improperly interfered with a state regulatory scheme whose design is at the heart of the state's police power. The district court should instead have abstained under the doctrine of Burford. . . .") (emphasis added); First Penn-Pac. Life Ins. v. Evans, 304 F.3d 345, 351 (4th Cir. 2002) ("State law also controls the instant dispute over the validity of a policy that may be a substantial asset of the receivership estate.") (emphasis added). The first rationale for Burford abstention was applicable in these cases because the courts were presented with difficult questions of state law. This case is far different because the court is asked to interpret federal law. Here the first rationale for Burford is simply not applicable.

         Moreover, this court's review of this case will not disrupt Maryland's efforts to establish a coherent policy with respect to a matter of substantial public concern. The Maryland SSPA requires the sellers of structured settlements to obtain court approval before selling a settlement. (ECF No. l, ¶ 29). This requirement reflects a policy decision that Maryland citizens should not be allowed to make ill-advised, uninformed decisions to sell structured settlements. Rigid enforcement of the CFPA-a federal statute meant to protect consumers from unfair, deceptive, and abusive acts and practices by individuals who provide consumer-financial products or services-would do nothing to create confusion regarding this policy. 12 U.S.C. § 5531(a). If anything, the consumer protection rationale underlying the state and federal statutes is the same.

         Defendants cite only one case where a court abstained under the second Burford rationale, that resolution of the federal claim would interfere with a state's attempt to establish a coherent policy. In Pomponio v. Fauqier County Bd. of Sup'rs, 21 F.3d 1319 (4th Cir. 1994), the plaintiff brought an 18 U.S.C. § 1983 claim, alleging that state officials had engaged in arbitrariness, made false statements, abused their authority, and engaged in other misconduct while administering local land and zoning laws. The court held that Buford abstention was appropriate-although the case involved an issue of federal law-because the plaintiffs argument:

boil[ed] down to an assertion that his plan complied with the zoning laws, and the local authorities wrongfully disapproved his plan by misapplying the laws and by abusing their authority in the decision-making process. In NOPSI v. Council of New Orleans, 491 U.S. 350 (1989), the Supreme Court found Burford abstention inappropriate in part because the claim asserted there was not "a claim that a state agency has misapplied its lawful authority or has failed to take into consideration or properly weigh relevant state-law factors." 491 U.S. at 362. [Plaintiffs] claim is just such a claim, and under the Supreme Court's precedent and our own, the Burford abstention doctrine applies in this case.

Id. at 1328. The second rationale for Burford was applicable in Pomponio because the plaintiff was arguing that the defendant-a state actor who was supposed to be the arbiter of its own state law-had misapplied that law. The court determined that by hearing such a case it would necessarily disrupt the state's efforts to establish a coherent policy with respect to its own state law. Here, unlike in Pomponio, the CFPB does not argue that the defendants violated federal law by improperly applying state law. This case would be like Pomponio if the CFPB were suing the state judges who approved the settlements at issue, arguing that they violated federal law by approving those settlements. The CFPB makes no such argument. Here the federal claim stands on its own. Thus, the second rationale for Burford is equally inapplicable.

         Ultimately, defendants seem to be asking this court to abstain from hearing this case under Burford based on a belief that it is inappropriate for a federal court to hear a case that might impact a state administrative scheme. Neither the Supreme Court nor the Fourth Circuit has taken such an expansive view of Burford. Indeed, "while Burford is concerned with protecting complex state administrative processes from undue federal interference, it does not require abstention whenever there exists such a process, or even in all cases where there is a potential for conflict with state regulatory law or policy.” NOPSI, 491 U.S. 350, 362 (1989). Congress enacted the CFPA to ensure that federal law protects consumers from unfair treatment by financial advisers. The existence of a state administrative scheme whose requirements reflect a similar concern does not provide this court with a reason to abstain from enforcing federal law if it has been violated. Accordingly, 1 will not abstain from hearing this case under Burford.

         b. Issue Preclusion

         Defendants next ask the court to find that the CFPB is barred by the doctrine of issue preclusion from relitigating two issues that were decided in Maryland state court: whether Smith provided independent professional advice and whether the structured settlement transfers were fair to the consumers. The CFPB argues that three of the four requirements for issue preclusion are not present and that it would therefore be inappropriate to apply the doctrine in ...

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