Consumer Fin. Prot. Bureau v. Commonwealth Equity Grp., LLC

554 F.Supp.3d 202

CONSUMER FINANCIAL PROTECTION BUREAU and Commonwealth of Massachusetts, Plaintiffs

v.COMMONWEALTH EQUITY GROUP, LLC dba Key Credit Repair and Nikitas Tsoukales, Defendants

CIVIL ACTION NO. 20-CV-10991

United States District Court, D. Massachusetts.

Signed August 10, 2021

Benjamin Z. Konop, Nelle Rohlich, Consumer Financial Protection Bureau, Washington, DC, Lawrence DeMille-Wagman, United States Court of Appeals, Boston, MA, for Plaintiff Consumer Financial Protection Bureau.

Lilia Volynkova DuBois, Diana K. Hooley, Massachusetts Attorney General's Office, M. Claire Masinton, Office of the Attorney General Insurance & Financial Services, Boston, MA, for Plaintiff The Commonwealth of Massachusetts.

Amie Marie Bauer, Pro Hac Vice, Jordan E. Wilkow, Pro Hac Vice, Timothy A. Hudson, Pro Hac Vice, Tabet DiVito & Rothstein LLC, Chicago, IL, David B. Mack, Stephanie R. Parker, O'Connor, Carnathan and Mack LLC, Burlington, MA, for Defendants.

MEMORANDUM & ORDER

ZOBEL, S.D.J.

The Consumer Financial Protection Bureau ("CFPB") and the Commonwealth of Massachusetts filed a nine-count complaint against Commonwealth Equity Group, doing business as Key Credit Repair ("Key Credit"), and its president, Nikitas Tsoukales, for alleged violations of federal and state law in connection with their business of offering credit repair services. Plaintiffs allege that defendants made false representations about customers’ ability to improve their credit rating and requested payment in advance of full performance, in violation of the Telemarketing Sales Rule ("TSR"), 16 C.F.R. § 310 et seq. , the Consumer Financial Protection Act ("CFPA"), 12 U.S.C. §§ 5531, 5536, and state law. They seek injunctive relief, monetary damages to benefit consumers who were allegedly harmed by defendants’ actions, and civil monetary penalties. (Docket # 26 at 26–27). Defendants move to dismiss all counts. (Docket # 29).

I. FACTUAL BACKGROUND¹

Key Credit offers credit repair services nationwide and is owned and operated by Mr. Tsoukales. Among the services offered is assistance in removing negative information from customers’ credit reports and improving their credit rating. Customers learn about Key Credit's services through its website and advertising, and call to request assistance. Mr. Tsoukales created the script that Key Credit's sales representatives use to market its offerings. Customers engage Key Credit on a month-by-month basis, paying a monthly fee before obtaining the promised results on their credit ratings. Key Credit's website promises that "credit experts" and "certified credit consultants" will assist customers, but the majority of customers interact with telemarketers located outside the country. The company also includes promises to "fix unlimited negative items" from a credit report, to achieve an "average 90 point increase in 90 days," and to "dramatically increase credit scores." These representations are alleged to be false.

II. LEGAL STANDARD

"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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal citations omitted). "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." Id. The inquiry is usually limited to the facts alleged in the complaint, incorporated into the complaint, or susceptible to judicial notice. In re Colonial Mortg. Bankers Corp., 324 F.3d 12, 15 (1st Cir. 2003).

III. DISCUSSION

A. The Telemarketing Sales Rule

Count I alleges that defendants collected payment for credit repair services before completing the "repair" and without providing the customer with a credit report demonstrating the promised results, in violation of the TSR, 16 C.F.R. § 310.4(a)(2). This violation is also related to counts II, III, and V. Defendants raise numerous defenses against the claim.

1. The Credit Repair Organizations Act and TSR

Defendants first argue that the TSR is secondary to the Credit Repair Organizations Act ("CROA"), which provides that "[n]o credit repair organization may charge or receive any money or other valuable consideration for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed." 15 U.S.C. § 1679b(b). They claim that this provision of the CROA cannot be reconciled with the TSR and that the CROA alone governs their activities.

"[A]lthough the [CROA] undoubtedly governs Defendant's business, there is no language in that statute indicating that Defendant's telemarketing activities may not simultaneously be regulated by the Telemarketing Act." Tennessee v. Lexington Law Firms, No. 96-CV-0344, 1997 WL 367409, at *6, 1997 U.S. Dist. LEXIS 7403, at *17 (M.D. Tenn. May 14, 1997). As plaintiffs note, compliance with the TSR's payment requirements would not cause defendants to violate the CROA. The TSR simply adds a precondition to requesting payment, namely that the organization provide proof that the services were rendered more than six months after performance.

Defendants maintain that where a statute and a regulation provide restrictions of differing degrees, there is conflict preemption. Their reply brief cites several judicial decisions that a subsequently enacted statute superseded a prior inconsistent regulation. However, in each of those cases, it was impossible to comply with both the statute and the regulation.² That is not the situation here. The TSR and the CROA thus do not conflict. See Radzanower v. Touche Ross & Co., 426 U.S. 148, 155, 96 S.Ct. 1989, 48 L.Ed.2d 540 (1976) (holding that if two provisions "are capable of coexistence, it is the duty of the courts ... to regard each as effective" (alteration in original) (quoting Morton v. Mancari, 417 U.S. 535, 550–51, 94 S.Ct. 2474, 41 L.Ed.2d 290 (1974) )); Consumer Fin. Prot. Bureau v. Prime Mktg. Holdings, LLC, No. 16-cv-07111, 2016 WL 10516097, at *9, 2016 U.S. Dist. LEXIS 194873, at *27 (C.D. Cal. Nov. 15, 2016) (discussing the CROA and TSR and finding that "the two provisions may be complied with concurrently; they do not conflict").

2. Alleged Vagueness of the TSR

Defendants next contend that the TSR violates the Due Process Clause because its definition of "telemarketing" fails to provide fair notice as to who is covered by the regulation. The rule defines telemarketing as "a plan, program or campaign which is conducted to induce the purchase of ... services ... by use of one or more telephones and which involves more than one interstate telephone call." 16 C.F.R. § 310.2(gg). Defendants take issue with the lack of a definition for the terms "plan," "program," and "campaign" because, they say, all businesses that receive sales calls necessarily employ some plan, program, or campaign to induce the purchase of services, and therefore, the TSR would apply to all vendors and service providers who communicate with customers over the telephone.

Defendants acknowledge, however, that the TSR exempts liability for the vast majority of businesses, while expressly declining to exempt credit repair organizations like Key Credit. 16 C.F.R. § 310.6(b)(5). "A [party] who engages in some conduct that is clearly proscribed cannot complain of the vagueness of the law as applied to the conduct of others." Hoffman Estates v. Flipside, Hoffman Estates, 455 U.S. 489, 495, 102 S.Ct. 1186, 71 L.Ed.2d 362 (1982) ; see 1A Debtor-Creditor Law § 17.04 (2021) ("The Rule specifically covers cases where the consumer makes the first call to the credit repair organization in response to an advertisement or direct mail solicitation ....").

Likewise, the TSR's description of a "plan, program, or campaign" to induce the purchase of services is clear, particularly in this context: defendants are alleged to have developed a plan to offer credit relief services to consumers, and to have carried out that plan by advertising and promoting those services. (Docket # 26 at ¶¶ 15–24, 33, 35, 37); see Consumer Fin. Prot. Bureau v. Irvine WebWorks, Inc., No.14-cv-01967, 2016 WL 1056662, at *12, 2016 U.S. Dist. LEXIS 36097, at *36–37 (C.D. Cal. Feb. 5, 2016) ("Defendants’ final argument is that the [TSR] is impermissibly vague and that the rule failed to give Defendants fair notice of what conduct was prohibited .... The Court disagrees. The regulation was properly published and promulgated prior to the conduct that the Bureau contends violated the [TSR].").

3. Alleged First Amendment and Equal Protection Violations

Defendants also assert that the TSR's definition of "telemarketing" places a content-based restriction on speech by burdening credit repair service providers with a restriction as to when they can collect payment for their services. As plaintiffs note, however, the restriction is on conduct—the timing of payment—not on speech. See Wine & Spirits Retailers, Inc. v. Rhode Island, 481 F.3d 1, 6 (1st Cir. 2007) ("The statute at issue here merely proscribes conduct .... Such a ban is not a ban on commercial speech."). Even if, as defendants would have it, speech in support of sales of their services necessarily leads to payment, "[i]t has never been deemed an abridgement of freedom of speech or press to make a course of conduct illegal merely because the conduct was in part initiated, evidenced, or carried out by means of language, either spoken, written, or printed." Id. at 7 (quoting Rumsfeld v. Forum for Acad. & Inst. Rights, Inc., 547 U.S. 47, 62, 126 S.Ct. 1297, 164 L.Ed.2d 156 (2006) ).

In line with this assertion, defendants also state that the regulation violates the Equal Protection Clause by discriminating against credit repair telemarketers as a subclass of telemarketers. Yet, as the First Circuit has held, the legislature must be allowed to "devise specific...