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Consumer Financial Protection Bureau v. Mortgage Law Group, LLP

United States District Court, W.D. Wisconsin

November 4, 2019

CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff,
v.
THE MORTGAGE LAW GROUP, LLP, CONSUMER FIRST LEGAL GROUP, LLC, THOMAS G. MACEY, JEFFERY J. ALEMAN, JASON E. SEARNS and HAROLD E. STAFFORD, Defendants. Defendant and Type of Violation No. of Counts Per Type of Violation No. of Days Engaged in Violations Penalty Amount at $5, 000/day (Strict Liability) Penalty Amount at $25, 000/day (Reckless) Total Maximum Penalty Mitigated Penalty

          OPINION AND ORDER

          WILLIAM M. CONLEY, DISTRICT JUDGE

         Plaintiff brought this civil enforcement action under the Consumer Financial Protection Act of 2010 (“the Act”), 12 U.S.C. §§ 5564-65, against two former mortgage relief services providers and their principals for violations of Regulation O, 12 C.F.R. part 1015, including misrepresenting their services to consumers in a number of respects, failing to make required disclosures, and illegally collecting advance fees. On July 20, 2016, the Honorable Barbara B. Crabb resolved a number of the claimed violations against defendants on summary judgment, including finding the individual defendants liable under the Act for the misconduct of institutional defendants The Mortgage Law Group (TMLG) and Consumer First Legal Group (CFLG) I and II.[1] (Dkt. #191.) Following a subsequent transfer of the case to me for reasons unrelated to the merits, the remaining disputes proceeded to a bench trial in April 2017. In its first post-trial order on June 21, 2017, the court entered monetary and injunctive relief against defendant TMLG only, including imposition of civil penalties, while leaving other questions to be further briefed by the other defendants. (Dkt. #404.)[2] On November 15, 2018, the court issued its second post-trial order with respect to various issues of liability and level of scienter of the remaining defendants -- CFLG I and II, Harold Stafford, Thomas Macey, Jeffery Aleman, and Jason Searns -- although the court refrained from entering final judgment until the parties had an opportunity to be heard on the issues of damages and injunctive relief. Those issues included: (1) whether civil penalties should be awarded against the remaining defendants under 12 U.S.C. § 5565(c); (2) how those penalties, if any, should be calculated; and (3) whether any relevant mitigating factors apply. (Dkt. #409.) Having considered the parties' additional briefs with respect to these issues, and the court's factual findings as set forth in its post-trial orders on liability, the court now orders restitution and disgorgement, civil penalties, and permanent injunctive relief as set forth below.

         OPINION

         As the court explained in its post-trial orders, the Act authorizes courts to “grant any appropriate legal or equitable relief with respect to a violation of Federal consumer financial law, including a violation of a rule or order prescribed under [that] … law.” 12 U.S.C. § 5565(a)(1). While the Act provides for various forms of relief, including restitution, disgorgement, civil money penalties, and “limits on the activities or functions of the person, ” § 5565(a)(2), it does not expressly authorize the imposition of exemplary or punitive damages, § 5565(a)(3). Here, the Consumer Financial Protection Bureau (“the Bureau') seeks restitution, disgorgement, civil money penalties, and permanent injunctive relief, all of which are addressed in this order.

         I. Restitution and Disgorgement

         The Bureau seeks restitution jointly and severally from: defendants Macey, Aleman, and Searns with respect to TMLG's advanced fees in the amount of $18, 716, 725.78; defendants CFLG, Macey, and Aleman with respect to CFLG II's advanced fees in the amount of $2, 897, 566; and defendants Stafford and CFLG with respect to CFLG I's advanced fees in the amount of $94, 730. To the extent that any portion of these amounts can no longer be returned directly to consumers as restitution, the Bureau further asks that the leftover funds be deposited in the United States Treasury as disgorgement of defendants' ill-gotten gains. See FTC v. Lanier Law, LLC, 194 F.Supp.3d 1238, 1287 (M.D. Fla. 2016) (ordering disgorgement of revenues that defendants derived through deceptive and improper solicitations, misleading sales tactics, and impermissible advance fees).

         Previously, Judge Crabb determined on summary judgment that the appropriate measure for restitution or disgorgement in this case is defendants' net revenues-the amount of advance fees collected from their clients minus any refunds made to those clients-which totaled $18, 331, 737[3] for TMLG and $2, 992, 296 for the CFLG entities ($94, 730 for CFLG I and $2, 897, 566 for CFLG II). (Dkt. #191 at 4.) Before trial, defendants moved this court to reconsider that ruling and reduce the restitution amount to account for the benefits that some consumers may have received from defendants' services in the form of mortgage modifications. The court denied this motion for reconsideration, finding that: (1) defendants had waived the issue by failing to develop it properly in their original response to the Bureau's motion for summary judgment; and (2) even if no waiver had occurred, the question whether a consumer was lucky enough to obtain a mortgage loan modification is ultimately irrelevant to the question whether defendants used misleading or deceptive representations to induce consumers to pay them fees, particularly since it is highly likely that the client would have obtained the same relief on his or her own or with assistance from a free, non-profit provider of loan resolution services. (Dkt. #256.)

         Using the briefing on remedies as an opening, defendants once again ask the court to reconsider its prior ruling on the measure and amount of restitution or disgorgement, asserting that there is new, contrary authority on the issue. Specifically, defendants cite CFPB v. Nationwide Biweekly Admin., 2017 WL 3948396 (N.D. Cal. Sept. 8, 2017), and CFPB v. CashCall, Inc., 2018 WL 485963 (C.D. Cal. Jan. 19, 2018), as more recent decisions in which restitution and disgorgement were not ordered. Contrary to defendants' assertions, however, both of these unpublished decisions turn on facts easily distinguishable from those in this case. In particular, neither Nationwide nor CashCall involved illegal advanced fees or misrepresentations under Regulation O.

         Moreover, the reasons provided for denying restitution in those cases do not apply here. In Nationwide, the Northern District of California found that a complete refund of “set up fees” charged to consumers for a mortgage “interest minimization” program would have been both unfair and unwarranted because the Bureau had only proven that some, rather than all, of defendants' challenged marketing statements were false or misleading and, in particular, the Bureau failed to prove that the nature of the set up fees were not adequately disclosed. Nationwide, 2017 WL 3948396, at *1, 13. Similarly, the Central District of California found in CashCall that restitution was not an appropriate remedy because the Bureau failed to prove that defendants engaged in a deliberate scheme to evade consumer protection laws. For that reason, the Bureau expressly distinguished the facts before it in CashCall from:

The majority of case law in the Ninth Circuit addressing the CFPA and the appropriateness of restitution stem[ming] from cases in which a defendant has engaged in a type of fraud that is akin to what is commonly referred to as that of a “snake oil salesman.” See Nationwide, 2017 WL 3948396, at *11. In these cases, a defendant's scheme to defraud typically uses fraudulent misrepresentations to dupe consumers into believing they are purchasing something other than what they actually receive. See F.T.C. v. Figgie, Inc., 994 F.2d 595, 604 (9th Cir. 1993) (“the seller's misrepresentations tainted the customers' purchasing decisions. If they had been told the truth, perhaps they would not have bought rhinestones at all or only some . . . . The fraud in the selling, not the value of the thing sold, is what entitles consumers in this case to full refunds for each [product] that is not useful to them.”).

CashCall, 2018 WL 485963, at *12. Indeed, the court explained in CashCall that there was no evidence that the defendants “set out to deliberately mislead consumers as to the nature of the Western Sky Loan Program or otherwise intended to defraud them or that consumers anticipated receiving a benefit that they did not actually receive under the loan agreements.” Id.

         Unlike in Nationwide and CashCall, the Bureau here satisfied its burden of proof with respect to both advanced fees charged and misrepresentations made. As this court found in both the summary judgment and post-trial orders, defendants used fraudulent misrepresentations to dupe customers into purchasing in advance a service that they could have received for free and for which they received no readily measurable benefit. Just as with defendants' earlier-filed motion for reconsideration of the court's ruling on restitution, “[n]ot only do defendants still fail to present any concrete evidence of satisfied or even partially satisfied clients, they continue to completely ignore that the relevant question is whether any client received a marginal benefit over and above what that same client would have received using the free services.” (Dkt. #256 at 7.)

         Finally, citing SEC v. Kokesh, 137 S.Ct. 1635 (2017), United States v. Bajakajian, 524 U.S. 321, (1998), and Bell v. Wolfish, 441 U.S. 520 (1979), defendants contend that the Supreme Court generally considers sanctions to be inherently punitive if they are imposed for the purpose of deterring violations of public laws. Under defendants' reasoning, awarding the restitution amount sought by the Bureau amounts to the same thing, which is precluded under the CFPA, 12 U.S.C. § 5565(a)(3) (“Nothing in this subsection shall be construed as authorizing the imposition of exemplary or punitive damages.”). Said another way, defendants maintain that absent evidence that either TMLG or CFLG were unjustly enriched, any award of disgorgement as a deterrent is inherently punitive.[4]

         In support of their argument, defendants do not even attempt to argue that Bell or Bajakajian are applicable beyond the general proposition that sanctions imposed for the purpose of deterring public law infractions are inherently punitive.[5] Instead, defendants principally rely on Kokesh, in which the United States Supreme Court held that disgorgement sought by the SEC in that case should be considered a “penalty” for the purposes of the five-year statute of limitations period on SEC enforcement actions for “any civil fine, penalty, or forfeiture.” Kokesh, 137 S.Ct. at 1639 (citing 28 U.S.C. § 2462). However, Kokesh did not address whether disgorgement qualified as “punitive damages”; to the contrary, the Supreme Court explained in Kokesh that “nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.” Id. at 1642 n.3. For this reason alone, Kokesh has no bearing on what counts as punitive damages under the CFPA. See FTC v. Dantuma, 748 Fed.Appx. 735, 737 (9th Cir. 2018) (limited holding in Kokesh inapplicable to assessing district courts' power to impose restitution and disgorgement of unjust gains under FTC Act).

         Unlike an award of punitive damages, the CFPA also expressly allows for disgorgement, 12 U.S.C. § 5565(a)(2)(D), which, contrary to defendants' suggestion, does not turn on the benefit obtained by defendants, but rather on the amount they wrongfully took. See Jul. 20, 2016 Summ. Judg. Ord. (dkt. #191 at 48-49) (citing cases with holdings to this effect); FTC v. Febre, 128 F.3d 530, 536-37 (7th Cir. 1997) (rejecting argument that relief should be limited to “defendants' profits” and explaining that “disgorgement is meant to place the . . . consumer in the same position he would have occupied had the seller not induced him into the transaction” and to “prevent[] the defendant from being unjustly enriched”) (emphasis added). In addition, the Court of Appeals for the Seventh Circuit has held that “[d]isgorgement to the United States Treasury does not transform compensatory damages into punitive damages.” Febre, 128 F.3d at 537 (“To ensure that defendants are not unjustly enriched by retaining some of their unlawful proceeds by virtue of the fact that they cannot identify all the consumers entitled to restitution and cannot distribute all the equitable relief ordered to be paid, the FTC often requests orders directing equitable disgorgement of the excess money to the United States Treasury.”).[6]

         Accordingly, the court finds that restitution is warranted where consumers (1) were charged advanced fees that were specifically prohibited by regulation, (2) were enticed to do so through various misrepresentations, and (3) received no measurable benefit for payment of those fees. Specifically, this results in the awards as follows against the respective defendants:

1. TMLG, Macey, Aleman, and Searns are jointly and severally liable for restitution in the amount of $18, 716, 725.78 with respect to the advance fees that TMLG collected from consumers.
2. CFLG, Macey, and Aleman Searns are jointly and severally liable for restitution in the amount of $2, 897, 566 with respect to the advanced fees that CFLG II collected from consumers.
3. Stafford and CFLG are jointly and severally liable for restitution in the amount of $94, 730 with respect to the advanced fees that CFLG I collected from consumers.

         The Bureau also requests that to the extent any portions of the restitution amounts ordered cannot be returned to the individual consumers, the court order defendants to disgorge their ill-gotten gains to the United States Treasury. While the court agrees that disgorgement is an appropriate remedy under the CFPA, this is a purely theoretical question because it is highly unlikely that the Bureau will begin to recover the full restitution amount from defendants, jointly or severally, given their questionable financial resources. Regardless, to avoid any risk that disgorgement may be deemed punitive in this case, the court will order that any excess restitution-minus any reasonable costs incurred by the Bureau in collecting and dispersing the restitution award-be applied first toward any outstanding civil penalties assessed against defendants, and second that the remainder, if any, revert to defendants on a pro rata basis consistent with the percentages of their allocated debt as set forth above.

         II. Civil Penalties

         A. Background

         For violations of consumer financial laws, including Regulation O, 12 U.S.C. § 5565(c)(2) provides in applicable part three tiers of civil monetary penalties:

(A) First tier
For any violation of a law, rule, or final order or condition imposed in writing by the Bureau, a civil penalty may not exceed $5, 000 for each day during which such violation or failure to pay continues.
(B) Second tier
Notwithstanding paragraph (A), for any person that recklessly engages in a violation of a Federal consumer financial law, a civil penalty may not exceed $25, 000 for each day during which such violation continues.
(C) Third tier
Notwithstanding subparagraphs (A) and (B), for any person that knowingly violates a Federal consumer financial law, a civil penalty may not exceed $1, 000, 000 for each day during which such violation continues.[7]

         In determining the amount of any penalty, the court must take into account the appropriateness of the penalty with respect to several mitigating factors discussed below. 12 U.S.C. § 5565(c)(3).

         Although there is little case law with respect to assessing civil penalties under the CFPA, district courts generally have broad discretion in calculating civil penalties under federal statutes. See, e.g., Tull v. United States, 107 S.Ct. 1831, 1840 (1987) (penalty calculations under the federal Clean Water Act (“CWA”) are “highly discretionary”); United States v. B & W Inv. Properties, 38 F.3d 362, 367-68 (7th Cir. 1994) (calculating penalty and applying mitigating factors under Clean Air Act is within trial court's discretion); U.S. EPA v. Envtl. Waste Control, Inc., 917 F.2d 327, 335 (7th Cir. 1990) (“[A]ssessment of penalties [under the federal Resource ...


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