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Minnesota Sues Six Debt Settlement Companies

First enforcement action under new state law orders

You've heard the commercials on radio and cable TV; companies promise desperate people they can help them settle their debt. What's often unsaid is these firms charge consumers hundreds, sometimes thousands of dollars of upfront fees.

As the recession drags on, more and more states are taking action against these firms. In Minnesota, Attorney General Lori Swanson has filed six lawsuits against separate out-of-state companies that promised to help consumers, but left them in worse financial shape.

The lawsuits are the first filed under a state law passed last year to regulate so-called "debt settlement" firms doing business in Minnesota. The suits accuse the six companies-based in Florida, Texas, and California-of signing up Minnesota consumers without being licensed by the State, in some cases charging cash-strapped people fees of hundreds or thousands of dollars more than allowed under state law.

The lawsuits were filed against American Debt Settlement Solutions, Inc. of Boca Raton, Florida; Debt Rx USA, LLC of Dallas, Texas; FH Financial Service, Inc. of Dallas, Texas; Morgan Drexen, Inc. of Anaheim, California; Pathway Financial Management, Inc. of Garden Grove, California; and State Capital Financial, Inc. of Hallandale Beach, Florida.

Swimming in debt

"Many people owe money on their credit cards and are struggling to keep up with their bills because of the bad economy," said Swanson. "People who are swimming in debt are often desperate for a life preserver, but they should know that debt settlement companies usually just anchor them down with even more financial problems. No consumer should ever do business with an unlicensed debt settlement company."

According to the Federal Reserve, American consumers owed nearly $2.5 trillion in credit card and other consumer debt (not including home mortgages) as of November, 2009. The debt settlement industry took off a few years ago as consumers faced high levels of credit card and consumer debt and a recession that made it difficult for many people to keep up with their bills.

Debt settlement companies tell consumers to stop paying their creditors and instead place the money that would have gone to creditors in a bank account, which the debt settler will supposedly use to negotiate a reduction in the consumer's debt.

The Better Business Bureau calls the debt settlement industry one fraught with "inherent problems." Debt settlement companies often ask consumers to pay origination and monthly fees of thousands of dollars, but their recommendations often leave consumers in even worse financial shape. For example, debt settlers typically recommend that consumers stop paying their bills so that the debt settler can negotiate reduced payments with the creditors.

Ruined credit and collection lawsuits

Consumers who stop paying their bills, however, usually end up with ruined credit and often face collection lawsuits, garnishment, and debt collection calls. In addition, when a consumer stops making payments on their credit card and other bills, late fees and interest accrue, and the amount of the loan swells. Meanwhile, the debt settlers are profiting from fees that could have been used by the consumer to pay bills.

The lawsuits allege that the companies signed up Minnesota consumers for debt settlement contracts after August 1, 2009, the effective date of the new state law, without being registered with the Minnesota Department of Commerce, as required by state law. Minnesota law limits the origination and monthly fees that may be charged by licensed debt settlement firms.

Depending on the amount of the consumer's debt and the method they choose to pay the debt settler, state law generally caps the origination fee that may be charged by the debt settler at between $200 and $500 and caps the monthly fee that may be charged by the debt settler at between $50 and $75.

Minnesota Sues Six Debt Settlement Companies...

03/01/2010

By Mark Huffman

Judge Rejects Honda Civic Hybrid Settlement

Says 'coupon settlement' doesn't provide enough to plaintiffs

It's a common complaint about class action lawsuits: they invariably result in hefty attorneys' fees while providing next to nothing for the plaintiffs, for whom the suit was ostensibly brought in the first place.

Last week, that argument spurred a federal judge to reject a proposed settlement in a suit involving misleading fuel economy claims about the Honda Civic Hybrid. The agreement -- which included $3 million in attorneys' fees and left consumers with rebates for future Honda purchases -- was apparently too much for Virginia Phillips, a U.S. District Judge in the Central District of California, to swallow.

She sided with 26 attorneys general and various consumer groups who argued that the deal provided nothing of value to the class. The ruling left Washington, D.C.-based Cuneo Gilbert & LaDuca, the firm representing the plaintiffs, scrambling to come up with a Plan B.

The court did not have enough information about the value of the settlement to approve the settlement, said Jonathan Cuneo, the firm's founding member. And the burden was on us. There is no question that she took, in my opinion, the objections to be serious.

Lead plaintiffs John True and Gonzalo Delgado filed the suit in 2007, taking issue with the car's advertised mileage of 51 miles per gallon on the highway and 49 in the city. In 6,000 miles of driving, True averaged only 31 miles per gallon in mixed highway/city driving. The suit was brought on behalf of owners of 2003-2008 Civic Hybrids, a class comprising over 150,000 consumers.

Settlement a marketing incentive

Under the terms of the settlement, Civic owners who were willing to trade in their car could receive a $1,000 coupon toward a new Honda; class members who wanted to keep their Civic were eligible for a $500 coupon. In either case, the coupon couldn't be used toward a certified used car or a new Civic Hybrid -- a bizarre and seemingly pointless restriction, especially considering that Civic Hybrids cost around $7,000 more than their standard counterparts.

Honda also generously agreed to provide each class member with a DVD containing tips on how to achieve better fuel economy.

To many observers, the deal seemed like a better deal for Honda than for the class.

It was essentially a marketing incentive program for Honda, according to Ted Frank, founder of the Center for Class Action Fairness, which filed a brief objecting to the settlement. So if you bought a Honda Civic Hybrid in 2008, the only relief was to get a coupon to buy another Honda. That's a benefit to Honda, certainly. It's not clear it's a benefit to the class members.

Michael Kirkpatrick, a lawyer for Public Citizen, which also objected to the settlement, said that, under the agreement, the class gives up their claims in exchange for basically nothing.

A victory for attorneys general

No fewer than 26 state attorneys general -- led by Greg Abbott of Texas -- said that the settlement didn't meet the heightened scrutiny required of coupon settlements. That standard, set forth in the 2005 Class Action Fairness Act, provides that the court may approve the proposed settlement only after a hearing to determine whether, and making a written finding that, the settlement is fair, reasonable and adequate for class members.

Indeed, a number of courts have rejected coupon settlements that give consumers a raw deal. The U.S. District Court for the Southern District of Florida summed it up well in Figueroa v. Sharper Image, a 2007 case involving the air purifier that eventually drove Sharper Image into the ground.

The court categorized the third proposed settlement agreement -- under which consumers would receive a $19 Sharper Image coupon -- as one in which class members [receive] little more than the right to purchase more products from the defendant at a discounted price.

Where the parties will go from here is unclear. Cuneo, the plaintiffs' attorney, pointed out that Judge Phillips didn't shut the door on a new, fairer proposed settlement. An amended agreement would be fine with many of the objectors too. Kirkpatrick, the Public Citizen lawyer, is hoping for a settlement that actually gives [the class] some value.

Last week, that argument spurred a federal judge to reject a proposed settlement in a suit involving misleading fuel economy claims about the Honda Civic H...