Chad M. Carlsen v. Global Client Solutions, LLC

Washington residents who were consumers of allegedly



illegal debt adjustment programs filed a class action against Global Client Solutions



LLC (GCS) and Rocky Mountain Bank and Trust (RMBT), companies that



respectively managed and held special purpose accounts, a key feature of the



programs. The United States District Court for the Eastern District of Washington



has certified to us four questions regarding Washington's debt adjusting statute,



chapter 18.28 RCW.



I. FACTUAL HISTORY



Heavily indebted Washington consumers, including plaintiffs Chad M. and



Shasta Carlsen and Carl and Mary Popham, sought debt relief from companies like



Freedom Debt Relief LLC (Freedom). Freedom advertised a debt relief program



under which consumers would stop paying their unsecured creditors and instead



authorize that monthly payments automatically be made into "special purpose accounts." Document (Doc.) 83, at 101 (Am. Class Action Compl. & Jury



Demand). The consumers also authorized the automatic payment of large fees from



the special purpose accounts to Freedom. When enough money accumulated in a



consumer's special purpose account, Freedom would attempt to use the funds to



negotiate settlements with creditors on terms favorable to the consumer.



The plaintiffs' special purpose accounts were held at RMBT and were



structured as subaccounts of a large custodial account in GCS's name. The



custodial account allowed debt settlement companies like Freedom to view the



balance and transaction history in each of their customers' accounts. The plaintiffs



could access their special purpose accounts on line and terminate them at any time



by sending written notice. But on a practical level, the plaintiffs did not need to



access their accounts because they had signed blanket authorizations upon entering



the debt relief program that established automatic (1) monthly transfers from the



plaintiffs' primary bank accounts to their special purpose accounts, (2) monthly



payments from the special purpose accounts to the debt settlement company, (3)



monthly and one-time payments from the special purpose accounts to GCS for



banking services, and (4) disbursements from the special purpose accounts to



creditors when the debt settlement company negotiated a settlement. In its role as



"processor" for the special purpose accounts, GCS initiated all these automatic



transfers. Doc. 70-7 (Decl. of Richard P. Epstein, Welcome to Global Client



Solutions letter).



GCS charged consumers various fees for its processing services. For



example, plaintiffs Carl and Mary Popham agreed to pay a one-time account setup



fee of $9.00, a monthly service charge of $9.85, and various fees per service, such



as $15.00 per wire transfer. The plaintiffs authorized these fees by signing a special



purpose account application when they signed up for the debt relief program.



According to the plaintiffs, GCS's custodial account at RMBT contained over



600,000 special purpose accounts. To obtain these accounts, GCS contracted with



over 500 different debt settlement companies like Freedom. Although GCS had



contracts with these debt settlement companies, it generally did not receive fees



from them. Rather, GCS's earnings came from the fees charged directly to special



purpose account holders like the plaintiffs. RMBT did not receive fees from GCS



or the plaintiffs, but it benefited by holding the plaintiffs' money without paying



interest.



In 2009, the Federal Deposit Insurance Corporation (FDIC) issued a cease



and desist order requiring drastic reformation of RMBT's banking practices. The



order included a requirement that RMBT "provide adequate and effective oversight



over the Bank's third-party relationships, specifically focusing on monitoring the



activities of third-party payment processors and their customers, who are referred to



herein as Debt Settlement Companies." Doc. 58-13, at 378 (Decl. of Darrell W.



Scott, Order to Cease and Desist). GCS subsequently stopped opening new



accounts at RMBT and transferred the majority of its existing special purpose



accounts to a new custodial account in its name at an Oklahoma bank.



II. PROCEDURAL HISTORY



In 2009, the Carlsens and the Pophams filed in the United States District



Court for the Eastern District of Washington a class action complaint against GCS



and RMBT on behalf of all Washington consumers who had special purpose



accounts with GCS. GCS and RMBT each moved to dismiss under Fed. R. Civ. P.



12(b)(6). The court stayed the Fed. R. Civ. P. 12(b)(6) motions pending



certification to this court of questions of first impression regarding Washington's



debt adjusting statute, "for which legislative history and relevant case law are



essentially non-existent." Certification to Washington State Supreme Court



(Certification) at 2-3. To assist it in formulating the certified questions, the court



ordered limited discovery on "the precise nature of GCS and RMBT, and what they



do in conjunction with each other, and in conjunction with debt settlement



companies." Doc. 40, at 8 (Order Den. Mots. to Compel Arbitration, inter alia).



The plaintiffs brought a separate class action suit against Freedom and similar



debt settlement companies, and the United States District Court for the Eastern



District of Washington certified to us three questions regarding that case. Carlsen



v. Freedom Debt Relief LLC, No. 84858-1. That case has been stayed because the



parties reached a settlement.



III. ANALYSIS



Certified questions from federal court are questions of law that we review de



novo. Bradburn v. N. Cent. Reg'l Library Dist., 168 Wn.2d 789, 799, 231 P.3d



166 (2010). We consider the legal issues not in the abstract but based on the



certified record provided by the federal court. Id. (citing RCW 2.60.030(2)).



QUESTION NO. 1: Is a for-profit business engaged in "debt adjusting" as defined in RCW 18.28.010(1) when, in collaboration with debt settlement companies, it: a) establishes and maintains a custodial bank account in its name; b) solicits debtors' establishment of a sub-account to receive and hold periodic payments to be used to pay debt settlement fees and pay settlements with creditors as negotiated by a debt settlement company; and c) as custodian for the debtor, receives and holds the debtor's periodic payments in a sub-account, paying from that account debt settlement fees and negotiated settlements with creditors?



Certification at 3. This question describes actions taken by GCS, not by RMBT, in



conjunction with debt settlement companies.



In interpreting a statute, we look first to the statute's plain meaning. Dep't of



Ecology v. Campbell & Gwinn, LLC, 146 Wn.2d 1, 11-12, 43 P.3d 4 (2002). RCW



18.28.010(1) defines "'[d]ebt adjusting'" as "the managing, counseling, settling,



adjusting, prorating, or liquidating of the indebtedness of a debtor, or receiving



funds for the purpose of distributing said funds among creditors in payment or



partial payment of obligations of a debtor." (Emphasis added.) Here, GCS is



engaged in "debt adjusting" under the plain language of this definition's last prong



because GCS receives funds into a custodial account in its own name and, after a



company like Freedom negotiates a settlement, GCS distributes money to the



creditor in payment or partial payment of the consumer's debt.



GCS argues it is not truly "receiving" the funds because the plaintiffs had full



control over their special purpose accounts and authorized every transaction.



"[R]eceive" means "to take possession or delivery of" or "to knowingly accept."



Webster's Third New International Dictionary 1894 (2002). The fact that plaintiffs



had management powers does not change the fact that GCS took possession and



delivery of the funds by accepting them into a custodial account established and



maintained in its own name. The custodial account structure allowed GCS and debt



settlement companies to view the balances and transaction histories of the special



purpose accounts. Thus, in practice, as well as based on title alone, GCS "received"



the plaintiffs' money.



GCS also argues it is not a debt adjuster because a 1978 legislative audit of



the debt adjusting statute described debt adjusters' basic model of operation as



involving direct contact with debtors and creditors, which GCS does not have. GCS



& RMBT's Answering Br. at 22-23 (quoting Performance Audit: Debt Adjusting,



Licensing and Regulatory Activities, Report No. 77-13, Jan. 20, 1978, at 7 (on file



with Wash. State Archives, H.B. 86 (1979)) (hereinafter 1978 Performance Audit)).



Because the definition of "debt adjusting" is unambiguous, we need not consider



legislative history. Campbell & Gwinn, 146 Wn.2d at 12. Even if we did, GCS's



interpretation of that history is strained. Read as a whole, the 1978 Performance



Audit reveals a deep-seated concern about the abuses inherent in the debt adjusting



industry. E.g., 1978 Performance Audit at 7 ("The lack of industry regulation, and



the frequently unsophisticated and/or desperate client seeking relief from bill



collectors' harassment, gave rise to numerous unfair and deceptive practices."). It is



unreasonable to suggest that the legislature intended to allow companies whose



activities fit the broad statutory definition of "debt adjusting" to nonetheless escape



regulation by splitting the traditional functions of a debt adjuster between multiple entities.2



QUESTION NO. 2: Does the exclusion found at RCW 18.28.010(2)(b) apply to a for-profit business described in Question No. 1?



Certification at 3.



2GCS and amicus NoteWorld LLC also argue that GCS is not engaging in debt adjusting because new Federal Trade Commission (FTC) rules implementing the Telemarketing and Consumer Fraud and Abuse Prevention Act (15 U.S.C. §§ 6101-6108) distinguish between debt relief services and account administrators. 16 C.F.R. § 310. Given that the plain language of the debt adjusting statute is unambiguous and that the statute's legislative history reinforces the plain language interpretation, we need not look beyond Washington law in our interpretation. We also decline to address the possibility of preemption, as it is beyond the scope of the district court's certified question.



A "'[d]ebt adjuster'" includes "any person engaging in or holding himself or



herself out as engaging in the business of debt adjusting for compensation." RCW



18.28.010(2). Certain persons are excluded from this definition, including,



[a]ny person, partnership, association, or corporation doing business under and as permitted by any law of this state or of the United States relating to banks, consumer finance businesses, consumer loan companies, trust companies, mutual savings banks, savings and loan associations, building and loan associations, credit unions, crop credit associations, development credit corporations, industrial development corporations, title insurance companies, or insurance companies.



RCW 18.28.010(2)(b).



GCS argues this exemption applies to it because it is (1) an agent of RMBT, a



bank, and (2) subject to FDIC oversight and the operating rules of the National



Automatic Clearinghouse Association (NACHA). Similarly, amicus NoteWorld LLC3 argues the words "relating to" mean the statute applies broadly to any entity



whose business relates to the listed entities. Br. of Amicus Curiae NoteWorld LLC



at 19. For example, NoteWorld contends money transmitters (a type of entity



subject to regulation under chapter 19.230 RCW) are exempt from the debt



adjusting statute under RCW 18.28.010(2)(b) because they are subject to federal



regulation under the Bank Secrecy Act, 31 U.S.C. § 5312(a)(2)(R).



To ascertain a statute's plain meaning, we look not only to the particular



statute at issue, but also to what the legislature has said in related statutes.



Campbell & Gwinn, 146 Wn.2d at 11-12. Here, nearly all of the 13 entities listed in



RCW 18.28.010(2)(b) correspond to the name of a title or chapter in the Revised



Code of Washington containing a regulatory law.4 These related statutes show that



the legislature intended to exempt entities whose primary operations were already



subject to defined regulatory schemes. The phrase "doing business under and as



permitted by" further emphasizes that the exempt entities' primary business



activities and operations must be fully governed by regulatory law. Therefore, only



the 13 entities actually listed, which are fully regulated under other Washington



statutes, are exempt under RCW 18.28.010(2)(b). Application of a single law



relating to one of the listed entities, like the Bank Secrecy Act, is not enough to



qualify for the exemption.



Washington case law supports this interpretation. In Kelleher v. Minshull, 11



Wn.2d 380, 389, 119 P.2d 302 (1941), we described a similar exemption in



Washington's small loan act as "exempt[ing] from the operation of the act eight



classes of persons." This description shows we interpreted the exemption as



applying to the specific entities listed, not to a broader group of unnamed but related



entities. We went on to say that the exemption existed because "the legislature



undoubtedly concluded that the persons exempted from the operation of the [small



loan act] were sufficiently regulated and controlled by the terms of specific statutes



previously enacted to regulate such persons and the businesses in which they are



engaged." Id. at 390. Under the same reasoning, only entities sufficiently regulated



and controlled under other laws should benefit from the exemption in Washington's



debt adjusting statute.



Moreover, as a remedial statute enacted to stem the "numerous unfair and



deceptive practices" rife in the growing debt adjustment industry, the debt adjusting



statute should be construed liberally in favor of the consumers it aims to protect.



1978 Performance Audit at 7; see State v. Pike, 118 Wn.2d 585, 591, 826 P.2d 152



(1992). A narrow interpretation of RCW 18.28.010(2)(b) protects consumers by



preventing companies from escaping the debt adjusting statute by identifying a



single law applicable to them that is also applicable to one of the 13 listed entities,



however tangential or limited the impact of that law may be. Such a gaping



loophole would directly contravene the debt adjusting statute's remedial purpose.



On the record before us, it appears the exemption in RCW 18.28.010(2)(b)



does not apply to GCS. GCS is not a bank. It does not matter if GCS is a bank's



agent or if it is subject to limited FDIC authority or the rules of a private



organization like NACHA. Unless GCS is one of the 13 entities listed, it is subject



to the debt adjusting statute.



QUESTION NO. 3: Do the fee limitations set forth in RCW 18.28.080 apply to for-profit debt settlement companies engaged in soliciting the participation of debtors in a debt management program involving: a) monthly set aside and accumulation of a debtor's funds in a custodial account for the purposes of facilitating negotiated settlement of specified credit card debts; and b) negotiations by the debt settlement company, on behalf of the debtor, to secure compromise settlement of the debtor's credit card debt, to be paid from the custodial account?



Certification at 3. This question essentially asks whether the debt settlement



companies that work with GCS and RMBT, such as Freedom, are subject to the



debt adjusting statute's fee limitations.



The debt adjusting statute's fee limit provision states in part,



The total fee for debt adjusting services may not exceed fifteen percent of the total debt listed by the debtor on the contract. The fee retained by the debt adjuster from any one payment made by or on behalf of the debtor may not exceed fifteen percent of the payment.



RCW 18.28.080(1) (emphasis added). This language indicates that fee limits apply



when the entity in question is a debt adjuster or providing debt adjusting services.



As noted, "'[d]ebt adjusting'" is defined as "the managing, counseling, settling,



adjusting, prorating, or liquidating of the indebtedness of a debtor, or receiving



funds for the purpose of distributing said funds among creditors in payment or



partial payment of obligations of a debtor." RCW 18.28.010(1). A "'[d]ebt



adjuster'" includes "any person engaging in or holding himself or herself out as



engaging in the business of debt adjusting for compensation." RCW 18.28.010(2).



Here, the debt settlement companies described in certified question three



appear to be providing debt adjusting services because they manage and, if



successful, eventually settle consumer debt. The fact that the legislature may not



have contemplated the precise business model used by these debt settlement



companies does not prevent their activities from being classified as "'[d]ebt



adjusting'" if the activities fit within the plain language of RCW 18.28.010(1). If



the debt settlement companies are "'[d]ebt adjusting,'" then they are also "'[d]ebt



adjusters'" because they are "engaging in . . . the business of debt adjusting for



compensation." RCW 18.28.010(1), (2). Whether Freedom and similar debt



settlement companies are actually debt adjusters who are debt adjusting, however, is



ultimately a factual question the district court must resolve based on the exact nature



of the debt settlement companies and the services they provide.



QUESTION NO. 4: Does the [d]ebt [a]djusting statute provide for an implied civil action against an alleged "aider and abettor" where aiding or abetting a violation of the [d]ebt [a]djusting statute is expressly made a crime pursuant to RCW 18.28.190?



Certification at 3-4.



RCW 18.28.190 makes it a gross misdemeanor to aid and abet violation of



the debt adjusting statute. By criminalizing aiding and abetting, the debt adjusting



statute establishes that aiding and abetting its violation is wrongful conduct. RCW



18.28.185 provides an express civil remedy for violation of the debt adjusting



statute: "a violation of this chapter constitutes an unfair or deceptive act or practice



in the conduct of trade or commerce under [the Consumer Protection Act (CPA),]



chapter 19.86 RCW." Because the debt adjusting statute explicitly makes it a



wrongful, criminal act to aid and abet violations of the statute's primary



requirements for debt adjusters, such as fee limits and disclosure rules, "a violation



of this chapter," as used in RCW 18.28.185, includes such aiding and abetting



violations. The plaintiffs need not establish an implied civil cause of action to



recover for aiding and abetting violations, as RCW 18.28.185 provides them a direct civil remedy for this conduct under the CPA.5



* * *



See: http://www.courts.wa.gov/opinions/index.cfm?fa=opinions.showOpinion&filename=848556MAJ

GCS is a debt adjuster, and GCS is not exempt under RCW 18.28.010(2)(b)



because GCS is not a bank or another listed entity. Debt settlement companies that



work with GCS and RMBT are likely subject to the debt adjusting statute's fee



limitations, depending on whether they are debt adjusters providing debt adjusting



services. Because RCW 18.28.185 makes aiding and abetting violation of the debt



adjusting statute an unfair or deceptive act or practice in the conduct of trade or



commerce under the CPA, we need not consider whether an implied cause of action



for such conduct also exists.