United States: Federal Court Strikes CFPB's Counts Against Payment Processors For Violating Discovery Order

Last Updated: September 26 2017
Article by David Long, Jr. and Ashley L. Taylor

On August 25, the United States District Court for the Northern District of Georgia struck four counts of a complaint filed by the Consumer Financial Protection Bureau because it failed to abide by the Court's discovery order.

This matter began on March 26, 2015, when the CFPB filed a complaint against 12 debt collectors, four payment processors, and a telephone broadcast service provider for violations of the Consumer Financial Protection Act ("CFPA").  The CFPB claimed the debt collectors engaged in a scheme to defraud consumers by using threats and harassment to collect "phantom" debts.  According to the complaint, the debt collectors used automated telephone dialers to contact consumers and their family members with false allegations of check fraud and false claims of debt owed.  The CFPB alleged that the debt collectors told consumers that failure to pay the debt would result in a "financial restraining order," notice to the consumer's employer of the alleged debt, wage garnishment, and arrest.  According to the complaint, the debt collectors refused to identify to the consumers the issuer of the supposed debt, but attempted to convince the consumers of their legitimacy by providing the consumers' personal information.  The CFPB further claimed that many of the consumers targeted by the debt collectors did not owe the debt.  The complaint further alleged that the payment processors facilitated the debt collectors' fraud by enabling the debt collectors to accept payment by consumers' bank cards when the payment processors were aware the debt collectors were engaging in wrongful conduct.

The CFPB claimed the payment processors violated the CFPA by assisting the debt collectors' unfair or deceptive conduct (Counts VIII and X) and engaging in unfair acts or practices (Counts IX and XI) for failing to perform reasonable investigations to detect the debt collectors' unlawful conduct.

In August 2016, the payment processors served the CFPB with a Rule 30(b)(6) deposition notice.  The CFPB objected to the notice, arguing that the Court should not require the CFPB to sit for the deposition for three reasons: (1) the information the payment processors sought in the deposition was already provided by the CFPB in response to the payment processors' interrogatories; (2) the noticed topics were protected by the law enforcement and deliberative process privilege; and (3) the depositions improperly sought the CFPB's counsel's mental impressions and analyses.

The Court rejected the CFPB's objections but limited the deposition inquiries to factual matters for each allegation against the payment processors.

In April 2017, one of the payment processors took the CFPB's 30(b)(6) deposition.  Following this deposition, the payment processors objected to the CFPB's witness's use of "memory aids" to deliver unresponsive answers to the deposition questions.  They also objected to the CFPB's use of privilege, preventing the witness from answering questions about the facts underpinning the CFPB's allegations.  Again, the Court ordered the CFPB to answer questions regarding the facts of its allegations against the payment processors.  According to the payment processors, the CFPB continued to provide nonresponsive answers and to assert privilege when questioned about facts related to its allegations against the payment processors.

In response to the CFPB's non-compliance with the Court's order, the payment processors sought sanction on the basis of Rule 11 and Rule 37 to strike the CFPB's claims against the payment processors.

The crux of the payment processors argument for Rule 11 sanctions was based on the fact that the CFPB filed the complaint against them based on a single month of misleading chargeback data.  The payment processors argued that viewing the account as a whole shows that the payment processors monitored the debt collectors' account in accordance with industry standards.  The Court denied the payment processors' motion for Rule 11 sanctions, holding that Rule 11 sanctions are not meant to test the legal sufficiency of the allegations in the pleading, which the payment processors sought to do.

The Court granted the payment processors' motion for Rule 37 sanctions, holding that the CFPB's pattern of conduct in willfully ignoring the Court's order warranted the striking of the claims against the payment processors.  In reaching the decision, the Court referred to the CFPB's use of memory aids to answer deposition questions, noting that in some instance it took the witness 40 minutes to recite the memory aid without actually answering the payment processors' questions.  The Court also reviewed the deposition transcript, noting that the CFPB's counsel claimed privilege on questions related to factual underpinnings of its claims.

The Court dismissed counts VIII through XI of the CFPB's complaint, thereby dismissing all claims against the payment processors.  The CFPB's claims against the debt collectors remain.

The Troutman Sanders' Consumer Financial Services Law Monitor blog offers timely updates regarding the financial services industry to inform you of recent changes in the law, upcoming regulatory deadlines and significant judicial opinions that may impact your business. To view the blog, click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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David Long, Jr.
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