Consumer Financial Protection Bureau v. David Gasparyan

NOTICE OF MOTION AND MOTION to Dismiss Case

C.D. Cal.August 8, 2016

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Steven R. Friedman, Esq (SBN 100748) Michael E. Friedman, Esq. (SBN 291694) Law Office of Steven R. Friedman 1880 Century Park East Suite 1411 Los Angeles, CA 90067 310 273-2505 Email: CFPBvGasparyan@gmail.com Attorneys for Defendant Davit Gasparyan UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiffs, vs. DAVIT GASPARYAN, a/k/a DAVID GASPARYAN, Defendant. _______________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No: 2:16-CV-2725-PSG(ex) Judge: Hon. Philip S. Gutierrez DEFENDANT DAVIT GASPARYAN’S NOTICE OF MOTION AND MOTION TO DISMISS PLAINTIFF’S FIRST AMENDED COMPLAINT; MEMORANDUM OF POINTS AND AUTHORITIES; DECLARATION OF M. FRIEDMAN IN SUPPORT. First Amended Complaint Filed: July 7, 2016 Current Response Date: August 8, 2016 Date: November 7, 2016 Time: 1:30 p.m. Place: Courtroom 880 255 E. Temple Street, Los Angeles, CA 90012 TO ALL PARTIES AND THEIR RESPECTIVE ATTORNEYS OF RECORD: PLEASE TAKE NOTICE THAT on November 7, 2016, at 1:30 p.m. or as soon thereafter as this matter may be heard, in Courtroom 880 of the Roybal Federal Building and United States Courthouse located at 255 E. Temple Street, Los Angeles, CA 90012, before the Honorable Philip S. Gutierrez, United States District Judge, presiding, 1 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 1 of 34 Page ID #:149 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Defendant Davit Gasparyan will and hereby does move the Court to dismiss Plaintiff's First Amended Complaint (“FAC”) pursuant to Rules 8 and 12(b)(6) of the Federal Rules of Civil Procedure (the “Motion”). The instant motion is made after all counsel have conducted telephonic meet and confer pursuant to C.D. Cal. R. 7-3. The instant Motion seeks the dismissal with prejudice of the CFPB’s First Amended Complaint for failure to state a claim upon which relief can be granted based upon the grounds that: (1) the CFPB lacks any authority to bring the instant action; (2) the CFPB has failed to allege any factual allegations as to Gasparyan’s conduct and has therefore failed to properly plead facts sufficient to support any cause of action; (3) the CFPB has failed to join necessary and indispensable parties; (4) the instant application of the CFPA by the CFPB violations Gasparyan’s due process and constitutional rights; (5) much of the relief sought in the instant complaint is improper and cannot be recovered as a matter of law. The Motion is based upon this Notice, the Memorandum of Points and Authorities attached hereto, the Declaration and Exhibits filed concurrently herewith, all pleadings and papers filed in this action, and such additional papers and arguments as may be presented at, or in connection with, the hearing, including all Reply papers. Dated: August 8, 2016 By: /s/ Steven R. Friedman Steven R. Friedman Attorney for Defendant Davit Gasparyan 2 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 2 of 34 Page ID #:150 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF CONTENTS TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv MEMORANDUM OF POINTS AND AUTHORITIES.. . . . . . . . . . . . . . . . . . . . . . Page 1 INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1 I. THE COMPLAINT VIOLATES GASPARYAN’S CONSTITUTIONAL AND DUE PROCESS RIGHTS BY SEEKING TO CREATE NEW DUTIES AND IMPOSE LIABILITIES FOR THOSE SAME DUTIES WHICH WERE NEVER ARTICULATED ANYWHERE ELSE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 2 A. The CFPA Requires the CFPB to Promulgate Regulations Prior to Bringing An Action Against a Person. Since No Regulations Were Promulgated Prior the Commencement of the Instant Action, Gasparyan Had No Notice That Any of Gasparyan’s Activities Violated the CFPA.. . . . . . . . . . . Page 2 B. Gasparyan Had No Notice the Duties Alleged in the Complaint Existed or Might Apply to Him Because None of the Allege Duties Are Stated In Any Law.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 4 C. The FAC Alleges Many Duties Which Are Never Articulated In the Law.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 6 D. There Is No Duty for Gasparyan or T3Leads to Police The Activities Of Unrelated Third Parties... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 8 II. THE COMPLAINT FAILS TO ALLEGE ANY FACTS TO SUPPORT THE SUBSTANTIAL ASSISTANCE CLAIM AGAINST GASPARYAN. INSTEAD THE COMPLAINT IMPROPERLY ALLEGES MERE LEGAL CONCLUSIONS WHICH MUST BE DISREGARDED BY THE COURT... . . . . . . . . . . . . . . . Page 9 i Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 3 of 34 Page ID #:151 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 A. The Complaint Does Not Allege Any Facts To Support the Allegation that Gasparyan Acted “Knowingly or Recklessly” and Therefore Fails To Support the Scienter Requirement of the CFPA.. . . . . . . . . . . . . . . . . Page 10 B. In Addition to Specific Facts, the Law Requires That Any “Substantial Assistance” Allegations Provide Sufficient Factual Details to Demonstrate a “Substantial Causal Connection” Between Gasparyan’s Action and the Purported Harm. The FAC Fails to State Any Allegations Regarding A Causal Connection.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 13 III. T3LEADS IS NOT A SERVICE PROVIDER AND THEREFORE THE CFPA DOES NOT PERMIT THE IMPOSITION OF LIABILITY UPON GASPARYAN FOR ANY SUBSTANTIAL ASSISTANCE TO T3LEADS... . . . . . . . . . . . . Page 14 A. T3Leads Provides Only a Basic Support Service Which Is Generally Provided to Businesses and Is Therefore Not a Service Provider.. . . . Page 15 B. T3Leads’ Business Deals Only with Ministerial Acts and Therefore T3Leads Does Not Qualify as a Service Provider.. . . . . . . . . . . . . . . . Page 16 IV. THE FAILURE TO JOIN NECESSARY OR INDISPENSABLE PARTIES, INCLUDING T3, AND THE ALLEGED WRONGDOING LENDERS AND LEAD GENERATORS PRECLUDES PROCEEDING AGAINST GASPARYAN ALONE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 17 V. THE CFPB MUST BE ORDERED TO PLEAD THE APPLICABLE DATES DURING WHICH THESE BAD ACTS TOOK PLACE IN ORDER FOR GASPARYAN TO HAVE NOTICE OF THE STATUTE OF LIMITATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 21 ii Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 4 of 34 Page ID #:152 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 VI. THE RELIEF SOUGHT IN THE COMPLAINT IS NOT PERMITTED.. . . . . Page 22 A. Redress or Restitution Are Not a Permitted Relief Because the FAC Fails To Allege that Any Consumer Has Suffered Any Harm and Restitution Is Only Permitted When Actual Harm is Alleged.. . . . . . . . . . . . . . . . . . Page 22 B. The CFPB’s Prayer for Penalties Is Prohibited Under the CFPA... . . . Page 23 C. The CFPB Is Cannot Recover Attorneys Fees or Any Other Fees. . . . Page 24 D. Injunctive Relief Against Gasparyan, Who The Complaint Admits Has Not Been Involved In the Operation or Management of T3Leads For Over Two Years, Is Prohibited Under These Circumstances and Therefore Must Be Dismissed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 24 CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 25 iii Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 5 of 34 Page ID #:153 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF AUTHORITIES CASES Amini Innovation Corp.v. KTY International Marketing, 768 F. Supp. 2d 1049 (C.D. Cal. 2011). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Alyeska Pipeline Service Co. v. Wilderness Society 421 U.S. 240, 247 (1975) . . . . . . . . 24 Ashcroft v. Iqbal 556 U.S. 662 (2009). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 10 Badger v. Southern Farm Bureau Life Insurance Company612 F.3d 1334 (11th Cir. 2010). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 23 Bates v. United States 522 U.S. 23 (1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Bell Atlantic Corporation v. Twombly, 127 Southern Ct. 1955 (2007). . . . . . . 9, 10, 12, 22 Broad v. Rockwell International Corp., 642 F.2d 929 (5th Cir. 1981). . . . . . . . . . . . . . . 11 Cachil Dehe Band of Wintun Indians of the Colusa Indian Community v. California, 547 F.3d 962 (9th Cir.2008). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Camp v. Dema 948 F.2d 455 (8th Cir. 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Chamber of Commerce of U.S. v. Whiting 563 U.S. 582, 636 (2011) . . . . . . . . . . . . . . . . 4 E.E.O.C. v. KarenKim, Incorporated 698 F.3d 92 (2d Cir. 2012). . . . . . . . . . . . . . . . . . 25 Greenup v. Rodman 42 Cal.3d 822 (1986). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990). . . . . . . . . . . . . . . . . . . 12 Japan Petroleum Company (Nigeria), Limited v. Ashland Oil, Incorporated, 456 F.Supp. 831 (D.Del.1978). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 21 Kaiser Aluminum and Chemical Corporation v. Bonjorno, 494 U.S. 827 (1990).. . . . . . . 5 Laker Airways, Incorporated v. British Airways, PLC, 182 F.3d 843 (11th Cir.1999). 18, 19 Lambert v. People of the State of California 355 U.S. 225, 228 (1957) . . . . . . . . . . . . . . 5 Landgraf v. USI Film Products, 511 U.S. 244 (1994). . . . . . . . . . . . . . . . . . . . . . . . . 5, 24 Makah Indian Tribe v. Verity, 910 F.2d 555 (9th Cir. 1990). . . . . . . . . . . . . . . . . . . . . . 20 McGregor v. Chierico 206 F.3d 1378 (11th Cir. 2000). . . . . . . . . . . . . . . . . . . . . . . . . . 22 Mendelsohn v. Capital Underwriters, Incorporated., 490 F.Supp. 1069 (N.D.Cal.1979) 1. 3 iv Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 6 of 34 Page ID #:154 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Metge v. Baehler 762 F.2d 621 (8th Cir. 1985). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Mohamad v. Palestinian Authority 132 S.Ct. 1702 (2012). . . . . . . . . . . . . . . . . . . . . . . . 16 Nathan v. Dierssen, 164 Cal. 607, 611 (1913). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Papasan v. Allain 478 U.S. 265 (1986). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 12 Pulitzer-Polster v. Pulitzer, 784 F.2d 1305 (5th Cir.1986). . . . . . . . . . . . . . . . . . . . . . . . 21 Rolf v. Blyth, Eastman Dillon and Company, 570 F.2d 38 (2d Cir. 1978). . . . . . . . . . . . 12 Runyon v. McCrary, 427 U.S. 160 (1976). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Russello v. U.S. 464 U.S. 16, 23 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Sanjuan v. American Board of Psychiatry and Neurology, Inc., 40 F.3d 247 (C.A.7 1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Sebelius v. Cloer 133 S.Ct. 1886, 1894 (2013). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SEC v. Big Apple Consulting USA, Inc., 783 F.3d 786 (11th Cir. 2015). . . . . . . . . . . . . . 12 Singleton v. Perry 45 Cal.2d 489, 498-99 (1955) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Sundstrand Corporation v. Sun Chemical Corp., 553 F.2d 1033 (7th Cir. 1977).. . . . . . 12 Swift and Company v. United States 276 U.S. 311 (1928). . . . . . . . . . . . . . . . . . . . . . . . 24 Title Ins. & Trust Co. v. Ingersoll, 158 Cal. 474, 480 (1910).. . . . . . . . . . . . . . . . . . . . . 22 Two Shields v. Wilkinson, 790 F.3d 791 (8th Cir. 2015). . . . . . . . . . . . . . . . . . . . . . . 18, 19 U.S. v. City of Miami 195 F.3d 1292 (11th Cir. 1999). . . . . . . . . . . . . . . . . . . . . . . . . . . 23 U. S. v. Naftalin 441 U.S. 768, 774 (1979). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 U.S. v. Western T. Grant Company 345 U.S. 629 (1953). . . . . . . . . . . . . . . . . . . . . . . . . 24 Via Christi Regional Medical Center, Incorporated v. Leavitt 509 F.3d 1259 (10th Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Weaver v. Graham, 450 U.S. 24 (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Williams v. Gerber Prods. Company, 523 F.3d 934 (9th Cir.2008). . . . . . . . . . . . . . . . . . 9 Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004 (11th Cir.1985). . . . . . . . . . . 11 Woodward v. Metro Bank of Dallas, 522 F.2d 84. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 v Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 7 of 34 Page ID #:155 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STATUTES 12 U.S.C.A. § 5481. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 15, 19 12 U.S.C.A. §5536(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 10, 11, 13 12 U.S.C.A. § 5564(g). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 12 U.S.C.A. § 5565. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 24 15 U.S.C.A § 78t(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Fed.R.Civ.P. 19(a).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 19 vi Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 8 of 34 Page ID #:156 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 MEMORANDUM OF POINTS AND AUTHORITIES INTRODUCTION The Consumer Financial Protection Act (“CFPA”) which created the Consumer Financial Protection Bureau (“CFPB”) serves as the sole basis for the complaint against Gasparyan. However, the purported duties alleged in the complaint are not recognized or articulated in any statute. Therefore, the claims brought by the CFPB violate Gasparyan’s constitutional and due process and notice rights because the CFPB, by this complaint, is seeking both to (1) establish duties never before articulated in any law; and (2) prosecute and punish Gasparyan for the alleged violation of these duties which the CFPB created after the alleged conduct took place. The complaint also fails to join all the necessary and indispensable parties, including T3Leads as well as the Lenders and Lead Generators which the CFPB claims engaged in the unfair or abusive acts. Therefore, the suit cannot proceed unless and until those necessary parties are joined. The complaint also fails to allege any facts to support the allegation that T3Leads is a “service provider.” Instead, the First Amended Complaint (“FAC”) only alleges that T3Leads carries out a “middle-man” role. The FAC admits that a third party, unrelated to T3Leads, advertises a consumer loan and gets a consumer to fill out the application (the “Lead Generator”). (FAC ¶6). The application is called a “Lead”. The Lead Generator is totally separate from T3Leads. (FAC ¶10). Once the consumer has applied for a loan with the Lead Generator, the Lead Generator now needs to connect the consumer to a lender who will actually make the loan to the consumer (the “Lender”). The Lead Generator doesn’t know the Lenders and so it needs a “middle-man” who is able to connect the Lead Generator to a Lender so that the consumer who applied for the loan can get the loan. T3Leads fills this role by taking the Lead from the Lead Generator and selling it to a Lender. (FAC ¶¶13-16). These transactions are instantaneous and automated, and on each of these transactions, T3Leads is paid a small fee for connecting 1 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 9 of 34 Page ID #:157 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 the Lead Generator’s Lead to a Lender. This is nothing more than a ministerial role or a support service provided to businesses generally. Therefore, T3Leads does not qualify as a service provider and no liability can be imposed upon Gasparyan. Similarly, the complaint fails to allege any facts as to the improper actions of Gasparyan, and those few sentences which do mention Gasparyan are nothing more than legal conclusions without supporting facts which must be disregarded by the Court. Therefore, the complaint is fatally defective in that it fails to allege any facts, let alone sufficient facts, to properly support its legal conclusions that Gasparyan “knowingly or recklessly provided substantial assistance to T3Leads.” While Defendant is cognizant of the Court’s standing order regarding liberality of pleading and leave to amend, this being the First Amended Complaint, it may be assumed that no new facts can be pleaded. Nor is the relief sought by the FAC proper. Indeed the monetary relief sought is prohibited under the CFPA and the injunctive relief is unsupported by any of the allegations of the FAC and therefore both categories must be dismissed. For all of these reasons, and because many of the threshold legal issues cannot be cured through redrafting of the complaint, the Court should grant the instant motion without leave to amend. I. THE COMPLAINT VIOLATES GASPARYAN’S CONSTITUTIONAL AND DUE PROCESS RIGHTS BY SEEKING TO CREATE NEW DUTIES AND IMPOSE LIABILITIES FOR THOSE SAME DUTIES WHICH WERE NEVER ARTICULATED ANYWHERE ELSE. A. The CFPA Requires the CFPB to Promulgate Regulations Prior to Bringing An Action Against a Person. Since No Regulations Were Promulgated Prior the Commencement of the Instant Action, Gasparyan Had No Notice That Any of Gasparyan’s Activities Violated the CFPA. The CFPB is authorized to establish duties of service providers, covered persons, related persons and those providing substantial assistance in knowingly or recklessly 2 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 10 of 34 Page ID #:158 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 violating “the provisions of section 5531 of this title, or any rule or order issued thereunder.” 12 U.S.C.A. § 5536(a)(3). While it is unclear from the failure to allege a single fact related to moving party and sole Defendant Davit Gasparyan, it appears that the CFPB seeks to hold Davit Gasparyan liable for some undescribed actions which the CFPB may contend violates §5536(3). However there are no specific duties to act, or refrain from acting, established in either §5536 or §5531. Rather §5536 directs the reader to §5531 to determine the actions which are prohibited. That is because at the time of the alleged “violations” in 2013 and 2014 the CFPB had not promulgated any “rule or order” governing Defendant. §5531 likewise does not establish any of the specific duties alleged in the Complaint. Instead, the complaint provides the very first notice to Defendant Gasparyan that he may be the target of enforcement for failure to comply with the not articulated specific duties alleged in the Complaint. It is significant to note that Congress has authorized the CFPB to promulgate “rules” under §5531(b), and that Congress has limited the authority in the rule making process. §5531(c)(d)(e) & (f). But the CFPB is NOT authorized to utilize this complaint as the first means of giving Gasparyan notice of the duties the CFPB seeks to establish. “The Bureau shall have no authority under this section to declare an act or practice . . . to be unlawful . . . unless” §5531(c) & (d) emphasis added. This language makes clear that the CFPB must first declare an act to be unlawful before initiating suit for the perpetration of such an act. By the mandate of Congress the CFPB is not authorized to bring suit as the first means of noticing the establishment of duties. The Code and the Constitution do not grant the CFPB the right to simultaneously establish the “duties” to act or not act while punishing the breach of the never previously articulated duties. The complaint, however, ignores the mandate to create rules in advance of filing a suit, so as to notice to the regulated parties by way of the promulgation of a rule. By way of example, the CFPB could have issued a rule precluding transacting business with a 3 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 11 of 34 Page ID #:159 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Native American Tribes or any foreign lender. But it never did so. Whether such a regulation or rule would be proper would be an issue for another day. But the CFPB cannot use the complaint as the first notice to Gasparyan of the new duties the CFPB seeks to create. As such Davit Gasparyan, or any other reasonable person, reading the act in question is provide no notice that he could be the target of an enforcement action, criminal or civil, brought by the United States or its authorized agency the CFPB. This notice is essential to the imposition of liability without violating the due process rights of all similarly situated persons and specifically Davit Gasparyan. Further, reading the act as written, the CFPA expressly prohibits the instant action against Gasparyan. See Russello v. U.S. 464 U.S. 16, 23 (1983) (emphasis added), see also U. S. v. Naftalin (1979) 441 U.S. 768, 774. Sebelius v. Cloer 133 S.Ct. 1886, 1894 (2013); Chamber of Commerce of U.S. v. Whiting 563 U.S. 582, 636 (2011) ; Bates v. United States, 522 U.S. 23, 29-30 (1997) (all holding that a law must be read as written and that when language is not included by Congress, the Court does not presume to add that language into the law). Because Congress rejected extending potential liability to related persons of a service provider, and prohibited using suit rather than rules to first notice what normal business activities are “violative of the provisions of 5531" Gasparyan was given unequivocal notice by the law that the instant action cannot be brought. Gasparyan was and is entitled to rely reasonably upon the act as written for due process notice that he cannot be made a target of enforcement. No claims can be brought against Gasparyan because the U.S. and California Constitutions preclude seeking the imposition of liability when the CFPA does not authorize and notice the instant effort was even possible. B. Gasparyan Had No Notice the Duties Alleged in the Complaint Existed or Might Apply to Him Because None of the Allege Duties Are Stated In Any Law. As the United States Supreme Court has repeatedly held: “[T]he presumption against retroactive legislation is deeply rooted in our jurisprudence, and embodies a legal 4 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 12 of 34 Page ID #:160 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 doctrine centuries older than our Republic. Elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly; settled expectations should not be lightly disrupted. For that reason, the ‘principle that the legal effect of conduct should ordinarily be assessed under the law that existed when the conduct took place has timeless and universal appeal.’ In a free, dynamic society, creativity in both commercial and artistic endeavors is fostered by a rule of law that gives people confidence about the legal consequences of their actions. These provisions demonstrate that retroactive statutes raise particular concerns. The Legislature's unmatched powers allow it to sweep away settled expectations suddenly and without individualized consideration. Its responsivity to political pressures poses a risk that it may be tempted to use retroactive legislation as a means of retribution against unpopular groups or individuals.” Landgraf v. USI Film Products, 511 U.S. 244, 265-66 (1994); citing Weaver v. Graham, 450 U.S. 24, 28-29 (1981); Kaiser Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827, 840 (1990) (SCALIA, J. Concurring). Moreover, where, as here, the complaint seeks to impose liability for Gasparyan’s failure to act, notice must be absolutely clear: “But we deal here with conduct that is wholly passive. . . due process places some limits on its exercise. Engrained in our concept of due process is the requirement of notice. . . Notice is required before property interests are disturbed, before assessments are made, before penalties are assessed. Notice is required in a myriad of situations where a penalty or forfeiture might be suffered for mere failure to act. These cases involved only property interests in civil litigation.” Lambert v. People of the State of California 355 U.S. 225, 228 (1957) (emphasis added). The CFPB does not allege that any specific regulation or duty, articulated in law which was breached by Defendant. The Government by this complaint seeks to establish a previously unrecognized set of duties and then, in the same action, seeks to impose liability for the breach of these new duties. This effort violates the Due Process 5 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 13 of 34 Page ID #:161 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 provisions of the Constitutions of both the United States and California and violates traditional and well accepted notions of fairness and justice. Notice of a duty to act, or refrain from acting, prior to taking action, liability cannot be imposed by the Court establishing the duty. There is no alleged wrong here which fits the category of malum in se. Matching criteria created by one customer with the needs of another customer is simply ordinary business. As the complaint concedes, the process is an entirely computer automated matching process and Gasparyan worked for the matching company, he did not personally match individual Leads with Lenders. The CFPB was both authorized by Congress and mandated by law to promulgate rules which would put all regulated persons on notice of the activity limited or proscribed as a condition precedent to bringing this action. They failed to do so, and cannot do so now by this complaint. The very first time Gasparyan heard of the duties alleged in the complaint or was placed on notice of the alleged duties was at the time of the filing of the complaint long after the activity alleged against him occurred. Such a position cannot withstand due process of law scrutiny. Especially as Congress or the CFPB could have, at any time, enacted such duties and to this date are still in the process of doing so. The complaint has not and cannot point to any Code, Law, Rule or Regulation existing at the time of the alleged activity which provides due process notice to Davit Gasparyan that the specific alleged “duties,” the breach of which is the subject of the claims against Gasparyan, even existed and therefore the complaint is unconstitutional. C. The FAC Alleges Many Duties Which Are Never Articulated In the Law. The duties alleges in the complaint without any legal basis are, inter alia: Not to allow sale of loan applications. FAC ¶12. Not to allow T3 to do business with small dollar lenders, data brokers or remarketing companies. FAC ¶13. To force T3 to “require that data managers and data brokers disclose the end purchasers of applications.” FAC ¶15 To force T3 to “require its purchasers to provide information to 6 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 14 of 34 Page ID #:162 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 T3 or to consumers about remarketing relationships they may have.” FAC ¶16. Not to allow T3 to “use a ping tree [at all]” or “use a ping tree in a manner most profitable to T3.” FAC ¶18; To require T3 to regulate and “effectively monitor” other third party websites for accuracy.” FAC ¶21-26. To mandate that T3 “require its purchasers to provide T3 with the precise loan terms that each consumer will be offered.” FAC ¶27. To ensure that all Lenders “are permitted to make loans to consumers in each state from which they seek applications.” FAC ¶31. To prevent binding arbitration agreements from being used by non-parties, FAC ¶36. Not do any business with Native American Tribal lenders or any offshore lender or bank. FAC ¶¶33, 46. The complaint appears to allege that each of these failures is a breach of a duty. However, there is no legal basis for the establishment of any of these duties as to T3, let alone to Gasparyan. For example, what law prohibits transacting any business with Native American Tribes? What law requires T3 to regulate arm’s-length third parties? Why is T3 transacting business with entities who require binding arbitration a wrong? These claims are violative of the due process rights of Gasparyan and the rule of law limiting irrational claims. How would Gasparyan, as an individual, police hundreds of T3 buyers and sellers? The CFPB here seeks to impose liability for Gasparyan’s not performing the function of the CFPB itself, and the CFPB cannot delegate its authority and duties, imposed upon it by Congress and the President, to Gasparyan. If Congress had intended to establish the above pleaded duties the Complaint would allege the rule or regulation establishing the specific “duties” above pleaded. The failure to plead the specific regulation establishing the alleged “duties” is fatal to the entirety of the action. The instant motion must be granted as to Davit Gasparyan. Without a legal duty no breach is legally possible. The claims of “duties” are legally baseless and, when first noticed in a complaint, violate the fundamental fairness of the Due Process and other provisions of the Constitutions of the United States and California. See Greenup v. 7 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 15 of 34 Page ID #:163 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Rodman 42 Cal.3d 822, 826 (1986) (holding that judgments are invalid when due process notice of the maximum liability is not provided prior to default.) D. There Is No Duty for Gasparyan or T3Leads to Police The Activities Of Unrelated Third Parties. As is clear from the allegations of the FAC, the CFPB seeks to impose duties not part of established and existing law upon T3Leads and therefore upon Gasparyan to function as a private legal policing agency by regulating the activities of unrelated arms length third parties. (FAC ¶¶28, 49, 50, 66). However, there is simply no duty for Gasparyan to regulate an unrelated, arm’s-length third party and therefore no claim can be brought by the CFPB for a failure to do so. See Badger v. Southern Farm Bureau Life Ins. Co.612 F.3d 1334, 1343-44 (11th Cir. 2010) (holding no special duties are owed to arms-length third parties absent some fiduciary or special relationship). There is no doubt the relationships alleged between non-parties T3leads and non-parties who are customers of T3Leads, such as Lenders and Lead Generators, are at arm’s-length. “An arm's-length transaction is a transaction negotiated by unrelated parties, each acting in its own self interest in which objective value is defined after selfish bargaining.... Via Christi Regional Medical Center, Inc. v. Leavitt 509 F.3d 1259, 1268 (10th Cir. 2007). The duty to regulate was assigned by Congress to the CFPB and other agencies of the United States. There is no duty either in the CFPA or otherwise imposed upon Gasparyan to regulate, investigate, or supervise actions of hundreds of entities whose only connection to Gasparyan is an arm’s-length relationship to non-party T3. Therefore the effort here to create a duty after the fact and then, simultaneous with the duty’s creation, impose significant, life altering, liability for the breach of the newly created duty is counter to well established principles of Constitutional Due Process.1 1 Gasparyan also joins in the constitutional challenges raised by Dmitry Fomichev’s Motion to Dismiss in Case No. 2:16-cv-2724 Document 29 as well as the arguments raised by T3Leads in its Motion to Dismiss in 2:15-cv-09692 Document 39. 8 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 16 of 34 Page ID #:164 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 II. THE COMPLAINT FAILS TO ALLEGE ANY FACTS TO SUPPORT THE SUBSTANTIAL ASSISTANCE CLAIM AGAINST GASPARYAN. INSTEAD THE COMPLAINT IMPROPERLY ALLEGES MERE LEGAL CONCLUSIONS WHICH MUST BE DISREGARDED BY THE COURT. “Although for the purposes of this motion to dismiss we must take all the factual allegations in the complaint as true, we are not bound to accept as true a legal conclusion couched as a factual allegation.” Papasan v. Allain 478 U.S. 265, 286 (1986) (emphasis added). Here, all of the allegations related to Gasparyan are nothing more than legal conclusion couched as factual allegations and therefore must be disregarded. See also Williams v. Gerber Prods. Co., 523 F.3d 934, 938 (9th Cir.2008) (quoting Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007)). “Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions. Second, only a complaint that states a plausible claim for relief survives a motion to dismiss. [citation]. Determining whether a complaint states a plausible claim for relief will, as the Court of Appeals observed, be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. 490 F.3d, at 157-158.But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not ‘show[n]'-‘that the pleader is entitled to relief.' Fed. Rule Civ. Proc. 8(a)(2)." Ashcroft v. Iqbal 556 U.S. 662, 678-79 (2009); Amini Innovation Corp.v. KTY Int’l Mktg., 768 F. Supp. 2d 1049, 1054-55 (C.D. Cal. 2011). Similarly, “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ibid.; Sanjuan v. American Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (C.A.7 1994), a plaintiff's obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a 9 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 17 of 34 Page ID #:165 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp. v. Twombly 550 U.S. 544, 555 (2007). Here the CFPB seeks to impose liability upon Gasparyan pursuant to 12 U.S.C. § 5536(a)(3), by improperly alleging only legal conclusions. The complaint contains the most basic and formulaic recitation of the legal conclusions that “Gasparyan knowingly or recklessly provided substantial assistance to T3" (FAC ¶¶57, 69) that “Gasparyan had significant responsibility for establishing T3’s policies and practices, and, throughout his employment at T3, he had substantial control over T3 operations.” (FAC ¶¶56, 68) and that “Gasparyan is a co-founder and was the Chief Financial Officer from the company’s founding in 2005 until 2009 and the Chief Marketing Officer from the company’s founding through July 2014. Gasparyan had managerial responsibility for T3 and materially participated in the conduct of its affairs.” (FAC ¶¶5, 9). The complaint similarly alleges the conclusions that “Gasparyan had authority and responsibility to decide whether to accept any lead generator or purchaser into or remove them from T3’s network and Gasparyan shared responsibility for deciding the position of each purchaser in the ping tree and designing T3’s systems” (FAC ¶¶17, 19). These are the only allegations in the complaint which mention Gasparyan’s actions and they are nothing but legal conclusions. In fact, the entire FAC focuses on acts carried out by T3Leads or unidentified Lead Generators or Lenders with which T3Leads did business. Therefore, the complaint, as it relates to Gasparyan, is nothing more than legal conclusions which must be disregarded. Ashcroft, at 680-81. Once these legal conclusions are disregarded, nothing remains which would link Gasparyan to any action carried out by T3Leads or any business affiliate of T3Leads. A. The Complaint Does Not Allege Any Facts To Support the Allegation that Gasparyan Acted “Knowingly or Recklessly” and Therefore Fails To Support the Scienter Requirement of the CFPA. As discussed above, there are no facts which provide any detail regarding the 10 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 18 of 34 Page ID #:166 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 conclusory allegations that “Gasparyan knowingly or recklessly provided substantial assistance to T3.” The complaint has not alleged any facts to support the allegation of actual knowledge of the impropriety of Gasparyan’s actions, leaving only the allegation that Gasparyan is liable under a “recklessness” standard. However the “legal conclusion couched as a factual allegation” that Gasparyan was reckless is insufficient to state any claim against Gasparyan under the standards articulated for recklessness. While no published cases interpret reckless as it is used in 12 U.S.C. 5536(a)(3),2 the Securities Exchange Act of 1934 (“Exchange Act”) utilizes similar language in articulating a scienter standard for, what is essentially, vicarious liability. 15 U.S.C. § 78t(e), states: “any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of this chapter. . . shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.” Because the Exchange Act language mirrors the CFPA, cases interpreting the science requirement of the Exchange Act are therefore instructive in interpreting recklessness as that term is used in 12 U.S.C. 5536(a)(3). Reckless conduct under 15 U.S.C. § 78t(e) has been held to be “limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers” Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1010 (11th Cir.1985) (quoting Broad v. Rockwell Int’l Corp., 642 F.2d 929, 961-62 (5th Cir. 1981)); see also SEC v. Big Apple Consulting 2 Defendant attaches as Exhibit 1, as a matter of first impression, an order of the District Court in the Eleventh Circuit in the case of Consumer Financial Protection Bureau v. Universal Debt & Payment Solutions, LLC, et al., Case No. 1:15-CV-0859- RWS (Sept. 1, 2015 N.D. Ga.) which held that the definition of “reckless” as used in 12 U.S.C. §5536(a)(3) means severe recklessness. In doing so, the Court adopted the legal standard applied under 15 U.S.C. § 78t(e). As discussed below, Defendant believes this standard should be applied by this Court in the instant action. 11 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 19 of 34 Page ID #:167 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 USA, Inc., 783 F.3d 786, 800 (11th Cir. 2015) (confirming that “severe recklessness” meets the science requirement in an aiding and abetting case); see also Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978) (holding that “Reckless conduct is, at the least, conduct which is ‘highly unreasonable’ and which represents ‘an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.’”). The Ninth Circuit has similarly defined reckless conduct under the Exchange Act: “[R]eckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990) (adopting the Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044 (7th Cir. 1977) holding). In order to meet this standard, the complaint must allege what the standard of care is for people in Gasparyan’s position and then must allege facts to support the legal conclusion that Gasparyan’s conduct was an extreme departure from the standard of care. Here, the CFPB has failed to allege any facts to support a legal conclusion that Gasparyan acted in a highly unreasonable manner or to establish that Gasparyan’s actions were an extreme departure from the standard of care. Indeed, the CFPB fails to allege what the ordinary standard of care is or that Gasparyan breached that standard. Instead, the complaint contains only the legal conclusion that Gasparyan was reckless. This legal conclusion must be disregarded by the Court pursuant to Papasan and Twombly. Moreover, the complaint fails to allege that Gasparyan had any notice that his conduct was “highly unreasonable” or an “extreme departure from the standard of care” or that T3Leads’ actions would qualify it as a service provider. Gasparyan therefore, had no notice of these allegations. 12 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 20 of 34 Page ID #:168 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Instead, the complaint alleges that Gasparyan acted just like any other employee, building business relationships and making ordinary business decisions. These decisions, without any notice that T3Leads was engaged in unfair or abusive acts, and without any factual allegations to support a claim that his conduct was highly unreasonable, cannot serve as a basis for liability. Indeed, just as with securities law, “before someone can be caught within the net of aiding and abetting liability under Rule 10b-5 . . . the alleged aider-abettor must be generally aware of his role in improper activity, and he must knowingly render substantial assistance. Without these limitations, the securities laws would become an amorphous snare for guilty and innocent alike.” Woodward v. Metro Bank of Dallas, 522 F.2d 84, 97. B. In Addition to Specific Facts, the Law Requires That Any “Substantial Assistance” Allegations Provide Sufficient Factual Details to Demonstrate a “Substantial Causal Connection” Between Gasparyan’s Action and the Purported Harm. The FAC Fails to State Any Allegations Regarding A Causal Connection. While no published decision currently interprets the pleading requirements regarding factual allegations of “substantial assistance” in violation of 12 U.S.C. §5536(a), here the failure of the CFPB to allege any facts to support the allegation of Gasparyan’s substantial assistance certainly fails all pleading requirements. It has been analogously held under the Exchange Act that: “If a defendant's knowledge of the securities laws violation is established, we move to the third prong of the analysis-substantial assistance. The assistance must be such that it is ‘a substantial factor in causing the resulting’ violation. [citations omitted] There must be a “ ‘substantial causal connection between the culpable conduct of the alleged aider and abettor and the harm to the plaintiff.’” Camp v. Dema 948 F.2d 455, 460 (8th Cir. 1991) (emphasis added), citing Metge v. Baehler 762 F.2d 621, 625 (8th Cir. 1985); Mendelsohn v. Capital Underwriters, Inc., 490 F.Supp. 1069, 1084 (N.D.Cal.1979). 13 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 21 of 34 Page ID #:169 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Here, the CFPB has failed to allege any facts to support the legal conclusion that there is any causal connection between Gasparyan’s conduct and the purported harm because the complaint does not allege even a single action taken by Gasparyan. Moreover, the complaint does not mention how any of Gasparyan’s actions caused any of the purported harm. Nor does the complaint list any actual harm or provide even one example of harm which resulted from Gasparyan’s serving as an officer of T3Leads. Therefore, the complaint is fatally deficient in that is it fails to allege any facts to support the legal conclusion that Gasparyan’s actions (which are never identified or articulated anywhere in the complaint) qualify as substantial assistance to T3Leads. Therefore, the Court must therefore dismiss the complaint with prejudice. III. T3LEADS IS NOT A SERVICE PROVIDER AND THEREFORE THE CFPA DOES NOT PERMIT THE IMPOSITION OF LIABILITY UPON GASPARYAN FOR ANY SUBSTANTIAL ASSISTANCE TO T3LEADS. A service provider under the CFPA means: “any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service, including a person that-- (i) participates in designing, operating, or maintaining the consumer financial product or service; or (ii) processes transactions relating to the consumer financial product or service (other than unknowingly or incidentally transmitting or processing financial data in a manner that such data is undifferentiated from other types of data of the same form as the person transmits or processes).” 12 U.S.C.A. § 5481(26)(a). However, not all services automatically qualify a person as a service provider: “(B) Exceptions The term “service provider” does not include a person solely by virtue of such person offering or providing to a covered person-- 14 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 22 of 34 Page ID #:170 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 (i) a support service of a type provided to businesses generally or a similar ministerial service” 12 U.S.C.A. § 5481(26)(b). (emphasis added). Those who provide ministerial services or support service to covered persons were deliberately excluded by Congress from any prosecution. The CFPB’s attempt to stretch the service provider definition a second step to Gasparyan for providing “substantial assistance to T3" far exceeds its authority and mandates dismissal of the complaint. A. T3Leads Provides Only a Basic Support Service Which Is Generally Provided to Businesses and Is Therefore Not a Service Provider. A person does not qualify as a service provider if it provides a covered person with “a support service of a type provided to businesses generally.” The complaint alleges that T3Leads does nothing more than aggregate Leads generated by Lead Generators and then transmit them to third party Lenders who use the Leads to contact the consumers directly. T3Leads is simply a conduit through which Leads and Lenders are matched up and connected. This type of support service is precisely the type which was intended by Congress to be excluded from the “service provider” definition. In fact, Lead Aggregation exists for almost every industry. Serving as the conduit which matches a seller and a buyer is a support service utilized throughout the decades no different than the Yellowpages telephone book (which aggregates contact information and sells it to its subscribers) or websites to buy cars (which aggregate people looking to buy cars and connect them with car dealerships) or websites which connect a real estate broker and a property buyer or seller. According to Forbes, the United States Postal Service (“Postal Service) admits to licensing leads to Lead Aggregators who then sell those leads to third parties who use the addresses provided by the Postal Service to contact the consumers. (Exhibit 2). This is the same business model used by T3Leads and is a vital business service provided to the U.S. Postal Service as well as grocery stores, clothing retailers and other companies which issue direct mailers to consumers. 15 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 23 of 34 Page ID #:171 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The role T3Leads plays in the stream of commerce is no different than any other aggregator. It collects information obtained by third parties and sells that information to a different set of third parties without ever interacting with the consumer. Similar systems exist for online dating as well as the marketing of home solar panels. In both these contexts a consumer or user utilizes a landing page looking for a matchmaking site or a solar panel distributor. The website where the consumer inputs generates a lead. That lead is then sold to a Lead Aggregator like T3Leads who connects the lead with an actual dating website or a retailer who sells solar panels. The T3Leads business model is a necessary utility in order to help match leads generated by third parties to the business who will actually sell the product to the consumer. This model is used worldwide and across all different businesses unrelated to financial products including purchasing cars, pharmaceuticals, and the telecommunications industry. The services provided by T3Leads therefore fit precisely within the exception to the “service provider” definition in that the service is nothing more than a standard support service provided to businesses generally. Therefore, T3Leads does not qualify as a service provider. B. T3Leads’ Business Deals Only with Ministerial Acts and Therefore T3Leads Does Not Qualify as a Service Provider. A ministerial act or support service has yet to be defined under the CFPA and other definitions provided in the law deal strictly with acts of governmental agencies. Therefore, the Court must look to the word’s ordinary meaning. “Because the TVPA does not define the term “individual,” we look first to the word's ordinary meaning. [citation] ‘When a statute does not define a term, we typically give the phrase its ordinary meaning” Mohamad v. Palestinian Authority 132 S.Ct. 1702, 1706-07 (2012) (wherein the Court then went on to utilize the definitions of the Oxford English, Random House, Webster’s International Dictionaries.) Therefore, a ministerial service should be defined as “an act that involves obedience to instructions or laws instead of discretion, judgment, or skill” Black’s Law Dictionary (10th ed. 2014). 16 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 24 of 34 Page ID #:172 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The allegations in the FAC make clear that T3Leads provides only ministerial services or basic support services to Lenders and Lead Generators when it alleges that “T3 is in the business of receiving consumer-loan applications from lead generators and selling the applications as leads to small-dollar lenders.” (FAC ¶6). Similarly, the CFPB alleges that those entities which buy leads (including Tribal Lenders), do so at “competitive prices for applications” (FAC ¶35). The complaint alleges that everything T3Leads does is merely an “automated process [that] takes just seconds” (FAC ¶20). Nowhere in the complaint is it alleged that T3Leads is involved in crafting the loan application or the establishment of criteria which govern loan acceptance or the issuance of a loan offer. Instead, the complaint makes clear that T3Leads has no input on the issuance of loans to consumers and instead merely acts as a conduit through which information is passed from a Lead Generator to a Lender. T3Leads is paid the market rate to simply connect the Lead Generator’s lead to the Lender. No discretion is involved, and instead the connection is made automatically via a computer program. Therefore, T3Leads does not qualify as a service provider. IV. THE FAILURE TO JOIN NECESSARY OR INDISPENSABLE PARTIES, INCLUDING T3, AND THE ALLEGED WRONGDOING LENDERS AND LEAD GENERATORS PRECLUDES PROCEEDING AGAINST GASPARYAN ALONE. The only Defendant to the instant action is Gasparyan, yet he is the least discussed party in the complaint. Of the 69 paragraphs of the complaint non-party T3 is mentioned 108 times in 57 of the paragraphs, non-party Lenders who are alleged to have been the active wrongdoers are mentioned 50 times in 23, and Lead Generators who are alleged to be the active wrongdoers are mentioned 27 times in 22. Gasparyan, the sole Defendant is, mentioned only 15 times in 8 out of the 69 paragraphs and even those fail to allege any facts as to Gasparyan’s wrongdoing. The Lenders, Lead Generators and T3Leads are discussed at length because the CFPB recognizes that they are necessary parties for at least three reasons: (1) the injunctive relief sought directly impacts all the non-parties as 17 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 25 of 34 Page ID #:173 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 well as Gasparyan; (2) without the Lenders, Lead Generators and T3Leads, Gasparyan is unable to defend against the claims brought against him because his liability only arises out of the CFPA violations of the Lenders, Lead Generators and T3Leads; (3) some of the Lenders and Lead Generators possess sovereign immunity, and Gasparyan would be unable to obtain discovery from these parties unless they are joined in the action. “Required Party. A person who is subject to service of process and whose joinder will not deprive the court of subject-matter jurisdiction must be joined as a party if: (A) in that person's absence, the court cannot accord complete relief among existing parties” Fed. Rules Civ.Proc., Rule 19. In Two Shields v. Wilkinson, 790 F.3d 791, 797 (8th Cir. 2015) the Court distinguished the instant fact pattern in which the absence of the other alleged breaching parties both adversely impacts the named parties ability to litigate the complaint and the rights of the party not named and concluded that in a fact pattern similar to the present fact pattern, jointly responsible parties necessarily must be joined. “[Rule 19] instructs courts to examine the interests of an absent party in an effort to determine whether ‘as a practical matter’ its ability to protect those interests will be hindered. Fed.R.Civ.P. 19(a)(1)(B)(i).An illustrative case in which an absent joint tortfeasor was necessarily implicated is Laker Airways, Inc. v. British Airways, PLC, 182 F.3d 843 (11th Cir.1999). There, Laker had sued British Airways (BA), for conspiring with Airport Coordination Ltd (ACL) to reserve preferential take off and landing slots in British airports. Id. at 845. . . The Eleventh Circuit concluded that ACL was a required party whose interests were “more significant than those of a routine joint tortfeasor.” Id. at 847-48. It reasoned that a joint tortfeasor is a necessary party if it “emerges as an active participant in the allegations made in the complaint that are critical to the disposition of the important issues in the litigation.” Id. at 848. Similar to the allottee appellants here, Laker argued that ACL's interests were not implicated because it sought only monetary damages from BA for its conspiratorial conduct and no relief from ACL. Id. at 849. Although the requested relief might not have directly implicated ACL, the 18 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 26 of 34 Page ID #:174 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 court reasoned that Laker's claims necessarily required an evaluation of ACL's actions, ‘thereby substantially implicating ACL's interests.’” Two Shields v. Wilkinson, 790 F.3d 791, 797 (8th Cir. 2015) (emphasis added). Here, the basis for the CFPB’s complaint is that the Lenders (including Native American Tribal Lenders, hereinafter “Tribal Lenders”), and Lead Generators are covered persons who are violating the CFPA and that T3Leads is a service provider and that Gasparyan worked for T3Leads. Therefore, all of the allegations against Gasparyan rely upon the CFPB demonstrating that the Lenders, including Tribal Lenders, as well as the Lead Generators are “covered persons” under the 12 U.S.C.A. § 5481 and then demonstrating that in addition to being covered persons, the Tribal Lenders and Lead Generators engage in “unfair” or “abusive” conduct such that a violation of the CFPA occurs. Then the CFPB must demonstrate that T3Leads is a service provider. Only after all of this is proven, can a claim against Gasparyan survive. The CFPB therefore failed to join the parties who it alleges committed the actual wrongs against the consumers. It is therefore impossible for the Court to make a determination as to the rights and liabilities of all the parties without the joinder of the Lenders and Lead Generators who, the CFPB alleges, are the covered persons violating the CFPA. Therefore this Court will be required, as in Laker, to adjudicate the actions of the lenders and lead generators. Without the Lenders and Lead Generators the Court cannot afford complete relief among the existing parties, making the Lenders, Lead Generators and T3Leads necessary parties who must be joined before the case can proceed. The first question is whether T3Leads, the Lenders and Lead Generators are “necessary,” in the sense that they “claim an interest relating to the subject of the action” and are “so situated that disposing of the action in [their] absence may: (i) as a practical matter impair or impede [their] ability to protect the interest; or (ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.” Fed.R.Civ.P. 19(a). To perform this analysis, the 19 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 27 of 34 Page ID #:175 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Court “must determine whether the absent party has a legally protected interest in the suit” and if so, whether “that interest will be impaired or impeded by the suit.” Makah Indian Tribe v. Verity, 910 F.2d 555, 558 (9th Cir. 1990). A “substantial” interest, such as a claim under a contract, or “an interest in a fixed fund or limited resource that the Court is asked to allocate may also be protected.” Cachil Dehe Band of Wintun Indians of the Colusa Indian Community v. California, 547 F.3d 962, 970 (9th Cir.2008) (citing Makah at 558-59). On the other hand, the interest need not rise to the level of “property in the sense of the due process clause.” Makah at 558. Again, the determination is “practical” in nature and “fact-specific.” Cachil Dehe Band at 970. The injunctive relief sought, which would ban doing business with Lenders and Lead Generators directly impacts the contracts with those parties, making them necessary. Likewise this Defendant’s inability to litigate the merits of any claim of liability based upon the alleged unlawful practices of the Lenders and Lead Generators causes those specifically alleged persons to be necessary or indispensable parties. Gasparyan has no information related to the actions of these third parties. Further if the CFPB’s decision not to name these necessary parties is based upon a jurisdictional problem due to their being Tribes, the burden of that problem cannot be shifted to Gasparyan, who is twice removed from either the consumer or the Tribal data which is essential to defending the claims presented here. Similarly, T3Leads is a necessary party to the instant proceeding because the entire claim against Gasparyan relies solely upon the allegation that T3Leads is a service provider who violated the CFPA. Under the first prong of the Rule 19(a) test, this action cannot proceed because the Lenders, Lead Generators and T3Leads are all contracting parties and are all absent, making them necessary parties, without whom Gasparyan cannot defend against the instant claims. In Japan Petroleum Co. (Nigeria), Ltd. v. Ashland Oil, Inc., 456 F.Supp. 831 (D.Del.1978), the Court held that in a contract action, the Nigerian subsidiary of two defendants had to be joined because it was the subsidiary 20 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 28 of 34 Page ID #:176 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 alone that signed the contract with the plaintiff. Ashland at 836. In the present case, it is the relationship between T3 and the lenders and lead generators which serves as the entire basis of the plaintiff’s action. Moreover, T3 and the lenders and lead generators all stand in direct liability relationship to the plaintiff and they must be joined. Additionally, when a Court finds that a necessary party is absent, the burden then shifts to the party opposing joinder to show why that party should not be joined. Pulitzer-Polster v. Pulitzer, 784 F.2d 1305, 1309 (5th Cir.1986). This burden cannot be met because the CFPB deemed it necessary to plead the bad acts of the Tribal Lenders as the only example of CFPA violations by T3leads, thereby conceding that the tribal lenders are necessary and indispensable parties. The CFPB went out of its way to describe some of the general practices of Tribal Lenders, including offering competitive rates for leads, requiring a binding arbitration agreement before providing a loan, and providing in depth disclosures to consumers. See FAC ¶¶33, 34, 35, 36, 37, 62, 63. These are not allegations of wrongdoing by T3Leads or by Gasparyan. The CFPB alleges that these purported wrongs are carried out solely by Tribal Lenders. Therefore, the instant action cannot proceed without the joined of these necessary or indispensable parties. V. THE CFPB MUST BE ORDERED TO PLEAD THE APPLICABLE DATES DURING WHICH THESE BAD ACTS TOOK PLACE IN ORDER FOR GASPARYAN TO HAVE NOTICE OF THE STATUTE OF LIMITATIONS. “Except as otherwise permitted by law or equity, no action may be brought under this title more than 3 years after the date of discovery of the violation to which an action relates.” 12 U.S.C.A. § 5564(g). Plaintiff has failed to plead the date range when it alleges the wrongful conduct took place, and therefore Gasparyan has no means to determine whether the claims brought by the CFPB are timely. Upon that basis, Gasparyan argues that the CFPB, which conducted extensive discovery of T3Leads in 2013 and 2014, is barred by the statute of limitations from bringing any claims against Gasparyan for any action which took place prior to 2013. 21 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 29 of 34 Page ID #:177 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 VI. THE RELIEF SOUGHT IN THE COMPLAINT IS NOT PERMITTED. The FAC seeks a panoply of monetary relief, including restitution, disgorgement, penalties, attorneys’ fees and costs, and other unspecified monetary damages. However, the law does permit the relief sought and therefore these portions of the prayer must be dismissed. The Motion to Strike portions of a prayer as a matter of law “is more appropriately examined as a motion to dismiss.” In re Toyota Motor Corp. (C.D. Cal. 2011) 790 F.Supp.2d 1152, 1170). A. Redress or Restitution Are Not a Permitted Relief Because the FAC Fails To Allege that Any Consumer Has Suffered Any Harm and Restitution Is Only Permitted When Actual Harm is Alleged. “Fundamental fairness requires that Teri Chierico not be held liable for consumer redress when she did not participate in any acts which caused harm to consumers . . . [Moreover] the district court's ability to order payment of consumer redress is limited to actual damages.” McGregor v. Chierico 206 F.3d 1378, 1385-86 (11th Cir. 2000). Here, the CFPB fails to allege that any actual damages occurred as a result of any of the conduct alleged. Indeed, the FAC alleges only that T3Leads’ actions are “likely to cause substantial injury to consumers.” (FAC ¶53). Nowhere in the complaint does the CFPB allege that even a single consumer was harmed. “[O]n a motion to dismiss, courts ‘are not bound to accept as true a legal conclusion couched as a factual allegation’. Factual allegations must be enough to raise a right to relief above the speculative level” Bell Atlantic Corp. v. Twombly (2007) 550 U.S. 544, 555. (emphasis added). “It is the usual rule that in a contested case plaintiff may secure relief justified by the allegations of the complaint and the evidence” Singleton v. Perry 45 Cal.2d 489, 498-99 (1955) citing Nathan v. Dierssen, 164 Cal. 607, 611 (1913); Title Ins. & Trust Co. v. Ingersoll, 158 Cal. 474, 480 (1910). 22 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 30 of 34 Page ID #:178 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Here, the relief of “redress to harmed consumers” is not at all justified by the complaint and is therefore not recoverable because it is unsupported by even a single factual allegation. Because no harm is alleged, no recovery can take place. No consumers are alleged to have been harmed and therefore the Court cannot order redress. Moreover, an order mandating redress when no actual harm has occurred is nothing less than a punitive damage. See U.S. v. City of Miami 195 F.3d 1292, 1298 (11th Cir. 1999). However, punitive damages are expressly prohibited under the CFPA: “(3) No exemplary or punitive damages Nothing in this subsection shall be construed as authorizing the imposition of exemplary or punitive damages.” 12 U.S.C.A. § 5565(a)(3). Additionally, nowhere in the complaint does the CFPB allege that T3Leads or Gasparyan ever received any income or money from any consumer. Therefore no restitution or redress is proper. Because no actual harm is alleged in the FAC, any redress ordered by the Court would amount to a punitive damage which is expressly forbidden. Therefore, the Court must dismiss all prayers for redress or restitution in the complaint. B. The CFPB’s Prayer for Penalties Is Prohibited Under the CFPA. The CFPB does not have unlimited authority to seek unlimited civil penalties. Instead, the CFPA limits the types of penalties by establishing three tiers of penalties, either (a) no more than $5,000 per day “For any violation of a law, rule, or final order or condition imposed in writing by the Bureau”; (b) no more than $25,000 per day for reckless violations; or (c) up to $1,000,000 per day for deliberate violations of Federal consumer financial laws. 12 U.S.C.A. § 5565(c)(2). As discussed above, there has been no violation of any written rule of the CFPB because no rules existed prior to the filing of the instant suit. Therefore the $5,000 penalty is inapplicable. Additionally, neither the $25,000 or $1,000,000 per day amount can be imposed upon Gasparyan because the complaint fails to allege any facts to support the allegations of a reckless, knowing or deliberate violation of any law. 23 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 31 of 34 Page ID #:179 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Therefore, the Court should dismiss the prayer for penalties. C. The CFPB Is Cannot Recover Attorneys Fees or Any Other Fees. “Our cases establish that attorney's fees generally are not a recoverable cost of litigation absent explicit congressional authorization.’ . . . Recognition of the availability of attorney's fees therefore requires a determination that ‘Congress intended to set aside this longstanding American rule of law.’” Key Tronic Corp. v. U.S. (1994) 511 U.S. 809, 814 citing Runyon v. McCrary, 427 U.S. 160, 185 (1976) and Alyeska Pipeline Service Co. v. Wilderness Society 421 U.S. 240, 247 (1975) (holding “In the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser.”). The CFPB’s FAC also prays for the award of “Plaintiff’s costs and fees” (FAC Prayer ¶8). However, no attorneys’ fees or other fees may be recovered based upon the instant allegations because here, 12 U.S.C.A. § 5565(b) permits only the recovery of costs but does not make any allowance for attorneys’ fees or any other type of fees. Therefore, the Court must dismiss the CFPB’s prayer for all types of fees. D. Injunctive Relief Against Gasparyan, Who The Complaint Admits Has Not Been Involved In the Operation or Management of T3Leads For Over Two Years, Is Prohibited Under These Circumstances and Therefore Must Be Dismissed. “The purpose of an injunction is to prevent future violations” U.S. v. W. T. Grant Co. 345 U.S. 629, 633 (1953) (emphasis added) citing Swift & Co. v. United States 276 U.S. 311, 326 (1928) . “[Plaintiff] must satisfy the court that [injunctive] relief is needed. The necessary determination is that there exists some cognizable danger of recurrent violation, something more than the mere possibility which serves to keep the case alive.” U.S. v. W. T. Grant Co. 345 U.S. 629, 633 (1953) (emphasis added). “In determining whether to impose an injunction where a defendant has ceased the offending conduct, courts may consider ‘the bona fides of the [defendant's] expressed intent to comply’ with the law, ‘the effectiveness of the discontinuance,’ and ‘the 24 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 32 of 34 Page ID #:180 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 character of the past violations.’” E.E.O.C. v. KarenKim, Inc. 698 F.3d 92, 100 (2d Cir. 2012) . Here, injunctive relief is entirely improper against Gasparyan because the complaint does not allege that there is any risk of a recurrent violation. Instead, the complaint alleges that Gasparyan ceased all of the alleged activity in July 2014, more than two years ago. (FAC ¶5). Therefore, even under the complaint’s allegations, there has been a bonafide expressed intent to cease all assistance to T3Leads, there has been an entirely effective discontinuance of all assistance to T3Leads and the past purported violations (though disputed by Defendant) all relate to Gasparyan’s assistance to T3Leads, which the complaint alleges ceased in July 2014. Therefore, all three of the factors which the Court should consider favor Gasparyan and the denial of an injunction. Therefore the Court must dismiss the prayer for injunctive relief because even on the face of the complaint, the prayer for injunctive relief is fatally defective. Alternatively, the Court must dismiss the prayer for general and unlimited injunctive relief and limit all injunctive relief to prohibiting Gasparyan from providing material assistance to T3Leads since the only purported violation alleged in the complaint is that Gasparyan provided material assistance to T3Leads when he served as their Chief Marketing Officer. (FAC ¶5). CONCLUSION For all of the foregoing reasons the Court should grant the instant motion to dismiss. Moreover, because the Plaintiff has already been provided with an opportunity to amend the complaint and has filed the instant First Amended Complaint which is still fatally deficient despite extensive and multiple rounds of meet and confer, the Court should dismiss the complaint without leave to amend. Dated: August 8, 2016 By: /s/ Steven R. Friedman Steven R. Friedman Attorney for Defendant Davit Gasparyan 25 Defendant Gasparyan’s Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 33 of 34 Page ID #:181 1 PROOFOFSERVICE 2 COUNTY OF LOS ANGELES I am a resident of andi’or employed in the county of Los Angeles, State of California: 4 I am over the age of eighteen years and not a party to the within entitled action; my business address is 1880 Century Park East, Suite 1411, Los Angeles, California 90067. 6 On August 8, 2016, I served the within document(s) in this action entitled: DEFENDANT DAVIT GASPARYAN’S NOTICE OF MOTION AND MOTION TO 7 DISMISS PLAINTIFF’S FIRST AMENDED COMPLAINT; MEMORANDUM OF POINTS AND AUTHORITIES: DECLARATION OF M. FRIEDMAN IN SUPPORT. 9 ...on the interested parties listed below via electronic service via the Court’s Case Management/Electronic Case Filing (CM/ECF) through the Notice of Electronic Filing 10 under the case caption and number. 11 Kara K. Miller, Esq. 12 Leanne E. Hartmann, Esq 13 Consumer Financial Protection Bureau 14 1700G. Street, NW Washington, DC 20552 16 17 18 Executed on August 8, 2016, at Los Angeles, California. 19 Li (State) I declare under penalty of perjury that the foregoing is true and 20 correct. 21 22 (X) (Federal) I declare that I am employed in the office of a member of the bar of the United States District Court for the Central District of California 23 at whose direction the service was made. 26 Michael E.-dman 27 28 26 Defendant Gasparyan’s Motion to Dismiss Plaintiffs First Amended Complaint S 2 3 / l , t t lif r ia; titl ti ; i es 5 i . 6 l : ' I 7 ' 8 ; . ... t i rt' e t i i 10 t I I . 12 13 r 00 i 15 , . C) GU 24 25 28 l t t l i t i r r f t it t t rt t t l i t r ia t i ti t Defendant asparyan's otion to is iss Plaintiffs First ended lai t Case 2:16-cv-02725-PSG-E Document 31 Filed 08/08/16 Page 34 of 34 Page ID #:182 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Steven R. Friedman, Esq (SBN 100748) Michael E. Friedman, Esq. (SBN 291694) Law Office of Steven R. Friedman 1880 Century Park East Suite 1411 Los Angeles, CA 90067 310 273-2505 Email: CFPBvGasparyan@gmail.com Attorneys for Defendant Davit Gasparyan UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiffs, vs. DAVIT GASPARYAN, a/k/a DAVID GASPARYAN, Defendant. _______________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No: 2:16-CV-2725-PSG(ex) Judge: Hon. Philip S. Gutierrez DECLARATION OF MICHAEL FRIEDMAN AND EXHIBITS THERETO SUBMITTED IN SUPPORT OF DEFENDANT DAVIT GASPARYAN’S NOTICE OF MOTION AND MOTION TO DISMISS PLAINTIFF’S FIRST AMENDED COMPLAINT. First Amended Complaint Filed: July 7, 2016 Current Response Date: August 8, 2016 Date: November 7, 2016 Time: 1:30 p.m. Place: Courtroom 880 255 E. Temple Street, Los Angeles, CA 90012 DECLARATION OF MICHAEL FRIEDMAN AND EXHIBITS THERETO SUBMITTED IN SUPPORT OF DEFENDANT DAVIT GASPARYAN’S NOTICE OF MOTION AND MOTION TO DISMISS PLAINTIFF’S FIRST AMENDED COMPLAINT 1 Declaration of Michael Friedman in Support Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 1 of 68 Page ID #:183 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I Michael E. Friedman declare and state as follows: 1. That I am over the age of 18 years and of sound mind. That I make the following statements from my own personal knowledge. That if called to testify I could and would competently attest to each of the following facts. That I am the attorney of record in this matter for the Defendant Davit Gasparyan. 2. That I participated in the research, investigation and drafting of the pleadings related to the First Amended Complaint by the CFPB pending before this Honorable Court. 3. That as part of my research and investigation I became aware of the case of Consumer Financial Protection Bureau v. Universal Debt & Payment Solutions, LLC, et al., Case No. 1:15-CV-0859-RWS (Sept. 1, 2015 N.D. Ga.). Through my account with the Courts of the United States I obtained a true and correct copy of the Order entered by the Court upon the Motion to Dismiss brought by three parties in that action. 4. That attached hereto as Exhibit 1 is a true and correct, and unmodified, copy of the order of the United States District Court for the Northern District of Georgia, Atlanta Division in the case of Consumer Financial Protection Bureau v. Universal Debt & Payment Solutions, LLC, et al., Case No. 1:15-CV-0859-RWS (Sept. 1, 2015 N.D. Ga.). 5. That as part of my research I obtained a copy of an article published by the Forbes Magazine relating to United States Post Office and its practice of lead generation and sales. Attached hereto as Exhibit 2 is a true and correct, and unmodified, copy of the complete article as it appears in the Forbes online magazine. 6. That as of August 8, 2016, the Forbes article attached as Exhibit 2 is available at the following URL: http://www.forbes.com/sites/adamtanner/2013/07/08/how-the-post-office-sells-your-new -address-with-anyone-who-pays-and-the-little-known-loophole-to-opt-out/#2a46465950 50 2 Declaration of Michael Friedman in Support Motion to Dismiss Plaintiff’s First Amended Complaint Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 2 of 68 Page ID #:184 I declare the forgoing to be true and correct under penalty of perjury pursuant to 2 the laws of the United States of America. Executed this 8th day of August, 2016at s-*rrgees, CJifornia. 5 Michael E. Friedman 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 77 23 24 25 26 27 28 3 Declaration of Michael Friedman in Support Motion to Dismiss Plaintiff’s First Amended Complaint t r t r lty f rjury rsuant t t t t . 3 t , at 4 l 22 27 3 eclaration of ichael Fried an in Support otion to is iss Plaintiffs First ended o plaint Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 3 of 68 Page ID #:185 EXHIBIT 1 Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 4 of 68 Page ID #:186 AO 72A (Rev.8/82) IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff, v. UNIVERSAL DEBT & PAYMENT SOLUTIONS, LLC, et al., Defendants. : : : : : : : : : : : : CIVIL ACTION NO. 1:15-CV-00859-RWS ORDER This case comes before the Court on Defendant Pathfinder Payment Solutions, Inc.’s Motion to Dismiss [89], Defendant Global Payments, Inc.’s Motion to Dismiss [93], and Defendant Frontline Processing Corp.’s Motion to Dismiss [97]. After reviewing the record and with the benefit of oral argument, the Court enters the following Order. Background The Consumer Financial Protection Bureau (“CFPB”) brings this action against numerous individuals and entities in connection with a massive debt- collection scheme. The CFPB alleges violations of the Fair Debt Collection Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 1 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 5 of 68 Page ID #:187 AO 72A (Rev.8/82) Practices Act (“FDCPA”), 15 U.S.C. §§ 1692-1692p, and the Consumer Financial Protection Act (“CFPA”), 12 U.S.C. §§ 5531, 5536(a). According to the CFPB, several individuals created limited liability companies in Georgia and New York to perpetrate a debt-collection scheme targeting millions of consumers. These companies included, among others, Defendants Universal Debt and Payment Solutions, LLC (“UDPS”) and Credit Power, LLC (“Credit Power”), both organized by Defendant Mohan Bagga (collectively, “Debt Collectors”). (Compl., Dkt. [1] ¶¶ 13, 37.) I. The Debt-Collection Scheme The Debt Collectors made millions of collection calls to consumers in attempts to collect debts the Debt Collectors were not in fact owed. (Id. ¶ 94.) The Debt Collectors threatened litigation and told consumers they needed to settle the debt to avoid a restraining order or criminal prosecution. (Id. ¶¶ 96- 97.) When asked for information about the purported debts, the Debt Collectors refused to identify the lenders but, by reciting the consumers’ personal information, including Social Security number, date of birth, and place of employment, convinced consumers the debts were legitimate and were owed to them. (Id. ¶ 98.) The Debt Collectors purchased that identifying 2 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 2 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 6 of 68 Page ID #:188 AO 72A (Rev.8/82) information from debt and data brokers. (Id. ¶ 101.) When consumers provided their payment information, the Debt Collectors used payment processors to withdraw funds from the consumers’ accounts. (Id. ¶ 100.) Defendant Global Payments, Inc. (“Global Payments” or “Global”) is a payment processor that processed transactions for the Debt Collectors. Payment processors “enable merchants to accept check, card, and electronic payments at a point of sale.” (Id. ¶ 144.) During a transaction, the card information is captured by a point-of-sale terminal card reader and transmitted to a payment network. (Id. ¶ 147.) Payment processors are sponsored by an acquiring bank that is registered with one or more card associations, such as Visa or MasterCard. (Id. ¶ 148.) They are also subject to the rules and credit risk policies of the card associations. (Id. ¶ 149.) Two other companies, Defendants Pathfinder Payment Solutions, Inc. (“Pathfinder”) and Frontline Processing Corp. (“Frontline”) are independent sales organizations (“ISOs”) that entered into merchant services agreements with a Global Payments subsidiary to market Global Payments’ processing services to merchants. (Id. ¶¶ 80, 84.) Pathfinder also agreed to review potential merchants’ creditworthiness, to underwrite the merchants, to monitor 3 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 3 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 7 of 68 Page ID #:189 AO 72A (Rev.8/82) processing activity to detect fraud and risk, and to advise Global Payments accordingly. (Id. ¶ 80.) Frontline agreed to prescreen merchants for compliance with Global Payments’ credit criteria. (Id. ¶ 84.) The CFPB accuses Global Payments, Pathfinder, and Frontline (collectively, “Payment Processors”) of providing substantial assistance to the1 Debt Collectors’ unfair or deceptive conduct (Count VIII) and of engaging in unfair acts or practices (Count IX). The CFPB asserts that the Payment Processors “enabled [the Debt Collectors] to efficiently accept payments and convince consumers that they were credible merchants.” (Id. ¶ 146.) Moreover, these Defendants were required to follow policies and procedures to evaluate merchant creditworthiness and identify fraud. (Id. ¶ 155.) This is because payment processors face credit exposure given that merchants are paid quickly, while consumers’ payments are provisional and may be reversed if a consumer disputes a charge, resulting in a “chargeback.” (Id. ¶¶ 152-53.) If a merchant is unwilling or unable to fund the reversed transaction, the payment Pathfinder and Frontline point out that ISOs do not actually process1 payments. Keeping this distinction in mind, the Court nevertheless uses this term because the CFPB uses it in its Complaint to refer to Global Payments, Pathfinder, and Frontline. The Court uses this term only as shorthand to refer to these three Defendants alleged to be involved in facilitating payment processing. 4 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 4 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 8 of 68 Page ID #:190 AO 72A (Rev.8/82) processor is responsible for the chargeback. (Id. ¶ 154.) Global Payments’ credit policy, like the card networks’ policies, identifies collection agencies as “prohibited merchants” that the ISOs were not to solicit and which required Global Payments’ approval. (Id. ¶ 157.) Global Payments also prohibited “Aggregators,” which are merchants who use their processing account to process payments for other merchants-a practice called “factoring.” (Id. ¶ 160.) Defendants considered collection agencies to be high- risk merchants because they processed only “card-not-present” transactions. (Id. ¶ 162.) Thus, Global Payments’ policies required more scrutiny of card- not-present merchants. (Id. ¶ 163.) The CFPB alleges, however, that Global Payments, Pathfinder, and Frontline all failed to monitor the Debt Collectors’ accounts for signs of unlawful conduct and thus “knowingly or recklessly provided substantial assistance” to the Debt Collectors’ scheme. 12 U.S.C. § 5536(a)(3). Furthermore, the CFPB alleges that this conduct amounted to unfair acts or practices. 12 U.S.C. §§ 5531(a), (c)(1), 5536(a)(1)(B). Because the parties’ arguments turn on the ISOs’ and Global Payments’ levels of knowledge and respective culpabilities, the Court recounts the specific allegations as to each Defendant below. 5 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 5 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 9 of 68 Page ID #:191 AO 72A (Rev.8/82) II. Pathfinder’s Underwriting and Risk Monitoring The CFPB alleges that Pathfinder failed to follow up on a number of red flags in the Debt Collectors’ applications for Global Payments processing accounts. In February 2011, Defendant Bagga submitted an application on behalf of Credit Power. (Id. ¶ 165.) Pathfinder’s underwriting process was supposed to include a review for criminal activity, associates, verification of addresses, business filings, and corporate affiliations. (Id. ¶ 166.) Credit Power’s chief executive officer had recently completed a sentence for drug trafficking and shared an address with Mr. Bagga, but Pathfinder and Global Payments approved the application. (Id. ¶ 167.) Mr. Bagga applied for a second account with Pathfinder, this time on behalf of UDPS. (Id. ¶ 168) Mr. Bagga listed the same address on the application for both his residence and UDPS. (Id. ¶ 170.) Pathfinder’s vice president for compliance recognized that a merchant operating out of his home indicated the business may not be legitimate. (Id. ¶ 171.) Moreover, when Pathfinder conducted a site survey of UDPS’s business premises-also Mr. Bagga’s residence-Pathfinder recorded that the premises was leased, and “the amount of inventory and merchandise on the shelves and floor appear to be 6 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 6 of 59Case 2:16-cv-0272 PSG-E Document 31-1 Filed 08/08/16 Page 10 of 68 Page ID #:192 AO 72A (Rev.8/82) consistent with the type of business.” (Id. ¶ 172.) The UDPS application further showed that Mr. Bagga had minimal income and had a subprime credit score. (Id. ¶ 173.) Yet even though Global Payment’s risk policy stated that creditworthiness was critical to the underwriting decision, Pathfinder and Global Payments approved the application. (Id. ¶ 174.) The CFPB next alleges that when Credit Power and UDPS began processing transactions, Global and Pathfinder continued to ignore indicators that the collectors were committing fraud. In January 2012, for instance, Pathfinder recognized that UDPS was processing payments for another merchant called RSB Equity Group, LLC (“RSB”). (Id. ¶ 177.) Even though Global Payments’ policy prohibits the practice of factoring, it allowed UDPS and Credit Power to continue processing payments for RSB. (Id.) Then, in November 2012, Pathfinder received an alert for UDPS and RSB from MasterCard’s “Member Alert to Control High-Risk Merchants,” or “MATCH,” system to identify and prevent fraud. (Id. ¶¶ 178-79.) Global Payments, Pathfinder, and Frontline were all required to consult the MATCH system under MasterCard and Global Payments’ rules. (Id. ¶ 179.) According to the MATCH alert, another processor had terminated affiliates of UDPS and 7 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 7 of 59Case 2:16-cv-0272 PSG-E Document 31-1 Filed 08/08/16 Page 11 of 68 Page ID #:193 AO 72A (Rev.8/82) RSB after investigating and finding factoring and an excessive chargeback volume. (Id. ¶ 180.) In March 2013, Global Payments notified Pathfinder that Visa had prohibited Credit Power from processing payments using its network. (Id. ¶ 182.) Then, on July 8, 2013, Global Payments notified Pathfinder that Discover was requiring it to close UDPS’s account due to “prohibited business practices.” (Id. ¶ 184.) Global Payments and Pathfinder continued to allow Credit Power and UDPS to process payments with MasterCard for almost another year. (Id. ¶ 185.) Communication with the Debt Collectors was also a problem that the CFPB alleges should have served as a warning signal. Pathfinder had difficulty contacting representatives of UDPS and Credit Power because mail was often returned and voicemail boxes were full. (Id. ¶¶ 186-87.) And when Pathfinder called UDPS customer service, the owner of RSB answered the phone. (Id. ¶ 188.) The CFPB alleges that these communication problems “should have caused the ISO to more closely monitor or terminate the Debt Collectors.” (Id. ¶ 189.) By August 2013, UDPS changed its address to that of a UPS store. (Id. ¶ 193.) 8 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 8 of 59Case 2:16-cv-0272 PSG-E Document 31-1 Filed 08/08/16 Page 12 of 68 Page ID #:194 AO 72A (Rev.8/82) Another issue was the high chargeback rate. Pathfinder considered any chargeback rate greater than zero to be a sign of suspicious activity. (Id. ¶ 190.) Still, Pathfinder took no action when it got data from Global Payments showing that Credit Power’s chargeback rate in July 2013 was 28.5%, and UDPS’s chargeback rate in August 2013 was 31%. (Id. ¶ 191.) The CFPB asserts that these high rates should have caused both Pathfinder and Global Payments to investigate the Debt Collectors’ business practices or terminate their accounts. (Id. ¶ 192.) III. Frontline’s Underwriting and Risk Monitoring The CFPB alleges that Frontline similarly ignored red flags in its underwriting process. In March 2013, Mr. Bagga applied for payment processing accounts on behalf of UDPS and Credit Power. (Id. ¶ 196.) Frontline does not include debt collectors on its list of prohibited merchants. (Id. ¶ 197.) Still, the CFPB contends the Debt Collectors’ merchant-processing applications were “replete with indicators of fraudulent activity.” (Id. ¶ 199.) For example, on its application UDPS identified an address it never occupied. (Id. ¶¶ 200-01.) It was also apparent that Mr. Bagga faxed the application from a FedEx Office location, and the address on the voided check UDPS provided 9 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 9 of 59Case 2:16-cv-0272 PSG-E Document 31-1 Filed 08/08/16 Page 13 of 68 Page ID #:195 AO 72A (Rev.8/82) along with its application belonged to another collection agency. (Id. ¶ 202.) UDPS stated in its application that it was in the debt-collection business. (Id. ¶ 204.) Frontline, however, identified UDPS with a merchant category code for “Family Clothing Stores” even though Frontline’s own underwriting manual emphasized the importance of using the correct merchant category codes “for activity tracking, reporting, and risk management purposes.” (Id. ¶¶ 203-04.) On its underwriting summary, Frontline noted that UDPS was a prohibited business under Global Payments’ credit guidelines. (Id. ¶ 205.) But both Frontline and Global approved the application. (Id. ¶¶ 206-07.) Weeks later, on March 23, 2013, Mr. Bagga submitted another application on behalf of Credit Power. (Id. ¶ 208.) The address for Credit Power was a UPS store, and the application was also faxed from the same FedEx Office as the UDPS application. (Id. ¶¶ 209-10.) The underwriting package included a Better Business Bureau (“BBB”) review of Credit Power showing that it was rated “F” and identified Credit Power’s principal as an ex- felon. (Id. ¶¶ 211-12.) According to Frontline’s underwriting policy, it is responsible for verifying information contained in the application, like the customer service 10 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 10 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 14 of 68 Page ID #:196 AO 72A (Rev.8/82) number, to ensure that the business is legitimate. (Id. ¶ 213.) Neither UDPS nor Credit Power included a customer service number in their applications at all. (Id. ¶ 215.) Frontline and Global Payments approved these applications, and the latter began processing payments for UDPS and Credit Power. (Id. ¶¶ 206-07, 216.) IV. Global Payments’ Monitoring of the UDPS and Credit Power Accounts Global Payments-as the actual payment processor-was responsible for handling all chargebacks under its agreement with its sponsor bank. (Id. ¶ 220.) In that regard, the CFPB alleges that Global Payments failed to investigate suspicious chargeback activity related to UDPS and Credit Power’s accounts. Because chargebacks occur, for example, when a charge was unauthorized, merchandise was not received, or the consumer was victimized by fraud, Global Payments’ agreement with its bank required it to “[p]erform standard investigations of chargeback transactions” and “provide documentation to the merchant as ‘case documentation’ supporting an adjustment.” (Id. ¶¶ 219, 221.) So, when a consumer disputed a charge that Global Payments processed, Global Payments received the chargeback 11 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 11 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 15 of 68 Page ID #:197 AO 72A (Rev.8/82) complaint from the issuing bank. (Id. ¶ 222.) Next, it created a “chargeback advice,” which contained card information, transaction information, and a narrative of the consumer’s dispute. (Id. ¶ 223.) Global Payments then mailed the chargeback advice to the merchant, and if the merchant disputed the chargeback, it could submit its own documentation to Global Payments. (Id. ¶ 222.) The CFPB declares that Global Payments processed numerous chargebacks related to the Debt Collectors that contained significant red flags. One consumer in Texas disputed a transaction from September 16, 2013, when the consumer said she received a call from LRS Litigations. (Id. ¶¶ 225-26.) The caller said the consumer owed money to LRS and even had her Social Security number. (Id. ¶ 227.) Although the consumer did not provide her debit card information or authorize a charge, Credit Power withdrew $500 from her account. (Id. ¶ 228.) Another consumer received a threatening call wherein the caller claimed that he had “a restraining order against [the consumer] to appear in court if [he] didn’t settle with them.” (Id. ¶¶ 229-30.) The caller further threatened that the consumer had 24 hours to pay $500 on a $1,600 debt owed to Bank of 12 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 12 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 16 of 68 Page ID #:198 AO 72A (Rev.8/82) America, or the caller would “contact [the consumer’s] employer to levy [his] wage, and they were also contacting the local police to serve papers against [the consumer].” (Id. ¶ 231.) The consumer gave over his bank card information because he was scared, but after he made the payment, his wife told him they had never done business with Bank of America. (Id. ¶¶ 232-33.) A consumer in Pennsylvania complained that he received a call on January 30, 2014, from a collection agency telling him he had to pay two payments of $250 to settle a $3,000 MasterCard debt or he would be “forced to go to court and pay further fees such as court costs, settlement fees, etc.” (Id. ¶ 235.) Because the consumer was scared of paying more fees and having to go to court (as he was already paying a collection agency for his credit card debt), he gave over his debit card number. (Id. ¶ 236.) After hanging up, he realized that his only credit card was a Visa. (Id. ¶ 238.) The caller also promised to send a receipt by e-mail, but it never arrived. (Id. ¶ 237.) A consumer in Oregon disputed a $600 payment to UDPS and complained that a caller claimed to have lost the consumer’s payment information because of a computer server outage. (Id. ¶¶ 239-40.) But the consumer had never given his payment information to the agency the caller 13 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 13 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 17 of 68 Page ID #:199 AO 72A (Rev.8/82) purported to represent. (Id. ¶ 241.) The caller also promised to send a settlement agreement before charging the consumer’s card, but he did not. (Id. ¶ 242.) According to the consumer’s complaint, “They lied about who they were, they lied about what they were doing, and they lied about providing documentation.” (Id. ¶ 243.) Even more consumers disputed charges by UDPS and Credit Power when they were unable to reach the merchant, payments were not applied to debt, the consumer did not receive a verification of debt, or the charge was not authorized. (Id. ¶ 244.) Many of these complaints mentioned LRS Litigations or IRS Equity, which the CFPB alleges should have at least alerted Defendants to factoring. (Id. ¶ 245.) Global Payments and the ISOs move for dismissal of both claims against them pursuant to Federal Rule of Civil Procedure 12(b)(6), asserting that the Complaint fails to state a claim upon which relief can be granted. Discussion I. Motion to Dismiss Legal Standard Federal Rule of Civil Procedure 8(a)(2) requires that a pleading contain a “short and plain statement of the claim showing that the pleader is entitled to 14 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 14 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 18 of 68 Page ID #:200 AO 72A (Rev.8/82) relief.” While this pleading standard does not require “detailed factual allegations,” mere labels and conclusions or “a formulaic recitation of the elements of a cause of action will not do.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In order to withstand 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.’ ” Id. (quoting Twombly, 550 U.S. at 570). A complaint is plausible on its face when the plaintiff pleads factual content necessary for the court to draw the reasonable inference that the defendant is liable for the conduct alleged. Id. “At the motion to dismiss stage, all well-pleaded facts are accepted as true, and the reasonable inferences therefrom are construed in the light most favorable to the plaintiff.” Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1273 n.1 (11th Cir. 1999). However, the same does not apply to legal conclusions set forth in the complaint. See Iqbal, 556 U.S. at 678. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. Furthermore, the court does not “accept as true a legal conclusion couched as a factual allegation.” Twombly, 550 U.S. at 555. II. Count VIII: Providing Substantial Assistance to the Debt Collectors 15 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 15 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 19 of 68 Page ID #:201 AO 72A (Rev.8/82) The CFPB alleges that Global Payments, Pathfinder, and Frontline substantially assisted unlawful debt-collection activity. The CFPB brings this claim under a provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Financial Protection Act (“Dodd-Frank Act”). Pub. L. No. 111-2 203. According to 12 U.S.C. § 5536(a)(3), it is unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of section 5531 of this title [prohibiting unfair, deceptive, or abusive acts or practices].” The Payment Processors move to dismiss on grounds that the CFPB does not adequately allege knowledge or recklessness, or that the Payment Processors provided substantial assistance to the Debt Collectors. A. The Scienter Requirement There is not yet any case law interpreting the substantial-assistance provision of the Dodd-Frank Act, and the parties dispute how the Court should interpret the scienter requirement under this statute. Defendants argue that the Court should look to a similar substantial-assistance provision in § 20(e) of the The CFPA, under which the CFPB brings this action, was enacted as part of2 Dodd-Frank. 16 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 16 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 20 of 68 Page ID #:202 AO 72A (Rev.8/82) Securities and Exchange Act of 1934 for the definition of recklessness, while the CFPB urges a more general definition of recklessness based on the 2010 amendment to § 20(e). Much like § 5536, § 20(e) establishes liability for “any person that knowingly or recklessly provides substantial assistance to another person in violation of [securities laws].” 15 U.S.C. § 78t(e). Defendants note that the Eleventh Circuit has found “severe recklessness” satisfies § 20(e)’s scienter requirement. According to the Eleventh Circuit: Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it. Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1010 (11th Cir. 1985) (quoting Broad v. Rockwell Int’l Corp., 642 F.2d 929, 961-62 (5th Cir. 1981)); see also SEC v. Big Apple Consulting USA, Inc., 783 F.3d 786, 800 (11th Cir. 2015) (confirming that “severe recklessness” meets the scienter requirement in an aiding and abetting case). The CFPB responds that before passage of the Dodd-Frank Act, § 20(e) 17 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 17 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 21 of 68 Page ID #:203 AO 72A (Rev.8/82) required a person to “knowingly provide substantial assistance,” and the Dodd-Frank Act amended the statute by adding the words “or recklessly” after “knowingly.” Pub. L. No. 111-203, § 929o. Thus, the CFPB notes that many of Defendants’ cases were interpreting § 20(e)’s pre-2010 requirement of knowing substantial assistance in holding that severe recklessness would suffice. (See CFPB’s Resp., Dkt. [114] at 22-23.) Now, according to the CFPB, Congress’s addition of the words “or recklessly” shows it meant to lower the scienter requirement for aiding and abetting liability. Furthermore, the CFPB argues that Congress should be presumed to know the Eleventh Circuit’s “prevailing ‘severely reckless’ standard inferred from the ‘knowing’ element in prior case law and consciously omitted the modifier ‘severely’ from the amended Exchange Act and the CFPA standards.” (Id.) Essentially, the parties differ on whether recklessness in this context should be afforded its general meaning in the context of civil law (as found in the Restatement (Third) of Torts, for example) or whether the severe recklessness formulation3 Under the Restatement, a person acts recklessly if:3 (a) the person knows of the risk of harm created by the conduct or knows facts that make the risk obvious to another in the person’s situation, and 18 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 18 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 22 of 68 Page ID #:204 AO 72A (Rev.8/82) should govern. Although at first glance it appears that Congress’s addition of the words “or recklessly” demonstrates it intended something less than severe recklessness, the Court finds the Payment Processors’ interpretation persuasive. Before the enactment of the Dodd-Frank Act in 2010, many courts applied the same scienter standard as the Eleventh Circuit under § 20(e). See Woods, 765 F.2d at 1010 n.9 (collecting cases). The Eleventh Circuit, it appears, called this standard “severe recklessness,” but the standard “is identical to that used by other courts to describe what conduct they considered reckless.” Id. 4 Evidently, the Eleventh Circuit uses the modifier “severe” to characterize the kind of reckless conduct that can satisfy the scienter requirement. Id.; see also (b) the precaution that would eliminate or reduce the risk involves burdens that are so slight relative to the magnitude of the risk as to render the person’s failure to adopt the precaution a demonstration of the person’s indifference to the risk. Restatement (Third) of Torts: Physical & Emotional Harm § 2 (Am. Law Inst. 2010). The Second Circuit, for example, defines “reckless conduct” as: “at the least,4 conduct which is ‘highly unreasonable’ and which represents ‘an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.” Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000) (quoting Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978)); see also Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977). 19 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 19 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 23 of 68 Page ID #:205 AO 72A (Rev.8/82) Bryant, 187 F.3d at 1282 n.18. In holding that severe recklessness can meet the requirement that a defendant “knowingly provide substantial assistance,” these courts indicated that actual knowledge is not required to establish liability under § 20(e). In SEC v. Big Apple Consulting USA, Inc., the Eleventh Circuit affirmed that actual knowledge is not required to constitute acting knowingly under the statute. 783 F.3d at 801. The conduct in that case took place before 2010, and so the Dodd-Frank amendment did not apply. But the court discussed the amendment because the defendants argued that the addition of the phrase “or recklessly” showed that actual knowledge was required before Dodd-Frank. Id. at 800. The Eleventh Circuit disagreed and characterized the amendment as a clarification of the law, not a substantive change. Id. at 801. Citing legislative history, the court explained: The amendment to § 20(e) was intended to correct the holding of “[a] growing number of courts” who concluded “that knowingly means actual knowledge, rather than recklessness.” H.R. Rep. No. 111-687(I), at 80 (2010). The amendment “clarif[ies] that recklessness is sufficient for bringing an aiding and abetting action.” Id.; see also H.R. Rep. No. 111-517, at 870 (2010) (Conf. Rep.) (stating that the amendment to § 20(e) “makes clear that the intent standard in SEC enforcement actions for aiding and abetting is recklessness”). 20 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 20 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 24 of 68 Page ID #:206 AO 72A (Rev.8/82) Id. As the Court explained above, the severe recklessness formulation the Eleventh Circuit uses is substantively the same as those in other circuits, which simply call it recklessness. When enacting legislation, “Congress is presumed to know the content of existing, relevant law.” Griffith v. United States, 206 F.3d 1389, 1394 (2000). Therefore, the Court presumes that Congress used the term “reckless” here intending to adopt the prevailing definition of recklessness defined in case law interpreting § 20(e). While the Eleventh Circuit added the modifier “severe,” other courts did not, and so the Court finds the omission of that modifier insignificant. As a result, to show that a defendant knowingly provided substantial assistance in committing securities violations, the SEC must show that the defendant acted with the level of recklessness defined by the Eleventh Circuit as “severe recklessness.” Furthermore, because the CFPA was enacted as part of the Dodd-Frank Act, the Court agrees that it should look to cases interpreting § 20(e) for guidance in interpreting § 5536. According to the canon of statutory construction in pari materia, statutes relating to the same subject matter should 21 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 21 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 25 of 68 Page ID #:207 AO 72A (Rev.8/82) “be construed ‘as if they were one law.’ ” Erlenbaugh v. United States, 409 U.S. 239, 243 (1972) (quoting United States v. Freeman, 3 How. 556, 564 (1845)). Under this canon, courts recognize that “a legislative body generally uses a particular word with a consistent meaning in a given context.” Id. “[T]he rule’s application certainly makes the most sense when the statutes were enacted by the same legislative body at the same time.” Id. Because of the similar structure of § 20(e) and § 5536, and because Dodd-Frank added the term “recklessly” to § 20(e) at the same time it enacted § 5536, the Court applies the same recklessness standard to the CFPB’s substantial-assistance claim in the consumer protection context. In sum, to survive dismissal the CFPB must allege acts satisfying the Eleventh Circuit’s formulation of severe recklessness against each Defendant: Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it. Woods, 765 F.2d at 1010. 1. Global Payments 22 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 22 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 26 of 68 Page ID #:208 AO 72A (Rev.8/82) The Court first addresses Global Payments’ characterization of the allegations against it before analyzing whether these allegations adequately provide a factual basis for recklessness. Global Payments emphasizes that it had limited involvement with the Debt Collectors. It notes that the ISOs were responsible for prescreening and underwriting merchants under the merchant services agreements. (See Global Payments’ Br., Dkt. [93-1] at 8-11.) Pathfinder was also obligated to provide an ongoing review of merchants to detect fraud. (Id. at 10; Pathfinder MSA, Dkt. [93-3] at 3.) Thus, Global Payments argues that it “relied on those ISOs to make certain that merchants that were brought to Global’s pipeline were legitimate, lawful, and complied with Global’s credit policy and those of the card networks.” (Global Payments’ Br., Dkt. [93-1] at 10-11.) Global Payments further cites the Visa and MasterCard chargeback policies in arguing that its “role in processing and investigating chargebacks is to transmit the chargeback through the payment chain from the issuing bank to the merchant and then transmit any dispute of the chargeback by the merchant back through the payment chain.” (Id. at 14.) Global Payments describes this role as “clerical and focused on confirming that the chargeback and any 23 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 23 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 27 of 68 Page ID #:209 AO 72A (Rev.8/82) response meet the formatting and other requirements of the card network.” (Id.) The cited provisions in the Visa and MasterCard chargeback policies5 provide little substantive information and do not refute the CFPB’s allegation that Global Payments had to conduct a “standard investigation” of chargebacks. (Compl., Dkt. [1] ¶ 221.) Visa’s policy includes a diagram illustrating its dispute-resolution process. See Chargeback Mgmt. Guidelines for Visa Merchants at 12, available at http://usa.visa.com/download/merchants/ chargeback-management-guidelines-for-visa-merchants.pdf (2014). This “The district court generally must convert a motion to dismiss into a motion5 for summary judgment if it considers materials outside the complaint.” D.L. Day v. Taylor, 400 F.3d 1272, 1275-76 (11th Cir. 2005); see also Fed. R. Civ. P. 12(d). But at the motion to dismiss phase, the Court may consider “a document attached to a motion to dismiss . . . if the attached document is (1) central to the plaintiff’s claim and (2) undisputed.” Id. (citing Horsley v. Feldt, 304 F.3d 1125, 1134 (11th Cir. 2002)). “ ‘Undisputed’ means that the authenticity of the document is not challenged.” Id. While these documents are available online, a plaintiff must concede a document’s authenticity if it contradicts the allegations in a complaint. See. e.g., Saunders v. Duke, 766 F.3d 1262, 1270 (11th Cir. 2014) (holding it is improper for defendants to simply “attach [documents] referenced in a . . . complaint to their motions to dismiss and ask courts to consider the contents of those [documents when] they contradict[] the allegations of [a] complaint”). Defendants also reference a number of other documents not attached to the Complaint and not conceded by Plaintiff as authentic. While the Court questions whether it is proper to cite these documents, the Court nevertheless finds these documents do not compel dismissal, as explained herein. 24 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 24 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 28 of 68 Page ID #:210 AO 72A (Rev.8/82) manual says nothing directly about Global Payments’ duties with respect to its sponsor bank. But in the Complaint, Plaintiff alleges Global undertook responsibility for chargebacks under its agreement with the sponsor bank (Compl., Dkt. [1] ¶ 220.) The diagram states that following a dispute, the merchant bank (or here, Global, under its agreement with the bank) “receives6 the chargeback and has the option of resolving the issue or forwarding it to the merchant.” Chargeback Mgmt. Guidelines for Visa Merchants at 12, available at http://usa.visa.com/download/merchants/chargeback-management- guidelines-for-visa-merchants.pdf (2014). The merchant then either accepts the chargeback or “addresses the chargeback issue and resubmits the item to the merchant bank.” Id. At that point, Global reviews the merchant’s information, and if it agrees that the merchant addresses the chargeback, the card issuer “may submit an arbitration case for a financial liability decision.” Id. On a motion to dismiss, where the Court must draw all reasonable factual inferences in the CFPB’s favor, the Court cannot conclude that Global Payments’ role in the chargebacks was merely clerical. Visa uses the term “Acquirer,” which refers to the merchant bank or6 merchant’s financial institution. Chargeback Cycle, available at http://usa.visa.com/ merchants/merchant-support/dispute-resolution/chargeback-cycle.jsp. 25 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 25 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 29 of 68 Page ID #:211 AO 72A (Rev.8/82) Next, Global Payments takes issue with the CFPB’s allegations that Credit Power and UDPS’s high chargeback rates in July and August 2013 were red flags. Global Payments asserts that those rates were artificially high due to a low transaction volume. (See Global Payments’ Br., Dkt. [93-1] at 15.) But the Court must take the allegations in the Complaint as true, and as such cannot consider that contention on a motion to dismiss. Global further asserts that the Visa and Discover notifications Global received, which are referenced in the Complaint, did not alert it to fraudulent conduct because Visa merely stated it did not process payments from debt collection agencies. The notice listed 26 merchants, including Credit Power and UDPS, who may have been debt collectors. (Id. at 17; Visa Letter, Dkt. [93-6] at 2.) But construing this letter in the CFPB’s favor, it does not necessarily contradict the Complaint, for it informed Global’s sponsor bank that it may be violating Visa’s regulations “as a result of improper Visa card acceptance practices of your merchants.” (Visa Letter, Dkt. [93-6] at 2.) Turning to the recklessness standard, the Court finds that the CFPB alleges facts which, taken as true, plausibly allege that Global Payments was “highly unreasonable” in ignoring obvious signs of debt-collection fraud 26 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 26 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 30 of 68 Page ID #:212 AO 72A (Rev.8/82) amounting to “an extreme departure from the standards of ordinary care,” thus presenting an obvious danger of debt-collection fraud to consumers of which Global must have been aware. See Woods, 765 F.2d at 1010. First, while Global Payments asserts that the ISOs were responsible for screening and underwriting merchants, Global’s own policies state that ISOs were not to solicit collection agencies because they were high risk and collection agencies required Global’s approval. (See Compl., Dkt. [1] ¶¶ 157, 164; Global’s ISO Credit Policy Manual, Dkt. [93-5] at 18.) The Court recognizes that “prohibited” merchants did not mean their activity was unlawful. But the policies indicate that Global considered collection agencies suspect. In fact, after listing “Collection Agencies” on its list of prohibited merchants, Global noted that “collection of charged off or bad debt is against card regulations.” (Id. at 19.) So, while the ISOs provided the initial screening and underwriting, the Court infers that Global Payments would have scrutinized those applications considering Global’s approval was required. And as explained in more detail infra with respect to the ISOs, the Debt Collectors’ applications to the ISOs lacked certain information or contained red flags, such as Mr. Bagga’s subprime credit score and his association with an ex-felon. 27 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 27 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 31 of 68 Page ID #:213 AO 72A (Rev.8/82) Perhaps most significantly, Global Payments also received a number of alarming chargeback narratives describing what appeared to be debt-collection fraud. The CFPB alleges that Global received these narratives as part of the chargeback process and was required to perform a standard investigation of the transactions, which included communicating with the merchant. As described in the Background section, supra, these consumer complaints showed that UDPS and Credit Power were engaging in factoring, misrepresenting who they were, and attempting to collect debt not owed to them. In addition, while Global insists that the ISOs were solely responsible for underwriting and monitoring the Debt Collectors, at this stage Plaintiff has met its burden. The CFPB has plausibly alleged that Global was receiving the suspicious information about the Debt Collectors, could have investigated the activity, and indeed had a duty to handle chargebacks under its agreement with its sponsor bank. Global cites Mizzaro v. Home Depot, Inc., 544 F.3d 1230 (11th Cir. 2008), for the proposition that “even allegations of highly unusual chargeback activity occurring rampantly throughout Home Depot stores were insufficient to meet the pleading standard for recklessness.” (Global Payments’ Br., Dkt. 28 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 28 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 32 of 68 Page ID #:214 AO 72A (Rev.8/82) [93-1] at 22.) In Mizzaro, the Eleventh Circuit dismissed a securities fraud class action investors filed against Home Depot and several of its officers and directors. 544 F.3d at 1235. The plaintiffs alleged primary securities violations against the individual defendants under § 10(b) of the Exchange Act, as well as derivative liability under § 20(a). Id. at 1235-36. The court did not, however, analyze substantial-assistance liability under § 20(e) of the Exchange Act. The Mizzaro plaintiffs alleged that Home Depot officers and directors knew about a scheme to process chargebacks for defective merchandise which, in short, artificially inflated Home Depot’s earnings and profit margins. See id. at 1240-41. Under the pleading standard relevant to securities fraud class actions, the court held that plaintiffs must “plead with particularity facts giving rise to a strong inference that the defendants either intended to defraud investors or were severely reckless when they made the allegedly materially false or incomplete statements.” Id. at 1238 (internal quotation marks omitted). The court went on to explain that a “strong inference” of scienter “must be cogent and compelling, thus strong in light of other explanations.” Id. at 1239 (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 29 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 29 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 33 of 68 Page ID #:215 AO 72A (Rev.8/82) (2007)). In that light, the court noted that the plaintiffs relied exclusively on the widespread nature of the alleged fraud to establish a strong inference that Home Depot officials acted with the requisite scienter. Id. at 1247. But the court found no allegations related to any of the individual defendants’ knowledge of fraudulent chargebacks. See id. at 1249-55. In fact, there were no “accounting red flags,” and Home Depot’s financial statements did not reveal suspicious activity, so senior officials could not have detected the fraud. Id. at 1252. Mizarro is distinguishable from this case because, first, the pleading standard for securities fraud class actions does not apply to this case. The Court need not find a strong inference of recklessness in light of other explanations. Moreover, the plaintiffs in Mizzaro relied exclusively on the widespread nature of the fraud without actually alleging how high-level officials could have learned about it. Here, the CFPB alleges that Global Payments knew about the high rate of chargebacks-the very activity that raised suspicions about the Debt Collectors. What is more, the chargeback reports contained specific information about the nature of the charges and the 30 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 30 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 34 of 68 Page ID #:216 AO 72A (Rev.8/82) fraudulent activity. Here the allegations in the Complaint plausibly show that Global, unlike Home Depot in Mizarro, knew, would have known, or acted recklessly to a high risk that its merchants were engaged in a debt-collection scheme. In addition to the above allegations, the CFPB alleges that Global Payments saw other warning signs of fraudulent debt-collection activity. For example, (1) Global Payments was required to consult the MATCH system, which alerted payment processors that another processor found the Debt Collectors were engaged in factoring and had an excessive chargeback volume; (2) Visa required closure of Credit Power’s account; and (3) Discover required closure of UDPS’s account due to prohibited business practices. Taking all the above allegations together, the Complaint plausibly alleges severe recklessness on Global’s part. 2. Pathfinder With respect to Count VIII, Pathfinder focuses mostly on “substantial assistance” (discussed infra Part II.B.), not whether Pathfinder was knowing or reckless. Still, Pathfinder contends that the CFPB merely alleges that it was knowing or reckless because merchant applications “were ‘replete with indicia 31 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 31 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 35 of 68 Page ID #:217 AO 72A (Rev.8/82) of fraud’ and because ‘industry and consumers’ provided ‘warnings’ of fraudulent activity.” (Pathfinder’s Br., Dkt. [89] at 13.) The Court finds that the Complaint plausibly alleges Pathfinder knowingly or recklessly acted with respect to the Debt Collectors. First, Pathfinder agreed under the merchant services agreement with Global to “market Global’s merchant processing services to merchants.” (Pathfinder’s MSA, Dkt. [93-3] at 2.) Pathfinder further agreed “to use its best efforts not to accept any merchant application which does not meet Global’s credit policy.” (Id.) It agreed to underwrite the merchants, collect and maintain all relevant information to the prescreening, and provide the information to Global upon request. (Id.) In addition to conducting a credit review, Pathfinder agreed to monitor the merchants’ processing activity to detect fraud and risk issues. (Id. at 3.) The agreement stated that Pathfinder was required to monitor the MATCH service, which it could access through Global. (Id.) Based on these allegations, the Court infers that Pathfinder knew of the risk of fraud that debt collectors posed generally. According to the allegations in the Complaint, Pathfinder approved Mr. Bagga’s applications for Credit Power and UDPS-which it knew were debt 32 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 32 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 36 of 68 Page ID #:218 AO 72A (Rev.8/82) collectors-even though the applications did not meet Global Payments’ credit requirements. For instance, Mr. Bagga had subprime credit, and one of the Debt Collectors’s chief executive officers had a drug trafficking conviction. Other signs that the Debt Collectors were not operating a legitimate business included Mr. Bagga listing the same address on the application for both his residence and UDPS, which Pathfinder acknowledges is a sign the business may not be legitimate. (Compl., Dkt. [1] ¶ 171.) In addition, Pathfinder even had trouble contacting UDPS and Credit Power; one time Pathfinder reached a representative of RSB when it tried to call UDPS customer service, again indicating that UDPS provided false information and might be a fraudulent business. Pathfinder also knew about the high rate of chargebacks, and it considered any chargeback activity suspicious. It was aware that other merchants were processing payments through the UDPS and Credit Power accounts in violation of Global’s policies. Like Global, Pathfinder received a MATCH alert concerning UDPS and Credit Power, and it knew that Visa and Discover terminated their accounts. Because Pathfinder was obligated to determine UDPS and Credit Power’s creditworthiness and to continue 33 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 33 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 37 of 68 Page ID #:219 AO 72A (Rev.8/82) monitoring for risk, the CFPB’s allegations plausibly show that Pathfinder was at least severely reckless in approving the applications and failing to heed signs of fraudulent activity. 3. Frontline Frontline contends that the facts alleged against it do not support a plausible inference that it engaged in an extreme departure from the ordinary standard of care. (Frontline’s Br., Dkt. [97-1] at 24.) Frontline points out that it is not alleged to have known about the chargebacks. In fact, Frontline says it was not responsible for continuing to monitor for risk like Pathfinder was. (Id. at 18-19; see also Frontline MSA, Dkt. [93-4] at 2-3.) The Court agrees that the most relevant allegations against Frontline pertain to the merchant applications. But, assuming the truth of the Complaint’s allegations, Mr. Bagga’s merchant applications not only lacked required information, but also contained indicators that he ran illegitimate collection agencies. While Frontline was responsible for verifying applicant information, the address UDPS provided was never occupied by UDPS, and Mr. Bagga failed to list customer service number on either application even though Frontline considered that information important in verifying a business 34 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 34 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 38 of 68 Page ID #:220 AO 72A (Rev.8/82) is legitimate. Frontline even had a BBB report for Credit Power giving it a rating of “F.” Frontline stresses that it did not have responsibility under the merchant services agreement to monitor for risk. Still, the Complaint alleges that Frontline and other ISOs were required to consult MATCH alerts, so the Court can infer that Frontline received the MATCH alert concerning factoring and excessive chargeback rates. (See Compl., Dkt. [1] ¶¶ 179-80.) The Court acknowledges that Frontline’s level of knowledge or recklessness is a closer question given it may have had less involvement in monitoring the merchants. But at the motion to dismiss stage, the allegations in the Complaint show Frontline knew Global Payments considered debt collectors high risk and were generally prohibited. Despite being responsible for screening and underwriting merchant applications for payment processing accounts, Frontline approved UDPS and Credit Power’s applications containing numerous warning signs they were not legitimate businesses. Taking these allegations as true, the CFPB plausibly alleges that Frontline was at least severely reckless in screening and underwriting the merchant applications. 35 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 35 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 39 of 68 Page ID #:221 AO 72A (Rev.8/82) B. Substantial Assistance The Payment Processors contend that even if they acted knowingly or recklessly, they still did not provide substantial assistance under the allegations in the Complaint. The CFPB alleges the Payment Processors provided substantial assistance “by enabling them to accept payment by credit and debit card, legitimizing the Debt Collectors’ business, making transactions easy for consumers and the Debt Collectors, enabling the Debt Collectors to accept payment from consumers with insufficient cash, and facilitating the Debt Collectors’ efficient collection of consumers’ funds.” (Compl., Dkt. [1] ¶ 328.) Global Payments argues that it merely provided payment processing services to the Debt Collectors and that there are no allegations plausibly showing that there is a substantial causal connection between Global’s conduct and harm to consumers. (Global Payments’ Br., Dkt. [93-1] at 25.) Pathfinder too asserts it cannot be held liable for substantial assistance because it provided services to the Debt Collectors in the routine course of business just like any other business would. (Pathfinder’s Br., Dkt. [89] at 13-16.) Frontline insists that it only had a limited screening function before forwarding potential merchant applications to Global, that it did not have the responsibility to 36 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 36 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 40 of 68 Page ID #:222 AO 72A (Rev.8/82) monitor for risk, and that in any event Global had already been processing transactions for UDPS and Credit Power for over a year before Frontline submitted their applications. (Frontline’s Br., Dkt. [97-1] at 21-22.) According to the Payment Processors, the Court should look to SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012), for guidance on the substantial- assistance question. The CFPB agrees that Apuzzo is relevant to this case. In Apuzzo, the Second Circuit addressed substantial-assistance liability under § 20(e) of the Exchange Act. Id. at 211. The court held that “the SEC is not required to plead or prove that an aider and abettor proximately caused the primary securities law violation.” Id. at 213. The court explained that § 20(e) was passed “precisely to allow the SEC to pursue aiders and abettors who . . . were not . . . themselves involved in the making of the false statements that proximately caused the plaintiffs’ injuries.” Id. In fact, “many if not most aiders and abettors would escape all liability if such a proximate cause requirement were imposed, since, almost by definition, the activities of an aider and abettor are rarely the direct cause of the injury brought about by the fraud, however much they may contribute to the success of the scheme.” Id. The Second Circuit adopted the standard used in criminal aider and 37 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 37 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 41 of 68 Page ID #:223 AO 72A (Rev.8/82) abettor actions for aider and abettor liability in securities fraud cases. Id. at 212. Thus, to plead substantial assistance against a defendant, the SEC must allege “that he in some sort associated himself with the venture, that the defendant participated in it as in something that he wished to bring about, and that he sought by his action to make it succeed.” Id. (quoting United States v. Peoni, 100 F.2d 401, 402 (2d Cir. 1938)) (internal quotation marks and alterations omitted). The Apuzzo court recognized that proximate cause is relevant to identifying substantial assistance, but it is not a distinct element of an aiding and abetting claim. Id. at 213 n.11. While acknowledging Apuzzo’s standard, Global Payments and Frontline argue that proximate cause or at least a substantial causal connection should be required to establish substantial assistance. (Global Payments’ Br., Dkt. [93-1] at 25-26; Frontline’s Br., Dkt. [97-1] at 21.) The Court finds, however, that proximate cause is relevant but not required and adopts Apuzzo’s standard. 7 While the Court emphasizes that Second Circuit case law does not bind this7 Court, it acknowledges that court’s special expertise in the area of securities. See, e.g., Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 276 (2010) (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 762 (1975) (Blackmun, J., dissenting)) (describing the Second Circuit Court of Appeals as the “ ‘Mother Court’ 38 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 38 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 42 of 68 Page ID #:224 AO 72A (Rev.8/82) Finally, the parties note the Second Circuit found that a party’s level of knowledge impacts the substantial-assistance analysis. Thus, if a defendant has “a high degree of actual knowledge, this lessens the burden [the SEC] must meet in alleging substantial assistance.” Apuzzo, 689 F.3d at 214. Conversely, a high degree of substantial assistance may lessen the burden of showing scienter. Id. at 215. 1. Global Payments Global emphasizes its limited and routine role as a payment processor: “Global simply provided a technology platform to process payments,” and the processing of payments was simply “ ‘the daily grist of the mill’ for payment processors like Global.” (Global Payments’ Br., Dkt. [93-1] at 27-28.) Considering Global’s conduct within the framework of the language in Apuzzo, the Court finds that the CFPB has adequately alleged that Global did in some sort associate itself with the venture, participate in it as something it wished to bring about, and seek to make it succeed by approving the Debt Collectors’ applications and processing payments. See Appuzzo, 689 F.3d at 206. While payment processing is in many ways routine, the processing of of securities law”). 39 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 39 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 43 of 68 Page ID #:225 AO 72A (Rev.8/82) consumer bank cards was far from an incidental part of the Debt Collectors’ scheme. The entire purpose of the abusive phone calls was to bully and harass consumers into turning over their bank card information, a scheme made possible only by the approval of a payment processing account that enabled the Debt Collectors to process card-not-present transactions. Global cites Woods v. Barnett Bank of Ft. Lauderdale, which stated that “knowing assistance can be inferred from atypical business actions.” 765 F.2d at 1012. According to Global, nothing about processing payments is atypical. But Woods further explained that a common practice for a bank, such as writing a reference for one of its customers, “can hardly be regarded as ‘the daily grist of the mill’ ” in the context of a securities fraud case when the letter “contain[s] statements of which the writer has no knowledge, [and is issued] without even minimal investigation to determine whether its contents are accurate, solely for the purpose of ‘currying favor’ with a good client.” Id. Woods therefore suggests that common business practices could nevertheless substantially assist unlawful conduct if there are “atypical” factors involved in the common practice. Here, the CFPB alleges the warning signs of fraud-like high rates of chargebacks containing alarming consumer narratives, along with 40 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 40 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 44 of 68 Page ID #:226 AO 72A (Rev.8/82) MATCH alerts and deficient applications-demonstrate that Global’s payment processing was not merely the typical grist of the mill.8 Global Payments expresses its concern that holding it liable would “impose on Global a strict liability standard for every transaction it processes” and consequently upend the entire payments industry. (Global Payments’ Br., Dkt. [93-1] at 8.) The Court notes that the elements of substantial assistance “cannot be considered in isolation from one another.” Apuzzo, 689 F.3d at 214 (quoting SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009)). So, innocuous business practices in one context could amount to substantial assistance to unfair, deceptive, and abusive practices in another, as long as the aider or abettor knows of or is reckless to the risk of the primary violation. Taking the extensive allegations of warning signs that the Debt Collectors were defrauding consumers along with Global Payments’ own credit policy requiring that it Another case Global Payments cites, Perfect 10, Inc. v. Visa Int’l Serv.8 Ass’n, 494 F.3d 788, 796 (9th Cir. 2007), found that “credit card companies cannot be said to materially contribute to [copyright] infringement . . . because they have no direct connection to that infringement.” That case is distinguishable from this one because the court went on to observe that in contrast to websites like Amazon.com and services like Napster or Grokster, “the services provided by the credit card companies do not help locate and are not used to distribute the infringing images.” Id. By contrast, Global Payments did help the Debt Collectors obtain money they were not owed by processing consumer’s bank card numbers. 41 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 41 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 45 of 68 Page ID #:227 AO 72A (Rev.8/82) approve collection agencies (and thus more closely scrutinize them), at this stage the Court finds that the CFPB alleges facts that plausibly support a finding that Global Payments knowingly or recklessly provided substantial assistance to the Debt Collectors. 2. Pathfinder Pathfinder similarly argues that it cannot be liable for substantial assistance based on such routine business practices. It analogizes its services to those any business needs to operate, like cleaning services, business checking accounts, mail services, and internet access. For many of the same reasons stated above, the Court rejects Pathfinder’s argument. Pathfinder’s alleged assistance was substantial in this context because UDPS and Credit Power had to apply to ISOs like Pathfinder to obtain an account with Global Payments. Once approved, Pathfinder was responsible for risk monitoring and received numerous warning signs of suspicious debt-collection practices, including high chargeback rates, Visa and Discover’s termination of the Debt Collectors, and the like. But Pathfinder did not take action to investigate that activity, thus allowing the Debt Collectors to continue their scheme. Even though Pathfinder itself did not process payments, it approved deficient 42 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 42 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 46 of 68 Page ID #:228 AO 72A (Rev.8/82) applications of high-risk merchants and subsequently failed to act in the face of obvious warning signs of a debt-collection scheme. For that reason, it is plausible that Pathfinder associated itself with the venture, participated in it as something it wished to bring about, and sought by its action to make it succeed. 3. Frontline For its part, Frontline says it “only received, prescreened, and forwarded potential merchant applications to Global for Global’s acceptance or rejection. Frontline clearly maintains no authority over the approval of a merchant for processing.” (Frontline’s Br., Dkt. [97-1] at 22.) Moreover, these activities cannot amount to substantial assistance because Global had been processing transactions for the Debt Collectors for more than a year by the time Frontline processed the applications. (Id.) And in any event, Frontline states that any substantial assistance it provided was to Global, not the Debt Collectors. (Id. at 25.) Based on the allegations in the Complaint, however, it is plausible that Frontline provided substantial assistance to the Debt Collectors. While Frontline may not have had final authority to approve merchants for payment processing accounts, Global contracted with Frontline to serve as an ISO, and 43 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 43 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 47 of 68 Page ID #:229 AO 72A (Rev.8/82) Frontline had the responsibility of underwriting merchants-certainly a crucial step for the Debt Collectors in ultimately securing payment processing accounts. Moreover, even if Frontline’s contract was with Global Payments, its approval of merchant applications benefitted merchants because it enabled them to process bank card transactions. In addition, as for Frontline’s argument that Global was already processing the Debt Collectors’ transactions when they applied to Frontline, the Complaint nonetheless alleges Frontline screened the applications and consequently had the opportunity to recognize and investigate signs the Debt Collectors were illegitimate. By approving the Debt Collectors’ applications and failing to investigate obvious red flags, Frontline did in some way associate itself with the scheme and help to make it succeed. Consequently, at this stage the CFPB plausibly alleges substantial assistance against Frontline. III. Count IX: Unfair Acts or Practices The CFPB alleges the Payment Processors’ independent violations of the CFPA for engaging in unfair acts or practices as the next basis for liability. Under the CFPA, it is unlawful for “any covered person or service provider . . . to engage in any unfair, deceptive, or abusive act or practice.” 12 U.S.C. § 44 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 44 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 48 of 68 Page ID #:230 AO 72A (Rev.8/82) 5536(a)(1)(B). Pathfinder and Frontline deny they are either covered persons or service providers under the statute. Global Payments denies it is a covered person but does not dispute that it is a service provider. All assert they did not engage in unfair acts or practices. The CFPB responds that the Payment Processors committed primary violations of the CFPA because they are covered persons or service providers, and they “committed unfair acts or practices by ignoring clear signs of illegal conduct while collecting consumers’ payments for the Debt Collectors.” (CFPB’s Resp., Dkt. [114] at 14.) A. Covered Persons Each Payment Processor argues it is not a covered person. A covered person includes: (A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person. 12 U.S.C. § 5481(6). The statute in turn defines a “consumer financial product or service” as a financial product or service that “is offered or provided for use by consumers primarily for personal, family, or household purposes.” Id. § 45 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 45 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 49 of 68 Page ID #:231 AO 72A (Rev.8/82) 5481(5). The statute defines a financial product or service by listing eleven categories of services, one of which is “providing payments or other financial data processing products or services to a consumer by any technological means, including . . . through any payments systems or network used for processing payments data.” Id. § 5481(15) (emphasis added). The Payment Processors contend they did not offer their services to consumers but to merchants (and/or to Global, in the case of the ISOs). Nor are they affiliates of covered persons. In the paragraphs of the Complaint where the CFPB alleges Global Payments is a covered person and a service provider, it does not allege Global provides financial services to consumers, only to the Debt Collectors. (Compl., Dkt. [1] ¶ 77.) The same is true for Pathfinder and Frontline. (Id. ¶¶ 81, 85.) But, even if the Payment Processors are not covered persons, they could still be subject to liability for unfair acts or practices if they are service providers. See 12 U.S.C. § 5536(a). As explained below, they are. B. Service Providers The CFPA defines a “service provider” as: any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service, including a person 46 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 46 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 50 of 68 Page ID #:232 AO 72A (Rev.8/82) that-- (i) participates in designing, operating, or maintaining the consumer financial product or service; or (ii) processes transactions relating to the consumer financial product or service (other than knowingly or incidentally transmitting or processing financial data in a manner that such data is undifferentiated from other types of data of the same form as the person transmits or processes). 12 U.S.C. § 5481(26)(A). Global Payments does not argue that it is not a service provider. Pathfinder contends that it meets express exceptions to the definition, (Pathfinder’s Br., Dkt. [89] at 23), while Frontline disputes that it provided material services to the Debt Collectors. (Frontline’s Br., Dkt. [97-1] at 28-29.) 1. Pathfinder One of the exceptions to the definition of “service provider” is as follows: The term “service provider” does not include a person solely by virtue of such person offering or providing to a covered person- (i) a support service of a type provided to businesses generally or a similar ministerial service . . . . 12 U.S.C. § 5481(26)(B). 47 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 47 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 51 of 68 Page ID #:233 AO 72A (Rev.8/82) Pathfinder states it is exempt because it unknowingly or incidentally transmitted financial data and provided a ministerial support service to merchants, the covered persons under the statute. First, the main definition of “service provider” includes a person that “processes transactions relating to the consumer financial product or service (other than knowingly or incidentally transmitting or processing financial data in a manner that such data is undifferentiated from other types of data of the same form as the person transmits or processes).” 12 U.S.C. § 5481(26)(A). Pathfinder bases one of its exception arguments on this caveat. But the CFPB alleges that Pathfinder provided services other than processing transactions, such as underwriting merchants, approving applications, and monitoring for risk. Therefore the statutory language does not exempt Pathfinder. Pathfinder’s second argument is that it fits into the exemption under 12 U.S.C. § 5481(26)(B) as “a support service of a type provided to businesses generally or a similar ministerial service.” Yet while ISOs (and payment processors) provide services to many types of businesses, an ISO’s services are not ministerial. The plain meaning of the term “ministerial” describes “an act that involves obedience to instructions or laws instead of discretion, judgment, 48 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 48 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 52 of 68 Page ID #:234 AO 72A (Rev.8/82) or skill.” Ministerial, Black’s Law Dictionary 1086 (9th ed. 2009). Pathfinder performed underwriting and screening services and was supposed to monitor for risk after Pathfinder and Global approved merchant accounts. Pathfinder’s duties involved discretion, judgment, and skill because it had to evaluate creditworthiness and make judgments about merchants’ risk levels. The Court finds that Pathfinder is not covered by the exemptions it identifies. Furthermore, the Court finds that the allegations adequately state Pathfinder is a service provider. Pathfinder processed the Debt Collectors’ applications and enabled them to obtain accounts with Global Payments. Without the ability to obtain payment processing accounts, the Debt Collectors could not have succeeded in their scheme. Thus, Pathfinder provided material services to the Debt Collectors. Because the Payment Processors do not challenge that the Debt Collectors are covered persons, Pathfinder provided material services to a covered person and is a service provider as defined in § 5481(26). 2. Frontline Frontline similarly disputes that it provided material services, and it asserts that it provided services for the benefit of Global, not the Debt 49 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 49 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 53 of 68 Page ID #:235 AO 72A (Rev.8/82) Collectors. Although Frontline may have contracted with Global to serve as an ISO, the Court finds that the CFPB plausibly alleges Frontline provided services to the Debt Collectors by processing their applications and assisting them in obtaining payment processing accounts. Again, these services were material because the Debt Collectors could not have processed consumer credit cards without a Global account. Even though Global had final approval, as an ISO Frontline provided a screening function the merchants had to pass before obtaining a payment processing account. The Court finds that the Complaint adequately alleges that Frontline provided material services to a covered person and consequently is a service provider. C. Unfair Acts or Practices Causing Substantial Consumer Injury To state a claim for an unfair act or practice, the CFPB must allege that, in connection with a transaction with a consumer for a consumer financial product or service, “[1] the act or practice causes or is likely to cause substantial injury to consumers [2] which is not reasonably avoidable by consumers; and [3] such substantial injury is not outweighed by countervailing benefits to consumers or to competition.” 12 U.S.C. § 5531(c)(1). The Payment Processors do not dispute whether any injury to consumers was 50 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 50 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 54 of 68 Page ID #:236 AO 72A (Rev.8/82) substantial, reasonably avoidable, or outweighed by countervailing benefits to consumers or to competition. 1. Global Payments According to Global, the Complaint plainly fails to show that Global caused substantial injury to consumers. (Global Payments’ Br., Dkt. [93-1] at 28-30.) Global cites the general rule that proximate cause is required to hold a defendant liable for injury. See, e.g., Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1390 (2014) (“[W]e generally presume that a statutory cause of action is limited to plaintiffs whose injuries are proximately caused by violations of the statute.”). Moreover, Global points out that a district court observed, citing Lexmark, that proximate cause is a necessary element of liability in a case brought under § 5531. CFPB v. ITT Educ. Servs., Inc., - F. Supp. 3d -, No. 1:14-cv-0292-SEB-TAB, 2015 WL 1013508, at *30 n.34 (S.D. Ind. Mar. 6, 2015). In Lexmark, the Supreme Court explained that the “[p]roximate-cause analysis is controlled by the nature of the statutory cause of action. The question it presents is whether the harm alleged has a sufficiently close connection to the conduct the statute prohibits.” 134 S. Ct. at 1390. 51 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 51 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 55 of 68 Page ID #:237 AO 72A (Rev.8/82) The CFPB does not dispute that proximate cause is required. It cites several cases in which the Federal Trade Commission (“FTC”) brought enforcement actions to prevent the use of “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(1). These cases, the CFPB asserts, should guide the Court’s interpretation of the unfair practices provision of the CFPA. In FTC v. Neovi, Inc., 604 F.3d 1150, 1153 (9th Cir. 2010), a company called Qchex marketed software programs that allowed users to create and send checks by post or email. In short, The Qchex system was highly vulnerable to con artists and fraudsters. Because the information necessary to set up an account was relatively public and easy to come by, it was a simple matter for unscrupulous opportunists to obtain identity information and draw checks from accounts that were not their own. Id. at 1154. In fact, over a six-year period, Qchex had to freeze over 13,750 accounts for fraud. Id. The accounts were responsible for nearly 155,000 checks using more than 37,350 bank accounts drawing over $402 million. Id. Qchex received thousands of complaints from consumers, banks, and even law enforcement agencies, yet it argued it “was attuned to the risk of fraud from the outset” and took multiple steps to monitor and reduce fraud. Id. 52 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 52 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 56 of 68 Page ID #:238 AO 72A (Rev.8/82) The Ninth Circuit found that Qchex caused consumer harm, even though Qchex itself did not set out to defraud consumers, because it “created and controlled a system that facilitated fraud,” and it “was on notice as to the high fraud rate.” Id. at 1155. The court noted “that businesses can cause direct consumer harm as contemplated by the FTC Act in a variety of ways.” Id. at 1156. Importantly, actual knowledge of the harm is not required, and “the absence of deceit is not dispositive.” Id. The court further explained: Courts have long held that consumers are injured for purposes of the Act not solely through the machinations of those with ill intentions, but also through the actions of those whose practices facilitate, or contribute to, ill intentioned schemes if the injury was a predictable consequence of those actions. Id. 9 What is more, “Qchex had reason to believe that a vast number of checks were being drawn on unauthorized accounts-checks that it legitimized in the eyes of consumers.” Id. at 1157. It even expected its software would be used for fraudulent purposes from the start and “continued to create and deliver checks without proper verification.” Id. The court clarified that Qchex was liable for “engag[ing] in behavior that9 was, itself, injurious to consumers.” Neovi, 604 F.3d at 1157. So, its liability was direct and did not need to be based on a theory of aiding and abetting. Id. 53 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 53 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 57 of 68 Page ID #:239 AO 72A (Rev.8/82) For the most part, the parties here focus their arguments on causation. The Payment Processors distinguish Neovi by arguing that the defendant’s service was intended to facilitate fraudulent transfers and received thousands of complaints about unauthorized checks, so the fraud in that case was vast and better known. (Pathfinder’s Reply, Dkt. [128] at 22; Global Payments’ Reply, Dkt. [130] at 14.) But even if the evidence in Neovi is more compelling, that case was on summary judgment and benefitted from discovery. Here Plaintiff need only state a plausible claim. And in any case, Neovi stands for the proposition that a defendant may be liable for actions that “facilitate, or contribute to, ill intentioned schemes if the injury was a predictable consequence of those actions.” 604 F.3d at 1156; see also FTC v. Windward Mktg., Inc., No. Civ. A. 1:96-CV-615F, 1997 WL 33642380, at *13 (N.D. Ga. Sept. 30, 1997) (finding that a defendant engaged in the unfair practice of issuing bank drafts on consumers’ accounts without authorization when it “was on notice of a high probability of fraud and/or unfairness and consciously avoided learning the truth”). In this case, the CFPB plausibly alleges that Global Payments was the proximate cause of consumer injury. The CFPB alleges that Global “ignored 54 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 54 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 58 of 68 Page ID #:240 AO 72A (Rev.8/82) warnings from industry and consumers that the Payment Processors’ clients were engaged in a scheme to defraud consumers.” (Compl., Dkt. [1] ¶ 333.) It alleges facts to support the inference that Global knew the risks debt collectors pose, had a duty to investigate suspicious activity, and in the face of numerous warning signs of a debt-collection scheme permitted the Debt Collectors to continue to process payments anyway. In this way it facilitated the Debt Collectors’ unlawful acts by giving them the tools they needed to use bank card information to draw on consumers’ accounts-predictable consequences of ignoring consumer complaints about unauthorized charges and signs the debt- collection merchants were not legitimate businesses. At this stage, the Court finds that these acts or practices, in the words of § 5531(c)(1)(A), caused or were likely to cause substantial injury to consumers. There is thus a sufficiently close connection between Global ignoring signs of abusive practices and the harm that resulted such that the claim survives a motion to dismiss. 2. Pathfinder Pathfinder denies that it could have committed a primary violation of the unfair practices provision because the CFPB does not allege Pathfinder 55 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 55 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 59 of 68 Page ID #:241 AO 72A (Rev.8/82) “entered into ‘a transaction with a consumer for a consumer financial product or service or the offering of a consumer financial product or service.’ ” (Pathfinder’s Br., Dkt. [89] at 16-17.) Instead, Pathfinder says it “does business with other businesses.” (Id. at 17.) But § 5531(c)(1) forbids a “service provider from committing or engaging in an unfair . . . act or practice under Federal law in connection with any transaction with a consumer for a financial product or service.” 12 U.S.C. § 5531(c)(1) (emphasis added). As a result, the service provider need not engage directly with the consumer. The standard is broader, and the CFPB has adequately alleged Pathfinder’s actions were acts performed in connection with debt collection, as Pathfinder helped the Debt Collectors obtain and keep payment-processing accounts with Global Payments. 3. Frontline Frontline contends that the CFPB fails to allege Frontline itself committed any unfair acts. (Frontline’s Br., Dkt. [97-1] at 29-31.) Like Pathfinder, Frontline insists it did not provide direct services to consumers, communicate with them, or otherwise interact with them. More to the point, it argues that it could not have proximately caused injury to consumers when 56 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 56 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 60 of 68 Page ID #:242 AO 72A (Rev.8/82) Global Payments had already been processing the Debt Collectors’ payments for more than a year when Frontline approved their applications. However, the Court has explained that Frontline provided services to merchants despite its contractual relationship with Global. The Court also finds it plausible that Frontline could have proximately caused consumer injury because Frontline is alleged to have been in a position to screen and thus identify illegitimate businesses and credit risks. Frontline knew debt collectors posed a risk but failed to adhere to its duties in evaluating UDPS and Credit Power’s applications. A plausible consequence of the failure to investigate warning signs that debt collectors are illegitimate businesses is that they use their payment processing accounts to process unauthorized transactions. For that reason, for the purposes of a motion to dismiss, the CFPB adequately alleges that Frontline engaged in acts that proximately caused consumer injury. IV. Pleading under Rule 9(b) Finally, the Court briefly addresses Defendants’ arguments that the Court should apply a heightened pleading standard under Federal Rule of Civil Procedure 9(b) because the CFPB alleges claims sounding in fraud. Rule 9(b) requires a party alleging fraud to “state with particularity the circumstances 57 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 57 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 61 of 68 Page ID #:243 AO 72A (Rev.8/82) constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). The Eleventh Circuit has explained: Rule 9(b) is satisfied if the complaint sets forth (1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud. Tello v. Dean Witter Reynolds, Inc., 494 F.3d 956, 972 (11th Cir. 2007). The Court does not decide whether a heightened pleading standard is appropriate under 12 U.S.C. § 5536. Instead, the Court finds that if a heightened pleading standard is appropriate, the Complaint complies with Rule 9(b). The CFPB levels extensive allegations against Defendants. It alleges the particular red flags contained in the Debt Collector’s applications, the sources of the duties the Payment Processors had under the merchant services agreements and Global Payments’ agreement with its sponsor bank. Moreover, the CFPB explained how the chargeback rates and narratives should have put the Payment Processors on notice the Debt Collectors were engaged in unlawful activity harming consumers. There are even examples of particular 58 Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 58 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 62 of 68 Page ID #:244 AO 72A (Rev.8/82) consumer complaints. Lastly, the allegations are not deficient based on the CFPB’s “lumping” of the Payment Processors together. Although the Complaint does lump them together for the purposes of Counts VIII and IX, the Complaint further contains particular allegations as to each Defendant, as extensively summarized in the Background section. For that reason, Defendants are on notice as to which allegations pertain to them and what conduct was allegedly unlawful. In sum, at this stage the Court finds that the CFPB has alleged allegations against each Payment Processor sufficient to survive a motion to dismiss. Conclusion For the foregoing reasons, Defendant Pathfinder Payment Solutions, Inc.’s Motion to Dismiss [89], Defendant Global Payments, Inc.’s Motion to Dismiss [93], and Defendant Frontline Processing Corp.’s Motion to Dismiss [97] are DENIED. SO ORDERED, this 1st day of September, 2015. 59 ________________________________ RICHARD W. STORY United States District Judge Case 1:15-cv-00859-RWS Document 149 Filed 09/01/15 Page 59 of 59Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 63 of 68 Page ID #:245 EXHIBIT 2 Case 2:16-cv-02725-PSG-E Document 31-1 Filed 08/08/16 Page 64 of 68 Page ID #:246 [low The Posi 0111cc Sells Your Address Update To Anyone Who Pay.. http:/www.1orbes.coni’sites’adamtanner2Ol3/O7/O8/how-ihe-post-o1L.. Forbes littp://onforb.es/i ivl VII Free Change of Address cablernover.com Fast, Secure, and Easy! Plus Special Internet, TV & Phone Offers Franchises under $10,000 fta tic hise - ha nchi sega to r,c 0111 Franchises for less than $ioK. 100’s of low cost franchises. New: Top BI Trends 2016 tableau.com Read the Top 10 Trends in HI. Download Free Whitepaper Now! Franchises Under $10,000 franchise lielpeom/Opport tinily Are you ready to be your own boss? 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It’s all there in the fine print when you sign up for a change of address: We do not disclose your personal information to anyone, except in accordance with the Privacy Act.” Then ii lists a number of exceptions including “to mailers, if already in possession of your name and old mailing address, as an address correction senice.” The Postal Senice set up us current National Change of Address program, sometimes abbreviated as NCOA, in tg86. Until 2002, the L’SPS licensed to just 22 companies. After complaints about pr1va violations, they reformatted the data to assure only those with the former address could obtain the new information, according to spokesman Roy Betts. That change allowed the postal service to distribute the address changes more widely. - 7 H 5, UI’:;.;- .1! SEE HOW FAR A SINGLE POST WILL TAKE YOU. Reach candidates across desktop, mobile and social. 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