SAN FRANCISCO (CN) - A prior settlement and $50,000 fine do not absolve debt collectors from claims that they used government seals and letterheads to trick consumers into paying illegal fees, a federal judge said Thursday.
Four California residents sued Victim Services Inc. and its affiliated companies in 2014 for allegedly using false threats of criminal prosecution to obtain fees of about $200 each as part of a state-sanctioned bad check diversion program.
On Thursday, a defense attorney urged U.S. District Judge Vince Chhabria to dismiss the case, or at least deny the plaintiffs' motion for class certification. He said the plaintiffs lack standing to sue because their claims were already resolved in a 2015 settlement with the Consumer Financial Protection Bureau (CFPB).
"The relief the plaintiffs seek in this action has already been achieved by this settlement," defense attorney Sean Hardy said.
Under the terms of a 2015 consent decree, the debt collectors pledged to stop using prosecutors' seals and letterheads, to clearly disclose their identities, and to stop threatening criminal prosecution in collection letters. They also paid a $50,000 fine.
Chhabria said the prior settlement and fine do not address allegedly illegal fees that plaintiffs say they were pressured to pay under false pretenses.
"Their theory is that you wrongfully took money from the class members," Chhabria siad. "You're saying 'We should be able to keep that money because we already paid a fine to the CFPB.'"
The judge said potential class members should be allowed to seek restitution for those fees, but he suggested a state court judge might be better suited to resolve the dispute, given that the fees were part of a state program.
"Let the state court decide whether the state's own program is being violated or not," Chhabria said.
The plaintiffs say the program requires that county district attorneys individually determine whether each check writer can be prosecuted or referred to the program. To avoid prosecution, the person must pay their debt and attend an intervention program at their own expense.
According to the lawsuit, the debt collectors get automatic referrals from county prosecutors and then demand fees for "financial accountability" classes, which no one is actually required to attend.
"They were worried if they didn't sign up for the program and pay fees, they would go to jail," said plaintiffs' attorney Beth Terrell in an interview after the court hearing.
Chhabria said Thursday he will deny the debt collectors' motions to dismiss and that he will likely certify a class of California consumers who received debt collection letters prior to March 30, 2015, when the CFPB settlement was reached.
The judge rejected the plaintiffs' argument that debt collection practices were not "materially different" after the collectors agreed to stop using DA letterheads and seals, among other reforms.
"Those are significant changes," Chhabria said. "It's not on DA letterhead, and it's not the same letter."
Because all three named plaintiffs received letters before 2015, Chhabria said they lack standing to seek an injunction.
"It seems to me there needs to be a plaintiff who was subject to the defendants' conduct based on the way they're doing it now," Chhabria said.
The plaintiffs asked for permission to add a new named plaintiff who received a debt collection letter after March 30, 2015. The judge said he would consider that request, but a new lawsuit might need to be filed to pursue those claims.
The judge scheduled a case management conference for Nov. 15 and asked the defense attorneys to figure out whether they intend to oppose the request to add a new named plaintiff.
The defendants include Victim Services Inc., National Corrective Group Inc., American Justice Solutions Inc. and Birch Grove Holdings Inc., collectively doing business as CorrectiveServices. Matt Jonsson, CEO of National Corrective Group, and Karl Thomas Jonsson, principal shareholder and officer of Victim Services, are also named as defendants.
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