Court: District Court, N.D. Illinois; March 25, 2011; Federal District Court
Plaintiffs Timothy and Christine Greene initiated a lawsuit alleging violations of the federal Credit Repair Organizations Act (CROA) and the Illinois Credit Service Organizations Act (ICSOA). They filed a motion for summary judgment, which the Court partially granted and partially denied. The procedural history is complex, with the second amended complaint naming 19 defendants, of which 15 were voluntarily dismissed, leaving CCDN, LLC, R.K. Lock & Associates, Robert K. Lock, Jr., and Philip M. Manger as the remaining defendants.
Despite the lack of evidence showing proper service to the defendants, they have actively participated in the litigation, thereby waiving any defense related to defective service. The Court clarified that the absence of a filed answer from the defendants does not impede consideration of the summary judgment motion, as per Federal Rule of Civil Procedure 56(b). The Court will evaluate facts based on Local Rule 56.1 statements, which require factual allegations to be supported by admissible evidence. The Court emphasizes that it will carefully review the material facts and disregard unsupported legal conclusions or assertions, treating inadequately supported denials as admissions.
Evasive denials in responses to material facts under Local Rule 56.1 are insufficient and do not meet the requirements set forth in Bordelon v. Chicago Sch. Reform Bd. of Trs. Any additional statements not included in the L.R. 56.1(b)(3)(B) statement will be disregarded, as established in Malec and Midwest Imports, Ltd. Denials must not introduce new facts beyond merely negating the opponent's statements, as affirmed in Ciomber v. Cooperative Plus, Inc. The Seventh Circuit supports strict compliance with L.R. 56.1, granting broad discretion to district courts (Koszola, Curran).
In this case, Plaintiffs submitted a statement of facts consisting of 24 paragraphs, while Defendants only addressed paragraphs 2, 3, and 13, leading to the admission of the other paragraphs if properly supported by evidence. Defendants also presented their own 17-paragraph statement, which Plaintiffs did not respond to, resulting in the admission of those facts not contradicted by Plaintiffs. The Court found several instances of unsupported assertions in both parties' statements, complicating the motion's evaluation. The parties are advised to review L.R. 56.1 and the Malec opinion before future motions.
Defendants Lock and Manger co-founded CCDN, which is managed by them and operates under Lock's sole proprietorship, RKLA. Plaintiffs, residing in Spring Valley, Illinois, have significant debt and sought CCDN's assistance after being attracted by an advertisement in early 2006. Christine contacted CCDN, where she spoke with Manger, who outlined the services offered, including credit negotiation and restoration.
Manger indicated that CCDN successfully removed fraudulent items from credit scores through a structured program, which aimed to improve credit ratings by addressing erroneous charges. He assured Christine and Timothy that CCDN would negotiate to eliminate their credit card debt and restore their credit to its original state or better, without the need for court appearances, although representation would be available if necessary. The plaintiffs believed that by enrolling in CCDN's program and paying approximately $6,000, they would eliminate significant credit card debt and enhance their credit score.
The CCDN Debt Reconciliation Program Enrollment Manual, attached as an exhibit, includes a letter from CCDN founders that emphasizes providing consumers overwhelmed by debt a second chance. The program consists of three phases:
1. **Credit Restoration** (12 months): Begins upon enrollment, with an expectation that most negative items will be removed within 4 to 6 months, involving the submission of paperwork to CCDN for processing by a separate Fulfillment Center.
2. **Reconciliation** (3 to 8 months): Focuses on establishing the ownership and validity of debts through communication with original creditors or debt collectors. CCDN intends to validate debts and potentially have them marked as 'paid as agreed' if validation fails.
3. **Federal Lawsuit**: Involves a compliance audit of customer accounts conducted by CCDN paralegals, followed by the drafting and filing of a federal complaint by CCDN attorneys.
The program's summary claims that following its procedures will lead to improved credit scores and debt resolution, ultimately guiding participants towards financial freedom.
Plaintiffs submitted portions of CCDN's website as exhibits, revealing that the website contains statements similar to those in the Manual. The 'CCDN Debt Reconciliation Program Application' requires clients to initial several agreements, including the use of CCDN to dispute unverifiable or misleading items on credit reports, forwarding correspondence from credit agencies, and granting CCDN authority to contact credit bureaus and creditors. However, CCDN did not perform any credit improvement services; instead, it forwarded clients' information and payments to third-party partners like Beacon Consulting Services and the Consumer Advocate Foundation. CCDN's primary role was to educate consumers on their rights under consumer protection laws and refer claims to attorneys in its network.
Upon enrollment, Plaintiffs paid CCDN an initial fee of $1,433.33, and were advised to stop payments to creditors. This led to harassment from creditors and eventual lawsuits against them, with no assistance from CCDN. Defendants admitted to providing minimal guidance and failing to represent Plaintiffs in court or improve their credit. Communication with CCDN's representative, Mr. Lock, did not address Plaintiffs’ concerns regarding the program's effectiveness. Plaintiffs never entered into a separate agreement with Lock or any other associated parties, nor did they make direct payments to them.
Summary judgment is warranted when there are no genuine material facts in dispute, and the moving party is entitled to judgment as a matter of law, as outlined in Federal Rule of Civil Procedure 56(c). The court must view facts and inferences favorably to the nonmoving party.
To avoid summary judgment, the opposing party must present specific facts demonstrating a genuine issue for trial, surpassing mere allegations. A genuine issue of material fact exists if reasonable evidence could lead a jury to favor the nonmoving party. The burden lies with the party seeking summary judgment to prove the absence of any genuine issue of material fact. Summary judgment is appropriate when a party fails to substantiate an essential element of their case, which they must prove at trial. The non-moving party's evidence must be substantial enough to allow a reasonable jury to decide in their favor; mere speculation or minimal evidence is insufficient.
The Credit Repair Organizations Act (CROA), enacted in 1996, responds to abusive practices by credit repair companies, aiming to protect consumers by ensuring they receive adequate information for informed decision-making and safeguarding them from misleading business practices. The CROA imposes specific requirements on credit repair organizations (CROs) and prohibits false or deceptive statements regarding their services. Similarly, the Illinois Credit Service Organizations Act (ICSOA) seeks to inform consumers and protect them from deceptive practices in credit services. The ICSOA is designed to assist consumers looking to improve their credit standing and is to be broadly construed to achieve its objectives. The CROA does not preempt state laws like the ICSOA unless there is a direct inconsistency.
Plaintiffs are seeking summary judgment on four key issues against Defendants. The first issue is whether Defendants qualify as 'credit repair organizations' under the Credit Repair Organizations Act (CROA) and as 'credit service organizations' under the Illinois Credit Services Organization Act (ICSOA). The CROA defines a credit repair organization as any entity that, for payment, offers services aimed at improving a consumer’s credit record or provides related advice. Relevant case law, particularly Plattner v. Edge Solutions, indicates that the definition is broad and focuses on entities whose primary objective is credit improvement. In that case, the court determined that the defendant did not qualify as a CRO because it did not represent that it would improve credit, only providing general debt advice. However, in the current case, the Court finds that CCDN qualifies as a 'credit repair organization' under the CROA, as it explicitly advertised services to help with credit negotiation and restoration, thereby meeting the statutory definition.
The second issue concerns whether Defendants violated the CROA and ICSOA by demanding advance payments before fully performing services. The third issue addresses potential violations by making false and deceptive statements regarding the services offered. Finally, Plaintiffs are requesting a refund of $1,433.33 and punitive damages of $100,000. The Court plans to evaluate each of these matters sequentially.
Phase I of the CCDN program, titled 'Credit Restoration,' claims that the majority of negative items will be removed from a customer's credit report within 4 to 6 months. CCDN's manual suggests that participants will see significant improvements in their credit scores and debt resolution. The court reviewed CCDN’s website, enrollment materials, and witness testimonies, concluding that consumers would be led to believe that CCDN was offering credit improvement services. Previous cases support this interpretation, indicating that companies making such representations qualify as credit repair organizations (CROs) under the Credit Repair Organizations Act (CROA).
Despite CCDN stating its intent to develop claims for its network of attorneys, it also claimed that participants would experience dramatic credit score improvements and debt resolution. The court noted that it is irrelevant whether CCDN actually performed credit repair services, as the statutory definition focuses on the representations made by the organization. CCDN's claims led to the conclusion that it was indeed acting as a CRO, as confirmed by admissions from Defendant Lock regarding the misleading impressions created by CCDN's communications.
Defendants Lock and Manger are also classified as CROs because they made multiple promises to consumers about credit improvement and were identified as founders of CCDN. Manger acknowledged that key representations could be interpreted as personal commitments from him and Lock. Additionally, the CROA stipulates that individuals providing assistance to consumers in obtaining services from a CRO are considered CROs themselves. The court determined that Lock and Manger both personally engaged with consumers, fulfilling the criteria of a CRO.
However, the court found insufficient evidence to classify RKLA as a CRO, as there were no communications from RKLA indicating it could improve consumers' credit. Consequently, the court denied the plaintiffs' motion regarding RKLA.
The Court addresses the Illinois Credit Services Organization Act (ICSOA) and its definition of a "credit service organization," which closely mirrors that in the Credit Repair Organizations Act (CROA). According to the ICSOA, a "credit service organization" is any person who, for compensation, provides services related to improving credit records or obtaining credit extensions. CCDN, Lock, and Manger are identified as "credit services organizations" due to their representation of CCDN's ability to improve Plaintiffs’ credit records or assist in obtaining services. Despite questions about Lock and Manger's technical qualification, they are considered "agents or representatives" of CCDN under the ICSOA.
The Court finds that CCDN violated both the CROA and ICSOA by demanding and receiving advance payments before performing any services, as prohibited by 15 U.S.C. § 1679b(b) and 815 ILCS § 605/5(1). However, since RKLA does not qualify as a "credit repair organization" or "credit services organization," it cannot be held liable under these statutes. Regarding Lock and Manger, as Plaintiffs did not contract with them personally and directed payments solely to CCDN, the Court concludes that summary judgment against Lock and Manger for violations of these provisions should not be granted.
The Court referenced the case Zimmerman v. Cambridge Credit Counseling Corp. to support its conclusion regarding the liability of individual defendants. In Zimmerman, the individual defendants sought summary judgment, arguing they could not be sued as they only interacted with the entity-defendant, which they claimed was solely responsible for any violations of the Credit Repair Organizations Act (CROA). The court dismissed this argument, emphasizing that the statute applies to "any person," not exclusively credit repair organizations. Additionally, the court held that the individual defendants could be held liable under a veil piercing theory, determining that the corporate entity was essentially an alter ego for the individual defendants' interests.
The current plaintiffs did not present a similar veil piercing argument under Illinois law regarding the liability of Lock and Manger for CCDN's acceptance of an improper down payment, leading to the granting of summary judgment in favor of CCDN only.
The Court also addressed whether the defendants made false or misleading statements that violated CROA and the Illinois Credit Services Organization Act (ICSOA). It concluded that Lock, Manger, and CCDN were liable under these statutes for making untrue or misleading representations about their services. Specific examples included claims made by CCDN regarding their Debt Reconciliation Program, where they asserted they would challenge unverified information and monitor customer reports for 12 months, which they subsequently admitted was false as no such monitoring occurred.
Defendant Lock acknowledged that statements in CCDN’s Manual and on its website could mislead consumers. CCDN claimed it would send proprietary letters to debtors for debt validation, but instead only provided form letters to Plaintiffs, failing to send any communication directly. The Manual also falsely stated that CCDN would ensure accounts were marked 'paid as agreed,' which did not occur. Defendants assured Plaintiffs they would improve their credit scores, claiming that most negative items would be removed, but they did not take any action to fulfill this promise, resulting in a decline in Plaintiffs' credit. This conduct constituted a fraudulent business practice in violation of the CROA and ICSOA. Manger also misled Plaintiffs by promising legal representation in court, which CCDN did not provide when Plaintiffs were sued for debts.
The discussion did not implicate RKLA or Lock in his attorney capacity, as no misleading statements were identified against them, warranting summary judgment in their favor. Regarding damages, since Defendants Lock, Manger, and CCDN violated the CROA and ICSOA, the Court found Plaintiffs entitled to $1,433.33, the amount they paid to Defendants. Plaintiffs also sought $100,000 in punitive damages, which the Court found potentially justifiable based on the nature and persistence of Defendants' noncompliance, but it deemed it premature to decide on the amount at this stage of litigation.
The Court evaluates the intentionality of noncompliance as a factual question, typically reserved for trial, referencing the Seventh Circuit's precedent that issues of knowledge or intent should not be determined during summary judgment. The Court grants in part and denies in part Plaintiffs’ motion for summary judgment, finding Defendants Lock, Manger, and CCDN liable for $1,433.33, while reserving the matter of punitive damages for trial. Defendant Credit Collections Reconciliation Network has been voluntarily dismissed from the case. The Court notes that although Defendants did not contest the service of the second amended complaint, certain procedural revisions under the Federal Rules of Civil Procedure allow for motions for summary judgment at the commencement of an action, although often premature. Additionally, the Plaintiffs dismissed several Defendants after filing their L.R. 56.1 statement, leading to discrepancies as some facts pertain to individuals no longer involved in the case. The Court disregards attempts to collectively attribute facts to all former Defendants, clarifying that Lock and RKLA, despite lacking formal duties with CCDN, have been actively engaged in its operations and management. Lock is identified as the "founder" and a "Managing Member" of CCDN, with documented interactions with Plaintiffs in his capacity related to CCDN. The Court will refer to Plaintiffs by their first names for convenience.
Plaintiffs claim they relied on statements from Defendants’ website when purchasing services in early 2006. However, evidence from Christine's deposition only confirms she received an email about CCDN, not that she visited the website. Timothy's deposition corroborates this, as he stated he never reviewed the CCDN website. The website's content is pertinent for determining if CCDN qualifies as a "Credit Repair Organization" under relevant statutes, as established in Helms v. Consumerinfo.com, Inc. Defendants acknowledge that CCDN referred clients, including Plaintiffs, to other entities for credit-related support and admitted to investigating one referred entity, the Consumer Advocate Foundation (CAF), which CCDN found to be fraudulent, causing customers to lose over $75,000.
CCDN required upfront fees for its services, with Plaintiffs’ purchase agreement from May 6, 2009, specifying a $2,800 down payment for a credit restoration package. Both Lock and Manger confirmed that fees are collected before services are rendered. Plaintiffs made three payments during enrollment, with the first two directed to "CCDN/John Charles," a marketer for CCDN, and the final payment to "Debt to Credit/John Charles," as directed in an email from Charles. Despite the last payment not naming CCDN, it is acknowledged that the total $1,433.33 down payment was intended for CCDN. Lastly, it is noted that Defendants did not instruct Christine to stop paying her debts, and she communicated with Manger regarding her concerns during the program.
CCDN utilized an instrumentality of interstate commerce for its business promotion, though it has not engaged in providing credit repair services to clients. Evidence suggests misleading language on CCDN’s website may lead consumers to believe it offers credit restoration services. The discussion of whether individuals Lock and Manger qualify as credit repair organizations (CROs) is not central to the current motion. Plaintiffs assert that a defendant must be defined as a CRO under the Credit Repair Organizations Act (CROA) to be governed by section 1679b, which is partially incorrect. While section 1679b(b) applies specifically to CROs, section 1679(a)(3) prohibits certain actions by any person, not just CROs. Case law indicates that a plaintiff might still establish a claim under section 1679b even if the defendant is not technically a CRO. Various court decisions affirm that the term "person" in section 1679b(a) encompasses a broader scope than "credit repair organization." In contrast, the Illinois Credit Services Organization Act (ICSOA) specifically applies to credit service organizations and their representatives, with exemptions for those obtaining a surety bond, which has not been demonstrated in this case. Additionally, no evidence supports that RKLA is a representative of CCDN, thus limiting liability under the ICSOA. It is noted that no legitimate credit repair company can entirely remove negative entries from consumers’ credit reports.
An unqualified statement claiming that consumers could significantly enhance their credit scores and eliminate all negative accounts with the defendants' help was ruled fraudulent by the court in F.T.C. v. RCA Credit Services, LLC. Defendants criticized Plaintiffs for appearing uninformed during depositions regarding their own complaint and the legal claims against Defendants. However, the Supreme Court, in Surowitz v. Hilton Hotels Corp., established that a plaintiff does not need to have an in-depth understanding of their lawsuit to pursue a claim. A named plaintiff's lack of knowledge about the complaint or the defendants does not prevent class certification. Additionally, the ICSOA Section 605/11 allows for the awarding of both actual and punitive damages.
