Feb. 27, 2015 – A state appeals court has ruled that a debt settlement company must pay back the $4.2 million in fees that it charged individuals to settle their debts.
Morgan Drexen Inc. advised clients to stop paying creditors and put funds into accounts controlled by Morgan Drexen. Once a client’s account accumulated sufficient funds, Morgan Drexen would negotiate settlements with creditors and pay itself a fee.
During a five-year period, Morgan Drexen allegedly received more than $8 million from Wisconsin debtors, of which $4.2 million went towards paying itself service fees.
The Wisconsin Department of Financial Institutions (DPI) filed a complaint against Morgan Drexen, alleging a violation of laws regulating “adjustment service companies.” Specifically, DFI said Morgan Drexen was operating in this capacity without a license.
Under Wis. Stat. section 281.02(1)(a), enacted in 1935, adjustment service companies are individual principals or entities “in the business of prorating the income of a debtor to the debtor’s creditor or creditors, or of assuming the obligations of any debtor by purchasing the accounts the debtor may have with the debtor’s several creditors, in return for which the principal receives a service charge or other consideration.”
Morgan Drexen argued that it was not an adjustment service company subject to regulation. A hearing examiner disagreed and ordered Morgan Drexen to return the $4.2 million as restitution and pay a $1.89 million forfeiture for violating the law.
In Morgan Drexen Inc. v. Wisconsin Department of Financial Institutions, 2014AP1268 (Feb. 25, 2015), a three-judge panel for the District II Court of Appeals ruled that the hearing examiner did not err in determining Morgan Drexen was subject to regulation.
The panel rejected Morgen Drexen’s argument that it wasn’t an adjustment service company, as defined in the statute, because it didn’t “prorate” debtors’ income to creditors through an apportionment formula, and that’s a requirement.
“Contrary to Morgan Drexen’s assertion, our decision in JK Harris does not define ‘prorating’ to require the settlement of all debts at once or ‘apportioning payments among all creditors using a formula,’” Judge Paul Reilly for the panel.
“Instead, we affirmed the determination that prorating occurs when one ‘negotiates a reduction or extended payment on behalf of the debtor for the debtor’s outstanding debt with that creditor,” wrote Reilly, noting the evidence shows Morgan Drexen does that.
Finally, the panel rejected Morgan Drexen’s argument that the value of its services to customers should offset the restitution it must pay. The panel noted that all fees were charged illegally, and the hearing examiner had discretion to make the award.
“[A] cease and desist order that includes remittance of all fees collected from Wisconsin consumers by an unlicensed adjustment service company is consistent with agency practice,” Judge Reilly explained.