Defendant in Enforcement Action Punches Back – Files for Sanctions Against CFPB

Pathfinder Payment Solutions, Inc. (Pathfinder), one of the defendants in a Consumer Financial Protection Bureau (CFPB) initiated action previously described by insideARM as “chilling enforcement litigation,” has pushed back and filed a motion for Rule 11 Sanctions against the Bureau.

Editor’s Note:  Federal Rule of Civil Procedure 11 provides that a district court may sanction attorneys or parties who submit pleadings for an improper purpose or that contain frivolous arguments or arguments that have no evidentiary support. 

insideARM wrote about this case on April 8, 2015. Our earlier article can be found here.

The complaint, filed March 26, 2015, charges a host of shady “debt collection” companies with outright fraud for their efforts in attempting to get consumer to pay debts that never existed. Named in the suit are Buffalo-area companies with names including Universal Debt & Payment Solutions, LLC; Universal Debt Solutions, LLC; WNY Account Solutions, LLC; WNY Solutions Group, LLC; Check & Credit Recovery, LLC; Credit Power, LLC, collectively referred to as “The Debt Collectors” in the suit.

But the action also named a number of payment processors (including Pathfinder) and a voice broadcasting service as defendants for “enabling” the debt collectors in their scheme. Those defendants were charged with “providing substantial assistance to the Debt Collectors’ unfair or deceptive conduct.”

Per our earlier article: “The Payment Processors facilitated the Debt Collectors’ large-scale fraud by enabling the Debt Collectors to accept payment by consumers’ bank cards when the Payment Processors knew, or should have known, that the Debt Collectors were engaged in unlawful conduct,” the CFPB said. “By enabling the Debt Collectors and other persons who collect debt to accept credit and debit card payments, the Payment Processors enabled them to efficiently accept payments and convince consumers that they were credible merchants.”

On January 4, 2017 Pathfinder filed a Brief in Support of Motion for Rule 11 Sanctions Against Plaintiff. The opening salvo in the brief was:

“More than eighteen months ago, and two months after this case had been filed, Pathfinder Payment Solutions, Inc. (“Pathfinder”) informed the CFPB that the CFPB had knowingly exceeded its statutory authority, deliberately disregarded the law, consciously distorted the facts against Pathfinder in the Complaint, and should be sanctioned for this conduct. The CFPB’s case against Pathfinder has always been a farce. Discovery simply reinforced this.”

Pathfinder argues that the CFPB named the payment processors in the initial action because of a large number of chargebacks from the debt collector defendants.

However, Pathfinder argues:

“In the payment processing services industry, chargebacks are a fact of life. In the same way that a fruit farmer must deal with some worm-ridden apples, so too must a payment processor expect a reasonable amount of reversed transactions. The farmer wouldn’t abandon the production of apples based on these expected, regular losses of product. In fact, the farmer may not be concerned with such losses at all if the number of bad apples didn’t increase from prior years and the apple yield was otherwise in line with projected expectations. The CFPB’s cherry-picking view—that a high percentage rate of chargebacks in a single month for transactions by UDPS and by Credit Power (collectively, “Debt Collectors”) should have caused Pathfinder to terminate their accounts—is the sort of second-guessing regulatory tunnel vision that would bring the entire credit card processing industry to a screeching halt. The CFPB would have the farmer fell the entire orchard, return the money from selling good apples, accuse him of misconduct if he did not, and end his business to the chagrin of apple consumers.”

Per the Pathfinder brief:

The CFPB has alleged only three circumstances that it believes make Pathfinder liable for violations of the CFP Act.

1. Pathfinder should have noticed the excessively “high” chargeback rates for UDPS and Credit Power (two of the debt collectors) for isolated months.
2. Pathfinder ignored other ongoing warning signs of fraudulent activity.
3. Pathfinder should not have submitted application packages for UDPS and Credit Power for approval. 

Pathfinder further argues:

“The CFPB has submitted that Pathfinder should have been aware of the “excessive chargeback volume” of Credit Power and UDPS. The CFPB further claims that the “high rates” of chargebacks for single months for UDPS and Credit Power should have caused Pathfinder to investigate and to terminate their accounts. But the questions remain: who is entitled to define what volume of chargebacks is “high” or “excessive”? Against whose measure should Pathfinder’s conduct be marked? There are only two conceivable answers, only one of which is workable: (1) Pathfinder’s chargeback monitoring should be governed by the acceptable practices of the industry as a whole, or (2) Pathfinder is at the mercy of the CFPB to conjure an ex post standard out of thin air and at its own discretion.

Discovery in this case established that UDPS and Credit Power chargebacks were not excessive in any single month—let alone the specific months cited by the CFPB. Moreover, Pathfinder’s conduct was commensurate with every applicable industry or internal standard. By cherry-picking individual months—ones with low sale transactions counts and a few chargebacks, the CFPB mischaracterized the overall view of the risk presented by UDPS and Credit Power and keeps presenting that skewed theory to the Court. The CFPB and its Counsel should be sanctioned.

The Government, by and through its agencies and counsel, is not above Rule 11. Not only may the CFPB and its attorneys be sanctioned, but when the law entrusts officials with prosecutorial power, those same officials are held to a high standard.  Enormous power should not be wielded with reckless abandon. But at best, the CFPB’s arguments against Pathfinder are unscrupulous; at worst, they are dishonest and cynical. The CFPB and its attorneys are sophisticated litigants. Rule 11 is designed to protect defendants from these and other abuses of power.”

insideARM Perspective 

The brief filed by Pathfinder is very readable, even for non-lawyers. insideARM suggests interested parties take the time to read through the document.

Buried in a footnote in the memorandum is this claim from Pathfinder:

“Pathfinder is not a payment processor—a basic fact the CFPB has refused to acknowledge. Pathfinder is an independent sales organization (“ISO”) and marketer of payment processing services. Exhibit 2, Merchant Services Agreement between Pathfinder and Global Payments (“Pathfinder-MSA”). The Rule 11 Motion refers to Pathfinder as a payment processor based on the allegations made by the CFPB in the Complaint.” 

What is also interesting about the motion is the timing of the request.  There has not yet been any dispositive finding from the court on the CFPB allegations.

insideARM also contacted the attorneys representing Pathfinder. John Da Grosa Smith from the Smith LLC law firm had this comment:

“The CFPB has persisted in prosecuting a case based on factual misstatements and wrongheaded legal arguments. In a Bureau plagued with criticism, this action, from the outset, has been a case study of governmental overreach and a lack of sound judgment. The CFPB and its attorneys—as all civil litigants and their counsel—are accountable for their conduct.”

insideARM will continue to monitor this case.