NY’s AG sued Nationwide (and related entities) for fraud, false advertising, deceptive business practices, and unlawfully doing business in NY. Nationwide is in the business of “debt settlement”: it negotiates with creditors on behalf of debt-burdened consumers to try to wipe out a portion of their total unsecured debt. Nationwide markets its program through “cold calls” to distressed consumers. American Debt Arbitration, Nationwide’s partner, gets fees for enrolling consumers in Nationwide’s program, and Nationwide gets fees for negotiating with creditors.
In essence, Nationwide tells consumers they can eliminate their unsecured debt, typically over 2-3 years, while saving a large portion, typically 25-40%, of the original amount due at the time they enroll in Nationwide’s program. This savings promise supposedly takes into account the substantial fees Nationwide charges. Consumers get this result, Nationwide claims, by (1) stopping all payments to creditors, (2) making smaller monthly payments directly to Nationwide, (3) not negotiating personally with creditors, attorneys or collection agencies, and (4) instead authorizing Nationwide to negotiate settlements with creditors, but not immediately—only after delay, usually many months. Nationwide tells consumers that steps (1), (3), and (4) are helpful because creditors are more willing to write down debts that are more seriously delinquent. Nationwide does warn consumers that enrolling in its program is no guarantee against continued dunning, the institution of debt collection procedures, or the initiation of legal action. Nationwide also tells consumers to disclose all unsecured debt and put it into Nationwide’s program while not undertaking any new debt. As to step (2), Nationwide determines each consumer’s monthly cash flow and sets a monthly payment intended to enable the consumer to pay the amount “targeted” for negotiation, as well as Nationwide’s fees, over the anticipated duration of the program. The typical minimum is $300 a month, but could be much higher.
Nationwide charges various fees, including a setup fee of $399, an enrollment fee of three monthly payments (minimum $900), a monthly administrative fee (in conjunction with monthly bank fees), and an ultimate settlement fee. The first 3-5 monthly payments go to the initial fees, and only then is any portion of the monthly payment put into a special bank account set up to fund debt settlements. While the months pass waiting for money to accumulate in that bank account, the consumer usually becomes seriously delinquent. And once the bank account is set up, the consumer pays an additional monthly administrative fee of $49, plus additional monthly fees of a minimum of $7 a month, to the chosen bank (Rocky Mountain Bank and Trust). The final settlement fee, earned at the time Nationwide settles each designated account, is 29% of the difference between the original amount due on the account at the time the consumer signed up with Nationwide and the amount ultimately negotiated by Nationwide. If the bank account doesn’t contain enough to pay the settlement and the fees, the consumer has to pay the shortfall along with his or her next scheduled monthly payment.
The basic deceptive practices at issue: (1) According to information provided by Nationwide in response to subpoenas, the AG alleged, it rarely achieves the promised savings of 25% or more on behalf of New York consumers. Of 1981 consumers signed up from 2005 through May 5, 2008, only 64 (under 3%) successfully completed the program by September 25, 2008, while 537 had canceled, and of the 64, only 6 (.3%) realized savings of 25% or more after taking Nationwide’s fees into account.
(2) Nationwide allegedly systematically misrepresents the savings realized through its settlements. It provides a “Program Completion Summary” for each supposedly successful participant, listing the total amount paid by the consumer and concluding with a percentage of total savings, but the AG alleged that the Summary is deceptive because it doesn’t account for the enrollment and setup fees in total amount paid, nor does it account for those fees or the monthly administrative/bank fees in calculating total percentage saved. Moreover, if Nationwide settles a debt for more than the consumer originally owed when she signed up, Nationwide lists the amount saved as zero, rather than acknowledging the fact or amount of an overage.
(3) Nationwide allegedly fails to honor its guarantee that the total paid won’t exceed the original amount owed, even taking all fees into account. 27 of the 64 consumers Nationwide called “successes” actually paid more than the original amount owed when the program fees were taken into account.
(4) Nationwide allegedly fails to disclose all its fees up front, particularly the setup fee of $399 and the monthly bank fees.
The AG submitted a lot of evidence, including affidavits from ten of the 64 “successful” consumers, documenting their “very unhappy” experience with Nationwide, along with the contents of ADA’s telemarketing script.
Nationwide countered by denying the charges and claiming that the identified consumers, though originally identified as successes by Nationwide, failed to comply with Nationwide’s programs, so weren’t misled or damaged. Nationwide did its own analysis of results, looking at 116 consumers who were fully compliant (enrolling all debt with Nationwide and allowing Nationwide to negotiate settlements of all that debt); 596 consumers who completed the program with less compliance; 886 consumers who dropped out “before depositing enough in their accounts for respondents to negotiate any debt settlements on their behalf”; and 650 active customers. For the 116 successes, Nationwide’s expert calculated that they settled their debts at about 50 cents on the dollar, and saved 26.2% in the aggregate even taking all fees into account. For the 596 in partial compliance (which generally meant that they withdrew debt from the program, failed to make one or more monthly deposits, withdrew funds from their accounts, or opened new credit accounts), Nationwide had negotiated settlements of about 54 cents on the dollar for the debt remaining in the program (which represented under 40% of those consumers’ aggregate debt). As for the claim that Nationwide failed to honor its guarantee, Nationwide contended that the guarantee explicitly required compliance with its program, which almost no one achieved because they failed to disclose all their unsecured debt, skipped multiple deposits into their special purpose accounts, negotiated with creditors or settled debts independently of the program, or withdrew accounts from the program before completion.
The court agreed with the AG that Nationwide had engaged in false advertising and deceptive business practices. Initially, it credited the facts and figures provided in response to the AG’s subpoenas, not the revised data, whose late and “striking[ly] contradict[ory]” presentation was “troubling” at a minimum and definitely less reliable and credible than the AG’s evidence. Among other things, Nationwide calculated probable savings for accounts consumers withdrew from the program or didn’t reveal to Nationwide in the first place, and the court found it “rather speculative” to extrapolate possible savings and percentages for accounts not actually settled—indeed, it seemed as if much of the revised data had been “created out of whole cloth.”
The court had little difficulty concluding that Nationwide had persistently misrepresented typical savings of 25%-40%. The problem wasn’t simply with the use of the word “typical,” though the court agreed that it was seriously troubling to define a “typical” consumer in a way that excludes at least 95% of Nationwide’s consumers. Instead, by joining “typically” with a predicted range of savings, rather than simply using a percentage amount, Nationwide misleadingly suggested that enrollees would achieve savings in that range and that the risk of deviation from that range was small. But both parties’ statistics demonstrated that the risk of deviation was “exceedingly large.” What Nationwide calls “typical” or “average,” the evidence demonstrated “beyond any doubt” was “all too atypical.” By Nationwide’s own definition of success, under 3% of consumers achieved success, and only .3% realized savings of 25% or more.
Using Nationwide’s recharacterized numbers, that rises only to 5%--and the court was highly suspicious of the fact that none of the original 64 labeled as successes were included in the 116 successes in Nationwide’s recalculation; the kind of wizardry required to produce the new numbers prevented the court from having any confidence at all in the newly submitted information. Even were the court to take those figures at face value, they still wouldn’t match any common or reasonable understanding of “typical.”
Nationwide simply didn’t say to consumers what it said to the court: “There is no merit to respondents’ suggestion that reasonable consumers would understand respondents’ references to the ‘typical’ consumer as pertaining only to that comparatively rare consumer who, in resistance to all of the extreme financial and legal pressures inherent in the situation, might complete the program after complying strictly with the program’s core requirements. If respondents have been truly intent on conveying that limited understanding, they easily could have said so in their advertising and telemarketing script in approximately those words. (Comment: should have taken a page from the more careful weight loss ads! “It won’t be easy, but if you’re committed, you can do it.”)
Likewise, the “Program Completion Summary” was deceptive in representing savings because it omitted significant fees, and because it failed to take any overages into account. The court noted that showing “amount saved” as zero on debts for which the consumer paid more than originally owed was not inherently deceptive, given that a net cost is not a savings and that “only an economist would attribute meaning to the concept of a ‘negative savings.’” But the Summary became deceptive because it didn’t take the overages into account in calculating the aggregate amount saved.
Further, Nationwide engaged in deceptive business practices and false advertising by failing to honor its guarantee that total paid—including fees—wouldn’t exceed the total amount of confirmed debt a consumer had on entering the program. The AG showed that 27 out of the 64 who Nationwide initially identified as having successfully completed the program paid total amounts that exceeded—sometimes far exceeded—the original amount owed.
The guarantee was, however, expressly limited by requirements that the consumer disclose all creditors and adhere to other requirements, and by a provision that the guarantee was void if she skipped more than one payment within any 12-month period. Of the 27 consumers identified by the AG, 22 failed to adhere to these requirements. Nationwide attempted to show that the remaining 5 weren’t guarantee-eligible because they did things like negotiating with creditors on their own, continuing to use enrolled accounts, or opening new accounts.
The court was unimpressed: “respondents seek to demonstrate that their guarantee is so riddled with conditions, limitations, and exceptions as to be no real guarantee at all.” This wasn’t a great defense to a false advertising case. Instead, the court interpreted the guarantee to require only its two proximately expressed conditions—identify all unsecured debt and don’t skip multiple payments. Thus, withdrawing enrolled accounts, settling with creditors, etc. didn’t nullify the guarantee. Moreover, only in retrospect were the consumers told that withdrawing funds from their special bank account would nullify the guarantee. Thus, there were five demonstrated instances of violation of the guarantee. Given Nationwide’s pattern of misleading consumers and exaggerating savings, the court was convinced that these were deceptive acts aimed at consumers generally.
However, the court rejected the claim that Nationwide violated the law by failing to disclose all its fees. The AG focused only on one section of Nationwide’s website, the FAQ answer “What is the cost of your program?,” which didn’t specifically list the $399 setup fee and monthly bank fees. But the telemarketing script and other written materials do clearly disclose those fees.
The court found that the record was lacking in clear and convincing evidence of specific intent to defraud; thus, the AG showed fraud under the statute, but not fraud under common law. “Whatever their telemarketing methods, and however unethical or socially undesirable it may be for respondents to systematically encourage consumers to default on their just debts, and whatever detriment they might cause to desperate consumers in counseling them to a course of action that exposes many of them to unrelenting and unbearable pressure from creditors and successful suit by some such creditors, respondents through their program have undeniably furnished monetarily quantifiable ‘value’ to a demonstrable number of their New York consumers, although nowhere near all or even most such consumers.” Moreover, except for those specific consumers who furnished affidavits, the court couldn’t make individualized findings of actual and reasonable reliance as necessary to support a finding of common-law fraud. Even with the affidavits, all they showed is promises about what “usually” or “typically” happened to program participants. The consumers didn’t specifically allege that they relied on such representations.
Further, given the written materials Nationwide used, the court refused to credit the affidavits when the consumers said that other false promises were made to them, such as that interest and fees would stop accruing on their defaulted accounts if they entered the Nationwide program. “Even if respondents had said that, a reasonable consumer would not have believed it and relied on it to his or her detriment. More generally, in light of the scripted presentations and written materials furnished by respondents, the Court cannot infer that any of the Ten Consumers were promised that their credit rating or score would not be adversely affected by a default or that they would not be harassed, threatened, or sued by creditors or collection agencies if they defaulted on their debts.” If they really were told those things, the court didn’t think a reasonable consumer could have believed such statements. (Comment: why not? How were those 25-40% savings going to be achieved? I’ve seen ads on TV that promise to get Uncle Sam to stop dunning you for back taxes—why wouldn’t a consumer believe that initiating some process could be enough to make a creditor stop calling?)
Anyway, under the statute, reliance isn’t required, as long as the targeted practice has the capacity or tendency to deceive. (Also defendants were liable for doing business in NY as foreign corporations without authorization to do so. They were thus enjoined from doing business in NY unless and until authorized.)
The court permanently enjoined Nationwide from representing that consumers utilizing their services typically save 25% to 40% on their debt, failing to account for fees and overages, and failing to live up to its guarantees. The court refused, however, to grant full restitution, partly because the court wasn’t clear what the AG really wanted—some of the sums consumers paid to Nationwide went to settle their debts, after all. And some consumers received some value from paying fees. The AG wanted restitution for consumers who completed the program but paid more than the original amount due, and for consumers who canceled the program. The court thought this left out currently active participants, who might be paying a lot more than those groups; the court was especially disinclined to award restitution to those consumers who experienced buyer’s remorse and cancelled. (Apparently the court wanted them to embrace the sunk cost fallacy instead.) There was no way to calculate restitution without proof of what percentage of Nationwide’s revenues was attributable to deception.
However, the court would enforce the express guarantee on a showing of individual deception, causation and injury. (Why is deception required if it’s an express guarantee? Causation and injury would seem to follow from refusal to honor a guarantee, so I’m not as curious about those.) The AG would monitor computation and payment of such restitution, and could return to court if necessary.
The AG asked for a civil penalty of $200 per NY consumer signed up between January 2005 and May 2008 (the statute authorized $5000 for each deceptive act and false ad), but the court decided that $100 was more appropriate, for a total civil penalty of nearly $200,000.
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