A recent court ruling has dealt a blow to efforts by the Consumer Financial Protection Bureau to limit law firms' involvement in the debt collection process.
According to the decision, the agency had failed to prove that a Cleveland law firm, Weltman, Weinberg & Reis, had engaged in illegal debt collection practices harming consumers by sending them demand letters on law firm letterhead.
The CFPB has in the past worried that banks use law firms to intimidate consumers into thinking they could be sued, even if the firm had no direct knowledge of the consumer's situation.
But the ruling out of the U.S. District Court for the Northern District of Ohio is seen as limiting the regulatory risk for law firms to get involved, and for banks that hire them to collect debts.
"Attorneys are unique in the debt collection process. They are highly regulated by state laws and it is not the role of a federal regulator to set standards for how attorneys practice in the debt collection space," said Joann Needleman, at attorney at Clark Hill.
In his ruling this week, U.S. District Court Judge Donald C. Nugent said the CFPB "failed to prove by a preponderance of the evidence" that the law firm made false or deceptive representations to consumers by sending demand letters on law firm letterhead.
The case represents a big win for debt collection attorneys and lawyers generally because Nugent rejected the CFPB's attempts to regulate attorney conduct in financial services. Lawyers hired by banks to collect debts were watching the case closely.
The CFPB under former Director Richard Cordray
The CFPB had claimed that the law firm's demand letters violated the law, not because they contained false statements, "but because they allegedly falsely imply that an attorney was meaningfully involved in the collection of the debts to which the letters relate," Nugent wrote.
But in his decision, which came after a four-day trial in which the judge had impaneled an advisory jury, Nugent said the agency had failed to prove its case.
"The jury's finding, adopted by this Court, that lawyers were meaningfully involved, disproves the Plaintiff's sole theory of liability and precludes recovery under the Complaint," he said.
Nugent also noted the lack of any standard to demonstrate a firm's involvement. "There is no specific test for what constitutes "meaningfully involved,' " the judge wrote.
Scott Weltman, the law firm's managing partner, said the judge's ruling proved that the CFPB's lawsuit lacked merit. He told American Banker that the CFPB had threatened his firm, at one point demanding $95 million to settle the case. But he refused to settle.
“The Judge’s Opinion thoroughly vindicates Weltman’s processes and is a complete rejection of the CFPB’s unfounded allegations,” Weltman said in a statement. He highlighted Nugent's findings that the CFPB had not shown evidence of consumer harm, the firm's letters were truthful and that Weltman's lawyers were involved in the process.
Yale R. Levy, president of the National Creditors Bar Association, said that the decision confirms that attorneys who practice in the area of creditors rights law "are actively and meaningfully involved in all stages of the process."
He and others stressed that attorneys are state-licensed, and federal regulators cannot regulate attorney conduct.
"Attorneys need to be held to the standards set forth by the State Supreme Court’s in which they practice not a governmental agency,” Levy said in a statement.
Manny Newburger, a founding shareholder and vice president at Barron & Newburger in Austin, Texas, said the Weltman case demonstrated that "attorney involvement exists when lawyers are acting in an appropriate manner in the oversight of the cases they handle."
But he also noted that defending the lawsuit came at a cost for Weltman's firm.
"The theory that you can't fight City Hall is wrong," Newburger said. "Apparently, you can fight City Hall but the cost of vindicating your rights is very high."
One strange wrinkle in the case came in April when the CFPB, now headed by acting Director Mick Mulvaney, sought to exclude Cordray from testifying as a witness in the case.
Nugent overruled the CFPB's motion, but the law firm made a strategic decision not to call Cordray to testify, Weltman said.
Cordray, now a candidate for Ohio governor, was the state's attorney general from 2009 to 2010. According to court documents, he had hired Alan Weinberg, a former attorney at the firm who has since retired, as a special counsel to collect debts owed to the state. Cordray had directed the law firm to use the Ohio AG office letterhead on demand letters for the state that were similar to ones at issue in the CFPB lawsuit.
It is unclear whether the judge's ruling will impact other cases the CFPB is litigating involving attorneys.
In 2015, the CFPB
Last year, the CFPB
Nugent ruled that all costs in the case are assessed to the CFPB. It is unclear if Weltman will seek to have the CFPB pay its attorney fees.
