A California federal district court has entered a final judgment in favor of the CFPB in its enforcement action filed in August 2013 against Morgan Drexen, Inc. and its CEO. The lawsuit alleged that Morgan Drexen charged advance fees for debt relief services in violation of the Telemarketing Sales Rule (TSR) and engaged in deceptive acts and practices in violation of the Consumer Financial Protection Act (CFPA). The final judgment requires the now bankrupt Morgan Drexen to pay $132,882,488 in restitution and a $40 million civil money penalty. It followed a stipulated final judgment against Morgan Drexen’s CEO approved by the court in October 2015 which, based on the CEO’s inability to pay, required him to pay $500,000 in consumer redress and a $1 civil money penalty.
In July 2013, before the CFPB filed its lawsuit in California, Morgan Drexen filed a complaint against the CFPB in the D.C. federal district court seeking declaratory and injunctive relief based on a challenge to the CFPB’s constitutionality. In October 2013, the D.C. court dismissed Morgan Drexen’s lawsuit, holding that Morgan Drexen had an adequate remedy at law in the CFPB’s enforcement action in California and would suffer no irreparable harm. In May 2015, the dismissal was affirmed by the D.C. Circuit, which did not reach the merits of the constitutional challenge.
In January 2014, the California federal district court denied Morgan Drexen’s motion to dismiss, rejecting all of its constitutional arguments. In April 2015, the district court entered a default judgment against Morgan Drexen based on alleged falsification of evidence in discovery, and deferred until completion of supplemental briefing whether such sanctions also should be imposed against Morgan Drexen’s CEO. Following the court’s subsequent entry of an order imposing a temporary freeze on Morgan Drexen’s assets, the company filed a bankruptcy petition. In June 2015, based on a finding the company had violated the TSR and CFPA by charging upfront fees for debt relief services and deceptively describing its services, the court issued a permanent injunction prohibiting Morgan Drexen from collecting any more money from customers and charging upfront fees for debt relief services. The company then shut down its operations and a trustee appointed by the bankruptcy court took control of the company’s assets.