Federal Judge Certifies Nationwide Class in Consumer Class Action Against Debt Settlement Company Pathway Financial

On November 26, 2012, U.S. District Judge James V. Selna in Orange County, California granted Plaintiffs’ motion for class certification of a nationwide class against debt settlement company Pathway Financial, Inc. To see a copy of the Order granting class certification, click HERE.

The Plaintiffs’ complaint alleges that Pathway has operated as an unlicensed pro-rater in violation of Cal. Fin. Code § 12000, et seq. and additionally has over-charged plaintiffs and class members for its purported debt settlement services, in violation of that Statute. The complaint alleges violations of California Civil Code sec. 1789.10 et seq. (the “California Credit Services Act”), California Business and Professions Code section 17,200, et seq. (the “Unfair Competition Law”), California Civil Code sec. 1750 et seq. (the “Consumer Legal Remedies Act”), and the federal Credit Repair Organizations Act, 15 U.S.C. sec. 1679.

In its Order certifying the Class in this lawsuit, the Court certified the following nationwide Class:

All citizens of the United States who have entered into an agreement with Pathway between January 1, 2008 and the present (“the Class Period”) for Pathway to provide debt settlement relief services.

After seeing an ad for Pathway on television, the plaintiffs, Alabama residents Freddie Lee Smith and Lue Vail Smith, hired Pathway to negotiate down medical bills and other unsecured debts. Pathway advised the Smiths to stop paying their credit card bills, and required them to pay $408.00 per month beginning in November 2008. The Smiths were charged 12% of the full amount of their outstanding listed debt balance at the beginning of Pathway’s representation, and Pathway would not make any attempt to resolve any of their debts or make any payments to creditors until that percentage was paid — which took over a year. In the meantime, late charges accrued, and the Smiths were sued by one of their creditors. Pathway also would take an 8% contingency fee for any debt balance reduction — including the late fees that would inevitably result from following Pathway’s advice to not pay any credit cards — and close to $800 in “maintenance fees.” Pathway ultimately kept nearly $5,000.00 of the money that the Smiths paid to Pathway – over 40% of the total amount they provided to Pathway.

The definition of prorater, found in Financial Code § 12002.1 states:

A prorater is a person who, for compensation, engages in whole or in part in the business of receiving money or evidences thereof for the purpose of distributing the money or evidences thereof among creditors in payment or partial payment of the obligations of the debtor . (Emphasis added.)

California Financial Code § 12200 states:

No person shall engage in the business, for compensation , of selling checks, drafts, money orders, or other commercial paper serving the same purpose, or of receiving money as agent of an obligor for the purpose of paying bills, invoices, or accounts of such obligor, or acting as a prorater, nor shall any person, without direct compensation and not as an authorized agent for a utility company, accept money for the purpose of forwarding it to others in payment of utility bills, without first obtaining a license from the commissioner. (Emphasis added.)

Pathway has been illegally engaging in business as an unlicensed bill payer or prorater as defined in the Check Sellers, Bill Payers and Proraters Law, Cal. Fin. Code § 12200, et seq. The fees it uniformly charges all Class members violated California law. Cal. Fin. Code Sections 12314 and 12315 limits all such fees to approximately 10% of the total outstanding loan balance — four times less than what the Smiths paid — and requires the majority of creditors to approve such fees before any fees are taken. Because Pathway took any fees without the consent of creditors and above these limits and without complying with these requirements, all contracts with Pathway are, by statute, void, “and the prorater shall return to the debtor all charges received from the debtor.” Cal. Fin. Code Section 12316. Plaintiffs on behalf of all Class members are seeking full restitution of all moneys illegally collected based on these per se unlawful business practices.

If you believe you are a member of the Class, or if you have any questions, do not hesitate to contact the Mauriello Law Firm. To see a copy of the Plaintiffs’ Second Amended Complaint, click HERE.