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Wash. SC answers federal court's debt-adjustment questions

By Jessica M. Karmasek | May 18, 2011


OLYMPIA, Wash. (Legal Newsline) - The Washington Supreme Court said last week that debt settlement company Global Client Solutions LLC is not exempt under the state's debt-adjusting statute.

Washington residents who were consumers of allegedly illegal debt adjustment programs filed a class action lawsuit against GCS and Rocky Mountain Bank and Trust, companies that respectively managed and held special purpose accounts.

The Court, in an opinion filed Thursday, answered four certified questions from the U.S. District Court for the Eastern District of Washington regarding the debt adjusting statute, chapter 18.28 RCW. They included:

- Is a for-profit business engaged in "debt adjusting" as defined in RCW 18.28.010(1) when, in collaboration with debt settlement companies, it establishes and maintains a custodial bank account in its name; solicits debtors' establishment of a sub-account to receive and hold periodic payments to be used to pay debt settlement fees and pay settlements with creditors as negotiated by a debt settlement company; and as custodian for the debtor, receives and holds the debtor's periodic payments in a sub-account, paying from that account debt settlement fees and negotiated settlements with creditors?

- Does the exclusion found at RCW 18.28.010(2)(b) apply to a for-profit business described in question No. 1?

- Do the fee limitations set forth in RCW 18.28.080 apply to for-profit debt settlement companies engaged in soliciting the participation of debtors in a debt management program involving: monthly set aside and accumulation of a debtor's funds in a custodial account for the purposes of facilitating negotiated settlement of specified credit card debts; and negotiations by the debt settlement company, on behalf of the debtor, to secure compromise settlement of the debtor's credit card debt, to be paid from the custodial account?; and

- Does the debt adjusting statute provide for an implied civil action against an alleged "aider and abettor" where aiding or abetting a violation of the debt adjusting statute is expressly made a crime pursuant to RCW 18.28.190?

The Court, in its opinion, determined that GCS is a debt adjuster and that it is not exempt under the statute because GCS is not a bank or another listed entity. Also, debt settlement companies that work with GCS and RMBT are likely subject to the debt adjusting statute's fee limitations, depending on whether they are debt adjusters providing debt adjusting services, the Court said.

Because RCW 18.28.185 makes aiding and abetting violation of the debt adjusting statute an unfair or deceptive act or practice in the conduct of trade or commerce under the state's Consumer Protection Act, the Court said it need not consider whether an implied cause of action for such conduct also exists.

Justice Mary E. Fairhurst authored the Court's majority opinion.

Under RCW 18.28.010(1), "debt adjusting" is defined as "the managing, counseling, settling, adjusting, prorating or liquidating of the indebtedness of a debtor, or receiving funds for the purpose of distributing said funds among creditors in payment or partial payment of obligations of a debtor."

Here, the Court said, GCS is engaged in "debt adjusting" under the plain language of the definition's last prong because GCS receives funds into a custodial account in its own name and it distributes money to the creditor in payment or partial payment of the consumer's debt.

"It is unreasonable to suggest that the Legislature intended to allow companies whose activities fit the broad statutory definition of 'debt adjusting' to nonetheless escape regulation by splitting the traditional functions of a debt adjuster between multiple entities," the Court explained.

A "debt adjuster," by definition, includes "any person engaging in or holding himself or herself out as engaging in the business of debt adjusting for compensation."

Certain persons are excluded from this definition, including: "Any person, partnership, association, or corporation doing business under and as permitted by any law of this state or of the United States relating to banks, consumer finance businesses, consumer loan companies, trust companies, mutual savings banks, savings and loan associations, building and loan associations, credit unions, crop credit associations, development credit corporations, industrial development corporations, title insurance companies or insurance companies."

The Court wrote, "On the record before us, it appears the exemption in RCW 18.28.010(2)(b) does not apply to GCS. GCS is not a bank. It does not matter if GCS is a bank's agent or if it is subject to limited FDIC authority or the rules of a private organization like NACHA. Unless GCS is one of the 13 entities listed, it is subject to the debt adjusting statute."

The federal court's third question essentially asks whether the debt settlement companies that work with GCS and RMBT are subject to the debt adjusting statute's fee limitations.

"The fact that the Legislature may not have contemplated the precise business model used by these debt settlement companies does not prevent their activities from being classified as 'debt adjusting' if the activities fit within the plain language of RCW 18.28.010(1). If the debt settlement companies are 'debt adjusting,' then they are also 'debt adjusters' because they are 'engaging in... the business of debt adjusting for compensation,'" the Court explained.

It continued, "Whether Freedom (Debt Relief LLC) and similar debt settlement companies are actually debt adjusters who are debt adjusting, however, is ultimately a factual question the district court must resolve based on the exact nature of the debt settlement companies and the services they provide."

The Court said the plaintiffs need not establish an implied civil cause of action to recover for aiding and abetting violations, as RCW 18.28.185 provides them a direct civil remedy for this conduct under the CPA.

The Washington State Attorney General's Office submitted an amicus brief in the case in February. To view it, click here.

From Legal Newsline: Reach Jessica Karmasek by e-mail at

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