Shawn Vestal: Turning the tables on rip-offs

Second of two parts

From fall 2007 into 2008, Susie Hulse went from sad and worried, following her husband’s death and facing a mountain of debt, to comforted by the hope she placed in Freedom Debt Relief, back to sad and worried all over again.

After months of paying the debt-relief company – which touts itself as the nation’s largest – Hulse had realized that the company wasn’t doing what it promised, she said. It wasn’t paying her creditors. It wasn’t negotiating with her creditors.

“They didn’t even call them,” she said.

She’d quit the program and gotten $600 back. Six hundred dollars, out of about $2,800 she’d paid in. The whole thing seemed improper. Surely it was illegal, she thought. She filed a complaint with the attorney general’s office. The attorney general’s office told her to get in touch with Darrell Scott.

Debate coach first

Scott, 62, grew up in Bremerton, the son of a single mom who struggled to support her three kids. He did not set out to become an attorney as a young man; he got his doctorate degree and went into academia. He taught for many years at Gonzaga, where he coached the debate team to a national championship.

Then he decided to go to law school and open a practice. His priority, he says, was to figure out ways to provide help for people caught up in situations where the costs of legal action were a barrier to justice. An important tool has been the class action, in which Scott is able to aggregate the claims of many people – each of which might be impractical to pursue on its own.

He wanted to take on problems, not just win cases. He’s worked on cases involving asbestos contamination in attic insulation, employee workplace rights, and dangerous products.

Right now, his campaign – along with attorneys Andrew Biviano, Boyd Mayo and Matthew Zuchetto – is the debt-settlement industry. Washington law limits the upfront fees to $25, and 15 percent of the debt settled, for such companies. In the first Freedom case – and in case after case that followed – companies took all or most of the money in fees that they were given to settle debts. One of Hulse’s fellow plaintiffs paid about $6,000 to Freedom before quitting the program; Freedom kept $4,500 in fees and paid no creditor.

Scott’s first and most important case involved Hulse and other plaintiffs in a class action against Freedom Debt Relief. The case was filed in February 2009. Freedom argued that Washington’s consumer protection laws did not apply to it because it was headquartered in California. And it tried to invoke a clause in its contract that required debtors to settle disputes in arbitration – often a practical impossibility for people on the verge of bankruptcy who would have to travel to argue their case. The trip might cost them as much as the amount in dispute.

The case quickly went to the state Supreme Court. Freedom eventually settled before the high court ruled, but in a companion case the court ruled that the state’s laws did indeed apply to out-of-state debt-settlement companies.

It also ruled that a third-party company that handles money for several debt-settlement companies, Global Debt Solutions, was subject to state laws governing the industry – a key ruling for breaking through the complex interrelationships that the operations use to skirt the laws and rack up illegal fees, Scott said.

Justice Tom Chambers wrote, “As cats are drawn to cream, many for-profit debt adjusters will be attracted to the most unsophisticated of customers. … I fear that until the Washington legislature prohibits debt adjusting for profit, consumers in Washington will continue to suffer.”

The Legislature has not exactly rushed to do this. In fact, this year House lawmakers proposed legislation that would have undone the Supreme Court decision in part, and exempted “third-party administrators” from being considered debt adjusters. In other words, under the proposal, the people who manage the money for debt adjusters would be exempt from the fee limits governing debt adjusters.

The bill was presented as a measure to protect telemarketing jobs. It was passed out of committee and has been reintroduced in the special session, though it’s gone no further.

Company settles

Hulse became one of the lead plaintiffs in the lawsuit against Freedom Debt Relief. In her case, the company initially claimed more than $2,000 in fees, the large majority of her payments, while not settling any debt at all.

The lawsuit was given class-action status. Freedom fought the claims, arguing in part that its clients were bound by the contract to settle disputes in arbitration, not in court.

Hulse, meanwhile, found herself in worse financial shape than before. “I had to go bankrupt, and that’s the one thing I didn’t want to do,” she said.

Freedom tried and lost an attempt to force the plaintiffs into arbitration, and then settled the case – in tandem with the attorney general’s office – last July. It agreed to pay almost $900,000, plus about $40,000 in legal fees. Seven hundred people filed claims.

I could not reach Freedom CEO Andrew Housser for comment, and the firm’s legal department did not return a message seeking comment.

Keeping costs down

The Freedom case was soon followed by others. Some state and federal officials have pursued actions against debt collectors, but Scott’s office is working on the issue on a scale that exceeds most others. It is, in essence, doing law enforcement work – work that state attorneys general ought to pursue, and do, to some degree. Scott and his attorneys do get paid, but their hourly rates, according to court documents in several cases, are consistently well below the defendants’ attorneys, and Scott uses many non-attorney staffers to help keep costs down.

The model is unique as a method for addressing legal problems with limited financial upside, such as consumer protection actions.

“Were these cases lucrative cases that offered people the prospect of enriching themselves, there would be an army of attorneys fighting for the cases,” Scott said. “This isn’t the kind of litigation where you’re competing with other attorneys.”

Freedom settled its case in July 2011. The Morgan Drexen Group had settled the year before that. The owners of a Texas company recently lost a $1.5 million judgment. Swift Rock Financial – settled. Fast Track Debt Relief – settled. A settlement with Global Credit Solutions is pending. Many more cases are active in state and federal court.

In the first case, Scott’s clients got back 82 percent of everything they’d paid in.

“Except for that case,” Scott said, “we have been successful in getting back for people every penny they paid.”

Feelings of betrayal

Susie Hulse hopes no one else makes the mistakes she made. Now 59, taking college classes and coming back from her bankruptcy, Hulse is trying to move forward.

She’s glad to have been a part of helping go after Freedom Debt Relief. She’s glad to have gotten most of her money back, though she’s angry that Freedom got to keep even one penny.

But possibly the most hurtful thing, she says, is the way she felt taken advantage of during a time of grief. The way she told the person she’d called at Freedom – Mike, she remembers – about her husband’s long, difficult illness, about the way his medical bills spiraled out of control. The way he promised to help her, and her sense of utter relief.

“He told me a bunch of lies,” she said.