Arkansas, State of et al v. Capital Credit Solutions Inc et al

Filing 15

OPINION AND ORDER granting in part and denying in part the 13 motion for default judgment. The motion is granted as to the State's request for default judgment for violations of the Credit Repair Organizations Act and the Arkansas Deceptive Trade Practices Act. A civil penalty in the amount of $10,000 under the Arkansas Deceptive Trade Practices Act will be awarded. Attorneys' fees in the amount of $8,587.50 and costs in the amount of $594.10 under the Credit Repair Organizations Act and Arkansas Deceptive Trade Practices Act will be awarded. The motion is denied as to the State's request for a default judgment for violations of the Arkansas Credit Services Organizations Act, punitive damages under the Arkansas Credit Services Organizations Act, restitution under the Arkansas Deceptive Trade Practices Act, and injunctive relief. Signed by Judge J. Leon Holmes on 9/26/2017. (ljb)

IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF ARKANSAS
WESTERN DIVISION
STATE OF ARKANSAS, ex rel.
LESLIE RUTLEDGE, ATTORNEY GENERAL
v.

PLAINTIFF

No. 4:16CV00912 JLH

CAPITAL CREDIT SOLUTIONS, INC.;
and WILLIE J. MCKENZIE

DEFENDANTS

OPINION AND ORDER
The State of Arkansas, by and through its Attorney General Leslie Rutledge, brought this
action against Capital Credit Solutions, Inc., and Willie J. McKenzie for violations of the Credit
Repair Organizations Act, 15 U.S.C. §§1679 through 1679J; the Arkansas Deceptive Trade Practices
Act, Ark. Code Ann. §§ 4-88-101 through 116; and the Arkansas Credit Services Organizations Act,
Ark. Code Ann. §§ 4-91-101 through 109. The Attorney General is expressly authorized by statute
to enforce the Credit Repair Organizations Act and the Arkansas Deceptive Trade Practices Act.
15 U.S.C. § 1679h(c)(1); Ark. Code Ann. § 4-88-104. After Capital Credit Solutions and McKenzie
failed to respond to the complaint, the State filed a motion for entry of default. Document #9. The
Clerk of Court entered the defaults pursuant to Federal Rule of Civil Procedure 55(a). Documents
#10 and #11. Then, the State filed a motion for default judgment pursuant to Rule 55(b)(2).
Document #13. For the following reasons, the motion is granted in part and denied in part.
I.
The clerk must enter a default when a party against whom relief is sought has failed to plead
or otherwise defend. Fed. R. Civ. P. 55(a). “[E]ntry of default under Rule 55(a) must precede grant
of a default judgment under Rule 55(b).” Johnson v. Dayton Elec. Mfg. Co., 140 F.3d 781, 783 (8th
Cir. 1998). When a default is entered, the facts alleged in the complaint except those relating to the

amount of damages are deemed admitted and may not be later contested. Marshall v. Baggett, 616
F.3d 849, 852 (8th Cir. 2010); 10A Charles Alan Wright et al., Federal Practice and Procedure at
§ 2688. However, in deciding a motion for default judgment “it remains for the [district] court to
consider whether the unchallenged facts constitute a legitimate cause of action, since a party in
default does not admit mere conclusions of law.” See Murray v. Lene, 595 F.3d 868, 871 (8th Cir.
2010) (internal quotations omitted).
The State alleges the following facts. See Document #1. Capital Credit Solutions is a Florida
for-profit corporation. McKenzie managed and controlled its business practices, including the
furnishing of credit repair services to Arkansans. The defendants sell services purported to improve
a consumer’s credit history, credit score, and credit ratings. To promote the services they provide,
the defendants placed signs throughout Arkansas, soliciting business in exchange for compensation.
Without permission, the defendants placed signs in various locations, which read: “CREDIT
REPAIR SERVICE 866-424-9966 ” or “REPAIR BAD CREDIT $250 866-424-9966.” Document
#1 at 26. The phone number is linked with a website for Capital Credit Solutions, which makes
several representations: “Welcome to your road to credit redemption. REPAIR BAD CREDIT
$250”; “Grow Your Credit Score: WE REMOVE: OPEN COLLECTION ACCOUNTS . . .”; “All
of the negative results will bring your score down! Its [sic] our job to remove some the [sic] items,
including inaccurate debt!”; “[T]he fastest and most efficient way to build your credit score is let
[sic] us get to work for you!”; and “The longer your [sic] in the program the better the results!”
Document #1 at 28-30.
The website includes a page entitled “Contract.” Document #1 at 31. There are spaces for
a consumer to fill in his name, address, and social security number. Id. The contract describes the

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services Capital Credit Solutions agrees to provide: “Improve client’s FICO/credit scores and credit
history” and “[p]rovide consulting services on credit history and will work hard to improve your
credit rating and clear and/or correct your credit report of the credit and personal items which you
believe an identify to be inaccurate, misleading or unverifiable.” Id. at 32. The contract provides
that a consumer must pay an initial “Work Fee” of $250 to be paid three days after signing the
contract. Id. at 31. Then, the consumer must pay a monthly fee of $50 “after work is completed.”
Id. Work is completed “after receiving response from Credit Bureau informing the removal or
correction of the trade line/item.” Id. These unchallenged facts constitute legitimate causes of action
under the Credit Repair Organizations Act and the Arkansas Deceptive Trade Practices Act.
A.

Credit Repair Organizations Act
Congress enacted the Credit Repair Organizations Act to ensure that those considering the

services of credit repair organizations are provided the information necessary to make an informed
decision and to protect the public from deceptive advertising and business practices by those
organizations. 15 U.S.C. § 1679. The Credit Repair Organizations Act applies only to those who
are “credit repair organizations.” 15 U.S.C. § 1679a(3). The complaint alleges that Capital Credit
Solutions is a “credit repair organization:” McKenzie uses the internet—an instrumentality of
interstate commerce—to provide for a fee the services of Capital Credit Solutions, purported to
improve credit ratings. See Taylor v. Bettis, 976 F. Supp. 2d 721, 740-41 (E.D. N.C. 2013). The
complaint also sufficiently alleges that the State complied with the Credit Repair Organizations Act
notice requirement. Document #1 at 15, ¶40 (citing 15 U.S.C. § 1679h(2)(A)). The State maintains
that the defendants have violated and continue to violate the Credit Repair Organizations Act in three
ways: (1) misrepresenting to consumers the extent to which negative items can be legitimately

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disputed with the credit bureaus; (2) requiring consumers to pay in advance and to pay monthly fees;
and (3) providing a contract that does not meet Credit Repair Organizations Act specifications.
The Credit Repair Organizations Act prohibits credit repair organizations from making
misleading representations about their services. 15 U.S.C. § 1679b(a)(3). The complaint alleges that
the defendants represented in advertisements and on the Capital Credit Solutions website that they
could “repair” credit by removing inaccurate, misleading, or unverifiable entries and open collection
accounts from consumer credit reports, and that the longer a consumer subscribes to the services, the
more his credit will improve. Because these representations imply that Capital Credit Solutions has
the power to change a consumer’s credit report and then to guarantee those changes will continue
to improve a consumer’s credit, they are misleading and a violation of the Credit Repair
Organizations Act. See Nielsen v. United Creditors Alliance Corp., No. 98 C 5910, 1999 WL
674740 at *2 (N.D. Ill. Aug. 23, 1999).
The Credit Repair Organizations Act also prohibits credit repair organizations from charging
or receiving money prior to the full performance of the agreed-upon services. 15 U.S.C. § 1679b(b).
The State attached to the complaint the contract provided on the website. Document #1 at 31-37.
The terms of the contract include: “You agree to pay Capital Credit Solutions Inc. the initial Work
Fee within five (1) business days of signing this Agreement and only after the first work is
completed. You understand and acknowledge that First Work is non-refundable after five days of
signing this Agreement and after the first work is done.” Id. at 32. The initial work fee is $250. Id.
at 31. The agreed-upon services include consulting, improving the client’s credit rating, and
removing inaccurate, misleading, or unverifiable blemishes in the client’s credit report. Id. The
contract explains that Capital Credit Solutions cannot “accurately predict how long the process will

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take, but the average time for most clients is six (6) months.” Id. The contract does not define “first
work.” It is obvious, however, that “first work” does not entail the full performance of the agreedupon services. Charging money after “first work” and prior to the full performance of the agreedupon services is a violation of the Credit Repair Organizations Act. See F.T.C. v. RCA Credit Servs.,
LLC, 727 F. Supp. 2d 1320, 1334 (M.D. Fl. 2010).
In addition, the Credit Repair Organizations Act requires credit repair organizations to
provide certain disclosures to consumers in a particular form. 15 U.S.C. § 1679c. Section 1679c(a)
sets forth a written statement that credit repair organizations must provide to any consumer prior to
the execution of a contract. The complaint alleges and the attached contract reflects that while the
defendants included the written statement, they failed to emphasize certain parts of the statement in
bold font. Document #1 at 34. Section 1679c(b) requires the written statement to be set forth
“separate from any written contract” or “any other written material provided to the consumer.” The
complaint alleges that the defendants failed to provide the written statement to consumers on a
separate document.
Finally, section 1679d provides specifications for credit repair contracts. It requires contracts
to include the terms and conditions of payment, including the total amount of all payments to be
made by the consumer to the credit repair organization. 15 U.S.C. § 1679d(b)(1). The defendants’
contract does not include such terms and conditions. See Document #1 at 31. Section 1679d(b)(4)
requires a conspicuous statement in bold face type, in immediate proximity to the space reserved for
the consumer’s signature, regarding the consumer’s right to cancel the contract. The contract
includes such a statement, but the State alleges that the statement is obscured by contradictory
language in another section. Document #1 at 14, ¶38. This is not an unchallenged factual allegation;

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rather, it is a legal conclusion that does not support a legitimate cause of action under the Credit
Repair Organizations Act.
B.

Arkansas Credit Services Organizations Act
The Arkansas General Assembly enacted the Credit Services Organizations Act in 1987. In

2017, the Arkansas General Assembly repealed the Credit Services Organizations Act of 1987 and
replaced it with the Credit Repair Services Organizations Act of 2017, which became effective
August 1, 2017. 2017 Ark. Acts 944 (codified at Ark. Code Ann. § 4-91-201-02). The violations
complained of occurred under the Arkansas Credit Services Organizations Act of 1987, which is
similar to the federal Credit Repair Organizations Act in substance. See Ark. Code Ann. § 4-91101-09 (repealed 2017). However, the Arkansas Credit Services Organizations Act does not contain
an enforcement provision explicitly authorizing the Attorney General to bring an action on behalf
of consumers. Rather, “[a]ny buyer suffering damages as a result of a violation of [the Arkansas
Credit Services Organizations Act] by any credit services organization may bring an action for
recovery of damages.” Ark. Code Ann. 4-91-105(a) (repealed 2017) (emphasis added). A “buyer”
means any individual who is solicited to purchase or who purchases the services of a credit services
organization. Ark. Code Ann. § 4-91-102(1). The Attorney General is not a “buyer” under the
Arkansas Credit Services Organizations Act and therefore the State may not seek a remedy for a
violation of its provisions.
The State also seeks an injunction, enjoining the defendants from violating the Arkansas
Credit Services Organizations Act. Any future violations would occur under the Arkansas Credit
Repair Organizations Act of 2017. Unlike the Arkansas Credit Services Organizations Act, the
Arkansas Credit Repair Organizations Act provides that a violation of its provisions is subject to

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enforcement as provided in the Arkansas Deceptive Trade Practices Act. The Arkansas Deceptive
Trade Practices Act authorizes the Attorney General to enforce its provisions. Ark. Code Ann. § 488-104.
C.

Arkansas Deceptive Trade Practices Act
The Arkansas Deceptive Trade Practices Act protects consumers from a variety of unfair and

deceptive practices. Ark. Code Ann. § 4-88-101, et. seq.. It prohibits knowingly making a false
representation as to the characteristics, uses, and benefits of services. Ark. Code Ann. § 4-88107(a)(1). “Services” means work, labor, or other things purchased that do not have physical
characteristics. Ark. Code Ann. § 4-88-102(7). As discussed previously, the complaint alleges and
the evidence shows that the defendants advertised that they could repair bad credit as credit repair
doctors, remove negative credit, and remove open collection accounts. The Arkansas Deceptive
Trade Practices Act “catch-all provision” also broadly prohibits engaging in any other
unconscionable, false, or deceptive act or practice. Ark. Code Ann. § 4-88-107(10). “The Arkansas
Supreme Court has defined an unconscionable act as ‘an act that affronts the sense of justice,
decency, or reasonableness’ including acts that violate public policy or a statute.” Independence
Cnty. v. Pfizer, Inc., 534 F. Supp. 2d 882, 886 (E.D. Ark. 2008) (quoting Baptist Health v. Murphy,
365 Ark. 115, 226 S.W.3d 800, 811 (2006)). The complaint alleges that the defendants charge an
initial fee and a monthly fee while holding themselves out as experts in the field of credit repair,
though they did not possess any knowledge that the average consumer cannot access.
Taking the State’s allegations in the complaint as true, except for those allegations as to the
amount of damages, the Court concludes that the State is entitled to default judgment against the

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defendants with respect to liability under the Credit Repair Organizations Act and the Arkansas
Deceptive Trade Practices Act.
II.
The State’s motion for a default judgment seeks a permanent injunction, civil penalties,
punitive damages, and attorneys’ fees and costs. The State’s motion for a default judgment does not
seek compensatory damages, nor did the complaint allege that any person in Arkansas has incurred
damages.
The Arkansas Deceptive Trade Practices Act provides that the Court may “[a]ssess penalties
to be paid to the state, not to exceed ten thousand dollars ($10,000) per violation, against persons
found to have violated this chapter.” Ark. Code Ann. § 4-88-113(a)(3). The State requests the
maximum $10,000 for each violation and maintains that the unchallenged facts establish eight
separate violations. Document #14 at 12-13 (citing Document #1 at 15-16, ¶¶ 41-45).
The Court has the discretion to assess the amount of the penalty for each violation. See Ark.
Code Ann. § 4-88-113(a). The evidence as to how many violations occurred is murky at best.
Because the defendants defaulted, it can be assumed that at least one violation occurred. A civil
penalty of $10,000 will be assessed. Capital Credit Solutions and McKenzie are jointly and severally
liable for the penalties because the unchallenged facts establish McKenzie’s liability under Ark.
Code Ann. § 4-88-113(d)(1).
The State claims that it is entitled to an award of punitive damages under the Arkansas Credit
Services Organizations Act, but as explained above, the Arkansas Credit Services Organizations Act
does not authorize the State to bring an action for damages.

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In addition to the assessment of a civil penalty and the award of punitive damages, the State
asks the Court to enter a permanent injunction:
preventing the defendants from engaging in any deceptive acts or practices in
violation of the ADPTA and from violating any provisions of the ASCOA and
CROA; canceling any outstanding contracts for credit repair services between the
defendants and any Arkansas consumer, together with any obligations to which such
consumers may be subject under such contracts; returning to affected consumers all
funds received by defendants as a result of defendant’s prohibited practices;
forfeiting all corporate charters, licenses, permits or any authorizations to do business
in Arkansas currently held by defendants and that Defendant Willie McKenzie, who
directly or indirectly controlled the actions of the remaining defendants, be held
jointly and severally liable for any violations committed by the other defendants.
Document #14 at 11-12. The Arkansas Deceptive Trade Practices Act and the Credit Repair
Organizations Act authorize injunctive relief, whether directly or indirectly. Under the Arkansas
Deceptive Trade Practices Act, the Court may make such orders or judgments as may be necessary
to prevent the use by a violator of any prohibited practices, may order the violator to make
restitution, and may order the suspension or forfeiture of licenses or permits to do business in the
state. Ark. Code Ann. § 4-88-113. The complaint did not allege, nor did the motion for a default
judgment present proof, that either defendant has a license or a permit to do business in the State of
Arkansas. Under the Credit Repair Organizations Act, the chief law enforcement officer of a State
may bring an action to enjoin a violation of its provisions. 15 U.S.C. § 1679h(c)(1)(A).
The Arkansas Supreme Court has held that “when the Attorney General has a specific
statutory mandate to protect the public interest, the traditional common-law prerequisites for an
injunction in civil litigation, such as irreparable harm and likelihood of success on the merits, are not
applicable.” So. Coll. of Naturopathy v. State ex rel. Beebe, 360 Ark. 543, 553-54, 203 S.W.3d 111,
117 (2005). Instead, “[i]t is a violation of the Act that triggers the prayer for an injunction.” Id.
(citations omitted). The State has established that advertisements by the defendants violate the
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Arkansas Deceptive Trade Practices Act. They have not, however, alleged or presented evidence
that any person in the State of Arkansas has contracted with or paid any money to the defendants for
any reason. The State has identified no contracts that could be canceled nor any funds paid to the
defendants that could be the subject of restitution. In the absence of any allegation or any evidence
that any person in the State of Arkansas has contracted with the defendants or any suggestion as to
how an injunction could be enforced, it is not clear what would be accomplished by entering an
injunction. The Court will not exercise its power to issue an injunction.
Finally, the State requests that the Court award attorneys’ fees in the amount of $8,587.50
and costs in the amount of $594.10. Those requests are supported by the affidavit of Assistant
Attorney General David A.F. McCoy. Document #14 at 13, 18-22. The Credit Repair Organizations
Act and the Arkansas Deceptive Trade Practices Act provide for the recovery of attorneys’ fees and
costs in a successful enforcement action by the State. 15 U.S.C. 1679h(c)(1)(C); Ark. Code Ann.
§ 4-88-113(e). McCoy estimates the amount of time spent working on the case, a total of 57.25
hours, and bills the work at a rate of $150 per hour. Id. at 21. The fee request is reasonable. The
requested costs include a $400 filing fee and the costs for service of process on Capital Credit
Solutions and McKenzie. Document #14 at 22. These costs are recoverable. 28 U.S.C. § 1920.
CONCLUSION
For the foregoing reasons, the motion for default judgment is GRANTED IN PART and
DENIED IN PART. The motion is granted as to the State’s request for default judgment for
violations of the Credit Repair Organizations Act and the Arkansas Deceptive Trade Practices Act.
A civil penalty in the amount of $10,000 under the Arkansas Deceptive Trade Practices Act will be
awarded. Attorneys’ fees in the amount of $8,587.50 and costs in the amount of $594.10 under the

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Credit Repair Organizations Act and Arkansas Deceptive Trade Practices Act will be awarded. The
motion is denied as to the State’s request for a default judgment for violations of the Arkansas Credit
Services Organizations Act, punitive damages under the Arkansas Credit Services Organizations
Act, restitution under the Arkansas Deceptive Trade Practices Act, and injunctive relief. A judgment
will be entered separately.
IT IS SO ORDERED this 26th day of September, 2017.

_________________________________
J. LEON HOLMES
UNITED STATES DISTRICT JUDGE

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