Debt settlement company Morgan Drexen Inc. in Costa Mesa, Calif. filed for Chapter 7 bankruptcy liquidation Friday, shortly before a U.S. appeals court threw out the company's earlier constitutional challenge to the Consumer Financial Protection Bureau.
The CFPB sued Morgan Drexen in 2013 over its debt settlement services. The CFPB wants $90.7 million in restitution for an estimated 60,000 consumers it reports were charged unlawful fees for debt relief services, but received little or no services in return.
The 2013 CFPB lawsuit stated that Morgan Drexen, which sells support services to law firms, and its CEO, Walter Ledda, tricked consumers into signing up for costly bankruptcy-related services by telling them they would be "debt-free in months." But an investigation found that "little to no bankruptcy work is actually performed for consumers," according to the CFPB.
Federal law prohibits companies from charging fees for debt relief services until the debt has been settled or its terms have been altered.
The 2013 lawsuit suit, filed in U.S. District Court in Los Angeles, had intensified a dispute between the CFPB and Morgan Drexen. The company previously had filed a suit against the CFPB in U.S. District Court in Washington, D.C., stating it lacked the authority to demand documents and sensitive financial records about the company's customers.
Morgan Drexen officials complained it's unconstitutional because the powers delegated to the CFPB are overly broad, it's headed by a single director removable only for cause, it's funded outside the normal appropriations process and judicial review of its actions is limited.
All of this, Morgan Drexen unsuccessfully complained, violated the constitutional theory of separation of powers.
In the bankruptcy filing, Morgan Drexen listed $8 million in assets against $9.9 million in liabilities, according to the bankruptcy filing. It reported revenue of $34.7 million in 2013, falling to $22.9 million last year, and estimates it has 1,000 to 5,000 creditors. Judge Josephine Staton, a federal judge in California, wrote in a consent order that Morgan Drexen had been bundling unnecessary bankruptcy services into a package [of services] to disguise the fact that they charged an illegal upfront fee for what were essentially debt relief services.Morgan Drexen officials could not be reached for comment.
Staton found that as the 2013 CFPB lawsuit proceeded, Morgan Drexen misled the court and its own attorney by falsifying evidence. Staton then stopped Morgan Drexen from transferring, dissipating or concealing assets to ensure funds are available so the court can grant final relief for consumers.
Thee CFPB further found that Morgan Drexen - before the lawsuit was filed - had tried to bolster its case by making up bankruptcy documents that didn't exist. The judge agreed, writing in an order "defendants blatantly falsified evidence and then concealed this fact from the court, opposing cousel and even their own counsel at every turn."