JHASS GROUP L.L.C. aka J. HASS GROUP, LLC; JASON D. HASS; JEREMY R. HASS; JEFFREY HASS, Plaintiffs/Appellants
ARIZONA DEPARTMENT OF FINANCIAL INSTITUTIONS; LAUREN W. KINGRY, Superintendent, Defendants/Appellees
Appeal from the Superior Court in Maricopa County. No. LC2012-000639-001 DT. The Honorable Crane McClennen, Judge.
Timothy H. Barnes, P.C., Phoenix, By Timothy H. Barnes, Counsel for Plaintiffs/Appellants.
Arizona Attorney General's Office, Phoenix, By Natalia A. Garrett, Counsel for Defendants/Appellees.
Judge Michael J. Brown delivered the Opinion of the Court, in which Presiding Judge Peter B. Swann and Judge Kenton D. Jones joined.
[¶1] This appeal arises from a challenge to an administrative order imposing a $150,000 fine for failure to comply with Arizona Revised Statutes (" A.R.S." ) section 6-715, which requires a debt management company operating in Arizona to obtain a license from the Arizona Department of Financial Institutions (" the Department" ). A debt management company is defined as a person or entity that for compensation " engages in the business of receiving money, or evidences thereof, . . . as agent of a debtor for the purpose of distributing the same to his creditors[.]" A.R.S. § 6-701(4). Because we conclude a company that exercises substantial control over funds deposited by its client with a third party falls within the definition of a debt management company, we affirm the superior court's order upholding the administrative order.
[¶2] J. Hass Group, LLC, owned by three brothers (Jason, Jeremy, and Jeffrey Hass), was formed in February 2008. JHass engaged in the business of negotiating debt settlements on behalf of its clients. The company acquired many of its clients from an existing debt settlement practice conducted by Jason D. Hass, PLC, a law firm owned by Jason Hass. JHass also acquired clients through outside marketing companies that recommended debt relief products to potential clients in exchange for a portion of JHass' fees.
[¶3] The business model JHass developed was ostensibly quite simple: JHass charged its clients various fees to enroll in its " debt settlement program" and, in exchange, JHass negotiated with clients' creditors to achieve a reduced obligation that would allow clients to satisfy their unsecured debts more quickly. Each client signed a " Client Partnership Agreement" with JHass. In addition, clients executed a limited power of attorney allowing JHass, among other things, to share information regarding clients' account balances with creditors and review client account histories.
[¶4] Prospective clients would often complete the Client Partnership Agreement with the help of a marketing company, which would then submit the signed documents directly to JHass through an online system. Completion of the agreement required prospective clients to disclose their existing debts and credit card information. The JHass online system used this " list of debts" to calculate an estimated monthly payment and the number of months to complete the debt settlement program.
[¶5] Enrollment in the program required clients to fund the following: (1) a " Monthly Professional Fee," which JHass charged for " continuing customer service and account administration," (2) a " Monthly Maintenance
Fee," which JHass used to cover the cost of " trust account administration," and (3) " Client Savings," to be used to settle debts. According to the Client Partnership Agreement, JHass' fees would be deducted from the client's monthly savings. Clients were encouraged to deposit more than the " monthly payment amount" when their budgets allowed. JHass did not receive its fees directly from the clients. Instead, as a condition of enrollment in the program, clients were required to establish a " trust or controlled account" at a " bank, Escrow Company, or other financial institution or service company reasonably acceptable to [JHass]." 
[¶6] Although JHass did not have a contractual relationship with any third-party account providers, many JHass clients set up accounts with NoteWorld Servicing Center, LLC (" NoteWorld" ), an escrow agent independently licensed by the Department. When enrolling in the program, a client seeking to establish an account with NoteWorld would also execute a " Sign-up Agreement" authorizing NoteWorld to perform a number of services related to JHass, the client's chosen debt settlement company (" DSC" ). These services included receiving, processing and posting payments, holding such payments in a trust account, disbursing funds as authorized, and providing account and transaction information. NoteWorld charged clients a monthly fee for its services, in addition to the fees charged by JHass.
[¶7] NoteWorld held client funds in a single trust account at an FDIC-Insured bank, but kept a specific accounting of each client's individual balance in a " customer account." Once the Sign-up Agreement was executed, the client received online access to monitor the account balance. As part of the agreement, clients provided their bank account information and authorized NoteWorld to debit their personal checking accounts via monthly Automatic Clearing House (" ACH" ) transfers according to a schedule of debits provided by either JHass or the clients.
[¶8] JHass was able to access the NoteWorld online system, NoteWorld Reporter (" NWR" ), to provide NoteWorld with instructions regarding disbursements from client accounts to both creditors and JHass itself. NoteWorld maintained a user interface that allowed DSCs like JHass to use NWR to submit a client's personal bank account information and payment plan, create and modify a schedule of debits, and trigger disbursements from the client's account. For this purpose, JHass maintained a " Banking Department," which was responsible for entering client information into the JHass internal systems and NWR. Although JHass was able to create a schedule of debits in NWR, clients did not have that authority, and NoteWorld treated payment requests from JHass " as if" they came directly from the clients. However, if clients wanted to skip a periodic debit from their personal bank accounts, they could contact NoteWorld, which would cancel the debit up to two days before the scheduled release date.
[¶9] Each monthly debit from a client's private account automatically triggered a disbursement to JHass in payment of the monthly maintenance and professional fees charged for participation in the debt settlement program. JHass would also allocate the total fee charged per debit between JHass and any entities with which JHass had a fee-splitting arrangement, such as the marketing companies. Although clients reviewing their account balances could see that a portion of their monthly debit had been disbursed for " fee payments," the clients could not control the allocation or view how the total fee was allocated among JHass and its affiliates.
[¶10] Depending on the particular terms of the Client Partnership Agreement, some of the client's initial payments were allocated entirely to JHass as a " down payment" for the program. After the down payment, clients continued to deposit funds into their
NoteWorld accounts until sufficient funds, or " reserves," had accumulated so that JHass could begin negotiating with creditors. If the creditors agreed to a proposed settlement, JHass presented the offer to the client for consideration. If the client accepted, JHass would access NWR to schedule a disbursement from the client's account to that creditor.
[¶11] Per the Sign-up Agreement, NoteWorld disbursed funds from the client's account to creditors " upon receipt of a settlement letter from the [client's] DSC" or a creditor. A representative of NoteWorld clarified that even though NoteWorld required a settlement letter, if a payment was scheduled in NWR, NoteWorld had no way to verify that a settlement letter was received before the payment had been processed. In NWR, disbursements to creditors were treated differently than the schedule of debits from clients' personal checking accounts to their NoteWorld accounts and to DSCs. The terms of the Sign-up Agreement provided that the client could approve or decline a disbursement to a creditor within 24 hours of NoteWorld's receipt of notice of settlement. If the client took no action, the disbursement was deemed approved by the client and could not be revoked. Once a disbursement was made to a creditor, NoteWorld could not refund a client's account.
[¶12] Throughout this process, JHass continued to collect its monthly professional and maintenance fees in the form of scheduled debits from the client's NoteWorld account. While the account was open, JHass could modify the schedule of debits by accessing NWR. Clients had the option to communicate directly with NoteWorld regarding their accounts and disbursements, or to contact JHass, which would then relay the clients' requests to NoteWorld. However, if ...