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Complaint for Injunctive Relief and Damages FILED IN THE UNITED STATES DISTRJCT COURT FOR THE EASTERN DISTRJCT OF VIRGINIA Norfolk Division lU iq OEC i 8 A ;Q: 2 ~~ Consumer Financial Protection Bureau; ) State of~orth Carolina, ex rel. Roy Cooper, Attorney ) General; and Commonwealth of Virginia, ex rel. ) Mark R. Herring, Attorney General, ) ) Plaintiffs, ) ) v. ~ CIVIL ACTION No.CY.' JJ-/.Cvfd./,3 Freedom Stores, Inc., Freedom Acceptance A)JA-JTE-rA Corporation, Military Credit Services LLC, John F. j Melley, and Leonard B. Melley, Jr., ) ) Defendants. ) ________________________________ ) Complaint for Injunctive Relief and Damages The Consumer Financial Protection Bureau ("Bureau"), the State of North Carolina, ex ref. Roy Cooper, Attorney General (''North Carolina"), and the Commonwealth ofVirginia, ex rel. Mark R. Herring, Attorney General ("Virginia") (together, "States"), allege the following against Freedom Stores, Inc. ("Freedom"), Freedom Acceptance Corporation ("F AC"), Military Credit Services LLC ("MCS"), John F. Melley, and Leonard B. Melley, Jr.: Introduction 1. The Bureau brings this action under section 1054 of the Consumer Financial Protection Act of2010 ("CFPA"), 12 U.S.C. § 5564, section 918 ofthe Electronic Fund Transfer Act ("EFTA"), 15 U.S.C. § 1693o, and section 108 of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1607, based on Defendants' unfair and abusive practices in violation of the CFPA, 12 U.S.C. §§ 5531,5536, and their violations of EFTA's implementing regulation, Regulation E, 12 C.P.R. § 1005.10(b), and TILA's implementing regulation, Regulation Z, 12 C.F.R. § 1026.6(b), in connection with providing credit to and collecting debts from members of the United States military and other consumers. 2. The States bring this action against F AC, MCS, John Melley, and Leonard Melley based on their violations of the state and federal laws enumerated below. (a) North Carolina brings this action against FAC, MCS, Jolm Melley, and Leonard Melley under the North Carolina Unfair and Deceptive Practices Act, N.C. Gen. Stat. § 75-1.1, and the North Carolina Debt Collection Act, which prohibits debt collectors from bringing debt­ collection lawsuits against the debtor in any county other than (i) where the debt was incurred or (ii) where the debtor resides ifthe distances and amounts involved would make it impractical for the debtor to defend the claim, N.C. Gen. Stat.§ 75-55, and from publicizing or communicating the debtor's indebtedness to third parties, N.C. Gen. Stat. § 75-53. (b) North Carolina and Virginia bring this action against FAC, MCS, John Melley, and Leonard Melley under section 1042 of the CFPA, 12 U.S.C. § 5552, which authorizes state attorneys general to bring civil actions to enforce provisions of the CFPA, based on Defendants' unfair and abusive practices in violation of sections 1031 and 1036 of the CFPA, 12 U.S.C. §§ 5531 ' 5536. Jurisdiction and Venue 3. This Court has subject-matterjurisdiction over this action because it is brought under Federal consumer-financial law, 12 U.S.C. §§ 5552(a)(l), 5565(a)(l), presents a federal question, 28 U.S.C. § 1331, and is brought by an agency of the United States, 28 U.S.C. § 1345. 2 4. This Court has supplemental jurisdiction over North Carolina's state law claims because they are so related to the federal claims that they form part of the same case or controversy. 28 U.S.C. § 1367(a). 5. Venue is proper in this district because Freedom, FAC, and MCS are located, reside, and do business here, John Melley resides and does business here, and Leonard Melley does business here. 28 U.S.C. §1391(b); 12 U.S.C. § 5564(f). Parties 6. The Bureau is an agency of the United States created by the CFPA. 12 U.S.C. § 5491(a). It has independent litigating authority, including the authority to enforce the regulations promulgated under EFTA, 15 U.S.C. § 1693o, and TILA, 15 U.S.C. § 1607. 12 U.S.C. § 5564(a)-(b); see also 12 U.S.C. 5481(12), (14) (defining "Federal consumer financial law" to include EFTA and TILA). 7. The States have independent authority to enforce provisions of the CFPA. 12 U.S.C. § 5552. The State ofNorth Carolina has authority to bring suit to enforce its state consumer-protection laws and acts through its Attorney General, Roy Cooper, pursuant to authority granted by Chapters 75 and 114 of the North Carolina General Statutes. 8. Freedom is a Delaware corporation that is located, resides, and does business in this district. Freedom sells consumer goods and electronics and provides financing for those purchases. 9. FAC is a Virginia corporation that is located, resides, and does business in this district. F AC acquires, purchases, or services extensions of credit to consumers made by Freedom. FAC also collects debts owed under consumers' contracts with Freedom or MCS. Therefore, F AC offers or provides a consumer-financial product or service that is covered by the 3 CFPA. 12 U.S.C. § 5481(15)(A)(i), (15)(A)(x). FAC is a "covered person" under the CFPA. 12 U.S.C. § 5481(6)(A). 10. MCS is a Virginia limited-liability company that is located, resides, and does business in tills district. MCS extends credit to consumers and collects debts owed under consumers' contracts with MCS. Therefore, MCS offers or provides a consumer-financial product or service that is covered by the CFPA. 12 U.S.C. § 5481(15)(A)(i) . .MCS is a "covered person" under the CFPA. 12 U.S.C. § 5481(6)(A). 11. John Melley is the president and chlef executive officer ofFAC , the president and chief executive officer ofMCS, and the vice president and chief operating officer of Freedom. Given his status as an officer, John Melley is a "related person" to FAC and MCS under the CFPA. 12 U.S.C. § 5481(25)(C)(i). Because he is a related person, John Melley is deemed a "covered person" for purposes of the CFPA. 12 U.S.C. § 5481(25)(B). 12. Leonard Melley is the president and chlef executive officer of Freedom and the chief operating officer of both F AC and MCS. Given his status as an officer, Leonard Melley is a "related person" to FAC and MCS under the CFPA. 12 U.S.C. § 5481(25)(C)(i). Because he is a related person, Leonard Melley is deemed a "covered person" for purposes of the CFPA. 12 U.S.C. § 5481(25)(B). Goods and Services Provided to Consumers by Freedom, FAC, and MCS 13. Freedom is a nationwide retailer of consumer goods, including household appliances, jewelry, furniture, electronics, airline tickets, and stereo equipment. The company sells merchandise online at http://www.shopfreedom.com and at its fourteen retail stores, which are all located near military bases, including in North Carolina and Virginia. 4 14. From January 1, 2010, to November 1, 2013, Freedom financed its customers' retail purchases through retail-installment contracts, which established monthly payments that were typically due on the second of each month. Many of the consumers who obtained credit from Freedom were current or former members ofthe United States military or their family members. 15. Freedom immediately assigned the retail-installment contracts it issued to PAC, which was responsible for servicing and collecting consumers' Freedom-related debts. 16. From January 1, 2010, to November 1, 2013, MCS extended credit to consumers who purchased retail goods at over 300 independent retailers ("MCS Dealers") within MCS's dealer network, some of which were located in North Carolina and Virginia. 17. MCS's credit contracts were revolving-credit agreements. The MCS agreements disclosed a "maximum" aruma} percentage rate ("APR") but not each periodic rate actually used to compute the fmance charge and the corresponding nominal annual percentage rate. The MCS account-opening disclosures were not provided in the form of a table. 18. Like the Freedom contracts, MCS's revolving-credit agreements typically required payment by the second of each month. Also like Freedom, MCS Dealers catered to consumers on or near military bases. Most of MCS 's customers were current or former members of the United States military or their family members. MCS and PAC both collected consumers' MCS-related debts. Companies' "Double Payment" Practices 19. Many military members elected to repay their Freedom- and MCS-related debts by allotment, or automatic deductions from their pay. 5 20. When military consumers obtained credit from Freedom or MCS, employees of Freedom, MCS, or the MCS Dealers directed these consumers to an in-store computer terminal where they could log into a Department of Defense ("DoD") website to set up a recurring direct transfer of funds from their pay to Freedom, FAC, or MCS. 21. In addition, when consumers elected to repay their Freedom- or MCS-related debts by allotment, Freedom, MCS, or the MCS Dealers gave consumers the forms required to establish a bank account with a third-party military-allotment-processing bank ("Allotment­ Processing Bank"). 22. Once the forms were completed, Freedom, MCS, or the MCS Dealers forwarded them to the Allotment-Processing Bank. 23. The Allotment-Processing Bank arranged for the DoD to transfer funds directly from servicemembers' pay to the Allotment-Processing Bank twice each month. The bank, in turn, paid the consumers' monthly allotment to FAC or MCS on the contract due date. 24. The amount of the monthly allotment equaled the consumers' monthly payment obligation under the credit agreements. 25. The companies allowed servicemembers at the time of contracting to provide F AC and MCS an alternative payment method in the event their allotments ceased. 26. Specifically, FAC's and MCS's credit applications contained the following provisions regarding ACH authorizations ("ACH Pre-Authorization"): a.
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