CBE Grp v. Lexington Law Firm ( 2021 )

Case: 20-10166 Document: 00515805477 Page: 1 Date Filed: 04/01/2021
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
April 1, 2021
No. 20-10166 Lyle W. Cayce
Clerk
The CBE Group, Incorporated; RGS Financial,
Incorporated, on behalf of themselves and all others similarly situated,
Plaintiffs—Appellants,
versus
Lexington Law Firm; Progrexion, Incorporated; John C.
Heath, Attorney at Law, P.L.L.C., doing business as
Lexington Law Firm,
Defendants—Appellees.
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:17-CV-2594
Before Stewart, Higginson, and Wilson, Circuit Judges.
Carl E. Stewart, Circuit Judge:
Plaintiffs-Appellants CBE Group and RGS Financial, which furnish
consumer financial information to credit bureaus, sued Defendants-
Appellees Lexington Law and its vendor, Progrexion, for purportedly
perpetrating a fraud in which the firm failed to disclose that it was sending
letters to the companies in its clients’ names and on their behalves. A jury
agreed that Defendants had violated Texas law in committing fraud and fraud
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by non-disclosure (though found in favor of Defendants on the Plaintiffs’
claim of conspiracy to commit fraud). The district court, however, set aside
the verdict regarding the fraud and fraud by non-disclosure claims and issued
a judgment in favor of Defendants as a matter of law. Plaintiffs appealed.
For the reasons that follow, we AFFIRM.
I. FACTS & PROCEDURAL HISTORY
Lexington Law is a consumer advocacy law firm that offers credit-
repair services to its clients. As part of its services, the firm consults with its
clients on how to challenge entries that the clients believe are incorrectly
included in their credit reports, which are called negative “tradelines.” The
firm sends letters on their clients’ behalves to data furnishers, such as CBE
Group and RGS Financial, contesting the negative tradelines. The letters are
formatted using one of several templates generated by Progrexion that
incorporates digital copies of the clients’ signatures. Lexington Law does not
identify itself as the sender of the letters.
An engagement agreement, which customers must sign before
engaging the firm’s services, notifies prospective clients that
“[c]ommunications sent by Lexington to [data furnishers] and [credit
bureaus] on your behalf will be sent in your name, and will not be identified
as being sent by Lexington.” Elsewhere the agreement provides Lexington
Law with the ability to sign and send communications on behalf of clients and
in their names that “verify and/or challenge the accuracy of [the clients’]
credit reports.”
As early as 2010 and 2012, CBE Group and RGS Financial,
respectively, began to question whether letters that they had received
disputing negative tradelines and purporting to be from consumers had in fact
been sent by the consumers themselves. Plaintiffs grew suspicious because
the letters were “strikingly similar in format, wording, and signature” and
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came in envelopes that were “similarly addressed and stamped . . . .” A pre-
discovery suit filed by CBE Group in state court in January 2017 revealed the
letters had been sent by Lexington Law. CBE Group received 120,716 such
letters between 2015 and 2018, while RGS Financial reviewed 5,600 of them
between 2014 and 2018.
In July 2017, CBE Group filed a lawsuit in a Texas court, which
claimed that Lexington Law committed fraud by sending dispute letters
purporting to be from consumers. Lexington Law then removed the suit to
federal court. Following removal, CBE Group added RGS Financial as a
plaintiff to its lawsuit and Progrexion as a defendant. As the district court
observed, “In a nutshell, Plaintiffs contend that Defendants run a nationwide
fraudulent credit-repair scheme, preying on financially troubled consumers
by drafting, signing, and mailing frivolous dispute correspondences—all
using Progrexion’s patented software that generates context-based unique
letters—in the name of consumers, without the consumer’s specific
knowledge or consent, and without identifying that the letters are from a law
firm, rather than a consumer.” Plaintiffs averred that they suffered damages
because of Defendants’ fraudulent conduct since, under the Fair Credit
Reporting Act (“FCRA”), 15 U.S.C. § 1681 et seq., and the Fair Debt
Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692 et seq., they must
investigate a challenge to a negative tradeline when a consumer, rather than
a law firm, sends a dispute letter. In other words, Plaintiffs alleged that they
incurred costs investigating dispute letters between 2014 and 2018 that they
would not have otherwise investigated had they known the letters came from
a law firm.
The operative complaint asserted claims under Texas law for (1)
fraud, (2) fraud by non-disclosure, (3) tortious interference with Plaintiffs’
existing contracts with creditors, (4) tortious interference with Plaintiffs’
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prospective relations, and (5) conspiracy to commit fraud. Plaintiffs
withdrew their tortious interference claims at trial.
Defendants did not file any dispositive motions until the close of
evidence at trial when they filed for judgment as a matter of law under Federal
Rule of Civil Procedure 50(a). In their motion, Defendants argued that
Plaintiffs had not satisfied the burden of proof on their claims and had not
overcome the Defendants’ affirmative defenses that (1) Plaintiffs’ claims
were time barred and (2) Plaintiffs had failed to mitigate their damages. The
district court reserved judgment on the motion pending the jury’s verdict.
The jury then rendered a verdict in favor of Plaintiffs on their fraud
and fraud by non-disclosure claims but found for Defendants on Plaintiffs’
conspiracy claim. The jury awarded (1) CBE Group approximately $513,000
in actual damages jointly against Defendants, (2) CBE Group about $1.86
million in punitive damages jointly against Defendants, (3) RGS Financial
around $38,000 in actual damages jointly against Defendants, and (4) RGS
Financial roughly $86,300 in punitive damages jointly against Defendants.
After trial, Defendants renewed their motion for judgment as a matter
of law, which the district court granted.
Plaintiffs timely appealed the district court’s dismissal of their fraud
and fraud by non-disclosure claims, as well as the jury’s verdict on their
conspiracy claim.
II. STANDARD OF REVIEW
The court reviews de novo a district court’s ruling on a motion for
judgment as a matter of law. Allstate Ins. Co. v. Receivable Fin. Co., 501 F.3d
398, 405 (5th Cir. 2007). Such a motion may be granted “only if, when
viewing the evidence in the light most favorable to the verdict, the evidence
points so strongly and overwhelmingly in favor of one party that the court
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believes that reasonable jurors could not arrive at any contrary conclusion.”
U.S. ex rel. Small Bus. Admin. v. Commercial Tech., Inc., 354 F.3d 378, 383 (5th
Cir. 2003) (citation omitted); see also Pineda v. United Parcel Serv., Inc., 360
F.3d 483, 486 (5th Cir. 2004) (“A motion for judgment as a matter of law
should be granted if ‘there is no legally sufficient evidentiary basis for a
reasonable jury to find for a party.’” (quoting FED R. CIV. P. 50(a))).
III. DISCUSSION
A. Fraud
Since jurisdiction here is predicated on diversity of citizenship, the
court must apply the substantive law of the forum state, in this case Texas.
See Wisznia Co. v. Gen. Star Indem. Co., 759 F.3d 446, 448 (5th Cir. 2014).
Under Texas law, a plaintiff must prove the following elements to establish
fraud:
(1) the defendant made a material representation that was false;
(2) the defendant knew the representation was false or made it
recklessly as a positive assertion without any knowledge of its
truth; (3) the defendant intended to induce the plaintiff to act
upon the representation; and (4) the plaintiff actually and
justifiably relied upon the representation and suffered injury as
a result. The fourth element has two requirements: the plaintiff
must show that it actually relied on the defendant’s
representation and, also, that such reliance was justifiable.
JPMorgan Chase Bank, N.A. v. Orca Assets G.P., L.L.C., 546 S.W.3d 648, 653
(Tex. 2018) (internal citations and quotation marks omitted). Defendants
argue that Plaintiffs’ fraud claim fails on the first and fourth elements. We
agree.
The district court concluded that Defendants did not make any false
representations (material or otherwise) when signing and sending the dispute
letters because Lexington Law “had the legal right to sign its clients’ names
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on the correspondence it sent on their behalf to data furnishers who reported
inaccurate information about the clients’ credit.” Indeed, Lexington Law’s
engagement agreement provided the firm with the ability to sign and send
letters on the clients’ behalves and in their names. Under Texas law, “[i]t is
well settled that the attorney-client relationship is an agency relationship; the
attorney’s acts and omissions within the scope of his or her employment are
regarded as the client’s acts.” In re R.B., 225 S.W.3d 798, 803 (Tex. App.—
Fort Worth 2007) (citing, inter alia, Gavenda v. Strata Energy, Inc., 705
S.W.2d 690, 693 (Tex. 1986)). Given this principle, Texas courts have
repeatedly upheld settlement agreements signed by attorneys on behalf of
their clients. See, e.g., id. at 803; Wakefield v. Ayers, No. 01-14-648-CV, 2016
WL 4536454, at *4 (Tex. App.—Houston [1st Dist.] Aug. 30, 2016); Green
v. Midland Mortg. Co., 342 S.W.3d 686, 691 (Tex. App.—Houston [14th
Dist.] 2011). While this case does not involve a settlement agreement, the
principle stated in R.B. has persuasive value here.
Attorney Grievance Commission of Maryland v. Paul, 187 A.3d 625 (Md.
2018), upon which the district court relied in concluding Defendants had not
made any misrepresentations, is instructive on this point. In Paul, an attorney
signed a non-disclosure agreement in his client’s name without disclosing to
opposing counsel that he had done so. Id. at 632. The Maryland State Bar
initiated disciplinary proceedings against the attorney, arguing that the
attorney “made a knowing misrepresentation that a non-disclosure
agreement being sent to the opposing parties’ counsel was ‘signed by [the
client] and [the attorney]’ and when he knew that his client had not signed
the agreement.” Id. at 635. Observing that the client gave the attorney
permission to sign the agreement in his stead since the client was away on
vacation, the court determined that the attorney’s statement that the
agreement “‘was signed by [the client] and myself’ cannot be construed as
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‘false’ or ‘misleading’ even though [the client] did not physically sign the
agreement.” Id. at 636.
Plaintiffs object to the district court’s reliance on Paul, specifically,
and the court’s conclusion that Defendants did not make any
misrepresentations more generally. As to Paul, Plaintiffs first contend that,
unlike in that case, “there is no true attorney-client relationship” present
between Lexington Law and its clients. But even assuming that were true, the
engagement agreements, which provide Lexington Law with the legal right
to sign and send correspondence on their clients’ behalves and in their
names, have not been shown to be invalid. Consequently, Plaintiffs’ initial
attempt to distinguish Paul is unpersuasive.
Plaintiffs also assert that the district court’s reliance on Paul is
misplaced because Lexington Law did not discuss the dispute letters with its
clients before mailing them, while the attorney in Paul discussed the non-
disclosure agreement with his client before signing the agreement on the
client’s behalf. As evidence for their assertion, Plaintiffs point to deposition
testimony introduced at trial in which a former Lexington Law client,
Agustina Chavarria, testified that she did not understand that Lexington Law
intended to send letters on her behalf. They also rely upon a recording of a
phone call played at trial between another former client, Lance Garza, and a
Lexington Law intake consultant in which the consultant “glossed over”
how the firm would provide credit-repair services. Both Chavarria and Garza,
however, signed the firm’s engagement letter. While Chavarria and Garza
may have misunderstood the process through which Lexington Law would
represent them (and that misunderstanding may have been prompted by the
firm’s actions), they were still bound by the terms of an engagement
agreement the validity of which is not in doubt. “Absent fraud,
misrepresentation, or deceit, a party is bound by the terms of the contract he
signed, regardless of whether he read it or thought it had different terms.” In
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re McKinney, 167 S.W.3d 833, 835 (Tex. 2005). And the engagement
agreements permitted Lexington Law to sign and mail correspondence on its
clients’ behalves and in theirs names. Accordingly, whether the firm
discussed the dispute letters with its clients before sending them is
immaterial to whether the firm misrepresented itself in the letters.
Rather than cite to any case law illustrating Defendants’ conduct
amounts to fraud, Plaintiffs argue that the conduct undermines the FCRA
and the FDCPA. But Plaintiffs did not bring claims under those statutes.
Hence, the two cases upon which Plaintiffs rely in support of their
argument—Warner v. Experian Information Solutions, Inc., 931 F.3d 917 (9th
Cir. 2019), and Turner v. Experian Information Solutions, Inc., No. 16-CV-630,
2017 WL 2832738, at *1 (N.D. Ohio June 30, 2017)—are inapposite and
arguably undercut the claims they do in fact assert here. Both Warner and
Turner involved consumers who claimed that Experian, a consumer reporting
agency, violated their rights under the FCRA by not investigating dispute
letters sent by Go Clean Credit, a credit-repair organization, on their
behalves. 931 F.3d at 918–19; 2017 WL 2832738, at *1. As indicated above,
the FCRA mandates that a credit-reporting agency investigate dispute letters
when those letters are sent by the consumers themselves. § 1681i(a)(1)(A).
The Warner and Turner courts concluded that Experian was not required by
federal law to investigate Go Clean Credit’s dispute letters since the FCRA
only mandates that credit-reporting agencies respond to dispute letters sent
“directly” by the consumer. 931 F.3d at 921; 2017 WL 2832738, at *8.
Applied here, these cases suggest that Plaintiffs did not have a statutory
obligation to investigate the correspondence Lexington Law sent on its
clients’ behalves and in their names; they do not imply that the firm made
any misrepresentations when it sent the letters.
Moreover, to the extent Warner and Turner indicate that Plaintiffs
were not required to investigate the dispute letters, those cases also suggest
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that Plaintiffs did not justifiably rely on any representations Lexington Law
may have made. 1 Before the time period during which Plaintiffs claim they
were injured by Defendants’ fraudulent conduct, Plaintiffs began to question
whether the dispute letters had in fact been sent by consumers themselves.
For, witnesses from each plaintiff testified that the letters looked “similar”
as indicated by the “verbiage,” “stamps,” and envelope formatting. CBE
Group reviewed the letters and concluded that “all of the letters were coming
from the same place and . . . they were not written . . . by consumers.” RGS
Financial also reviewed the letters and determined that “they weren’t
directly [sent by] consumer[s] . . . .” Once Plaintiffs developed suspicions
that the letters may not have been sent from consumers themselves, they
incurred costs in investigating correspondence on their own accord rather
than because of the FCRA or the FDCPA. Indeed, Plaintiffs’ internal policies
require them to investigate and respond to dispute letters sent by consumers
and third parties alike. Thus, Plaintiffs fraud claim falls short for the
additional reason that they did not justifiably rely on any alleged
misrepresentations. See N. Cypress Med. Ctr. Operating Co., Ltd. v. Aetna Life
Ins. Co., 898 F.3d 461, 475 (5th Cir. 2018) (“Here, red flags, Aetna’s
independent investigation, and Aetna’s sophistication negate any justifiable
reliance Aetna had on NCMC’s alleged misrepresentations.”).
Additionally, Plaintiffs repeatedly observe that Defendants sent many
dispute letters on behalf of a given client, sometimes even after the
consumer’s account had closed. They focus on testimony provided at trial by
Erin Harness, an RGS Financial employee, who testified that she received 29
1
Although the district court did not reach the element of justifiable reliance, this
this court “may affirm on any basis supported by the record.” El Aguila Food Prod., Inc. v.
Gruma Corp., 131 F. App’x 450, 452 (5th Cir. 2005) (citing, inter alia, LLEH, Inc. v. Wichita
County, 289 F.3d 358, 364 (5th Cir. 2002)).
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dispute letters pertaining to one account and 50 regarding another. Putting
aside the fact that the witness could not confirm that those letters were in fact
sent by Lexington Law, this evidence at most suggests that the firm did
unnecessary work on behalf of a couple clients. It does not suggest that
Lexington Law committed fraud. In truth, Harness also testified that she
could not identify any client of the firm that did not provide it with
permission to mail dispute letters in the client’s name and on his or her
behalf.
A final word as to Plaintiffs’ fraud claim against Progrexion,
specifically. As the district court concluded, “There is no evidence that
Progrexion sent dispute letters; rather the evidence is that Progrexion
provided template letters to Lexington Law Firm for its use.” Hence,
Progrexion cannot be liable for fraud since it, like Lexington Law, did not
make any material misrepresentations. Nevertheless, Plaintiffs argue that
Progrexion is still liable for fraud because it was in a master-servant
relationship with Lexington Law. This argument is unpersuasive for two
reasons. First, implicit in the argument is the notion that Progrexion is
somehow vicariously liable for Lexington Law’s fraudulent conduct. But, for
the reasons discussed above, the firm did not commit fraud. Furthermore,
the case upon which Plaintiffs rely in support of their argument—Parex
Resources, Inc. v. ERG Resources, LLC, 427 S.W.3d 407 (Tex. App.—Houston
[14th Dist.] 2014)—is inapt. That case addressed whether a corporate
executive’s contacts with the forum state were sufficient to create personal
jurisdiction over a foreign corporation. Id. at 440.
In sum, Plaintiffs have not shown that Defendants committed fraud.
B. Fraud by Non-Disclosure
Plaintiffs also claim that Defendants committed fraud by non-
disclosure. “Fraud by non-disclosure, a subcategory of fraud, occurs when a
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party has a duty to disclose certain information and fails to disclose it.”
Bombardier Aerospace Corp. v. SPEP Aircraft Holdings, LLC, 572 S.W.3d 213,
219 (Tex. 2019). To establish fraud by non-disclosure under Texas law, a
plaintiff must prove:
(1) the defendant deliberately failed to disclose material facts;
(2) the defendant had a duty to disclose such facts to the
plaintiff; (3) the plaintiff was ignorant of the facts and did not
have an equal opportunity to discover them; (4) the defendant
intended the plaintiff to act or refrain from acting based on the
nondisclosure; and (5) the plaintiff relied on the non-
disclosure, which resulted in injury. In general, there is no duty
to disclose without evidence of a confidential or fiduciary
relationship . . . . [But] [t]here may [] be a duty to disclose when
the defendant . . . made a partial disclosure that created a false
impression . . . .
Id. at 219–20 (internal citations omitted).
As an initial matter and for the reasons discussed above, Plaintiffs’
fraud by non-disclosure claim must be dismissed because they did not
justifiably rely on any failure of the Defendants to disclose material facts.
Additionally, Plaintiffs have not shown that Defendants had a duty to disclose
that they were the ones actually sending the dispute letters. Plaintiffs contend
that Defendants defrauded them through partial disclosures in their
correspondence that their clients were disputing negative tradelines, which
in turn gave the false impression that the clients themselves had sent the
letters. In support of their argument, Plaintiffs rely on Ralston Purina Co. v.
McKendrick, 850 S.W.2d 629 (Tex. App.—San Antonio 1993, writ denied);
International Security Life Insurance Co. v. Finck, 475 S.W.2d 363 (Tex. Civ.
App.—Amarillo 1971); and Formosa Plastics Corp. v. Presidio Engineers and
Contractors, Inc., 941 S.W.2d 138 (Tex. App.—Corpus Christi 1995). But
each of these cases stand for a different proposition, namely that one party
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may have a duty to speak when it makes a partial disclosure during contract
negotiations. Moreover, Plaintiffs have not shown that Progrexion disclosed
any facts—material or otherwise—and so cannot be liable for fraud by non-
disclosure. And as the fact that Lexington Law had the legal right to send
dispute letters on their clients behalves and in their names suggests that the
firm did not make any false representations, so, too, does it indicate that the
firm did not create any false impressions requiring disclosure. Therefore,
Plaintiffs’ fraud by non-disclosure claim fails as well.
Finally, Plaintiffs argue that the facts Defendants stipulated to in a
joint pretrial order “alone establish fraud and fraud by nondisclosure.” In the
stipulated facts, Defendants state that they do not disclose to recipients of
dispute letters that they have mailed the letters on their clients’ behalves, in
their names, and from the clients’ states of residence. They also state that
they “intended that the recipient of the dispute letters treat them as if the
consumer personally drafted, signed, and mailed them.” But Plaintiffs do not
provide any precedential support or explanation for their assertion that these
facts demonstrate Defendants committed fraud and fraud by non-disclosure
beyond the observation that the jury found for them on those claims. In
reality, Plaintiffs stated multiple times on the record that there are no cases
directly on point—from Texas or elsewhere—that buttress their claims.
While we do not hold today that there are no situations in which a third party
may act fraudulently when it mails dispute letters (and leave for another day
what those situations may be), we can safely say that this is not one of them.
To conclude otherwise would risk undermining well-settled principles of
contract law and agency law that have long bound this court.
C. Conspiracy to Commit Fraud
Plaintiffs conclude by arguing that the jury erred in finding in
Defendants’ favor on the Plaintiffs’ conspiracy claim. However, Plaintiffs
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waived this argument by failing to move for judgment as a matter of law on
the claim before and after the case was submitted to the jury or for a new trial.
See Acadian Diagnostic Labs., L.L.C. v. Quality Toxicology, L.L.C., 965 F.3d
404, 412–13 (5th Cir. 2020) (“By failing to file any [] [such] motions in the
district court, Acadian forfeited its ability to seek appellate review of the jury
verdict.” (citing Unitherm Food Sys., Inc. v. Swift-Eckrich, Inc., 546 U.S. 394,
404 (2006))). Thus, the jury’s verdict on the conspiracy claim must stand.
IV. CONCLUSION
For the foregoing reasons, the judgment of the district court is
AFFIRMED.
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