Williams v. Equitable Acceptance Corporation

Background

Vanessa Williams and Kory Turner brought claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) and state law. They alleged that Equitable Acceptance Corporation (EAC), student-loan service dealers, and others operated a scheme that induced federal student-loan borrowers to buy purported loan-forgiveness services. According to the allegations, the services generally involved applying for loan consolidation and repayment programs that borrowers could have pursued themselves without charge. EAC financed the purchases through credit plans that borrowers repaid with interest.

The plaintiffs also alleged that Jeffrey Henn, who served as EAC’s president and chief executive officer, helped operate the scheme. They alleged that Jeffrey transferred his interest in EAC and other assets into a revocable trust and that property jointly owned by Jeffrey and Teresa Henn was transferred into another revocable trust, with both Henns serving as co-trustees. The plaintiffs further alleged that EAC used the borrowers’ payments in connection with commercial loans and transferred funds to lenders.

Motions and rulings

The court addressed three motions:

The court granted EAC’s motion to dismiss Claim 14. The plaintiffs argued that EAC’s commercial loans and payments to lenders should be presumed fraudulent because they resembled payments in a Ponzi scheme. The court rejected that argument. It explained that the alleged scheme did not have the features supporting that presumption: EAC owed money to the borrowers rather than to investors, the lenders were not earlier investors receiving artificially high returns, and the complaint did not adequately allege that the commercial loans were necessary to keep the scheme operating.

Without the presumption, the plaintiffs had to plead facts showing that EAC entered into the commercial loans with actual intent to hinder, delay, or defraud the borrowers. The court found that they had not done so. It reasoned that the alleged fraud occurred when borrowers were induced to enter credit agreements for the services, while EAC’s later borrowing from lenders and payments to those lenders were not themselves part of the alleged fraud. The court therefore dismissed Claim 14 and did not reach EAC’s other dismissal arguments.

The court granted the Henns’ motion as to the fraudulent-conveyance claims against Jeffrey and Teresa, called the Trust Claims. It held that property in a revocable trust remains subject to the settlor’s creditors’ claims. Because Jeffrey retained control over the trust property, the transfers into the trusts did not plausibly hinder, delay, or defraud the borrowers. The Trust Claims were therefore dismissed.

The court denied the Henns’ motion as to the RICO and fraud claims against Jeffrey. It found that the plaintiffs had made a sufficient preliminary showing that Jeffrey had contacts with New York related to the alleged scheme. The court considered communications between Jeffrey and a New York-based dealer executive concerning borrower contracts, credit information, complaints, financing, communications, credit reporting, and debt collection. It also found that allegations about Jeffrey’s role in recruiting dealers, approving agreements, controlling payment terms, and reviewing borrower materials supported personal jurisdiction and venue in New York.

Finally, the court denied the plaintiffs’ motion for a preliminary injunction. The requested injunction depended on the plaintiffs’ likelihood of succeeding on their fraudulent-transfer claims. Because the court dismissed the fraudulent-conveyance claim against EAC and the Trust Claims against the Henns, the plaintiffs could not satisfy that requirement. The court also noted that federal courts generally lack authority to issue a free-standing asset freeze to protect a possible future damages award.

Disposition and classification

The order granted EAC’s motion to dismiss Claim 14; granted in part and denied in part the Henns’ motion to dismiss, granting it as to Claims 12 and 13 and denying it as to Claims 1, 2, and 8 against Jeffrey Henn; and denied the plaintiffs’ motion for a preliminary injunction. Under the stated classification convention, this is a procedural order because the controlling rulings were motions to dismiss under the pleading and jurisdiction rules and an ancillary injunction request, rather than a final merits determination of the underlying claims.