Colorado bankruptcy trustees have recently been increasing their focus on debt settlement companies and attorneys alleged to be performing services in violation of the Colorado Uniform Debt-Management Services Act (“CUDMSA” or the “Act”). At the heart of this issue is the bankruptcy trustees' interpretation of the statutory penalties accessible under the CUDMSA for these alleged violations of the Act. Under C.R.S. § 5-19-235(b), which dictates private enforcement for certain violations of the Act, including failing to be licensed, “[an] individual may recover in a civil action three times the total amount of the fees, charges, money, and payments made by the individual to the provider, in addition to…reasonable attorney’s fees and costs.” According to the position taken by numerous Colorado bankruptcy trustees, the trebled amount that may be recovered under § 5-19-235 of the CUDMSA includes all monies paid into the debtor’s debt settlement program, not just the fees paid to the provider, regardless of whether those funds were subsequently used to pay the debtor’s creditors or refunded to the debtor. This wildly unreasonable interpretation is vastly different from the position we have seen other trustees take across the country, who typically seek treble damages only for monies paid in fees to the provider, not all monies deposited into the debtor’s debt settlement program.

The Colorado trustees have relied on 2005 commentary from the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) model Uniform Debt-Management Services Act (the “model Act”) as a way to claim the debtor is entitled to treble damages for all monies deposited into their debt settlement program (per Comment 3. of the private enforcement section, “[t]he amount to be trebled includes all payments made to the provider (or its designee), including amounts that thereafter are forwarded to the individual’s creditors”). This commentary defeats the purpose behind the punitive measure by seeking out money that already belonged or was paid out on behalf of the debtor. Furthermore, and most importantly, this commentary was never adopted by the Colorado state legislature and, as such, is only a mere guideline that does not constitute legal precedence in this matter.

Lack of Legal Precedent and Litigation Trends

The interpretation we have seen from Colorado bankruptcy trustees in the past few years is particularly concerning, given that there is no substantive legal precedent addressing how the applicable damages are to be calculated. In fact, no state that has adopted the model Act with the same or similar language regarding private enforcement and civil remedies has issued a legal opinion relating to the matter. This lack of clearly defined precedent has enabled Colorado trustees to pursue what many legal practitioners view as an unreasonable and excessively broad application of the law.

Research on the litigation and settlement patterns of Colorado trustees in CUDMSA-related cases reveals a relentless pursuit of claims against debt settlement providers. Since 2020, one attorney who is well known for representing multiple trustees across the state has filed fifty adversary proceedings against providers in the Colorado Bankruptcy Court, averaging over one filing a month. This figure does not even include any settlements made outside of court. It’s critical for those in the debt settlement industry to understand the implications of these litigation trends and recognize the potential for significant financial impacts. Absent clear legal precedent, this matter is ripe to be challenged before a judicial tribunal, and it would be interesting to see it challenged.