The U.S. Court of Appeals for the Second Circuit recently affirmed entry of summary judgment in favor of the Federal Trade Commission and against 13 corporations and their two co-owners for violations of the Federal Trade Commission Act and the federal Fair Debt Collection Practices Act for allegedly placing unlawful and threatening collection calls to consumers seeking to collect payday loan debt.
In so doing, the Second Circuit concluded that the trial court did not err in holding the offending corporations’ owners jointly and severally liable for the disgorgement assessed against all defendants, which was affirmed as an appropriate amount because it was a reasonable approximation of the total amounts received by the defendant companies from consumers as a result of their unlawful acts.
A copy of the opinion in Federal Trade Commission v. Moses is available at: Link to Opinion.
Two individuals founded and co-owned corporations, which were part of a single debt collection enterprise, consisting largely of collecting payday loan debts, brought from consumer-debt creditors and compiled into portfolios.
Their employees routinely contacted debtors by telephone, identifying themselves as “officers,” “investigators,” “fraud unit” and the like and accused the consumers of committing crimes by failing to pay and threatening legal action. Some such calls were placed to friends, family members, employers or co-workers of the debtors.
Upon receipt of consumer complaints, the Office of the New York State Attorney General investigated the corporations and their owners. Without admitting fault, the owners, on behalf of themselves and the corporations executed an Assurance of Discontinuance (AOD) which agreed they were subject to specified state and federal laws, including the FDCPA, 15 U.S.C. § 1692, et seq., agreed to dissolve some of the corporations, and hired a compliance officer to implement new procedures. But shortly thereafter, the owners incorporated new corporations, some in other states, and continued to engage in the disavowed practices.
The FTC brought this action in federal court in New York alleging that the debt collection practices of the owners and corporations, individually, and as officers for the corporations, had violated section 5(a) of the FTCA, 15 U.S.C. § 45(a), and the FDCPA.
Specifically, the FTC accused the corporations and their owners of continuing to operate companies in which collectors continued to mask their identities, falsely accuse consumers of various crimes, and refuse to reveal to debtors the circumstances and nature of alleged debts after signing the AOD, and further sought, and received an ex parte temporary restraining order against them, freezing their assets and appointing a receiver to oversee the corporations.
The FTC moved for summary judgment, requesting $10,852,396 in monetary relief and asserting that the corporations and their owners should be held jointly and severally liable. One of the owners (“Owner 1”) did not dispute the corporations’ wrongdoings, but argued that he could not be held individually liable for their actions, contending that he lacked control over and knowledge of their wrongdoings.
The magistrate judge’s report and recommendations, concluded that the FTC had proved that Owner 1 both had “the authority to control the [corporations] and knew of their wrongdoing after executing the AOD, and that its request for monetary relief “reasonably approximate[d] the [corporations’] unjust gains.” The trial court adopted the magistrate’s report and recommendation in its entirety and entered judgment in the government’s favor. Owner 1 appealed.
On appeal, Owner 1 raised three arguments: (i) that he was not given time to conduct discovery; (ii) that there were material facts at issue as to whether he could be held individually liable for the actions of the corporate defendants based upon his deposition testimony, and; (iii) that the disgorgement amount adopted by the trial court was grossly excessive. The second owner submitted no brief prior to the deadline submission set by the court, and the court dismissed his appeal under Local Rule 31.2(d).
The Second Circuit rejected Owner 1’s argument that the trial court wrongly denied an extension to discovery, citing his failure to conduct any discovery at all during the one-year period the owners requested, and waiving any such argument by failing to file an affidavit opposing summary judgment on this basis.
Turning to Owner 1’s argument that genuine disputes of material fact exist regarding his control of the corporations, the Second Circuit reviewed the standards of individual liability under the FTCA and FDCPA.
Under the FTCA, an individual may be held liable for a corporation’s deceptive acts or practices “if, with knowledge of the deceptive nature of the scheme, he either ‘participate[s] directly in the practices or acts or ha[s] authority to control them.'” FTC v. LeadClick Media, LLC, 838 F.3d 158, 169 (2d Cir. 2016) (quoting FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 573 (7th Cir. 1989)).4
To prevail on the issue, the FTC must establish that consumer injury resulted from reasonable reliance upon corporate misrepresentations or omissions and that the individual defendants participated directly in the practices or acts or had authority to control them. Amy Travel, 875 F.2d at 573 (citations omitted). “The FTC is [also] required to establish the defendants had or should have had knowledge or awareness of the misrepresentations,” but need not establish actual and explicitly knowledge of the particular deception at issue. Id. at 574.
Here, the Court concluded that the same standard applies when the FTC brings an action to enforce the FDCPA pursuant to its authority under the FTCA. Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573, 577, (2010); see also 15 U.S.C. § 1692l(a) “(‘[A] violation of [the FDCPA] shall be deemed an unfair or deceptive act or practice in violation of’ the FTCA and is subject to enforcement ‘in the same manner as if the violation had been a violation of a[n] [FTC] trade regulation rule.’).”
Here, Owner 1 was a founder of all but perhaps one of the corporate defendants, held a 50 percent ownership stake in them, had signatory authority over their bank accounts, and served as their co-director and general manager, taking hostile customer calls and consulting with other managers even after execution of the AOD.
Though he contended his deposition testimony addressed issues as to whether he exercised authority to control the corporations’ conduct, the dispositive issue here was whether he possessed the authority to do so. As the magistrate’s report and recommendations pointed out, the FTC found “numerous complaints in [Owner 1’s] personal office,” and his testimony evidenced that he neglected managerial duties only after executing the AOD in which he agreed to take measures to address the corporations’ deceptive conduct.
The Second Circuit further agreed that Owner 1 had knowledge of the unlawful conduct prior to the 2013 AOD, and the record evidenced that he was more involved with debt collection calls prior to the 2013 AOD.
Because ample evidence proved that Owner 1 had knowledge of the corporations’ violations before and after execution of the AOD, the appellate court concluded, no dispute of material fact existed requiring the trial court to deny the FTC’s motion for summary judgment.
Lastly, Owner 1 argued that the disgorgement in the amount of $10,852,396 was grossly excessive because it was predicated on “approximately 45 calls where it claimed that fraudulent claims were made,” which is “a far cry from the court’s finding that the entire operation was ‘permeated with fraud.'”
While Section 13(b)’s express text refers only to injunctive relief, the Second Circuit has also held that “unqualified grant of statutory authority to issue an injunction under [S]ection 13(b) carries with it the full range of equitable remedies, including the power to grant consumer redress and compel disgorgement of profits,” and established a two-step burden-shifting framework, requiring a court to look first to the FTC to ‘show that its calculations reasonably approximated the amount of the defendant[s’] unjust gains’ and then shift the burden ‘to the defendants to show that those figures were inaccurate.’ FTC v. Bronson Partners, LLC, 654 F.3d 359, 364 365 (2d Cir. 2011). The FTC is further required to demonstrate that consumers relied on the misrepresentations at issue.
Here, on summary judgment the FTC submitted more than 500 complaints regarding the owners’ and their corporations’ debt collection practices, aggressive telephone scripts and audio recordings that prove wide dissemination of misrepresentations.
Though Owner 1 argues that those consumer complaints are inadmissible at the summary judgment stage, he explicitly waived that argument in the trial court by failing to challenge the FTC’s evidence as inadmissible, and the magistrate did not err in concluding that the owners’ and corporations’ operation was “permeated with fraud.”
Because the FTC established a presumption of reliance, its use of the owners’ and Corporations’ gross receipts as a baseline for calculating damages was appropriate, and they failed to submit any proof that they earned “all or some of their revenue through lawful means.” See Verity Int’l, 443 F.3d at 67 (noting that burden-shifting framework requires “the FTC to first show that its calculations reasonably approximated the amount of the [owners’ and corporations’] unjust gains, after which the burden shifts to the defendants to show that those figures were inaccurate” (internal quotation marks omitted)).
Accordingly, the disgorgement award was appropriate, and the trial court’s judgment in the FTC’s favor was affirmed.