The Second Circuit affirmed a decision by the US District Court for the Western District of New York finding the owners of several debt collection companies personally liable for the disgorgement of the money the companies received as a result of violating the Federal Trade Commission Act (“FTCA”) and the Fair Debt Collection Practices Act (“FDCPA”). Federal Trade Commission v. Moses, 913 F.3d 297 (2d Cir. Jan. 11, 2019)
According to the FTC, the owners of twelve debt collection agencies which largely collected payday loan debts engaged in illegal and abusive debt collection practices. The companies’ employees would, among things, routinely contact debtors and falsely identify themselves as representatives from a “fraud unit” or “fraud division,” then accuse debtors of check fraud or a related crime and threaten them with criminal prosecution if they did not pay their debts.
After receiving a litany of consumer complaints, the New York State Attorney General (“AG”) began investigating the businesses. Thereupon, the companies’ owners, on behalf of themselves and the companies, entered into an “Assurance of Discontinuance” (the “AOD”) with the AG. While not admitting fault, the owners agreed to dissolve some of the companies and advise the AG’s Office if any of the companies changed their principal place of business, incorporated a new company, or did business under a new name.
Shortly afterwards, though, and without informing the AG’s Office, the owners incorporated new companies and continued to engage in the forsworn practices. It was determined that the owner (who later prosecuted the appeal) was a co-founder, co-owner, co-director, and general manager of most of the new companies, had a desk in the “collection call” area, and had signature authority for the companies’ bank accounts. He also was principally responsible for signing the employee’s checks; managing the bank accounts; handling the hiring and firing employees; maintaining the companies’ phone systems and websites; receiving consumer payments; and operating the entity which purchased consumer debts.
The FTC sued the companies and the owners seeking over $10,000,000 in monetary and other relief, asking that all of the defendants, including the owners, should be held jointly liable. The district court granted summary judgment to the FTC. It found that the owner had both “the authority to control the [companies] and knew of their wrongdoing.” Even if he somehow lacked detailed knowledge of the illicit collection practices, he could not plead ignorance after expressly agreeing to the 2013 AOD. The existence of the AOD established that he had notice of the illicit collection activities and was required to ensure that they followed the FTCA and the FDCPA. The court also concluded that the disgorgement request reasonably approximated the unjust gains and entered judgment for $10,852,396.
The Second Circuit affirmed. To prevail, the FTC must show that the individuals participated directly in the practices or had authority to control them. Authority to control can be evidenced by active involvement in business affairs and the making of corporate policy, including assuming the duties of a corporate officer. The FTC is also required to establish the defendants had or should have had knowledge or awareness of the deceptive practices. The FTC need not prove the defendant had actual knowledge; knowledge may be established by showing that the individual recklessly indifferent to its deceptiveness, or had an awareness of a high probability of deceptiveness and intentionally avoided learning of the truth.
The court determined that the FTC met its burden because the owner was a founder of all but perhaps one of the companies, held a 50 percent ownership stake in them, had signatory authority over their bank accounts, served as their co-director and general manager, continued to review the financial activities, and occasionally would visit the collection floor, where he would speak to other managers about the corporations’ business. In these various roles, he had the authority to control the companies’ deceptive actions and retained this authority after he signed the AOD.
The court was unmoved by the owner’s claim that after the AOD was signed his involvement in the companies was minimal. Not only was he on notice of the companies’ deceptive conduct after the AOD, but he had agreed to actively take measures to address the deceptive conduct and implement procedures. Viewed in light of all the evidence before the district court on the motion for summary judgment, the owner’s denial of involvement in, rather than the authority to control the actions of, the companies did not create a dispute of material fact.Download Related Document