Federal Trade Commission v. Loanpointe, LLC ( 2013 )


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  •                                                                      FILED
    United States Court of Appeals
    Tenth Circuit
    May 8, 2013
    UNITED STATES COURT OF APPEALS
    Elisabeth A. Shumaker
    FOR THE TENTH CIRCUIT                Clerk of Court
    FEDERAL TRADE COMMISSION,
    Plaintiff-Appellee,                            No. 12-4006
    (D.C. No. 2:10-CV-00225-DAK)
    v.                                                     (D. Utah)
    LOANPOINTE, LLC,
    EASTBROOK, LLC, and
    JOE S. STROM,
    Defendants-Appellants,
    BENJAMIN J. LONSDALE,
    JAMES C. ENDICOTT, and
    MARK S. LOFGREN,
    Defendants.
    ORDER AND JUDGMENT *
    Before LUCERO and HOLMES, Circuit Judges, and BRIMMER, District
    Judge. **
    *
    This order is not binding precedent except under the doctrines of law of the
    case, res judicata, and collateral estoppel. It may be cited, however, for its
    persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
    **
    The Honorable Philip A. Brimmer, U.S. District Judge, District of
    Colorado, sitting by designation.
    The Federal Trade Commission (“FTC”) initiated this action against
    appellants alleging that their issuance and collection of short-term “payday” loans
    violated the Federal Trade Commission Act (“FTC Act”), see 
    15 U.S.C. § 45
    , and
    its regulations, see 
    16 C.F.R. § 444.2
    , as well as the Fair Debt Collection
    Practices Act (“FDCPA”), see 
    15 U.S.C. § 1692
    . Aplt. App’x at A736. The
    district court granted summary judgment in favor of the FTC, entered a permanent
    injunction against appellants, and ordered disgorgement of interest recovered on
    certain loans. 
    Id.
     at A755. In their appeal, appellants challenge only the
    disgorgement order.
    I.
    Appellant LoanPointe, LLC, which is run by appellant Joe S. Strom, does
    business as GetECash (collectively, the “appellants”). 1 
    Id.
     at A736. GetECash
    offers relatively small-dollar (under $1,000), unsecured, high-interest loans
    (commonly known as “payday” loans) through its website, www.GetECash.com.
    
    Id.
     During the time periods relevant to this appeal, customers who applied for a
    GetECash payday loan were required to check a box indicating that they had read,
    inter alia, the Loan Note and Disclosure (the “Disclosure”). 
    Id.
     The Disclosure
    included the following statement in what the district court described as small
    bolded print: “NOTICE: I agree to have my wages garnished to pay any
    1
    Defendant Eastbrook, LLC was merged into LoanPointe prior to the start
    of the relevant time period and no longer exists as an independent entity. Aplt.
    App’x at A736.
    -2-
    delinquent amount on this loan.” 
    Id.
     Appellants concede that the inclusion of
    this wage assignment language violated the FTC’s Credit Practices Rule, which
    allows such wage assignment clauses only if “(i) [t]he assignment by its terms is
    revocable at the will of the debtor, or (ii) [t]he assignment is a payroll deduction
    plan or preauthorized payment plan, commencing at the time of the transaction, in
    which the consumer authorizes a series of wage deductions as a method of making
    each payment, or (iii) [t]he assignment applies only to wages or other earnings
    already earned at the time of the assignment.” 
    16 C.F.R. § 444.2
    (a)(3).
    Assignment clauses that do not meet these requirements are per se unfair under
    section 5 of the FTC Act. 
    Id.
    Appellants also included the following language in garnishment letters they
    sent to employers:
    One of your employees has been identified as owing a delinquent debt
    to GetECash. The Debt Collection Improvement Act of 1996 (DCIA)
    permits agencies to garnish the pay of individuals who owe such debt
    without first obtaining a court order. Enclosed is a Wage Garnishment
    Assignment directing you to withhold a portion of the employee’s pay
    each period and to forward those amounts to GetECash. We have
    previously notified the employee that this action was going to take
    place and have provided the employee with the opportunity to dispute
    the debt.
    Aplt. App’x at A738. This language is similar to that used by the Treasury
    Department’s Financial Management Service when it sends garnishment letters to
    employers. Aplt. App’x at A737-38. The district court found that the use of such
    language violated both the FTC Act and the FDCPA because it falsely represented
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    that appellants were authorized by the DCIA to garnish wages without a court
    order and that they had afforded borrowers the opportunity to dispute the debt.
    Appellants do not contest their liability under the FTC Act and the FDCPA for the
    garnishment letters.
    Based on the foregoing conduct, the FTC requested that the court order
    disgorgement of $2,036,936, which constituted all of the interest recovered on
    those loans utilizing the improper wage assignment clause. 
    Id.
     at A753. The
    district court denied that request, finding that the FTC did not establish a causal
    relationship between that amount and the violations. 
    Id.
     The district court
    explained that “[d]etermining equitable monetary relief in this case . . . requires
    the court to balance the need to hold Defendants accountable for deceptive
    practices with Defendants’ right to repayment of the loans.” 
    Id.
     at A754. With
    this goal in mind, the district court limited its consideration to the amounts
    garnished from employers who received the package of documents which violated
    the FTC Act and FDCPA. 
    Id.
     at A753-55. The total amount recovered from
    those employers was $468,020.91. 
    Id.
     The court subtracted the loan principal
    from that amount and ordered that appellants disgorge the $294,436.31 in interest
    appellants had recovered through improper garnishment. 
    Id.
     at A755, A779.
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    II.
    Appellants argue that, because this is an appeal of a summary judgment
    order, the Court should conduct a de novo review. See Appellants’ Br. at 14
    (citing Buchanan v. Sherrill, 
    51 F.3d 227
    , 229 (10th Cir. 1995)). Appellants,
    however, have not appealed the district court’s rulings regarding their liability.
    Rather, their appeal is limited to whether the district court had a sufficient basis
    for disgorging the interest appellants received on those loans that were repaid
    through garnishment. See id. at 2.
    In order to determine whether we review the district court’s disgorgement
    order de novo or for abuse of discretion, it is necessary to examine the nature of
    the remedy of disgorgement. “[D]isgorgement is a distinctly public-regarding
    remedy, available only to government entities seeking to enforce explicit statutory
    provisions.” FTC v. Bronson Partners, LLC, 
    654 F.3d 359
    , 372 (2d Cir. 2011).
    Disgorgement is remedial rather than punitive, SEC v. Blatt, 
    583 F.2d 1325
    , 1335
    (5th Cir. 1978), intended to “correct, remove, or lessen a wrong, fault, or defect.”
    B LACK ’ S L AW D ICTIONARY 1319 (8th ed. 2004). Its primary purpose “is to deter
    violations of the [ ] laws by depriving violators of their ill-gotten gains.”
    Bronson Partners, 
    654 F.3d at
    373 (citing SEC v. Fischbach Corp., 
    133 F.3d 170
    ,
    175 (2d Cir. 1997)); see also FTC v. Gem Merch. Corp., 
    87 F.3d 466
    , 470 (11th
    Cir. 1996) (the purpose of disgorgement “is not to compensate the victims of
    fraud, but to deprive the wrongdoer of his ill-gotten gain”). In keeping with this
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    purpose, government agencies are not required to return disgorged profits to the
    victims of a scheme, nor are victims’ losses necessarily the best measure of the
    amount that should be disgorged. Bronson Partners, 
    654 F.3d at 373
     (noting that,
    in many cases, “the nature of the harm is so diffuse that the specific identities of
    the victims would be nearly impossible to ascertain and the quantum of their
    individual entitlements too minimal to compute”); see also FTC v. Verity Int’l,
    Ltd., 
    443 F.3d 48
    , 67 (2d Cir. 2006) (disgorgement is measured by the
    defendant’s gain as opposed to the consumer’s loss).
    Although the FTC Act “does not expressly authorize a court to grant
    consumer redress (i.e., refund, restitution, rescission, or other equitable monetary
    relief), § 13(b)’s grant of authority to provide injunctive relief carries with it the
    full range of equitable remedies,” FTC v. Freecom Communications, Inc., 
    401 F.3d 1192
    , 1202 n.6 (10th Cir. 2005), including disgorgement of profits. Gem
    Merch. Corp., 
    87 F.3d at 468
    ; see also CFTC v. Wilshire Inv. Mgmt. Corp., 
    531 F.3d 1339
    , 1344 (11th Cir. 2008) (the FTC Act’s “grant of authority to issue an
    injunction carried the full range of equitable remedies, among which ‘is the power
    to grant restitution and disgorgement.’”) (internal citations omitted). “An order
    for disgorgement may be considered an equitable adjunct to an injunction decree.”
    Bronson Partners, 
    654 F.3d at 365
     (quoting Porter v. Warner Holding Co., 
    328 U.S. 395
    , 399 (1946)); see also Freecom Communications, 
    401 F.3d at
    1203 n.6
    (“In cases where the FTC seeks injunctive relief, courts deem any monetary relief
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    sought as incidental to injunctive relief.”). In other words, a district court’s
    authority to award disgorgement under § 13(b) falls within its general equitable
    jurisdiction to “decide all relevant matters in dispute and to award complete
    relief.” Porter, 
    328 U.S. at 399
    . The same standard of review thus applies to the
    appeal of an order granting injunctive relief as to the appeal of an order awarding
    equitable monetary relief.
    As we have previously explained, “[w]e review the decision to grant a
    permanent injunction for abuse of discretion.” FTC v. Accusearch Inc., 
    570 F.3d 1187
    , 1201 (10th Cir. 2009); see also FTC v. Stefanchik, 
    559 F.3d 924
    , 931 (9th
    Cir. 2009) (“We review the district court’s grant of equitable monetary relief [in
    the amount of consumers’ loss] for an abuse of discretion.”); FTC v. Febre, 
    128 F.3d 530
    , 534 (7th Cir. 1997) (“We review only the narrow issue of whether the
    actual amount of damages awarded by the district court, $16,096,345, was
    calculated properly. We review a district court’s grant of equitable relief for
    abuse of discretion.”). As a result, we reject appellants’ request that we conduct a
    de novo review and instead review appellants’ challenge to the disgorgement
    award for abuse of discretion.
    “A district court abuses its discretion where it commits a legal error or
    relies on clearly erroneous factual findings, or where there is no rational basis in
    the evidence for its ruling.” Clark v. State Farm Mut. Auto. Ins. Co., 
    433 F.3d 703
    , 709 (10th Cir. 2005) (quotations omitted). The district court’s discretion in
    -7-
    granting injunctive relief is “necessarily broad and a strong showing of abuse
    must be made to reverse it.” Accusearch, 
    570 F.3d at 1201
     (quotations omitted).
    III.
    Appellants challenge the disgorgement order on the grounds that the profits
    they earned in the form of interest collected by means of the unlawful
    garnishment letters were not “ill gotten.” Appellants’ Br. at 2. In support of this
    contention, they argue, first, that a violation of the Credit Practices Rule on its
    own is not sufficient to support a disgorgement award; second, that the district
    court erred in not requiring the FTC to offer evidence that borrowers were
    actually deceived by appellants’ statements or otherwise objected to having their
    wages garnished without a court order; and third, that appellants were
    legitimately owed all the money they collected and thus have neither caused any
    damage nor reaped any undue benefit. 
    Id.
     None of these arguments supports the
    conclusion that the district court abused its discretion.
    First, appellants claim that a violation of the Credit Practices Rule alone
    cannot support the disgorgement award. See Appellants’ Br. at 2 (Statement of
    the Issues on Appeal); id. at 9-10; see also 
    16 C.F.R. § 444.2
    . The district court,
    however, imposed disgorgement under the FTC Act and the FDCPA, as well as
    the Credit Practices Rule. Aplt. App’x at A823 (“Defendants are required to
    disgorge . . . profits from violations of Section 5 of the FTC Act, the FDCPA, and
    the Credit Practices Rule”).
    -8-
    Section 5 of the FTC Act prohibits “unfair or deceptive acts or practices in
    or affecting commerce.” 
    15 U.S.C. § 45
    . Under the FTC Act, a practice is
    deceptive if it entails a material misrepresentation or omission that is likely to
    mislead consumers acting reasonably under the circumstances. FTC v. Pantron I
    Corp., 
    33 F.3d 1088
    , 1095 (9th Cir. 1994). A practice is unfair if it “causes or is
    likely to cause substantial injury to consumers which is not reasonably avoidable
    by consumers themselves and not outweighed by countervailing benefits to
    consumers or to competition.” 
    15 U.S.C. § 45
    (n). The district court found that
    the false statements in the wage garnishment letters were deceptive under the FTC
    Act because they “made the employers more likely to garnish the wages of their
    employees.” Aplt. App’x at A743. The district court also found that disclosing
    debts to employers without the borrowers’ consent was an unfair practice under
    the FTC Act because it could cause significant, unavoidable harm to borrowers.
    
    Id. at 744-45
    .
    In addition to violating the FTC Act, the district court held that the wage
    garnishment letters violated the FDCPA, which bars debt collectors from using
    “any false, deceptive, or misleading representation or means in connection with
    the collection of any debt.” 15 U.S.C. § 1692e. The FDCPA also prohibits
    communicating with a third party regarding a debt without the prior consent of
    the borrower unless the communication is necessary to effectuate a post-judgment
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    judicial remedy. Id. at § 1692c(b). Appellants do not dispute the district court’s
    finding that they violated the FDCPA. See Appellants’ Br. at 2.
    Second, appellants argue that the district court’s disgorgement order is
    improper due to the lack of evidence that any borrowers were actually misled by
    the violations. As mentioned above, the district court concluded that the
    garnishment letters likely deceived the employers who received them. Aplt.
    App’x at A742. Appellants have not sought to challenge the district court’s
    conclusion that it was the employers, not the borrowers, who were likely misled. 2
    Further, appellants seem to misconstrue the standard for liability under § 5
    of the FTC Act. See, e.g., Appellants’ Reply Br. at 3-4, 7. The FTC does not
    need to prove actual deception, only the likelihood that a consumer (here,
    2
    Employers can be “consumers” under the “deceptive” prong of § 5 of the
    FTC Act. Communications made in the effort to collect a debt–for example, skip
    tracing forms seeking current information about a debtor’s location or
    employment status–may be found deceptive even when they are sent to third
    parties and not to the debtors themselves. See, e.g., Floersheim v. FTC, 
    411 F.2d 874
    , 876 (9th Cir. 1969) (finding deceptive a certain variety of skip tracing form,
    which is “sent to a person other than the debtor, [and] requests ‘answers to all
    questions on the reverse side of this form, pertaining to the subject’”); Rothschild
    v. FTC, 
    200 F.2d 39
    , 41 (7th Cir. 1953) (finding that skip tracing forms sent to
    individuals other than the debtor are deceptive); Dejay Stores, Inc. v. FTC, 
    200 F.2d 865
    , 867 (2d Cir. 1952) (“But it is not necessary to establish that the person
    deceived has suffered any pecuniary loss. . . . The Federal Trade Commission’s
    conclusion that it is in the public interest to require that creditors should not use
    dishonest methods in collecting their debts is within its discretion.”). Moreover,
    it is well established that misleading collection letters sent directly to debtors are
    deceptive, even though such communications are not advertisements designed to
    induce a purchase. See, e.g., FTC v. Check Investors, Inc., 
    502 F.3d 159
    , 174-75
    (3d Cir. 2007) (finding that writers of insufficiently funded checks, who were
    subject to misleading collection practices, qualified as “consumers” under § 5).
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    employers), acting reasonably under the circumstances, would be deceived. See,
    e.g., Kraft, Inc. v. FTC, 
    970 F.2d 311
    , 319 (7th Cir. 1992) (“We hold that the
    Commission may rely on its own reasoned analysis to determine what claims,
    including implied ones, are conveyed in a challenged advertisement, so long as
    those claims are reasonably clear from the face of the advertisement.”); Thiret v.
    FTC, 
    512 F.2d 176
    , 180 (10th Cir. 1975) (“Evidence of actual deception is not
    necessarily essential to a finding of unfair and deceptive practices. It is the
    capacity to deceive which is important.”). The district court properly applied this
    standard in reasoning that the letters were deceptive because an employer would
    likely be unfamiliar with the law governing debt collection and unable to verify
    the facts set forth in the letters. Aplt. App’x at A742-43. No further evidentiary
    basis was required.
    Moreover, the district court found that appellants caused harm to
    borrowers–and violated § 5 of the FTC Act–independent of the deceptive
    garnishment letters. Aplt. App’x at A744-45. Specifically, the district court held
    that disclosing employees’ debt to their employers without prior approval was an
    unfair practice under the FTC Act. Id. The district court described at some
    length the “substantial economic and monetary harm” that assignment clauses and
    wage garnishment letters can cause to employees. Id. This harm results, the
    district court noted, from the negative light in which many employers view wage
    garnishment notices, as they not only add to the employer’s administrative burden
    -11-
    but also suggest that the employee is irresponsible. Id. (citing Am. Fin. Servs.
    Assoc. v. FTC, 
    767 F.2d 957
    , 974 (D.C. Cir. 1985)). “As a consequence many
    lose their jobs after wage assignments are filed. Even if the consumer retains the
    job, promotions, raises, and job assignments may be adversely affected.” 
    Id.
    Garnishments are also harmful, the district court observed, because they can
    further disrupt already unstable personal finances, preventing wage earners from
    being able to afford necessities or driving them to take improvident emergency
    measures. 
    Id.
     By focusing exclusively on whether or not borrowers were
    deceived with respect to appellants’ power to garnish their wages, appellants’
    argument ignores this additional basis for liability under the Act.
    Third, appellants argue that the profit earned by means of the deceptive
    letters was not “ill gotten” because appellants “did not collect any money than
    [sic] was not owed.” Appellants’ Br. at 19. This rationale could be used to
    justify essentially any method of collecting a debt since it ignores the harm that
    can flow from the act of collection itself. 3 Moreover, following this logic would
    3
    The FDCPA was expressly designed to curb the harms of abusive debt
    collection practices. “Abusive debt collection practices contribute to the number
    of personal bankruptcies, to marital instability, to the loss of jobs, and to
    invasions of individual privacy. . . . It is the purpose of this subchapter to
    eliminate abusive debt collection practices by debt collectors . . . .” 
    15 U.S.C. § 1692
    (a), (e); see also Floersheim v. FTC, 
    411 F.2d 874
    , 878 (9th Cir. 1969)
    (“Petitioner contends there is no deception because deception requires injury, and
    here there is no injury because all the debtors owe the money. There is no merit
    in this contention. Deception itself is the evil the statute is designed to
    prevent.”).
    -12-
    deprive consumers of the specific protections accorded them under federal law.
    The district court deliberately fashioned a remedy that serves the two
    purposes of disgorgement, stripping the wrongdoer of ill-gotten gains and
    deterring improper conduct, without penalizing appellants. 4 Cf. United States v.
    Nacchio, 
    573 F.3d 1062
    , 1079-80 (10th Cir. 2009). The district court ordered a
    limited award that targets only those proceeds which, based on the best
    information available to the district court, had a strong causal connection to the
    relevant violations. 5 
    Id. at 1080
     (stating that the court need only reach a
    “reasonable approximation” of illegal profits) (citation and quotation omitted);
    FTC v. QT, Inc., 
    512 F.3d 858
    , 864 (7th Cir. 2008) (“A court is entitled to
    proceed with the best available information[]”). By rejecting the FTC’s request to
    4
    It is worth noting that the district court found that appellants collected
    $3,013,044 on loans containing the improper wage assignment clause, $2,036,936
    (or 67%) of which constituted interest. The district court’s ruling required
    appellants to disgorge only 14.5% of all the interest recovered on loans containing
    the wage assignment clause. Appellants expend a significant portion of their
    briefing analyzing whether anyone whose wages were garnished was actually
    deceived by the Disclosure, but fail to address whether any borrowers who paid
    off their loans before garnishment might have done so in order to avoid
    garnishment letters being sent to their employers, under the mistaken belief that
    such wage assignment was irrevocable. In light of this possibility, measuring the
    disgorgement award against the total interest recovered on all loans that violated
    the Credit Practices Rule demonstrates that this award is the product of a reasoned
    exercise of the district court’s equitable powers.
    5
    “[R]equiring Defendants to disgorge the interest they received through
    garnishment fulfills one of the purposes of disgorgement, which is to make
    violations unprofitable. . . . This disgorgement also serves to equalize the
    marketplace. Defendants’ violations should not allow them to profit more than
    other similar businesses who have complied with the law.” Aplt. App’x at A755.
    -13-
    award the interest earned from all borrowers whose loans contained the improper
    wage assignment clause, the district court arguably rejected the very position
    appellants attack on appeal. The district court thus tempered its mandate to
    discourage unfair trade practices with its recognition that appellants recovered
    only contractually determined sums. See Aplt. App’x at A754. In so doing, the
    district court did not abuse its discretion. See SEC v. Maxxon, Inc., 
    465 F.3d 1174
    , 1179 (10th Cir. 2006) (“‘Disgorgement is by nature an equitable remedy as
    to which a trial court is vested with broad discretionary powers.’”) (citation
    omitted); SEC v. First Jersey Sec., Inc., 
    101 F.3d 1450
    , 1474-75 (2d Cir. 1996)
    (“The district court has broad discretion not only in determining whether or not to
    order disgorgement but also in calculating the amount to be disgorged.”).
    IV.
    There is no reason to conclude that, in light of appellants’ violations, the
    district court had “no rational basis in the evidence” to order disgorgement of the
    interest received on garnished amounts. Therefore, the order of the district court
    is AFFIRMED.
    ENTERED FOR THE COURT
    Philip A. Brimmer
    United States District Judge
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