Federal Trade Commission v. Loanpointe, LLC

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This order is not binding precedent except under the doctrines of law of the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.
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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
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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”).
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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
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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.”).
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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.
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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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