Banking and Finance Law Daily FTC’s $10.85 million disgorgement order against ‘debt collection enterprise,’ principals upheld
Friday, January 11, 2019

FTC’s $10.85 million disgorgement order against ‘debt collection enterprise,’ principals upheld

By Thomas G. Wolfe, J.D.

In the FTC’s enforcement action against 13 corporate entities operating together as a "single debt collection enterprise" and the founders and directors of the enterprise—William Moses and Mark Briandi—for alleged violations of the FTC Act’s "unfair or deceptive acts or practices" provision as well as the Federal Fair Debt Collection Practices Act, the U.S. Court of Appeals in New York City upheld summary judgment against the defendants and determined that the lower court’s $10.85 million order of disgorgement was not excessive and that the enterprise principals were personally liable for that amount along with the corporate entities. The disgorgement amount was a reasonable approximation of the total amounts received by the defendant companies from consumers stemming from their unlawful conduct. The Second Circuit determined that the FTC presented ample proof that both Briandi and Moses had sufficient control and authority over the debt collection enterprise and had knowledge of the enterprise’s pervasive fraudulent practices, including falsely accusing payday loan debtors of check crimes and threatening them with criminal prosecution if they did not pay their debts. Further, the court emphasized that the FTC Act’s standard for establishing the individuals’ knowledge and awareness of the enterprise’s misrepresentations, deception, and illegal conduct also applied as the same standard for the agency’s enforcement of the FDCPA (FTC v. Federal Check Processing Inc., January 11, 2019, Sack, R.).

Briandi and Moses founded, and later co-owned and co-directed, Federal Recoveries, LLC. Over the course of several years, they incorporated 12 other companies that became part of a "single debt collection enterprise." According to the court’s opinion, the defendants’ business mainly consisted of collecting payday loan debts, which were bought from consumer-debt creditors and then compiled them into debt portfolios. Employee debt collectors would "routinely contact debtors by telephone and falsely identify themselves as ‘processors,’ ‘officers,’ or ‘investigators’ 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."

Assurance of Discontinuance. After the New York State Attorney General launched an investigation into the business of the debt collection enterprise, Briandi and Moses executed, on behalf of themselves and the many corporate defendants, a written "Assurance of Discontinuance" (AOD) with the New York AG. While Briandi and Moses did not admit liability, they conceded that they and the corporate defendants were subject to specified federal and state laws, including the FDCPA.

FTC Complaint. Eventually, in 2014, the FTC filed a complaint against the corporate and individual defendants in federal district court in Buffalo, New York. The FTC alleged two violations of Section 5(a) of the FTC Act in connection with prohibited "unfair or deceptive acts or practices," and four violations of the FDCPA (15 U.S.C § 1692). Among other things, the FTC claimed that, despite having executed the AOD with the New York AG, the defendants operated companies in which debt 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." The Commission obtained an ex parte temporary restraining order, which also froze the defendants’ assets and appointed a receiver to oversee the corporate defendants.

Procedural context. In October 2016, the federal trial court adopted the federal magistrate judge’s report and recommendation in its entirety and entered judgment in favor of the FTC. The magistrate judge had determined: the FTC proved that Briandi possessed the authority to control the corporate defendants and knew of their wrongdoing; the existence of the AOD established that Briandi had notice of the corporate defendants’ "illicit collection activities" and was required to ensure that they followed the FTC Act and the FDCPA; the FTC’s requested disgorgement was reasonable and approximated the $10,852,396 collected by the defendants from consumers between May 2010 and March 2014; and the FTC sufficiently demonstrated that "the defendants’ misrepresentations were widely disseminated," and that their operation was "permeated with fraud."

Because Moses did not submit an appellate brief, the Second Circuit dismissed his appeal. The court also rejected Briandi’s argument that he was not given adequate time to conduct discovery in the case, noting that he had previously requested and was granted discovery by the trial court but did not comply accordingly.

Individual liability. Ultimately, the federal appellate court concluded that, in light of the "undisputed evidence" presented by the FTC regarding the debt-collection operations of the corporate defendants and "Briandi’s relationship with them," Briandi had "both sufficient authority over the corporate defendants, and knowledge of their practices," to be held individually liable for their misconduct as a matter of law.

Notably, in arriving at that conclusion, the court determined that FTC did not need to establish, given the factual context of the case, that Briandi "had actual and explicit knowledge of the particular deception at issue." Rather, pointing to the standard followed by other federal circuits, the court explained that "knowledge" may be established by "showing that the individual [defendant] had actual knowledge of the deceptive conduct, or was recklessly indifferent to its deceptiveness, or had an awareness of a high probability of deceptiveness and intentionally avoided learning of the truth." Moreover, the court also concluded that "the same standard applies when the FTC brings an action to enforce the FDCPA."

Applying this standard, the appellate court agreed with the lower court that Briandi had knowledge of the corporate defendants’ unlawful conduct even "prior to the 2013 AOD."

Disgorgement amount not excessive. Next, the court rejected Briandi’s argument that the trial court’s disgorgement order for $10.85 million was "grossly excessive." Briandi had contended that the FTC’s calculation was predicated on "approximately 45 calls" where the agency claimed that fraudulent claims were made, "a far cry from the court’s finding that the entire operation was ‘permeated with fraud.’"

Applying the "two-step burden-shifting framework" for calculating equitable monetary relief, the court determined the FTC demonstrated that consumers relied on the misrepresentations at issue. Among other things, the Commission: submitted more than 500 consumer complaints regarding the defendants’ debt collection practices, aggressive "collection telephone scripts," and audio recordings of many employee debt-collectors "falsely telling consumers that the employees were law enforcement personnel or ‘processors.’" This constituted ample evidence that the defendants’ operation was "permeated with fraud."

The case is No. 16-3811-(L).

Attorneys: Michele Arington for the FTC. Herbert L. Greenman (Lipsitz Green Scime Cambria LLP) for Federal Check Processing Inc. and Mark Briandi.

Companies: Federal Check Processing Inc.; Federal Recoveries, LLC

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