Monday, October 24, 2011

Misleading and unfair garnishment letters lead to disgorgement

F.T.C. v. LoanPointe, LLC, 2011 WL 4348304 (D. Utah)

Defendants used to offer payday loans. The loan terms at issue included the following in fine print, albeit bold and underlined: “NOTICE: I agree to have my wages garnished to pay any delinquent amount on this loan.” Individual defendant Strom knew about this but believed it was lawful, and consulted a lawyer before authorizing the loan documents. Using this clause, defendants attempted to garnish consumers’ wages when they were in default. Eighty percent of these attempts failed, but defendants used the wage assignment clause to recover approximately 16% of all loan repayments from approximately 10% of all borrowers.

To garnish a consumer’s pay, defendants, using the name LoanPointe, sent a package to his or her employer including: 1) a “Letter to Employer & Important Notice to Employer”; 2) a “Wage Garnishment” document; 3) a “Wage Garnishment Worksheet”; and 4) an “Employer Certification.” “These document titles match exactly the document titles that the Treasury Department's Financial Management Service (“FMS”) includes in the wage garnishment package that it sends to employers when federal agencies seek to garnish wages.” The “Letter to Employer” also used wording similar to the FMS’s wording. The FMS says:
One of your employees has been identified as owing a delinquent nontax debt to the United States. The Debt Collection Improvement Act of 1996 (DCIA) permits Federal agencies to garnish the pay of individuals who owe such debt without first obtaining a court order. Enclosed is a Wage Garnishment Order directing you to withhold a portion of the employee's pay each period and to forward those amounts to us. 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.
Defendants omitted “nontax,” replaced references to the US with references to GetECash, and removed “Federal” from the references to agencies. Defendants also sent copies of the consumer’s loan application, including the loan amount.

The Treasury Department informed defendants that the reference to the DCIA was inaccurate and unacceptable, and then defendants removed that language. They asked the Treasury agent if she had any other concerns with the letter, but received no response.

Defendants contended that they attempted to contact consumers several times prior to garnishment, warning them of the garnishment. The FTC submitted evidence of two consumers who were unaware of the garnishment threat until defendants contacted their employers, and another who didn’t understand that after reviewing the loan application. Several consumers complained that defendants’ contact with their employers exposed them to embarrassment and risk of adverse action, such as job loss.

Using the loan application with the wage assignment clause, defendants made at least 7,121 payday loans from which they have collected slightly over $3 million. Of that, $976,107.54 represents repayment of principal. Defendants used garnishment to collect $468,020.91.

The FTC filed a complaint alleging violations of the FTC Act, the Fair Debt Collection Practices Act, and the FTC's Trade Regulation Rule Concerning Credit Practices. The parties agreed to a preliminary injunction. The FTC then moved for summary judgment.

The FTC argued that defendants violated the FTCA by “misrepresenting to consumers' employers that they were authorized to garnish wages under the DCIA without a court order; misrepresenting to consumers' employers that they had notified consumers and given consumers an opportunity to dispute the debt prior to sending the garnishment request; and communicating with and disclosing the existence and amount of consumers' loans to consumers' employers without consumers' knowledge or consent.” The first two were deceptive, and the third unfair.

Defendants didn’t dispute the factual predicates. As to the first two statements, therefore, the questions were whether the misrepresentations were material and likely to mislead consumers. Defendants argued that there was no likelihood of misleading consumers because the letters went to employers, not consumers. The court found that the employers were the relevant consumers. Defendants sent them letters that looked identical to a government garnishment request and asserted a statutory right to garnish. While defendants could be expected to know the laws governing credit, the employers in various fields couldn’t be. They were therefore likely to be misled by the letters. Moreover, the letters said that defendants had given the employee a right to dispute the debt, and the employers couldn’t know the truth of that. Even if they asked their employees, they wouldn’t be able to verify whose version of the truth was correct. This also was likely to mislead the employers.

The claims were also material: they were likely to affect a consumer’s choice or conduct. Express claims are material because saying them shows the advertiser’s belief that they matter. Also, 20% of employers who received the letters actually garnished the wages, further proving materiality.

What about disclosing consumers’ debts to their employers without consumers’ prior approval? Unfairness requires that a practice be likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and not outweighed by countervailing interests to consumers or competition. The disclosure was likely to cause substantial injury, as the FTC’s rulemaking record reflected: employers don’t like wage assignments and view failure to repay debt as a sign of irresponsibility, threatening employees’ jobs or benefits. Thus, defendants’ practices were unfair.

Likewise, the FTC argued that defendants violated the FDCPA through false representations and through prohibited communications. Defendants argued that the FDCPA didn’t apply to them because a lender collecting its own debts doesn’t fall within the scope of the law. However, a lender comes within the scope of the law if “in the process of collecting [its] own debts, [it] uses any name other than [its] own which would indicate that a third person is collecting or attempting to collect such debts.” 15 U.S.C. § 1692a(6). Defendants did this. Though their collection efforts were done in the name of GetECash, they used the name LoanPointe to create the impression that a separate entity was attempting to collect.

Defendants also argued that they were exempt because GetECash and LoanPointe are related by common ownership or affiliated by corporate control. But this statutory exception only applies if the principal business of the person collecting the debt is not the collection of debts. “Inherent in the payday lending business is collecting on the loans.” Thus, collecting was part of defendants’ principal business. (Would this also apply to mortgage lenders? What about car dealerships which almost always finance purchases? What about businesses that routinely supply services then bill for them later? Does it create a bright line that defendants are selling access to money, rather than something else? I don’t know this area of the law, and there may be very easy answers.)

The FDCPA prohibits the use of “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” So defendants violated it. The law “also bars debt collectors from communicating with third parties other than for the purpose of obtaining a consumer's home or workplace address or telephone number, unless the consumer consents to third-party communication or the communication is reasonably necessary to effectuate a post-judgment judicial remedy.” Defendants also violated this provision.

Further, the FTC argued that defendants violated its Credit Practices Rule, which generally prohibits the use of wage assignment clauses, unless the wage assignment: (i) is, by its terms, revocable at the will of the debtor; (ii) 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) applies only to wages or other earnings already earned at the time of the assignment. 16 C.F.R. § 444.2(a)(3). Defendants’ wage assignment clause didn’t qualify. “Even though several consumers refused to allow Defendants to garnish their wages upon request, the wage assignment clause was still not revocable by its terms.”

Defendants argued, wrongly, that the FTC was required to show that the violation was deceptive or unfair. But that’s the point of rulemaking: the FTC has already determined that all conduct violating the Rule is unfair. Defendants argued that they didn’t know that their wage assignment clause is illegal. But good faith is no defense to liability under the FTCA, nor is reliance on counsel.

Good faith may be relevant to the scope of injunctive relief, because permanent injunctions should only be granted if there’s some danger of a recurring violation. This involves two factors: 1) the deliberateness and seriousness of the present violation and 2) the violator's past record with respect to unfair advertising practices. Here, however, defendants’ ignorance didn’t negate the need for a permanent injunction, because the conduct was still deliberate and serious, and because defendants “should have been diligent in understanding the law relating to their chosen line of business.”

Defendants’ good faith argument reinforced, rather than excused, the need for permanent injunctive relief to protect consumers from them. “Defendants' inability to demonstrate that they are capable of understanding the law relating to credit practices and debt collection makes a permanent injunction, with monitoring by the FTC, a proper remedy in this case.”

Because the defendants had shared ownership and control, they were a common enterprise (and individual defendant Strom had the authority to control the corporations’ activities and knew about and participated in the wrongful acts, he was individually liable). They were all subject to the injunction and jointly liable for monetary remedies.

Turning to monetary relief: Disgorgement is appropriate to deprive the wrongdoer of its ill-gotten gains. The FTC argued that disgorgement should include all gains flowing from the illegal activities, without the need for the FTC to show actual consumer loss.

The FTC argued that the over $3 million collected from consumers on loans with a wage assignment clause should count, and that over $2 million of that was interest rather than principal that should be disgorged. Moreover, the FTC argued that the $468,020.91 taken in through garnishment should be disgorged.

Defendants argued that courts have distinguished between legally and illegally obtained profits in considering disgorgement. They contended that they did not collect any money that was not owed, and thus were not unjustly enriched by their deceptive practices.

The court reasoned that it only had equitable power over “property that is causally related to the illegal actions of the defendant.” Consumers agreed to pay defendants’ terms. “[T]here is no argument in this case that the other terms of repayment were misleading, deceptive, or inappropriate.” Thus, the court was forced to balance the need to hold defendants accountable for their deceptive and unfair practices with their right to repayment of the loans. First, the court ruled, consumers who repaid their loans in compliance with the terms weren’t harmed by the garnishment clause; there was no basis for concluding that the garnishment clause affected those repayments.

Thus, the relevant consumers were those who had garnishment letters sent to their employers. These letters violated federal law, but the court concluded that defendants shouldn’t be required to disgorge the principal. “To the extent that disgorgement applies to ‘ill-gotten gains,’ a return of the loan principal lent to the consumer is not actually a ‘gain’ to Defendants.” This seems to me a mistake about the level of risk of losing the principal involved in the loans, which was among other things likely reflected in the interest rate (which was, it should be noted, paid by people whose wages weren’t garnished too). Defendants received both interest they might not have received otherwise and principal they might not have recovered otherwise as a result of their misconduct. Both the interest and the principal were part of the contract; either they were entitled to both or neither, and neither seems like the appropriate deterrent. However, the court awarded only the interest as appropriate disgorgement.

“Technically, Defendants may have been entitled to the interest payments under the terms of the loans.” But requiring disgorgement of interest would fulfill one purpose of the remedy, which is supposed to make violations unprofitable. “If Defendants were subject to only an injunction, the resulting message would be that improper wage assignment clauses can be included in loan applications until discovered, at which point, the only consequence would be to stop violations of the law in the future. … 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.” (Note again how this justification seems equally applicable to recovery of principal.)

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