F.T.C. v. Ameridebt, Inc., No. CIV.A.PJM 03-3317.

• Decision Date: 24 September 2004
• Docket Number: No. CIV.A.PJM 03-3317.
• Citation: 343 F.Supp.2d 451
• Parties: FEDERAL TRADE COMMISSION, Plaintiff v. AMERIDEBT, INC. et al., Defendants
• Court: U.S. District Court — District of Maryland

343 F.Supp.2d 451

FEDERAL TRADE COMMISSION, Plaintiff v. AMERIDEBT, INC. et al., Defendants

No. CIV.A.PJM 03-3317.

United States District Court, D. Maryland.

September 24, 2004.

COPYRIGHT MATERIAL OMITTED

Jeanne-Marie Sidonie Raymond Burke, Esquire, Allison Ilene Brown, Esquire, James Anthony Silver, Esquire, Lucy Emily Morris, Esquire, Maiysha Renee Branch, Esquire, Michael Daniel Bergman, Esquire, Robert S. Kaye, Esquire, Washington, DC, for Plaintiffs.

Glenn A. Mitchell, Esquire, Kerrie L. Hook, Esquire, Theresa A. Coetzee, Esquire, Charles L. Eisen, Esquire, Mark David Taylor, Esquire, Washington, DC, for Defendants.

OPINION

MESSITTE, District Judge.

I.

The Federal Trade Commission (FTC) has sued AmeriDebt, Inc., DebtWorks, Inc. and Andris Pukke for misrepresentations and deceptive omissions under the Federal Trade Commission Act. It has also sued AmeriDebt for violations of the disclosure requirements under the Gramm-Leach-Bliley Act. The FTC alleges that Defendants, operating under the guise of a non-profit credit counseling service, have defrauded consumers with debt problems by offering to fashion debt repayment plans for them, then deducting for their own benefit payments the consumers made under the plans without disclosing those deductions to the consumers. The FTC has also sued Pamela Pukke, as Relief Defendant, to recover such proceeds of these transactions as have been received by her husband, Andris Pukke.

AmeriDebt has filed a Motion to Dismiss for Lack of Subject Matter Jurisdiction, and a Motion to Dismiss Count V for Failure to State a Claim Upon Which Relief Can Be Granted. DebtWorks has filed a Motion to Dismiss for Failure to State a Claim Upon Which Relief Can Be Granted, which Andris Pukke has adopted by reference. Pamela Pukke has filed a Motion to Dismiss for Lack of Jurisdiction and for Failure to State a Claim Upon Which Relief Can Be Granted, incorporating by reference the motions of all the Defendants and adding certain arguments applicable to her alone. The Court held oral argument on these motions and took them under advisement. Having considered the pleadings and the arguments of counsel, the Court DENIES both of AmeriDebt's Motions. The Motions to Dismiss of DebtWorks and Andris Pukke are GRANTED in PART and DENIED in PART, GRANTED WITHOUT PREJUDICE insofar as they seek dismissal of Count V as to these two Defendants, DENIED in all other respects. Pamela Pukke's Motion to Dismiss is also GRANTED in PART and DENIED in PART, GRANTED WITHOUT PREJUDICE insofar as it seeks dismissal of Count V as to her, DENIED in all other respects

II.

A. Factual Background

AmeriDebt is a privately held Maryland corporation incorporated as a nonprofit corporation under § 501(c)(3) of the Internal Revenue Code. Operating as a consumer credit agency (CCA), it ostensibly provides credit counseling and educational services to consumers with debt problems. Credit counseling takes various forms, including finding alternative funding sources for the consumer, giving him guidance on how to handle finances in the future, placing him on a Debt Management Plan (DMP), and, finally, assisting him in filing for bankruptcy. Restructuring debt through a DMP allows a consumer to consolidate unsecured debt, lower his interest rates and monthly payments, obtain re-aging of his debts, and/or curtail collection calls, penalties and over-limit fees. Typically, under a DMP a consumer signs a contract agreeing to make monthly payments to AmeriDebt, which then makes arrangements with the consumer's end-creditors and distributes payments to them.

AmeriDebt was incorporated in December 1996 by Pamela Pukke, Andris Pukke's wife.¹ Initially, AmeriDebt's counselors were required to review applications, input data, implement and maintain payment processing and accounting, negotiate with creditors, and interface with consumers through call-center operations. However, less than three years after its organization, AmeriDebt purportedly found these credit counseling services too time- and labor-intensive, in consequence of which Andris Pukke incorporated and became the sole shareholder of DebtWorks, a for-profit company.

DebtWorks' raison d'etre was to provide CCA clients with administrative services. Accordingly, DebtWorks has provided various "back-office" account management functions for AmeriDebt, including data entry, payment processing and tracking, and accounting. After a consumer is enrolled in DMPs, DebtWorks handles all communications with the consumer and the consumer's creditors, including setting up repayment terms, fielding incoming calls from the consumer, making outgoing calls to creditors, updating the consumer's information, collecting payments from the consumer and disbursing payments to creditors. Although historically AmeriDebt and other non-profit CCAs performed these payment and accounting processes in-house, DebtWorks took as its premise that the CCAs were inefficient in performing these functions and that this impeded their ability to focus on their core mission of counseling and educating consumers.

The FTC's Complaint alleges that AmeriDebt, DebtWorks and Andris Pukke have used deceptive practices to generate profits for themselves, to the detriment of consumers who can least afford it. Pukke, in particular, is alleged to have controlled and participated in the deceptive practices of the enterprises. The FTC argues that, unlike traditional non-profit credit counselors, AmeriDebt in recent years has essentially limited itself to one service: developing revenue-generating DMPs. Its counselors have not, despite Defendants' claims to the contrary, given financial advice or taught consumers how to handle debt; instead their sole objective has been to sell DMPs to consumers in order to obtain bonuses for high DMP enrollment rates. Moreover, AmeriDebt has allegedly charged fees to consumers for its purported non-profit services, which the FTC argues have been unreasonably high in comparison with other truly non-profit agencies.² While the FTC concedes that AmeriDebt gives some notice that it will receive these payments, it contends that this notice is given in contracts produced long after a customer has agreed to enroll in a DMP, and, in addition, refers to the payments as voluntary "contributions" despite the fact that the consumer's entire first payment is automatically deducted at the outset. AmeriDebt allegedly funnels the fees paid by consumers to its for-profit affiliate DebtWorks. In 2000, AmeriDebt paid DebtWorks over $13 million; in 2001, $27 million; and in 2002, $35 million. As DebtWorks' sole shareholder, Andris Pukke ultimately received the profits generated by these fees.³

B. Statutory and Regulatory Background

1. Federal Trade Commission Act

The FTC, an independent agency of the United States Government, was created by the Federal Trade Commission Act (FTC Act), as amended, 15 U.S.C. §§ 41-58. It is charged with enforcing Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which, inter alia, prohibits "unfair or deceptive acts or practices in or affecting commerce," and Title V of the Gramm-Leach-Bliley Act (GLBA), 15 U.S.C. § 6801(a) et seq., which requires financial institutions to "respect the privacy of its customers and to protect the security and confidentiality of those customers' nonpublic personal information."⁴ The Commission is authorized by Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), to initiate federal district court proceedings to enjoin violations of the Act and to secure such equitable relief as may be appropriate in each case, including, but not limited to, restitution and disgorgement.

Among the entities the FTC may seek to prohibit from using "unfair or deceptive acts or practices in or affecting commerce" are "corporations," 15 U.S.C. § 45(a)(2), defined in Section 4 of the FTC Act "to include any company ... which is organized to carry on business for its own profit or that of its members, and [which] has shares of capital or capital stock or certificates of interest...." 15 U.S.C. § 44.⁵ The FTC contends that AmeriDebt, in tandem with the Defendants, is a de facto corporation subject to the Act.

2. Gramm-Leach-Blilely Act

In addition, according to the allegations of Count V of the Complaint, AmeriDebt is a "financial institution," covered by the Gramm-Leach-Blilely Act (GLBA), 15 U.S.C. § 6801 et seq., and as such is required to provide notices to customers describing its information collection and sharing practices regarding personally identifiable financial information of the customers. 15 U.S.C. § 6803. Under the GLBA, consumers in certain cases have the right to opt out of, or refuse the sharing of, their information. 15 U.S.C. § 6802. AmeriDebt denies that it is a "financial institution" subject to the Act.

The GLBA does not exhaustively list the types of "financial institutions" subject to its coverage. Congress broadly defined the term under the GLBA to apply to any institution that engages in "financial activities" as that term is defined by section 4(k) of the Bank Holding Company Act of 1956 (BHCA), 15 U.S.C. § 6809(3)(A). Section 4(k)(4) of the BHCA lists activities that "shall be considered to be financial in nature," including "[p]roviding financial, investment, or economic advisory services...." 12 U.S.C. § 1843(k)(4)(C). Section 4(k)(4)(F) also deems "financial in nature" activities that the Federal Reserve Board (FRB) determines by order or regulation "to be so closely related to banking or managing or controlling banks as to be a proper incident thereto...." 12 U.S.C. § 1843(k)(4)(F). The FRB's "Regulation Y" implements this provision by listing activities "closely related to banking," including, inter alia, "brokering, or servicing loans or other extensions of credit," activity in connection therewith, and "[f]inancial and investment advisory activities." 12 C.F.R. §§ 225.28(a), (b)(1), (b)(2) & (b)(6) (1999).

The GLBA authorizes...