F.T.C. v. Ameridebt, Inc.

• Citation: 373 F.Supp.2d 558
• Decision Date: 09 May 2005
• Docket Number: No. Civ.A. PJM 03-3317.,Civ.A. PJM 03-3317.
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. AMERIDEBT, INC. et al., Defendants.
• Court: U.S. District Court — District of Maryland

373 F.Supp.2d 558

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

No. Civ.A. PJM 03-3317.

United States District Court, D. Maryland.

May 9, 2005.

COPYRIGHT MATERIAL OMITTED

Jeanne M. Crouse, Jeanne-Marie Sidonie Raymond Burke, Ramona Dee Elliott, Allison Ilene Brown, James Anthony Silver, Lucy Emily Morris, Maiysha Renee Branch, Michael Daniel Bergman, Robert S. Kaye, United States Federal Trade Commission, Washington, DC, for Plaintiff.

Glenn A. Mitchell, Stein Mitchell and Mezines LLP, John Buchanan Williams, Jones Day, Kerrie L. Hook, Theresa A. Coetzee, Collier Shannon and Scott PLLC, Robert M. Adler, O'Connor and Hannan LLP, Charles L. Eisen, Kirkpatrick and Lockhart Nicholson Graham LLP, 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 (FTC Act), 15 U.S.C. §§ 41-58. It has also sued AmeriDebt for violations of the disclosure requirements under the Gramm-Leach-Bliley Act, 15 U.S.C. § 6801(a) et seq. The FTC alleges that Defendants, operating in common as a non-profit credit counseling service, 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, and transferred to her.

The FTC has filed a motion pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), requesting that the Court enter a preliminary injunction appointing a receiver, freezing the assets of Andris Pukke and DebtWorks, Inc. (collectively "Defendants") requiring an accounting from them, and directing that Andris Pukke repatriate assets he has transferred offshore.¹ The Court held oral argument on the motion and took it under advisement. On April 20, 2005 the Court entered an Order granting the Motion. This Opinion sets forth the reasons for the Court's decision.

II.

The background of this litigation is set forth in FTC. v. AmeriDebt, 343 F.Supp.2d 451 (D.Md.2004). In brief, the FTC alleges that Defendants (except for Pamela Pukke) operated as a common enterprise to deceive consumers into paying for high-cost debt management plans in violation of Section 5 of the FTC Act, 15 U.S.C. § 45(a). After extensive discovery, the FTC filed a Motion for Summary Judgment Against DebtWorks and Andris Pukke, requesting that they be found liable, and that they be permanently enjoined and ordered to make restitution of some $172 million to injured consumers. That motion is currently pending. Meanwhile, the FTC alleges that since 2002, when Defendants became aware of the investigation that led to this lawsuit, Andris Pukke in particular has been actively dissipating Defendants' assets by making transfers to close friends and relatives, to trusts (both domestic and offshore), and by living a lavish lifestyle.² For example, since 2003 Pukke and DebtWorks have transferred over $2.8 million to individuals who never worked for DebtWorks, including Pukke's father in Latvia, his girlfriend Angela Chittenden, and his wife Pamela, as well as at least $1.6 million to a company controlled by Pukke, Infinity Resources Group. In addition, less than two months after the FTC served AmeriDebt and DebtWorks with Civil Investigative Demands in May and August 2002, Pukke attempted to establish domestic and offshore trusts which the FTC asserts were part of an effort to put his assets out of reach of the FTC and other creditors.³ Pukke, however, appears to retain substantial control over three primary trusts: The Pukke 2002 Family Irrevocable Trust (located in Delaware with estimated assets of over $8.8 million), The P Family Trust (established under the laws of the Caribbean island of Nevis with estimated assets of $9 million), and The P II Family Trust (established under the laws of the Cook Islands with estimated assets of $1.3 million). Lastly, the FTC catalogs numerous expenditures Pukke has made out of DebtWorks' funds to maintain personal residences, yachts and vacations unrelated to DebtWorks' business. The FTC asserts that if this behavior is allowed to continue, there is a substantial risk that it will not be able to satisfy any final order granting equitable monetary relief that may be entered in this case.

III.

Defendants oppose the Motion for Preliminary Injunction on the grounds that: (a) the Court lacks jurisdiction to grant the requested relief; (b) the FTC has failed to meet its burden of demonstrating a likelihood of success on the merits; (c) the FTC has failed to show that the balance of equities favors the entry of a preliminary injunction; and (d) any order granting the requested relief would violate the Anti-Injunction Act, 28 U.S.C. § 2283, and improperly interfere with the priority of federal tax liens.⁴

A. Jurisdiction

Pursuant to Section 13(b) of the FTC Act, "in proper cases the Commission may seek, and after proper proof, the court may issue a permanent injunction." 15 U.S.C. § 53(b). The authority to grant such relief includes the power to grant any ancillary relief necessary to accomplish complete justice, including ordering equitable relief for consumer redress through the repayment of money, restitution, rescission, or disgorgement of unjust enrichment. FTC v. Febre, 128 F.3d 530, 534 (7th Cir.1997). To insure that any final relief is complete and meaningful, the court may also order any necessary temporary or preliminary relief, such as an asset freeze. FTC v. Gem Merch. Corp., 87 F.3d 466, 469 (11th Cir.1996). Exercise of this broad equitable authority, which is vested in the court's sound discretion, is particularly appropriate where the public interest is at stake. Porter v. Warner Holding Co., 328 U.S. 395, 398, 66 S.Ct. 1086, 90 L.Ed. 1332 (1946) (citing Hecht Co. v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587, 88 L.Ed. 754 (1944)).

Defendants contend that the Court's jurisdiction to order the relief requested by the FTC is limited to "proper cases," which they contend are only those in which the FTC seeks "to halt a straightforward violation of section 5 that require[s] no application of the FTC's expertise to a novel regulatory issue," citing FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020, 1028 (7th Cir.1988). Defendants argue that since the FTC admitted in a press conference in November 2003 that this case involves "novel and difficult legal issues" rather than those involved in a routine fraud case, jurisdiction does not lie.

The FTC responds that a "proper case" under Section 13(b) is simply one that involves a violation "of any provision of law enforced by the Commission." Gem Merch., 87 F.3d at 468; FTC v. Evans Prods. Co., 775 F.2d 1084, 1086-87 (9th Cir.1985) ("In attempting to limit § 13(b) to cases involving `routine fraud' or violations of previously established FTC rules, [Defendant] misreads both the case law ... and the legislative history."); FTC v Va. Homes Mfg. Corp., 509 F.Supp. 51, 54 (D.Md.1981); FTC v. Mylan Labs., Inc., 62 F.Supp.2d 25, 36 (D.D.C.1999). Since, according to the FTC, Defendants Pukke and DebtWorks used deceptive claims to induce consumers to purchase their product in violation of Section 5, this is a "proper case" under Section 13(b) over which this Court should exercise jurisdiction.⁵

The Court agrees with the FTC's reading of "proper case" and that it has jurisdiction to order the requested relief under Section 13(b) of the Act.

B. Likelihood of Success on the Merits

Before a district court may enter a preliminary injunction under Section 13(b), it must (i) consider the FTC's likelihood of success on the merits and (ii) weigh the equities. FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1343 (4th Cir.1976). This test is different from that used for private litigants, who must also prove irreparable injury, because in an FTC action harm to the public interest is presumed. FTC v. Affordable Media, 179 F.3d 1228, 1233 (9th Cir.1999); Va. Homes Mfg. Corp., 509 F.Supp. at 59.

For their part, Defendants contend that for the FTC to prove a violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), it must demonstrate that their actions involved a material misrepresentation or omission "likely to mislead the consumer acting reasonably in the circumstances to the consumer's detriment," Southwest Sunsites, Inc. v. FTC, 785 F.2d 1431, 1435 (9th Cir.1986), a burden the FTC cannot carry.

First, say Defendants, the FTC has failed to demonstrate that their statements were likely to mislead consumers. Instead the facts show that AmeriDebt was actually a non-profit entity whose customers were asked for an initial enrollment contribution which was understood to be voluntary, and that AmeriDebt in fact did educate and counsel its customers with respect to finances and credit. In addition, in contrast to the FTC's claim that the allegedly misleading statements were likely to result in detriment to consumers, Defendants cite evidence tending to show that enrollment in their program actually benefitted consumers. Finally, Defendants argue that the FTC has not shown that it can succeed against DebtWorks and Pukke on theories of vicarious liability, since it has not established the various factors that courts require to determine the existence of a common enterprise.

The FTC submits that Defendants are arguing the merits of the case under a summary judgment standard. The burden for prevailing on a motion for a preliminary injunction under Section 13(b) is far more lenient. Specifically, the FTC "meets its burden on the `likelihood of success' issue if it shows preliminarily, by affidavits or other proof, that it has a fair and tenable chance of...