Fed. Trade Comm'n v. Gugliuzza (In re Gugliuzza)

• Decision Date: 12 March 2015
• Docket Number: No. SACV 14–01529–CJC.,SACV 14–01529–CJC.
• Citation: 527 B.R. 370
• Court: U.S. District Court — Central District of California
• Parties: In re Charles Francis GUGLIUZZA II, Debtor. Federal Trade Commission, Plaintiff–Appellee, v. Charles Francis Gugliuzza II, Defendant–Appellant.

527 B.R. 370

In re Charles Francis GUGLIUZZA II, Debtor.

Federal Trade Commission, Plaintiff–Appellee

v.Charles Francis Gugliuzza II, Defendant–Appellant.

No. SACV 14–01529–CJC.

United States District Court, C.D. California, Southern Division.

Signed March 12, 2015.

Christina Victoria Tusan, Federal Trade Commission, Los Angeles, CA, Kimberly L. Nelson, Megan A. Bartley, Michele Arington, Federal Trade Commission, Washington, DC, for Plaintiff–Appellee.

Brett H. Ramsaur, Michael B. Reynolds, Todd Eric Lundell, Snell and Wilmer LLP, Costa Mesa, CA, for Defendant–Appellant.

ORDER AFFIRMING IN SUBSTANTIAL PART AND REVERSING IN PART THE BANKRUPTCY COURT'S AUGUST 18, 2014 ORDER

CORMAC J. CARNEY, District Judge.

I. INTRODUCTION

Appellant Charles Francis Gugliuzza II appeals the Bankruptcy Court's August 18, 2014 order granting Appellee Federal Trade Commission's (“FTC”) motion for summary judgment and holding that the judgment debt Gugliuzza owed the FTC is nondischargeable under 11 U.S.C. § 523(a)(2)(A) (the “Bankruptcy Court Order”). For the following reasons, the Court AFFIRMS IN SUBSTANTIAL PART and REVERSES IN PART the Bankruptcy Court Order and REMANDS the action to the Bankruptcy Court.

II. BACKGROUND

A. The Underlying Action

In 2009, the FTC brought an action before this Court against Commerce Planet, Inc. (“Commerce Planet”) and several of its directors and officers, including Gugliuzza, (“Underlying Action”). (See Case No. SACV 09–01324–CJC(RNBx).) The FTC asserted two counts against Gugliuzza for deceptive and unfair practices in violation of Section 5(a) of the Federal Trade Commission Act (the “FTC Act”), 15 U.S.C. § 45(a), in connection with a deceptive Internet marketing scheme the defendants had created called the “OnlineSupplier.” FTC v. Commerce Planet, Inc., 878 F.Supp.2d 1048 (C.D.Cal.2012). OnlineSupplier was a web creation and hosting service that was marketed as a free “Online Auction Starter Kit” purporting to help consumers sell products on eBay. Id. at 1054. Commerce Planet marketed the OnlineSupplier on a “negative option” basis, but did not adequately disclose that if the consumers failed to cancel their subscriptions, they would be enrolled automatically in the program and charged a recurring monthly subscription fee. Id. Consequently, between July 2005 and March 2008, Commerce Planet had allegedly obtained over $45 million from over 500,000 consumers. Id. at 1089.

After a 16–day bench trial, this Court found by the preponderance of the evidence that the marketing of the OnlineSupplier was deceptive and unfair under Section 5(a) of the FTC Act, and held Gugliuzza individually liable after finding that (1) Gugliuzza was involved in making core decisions that affected the operations of Commerce Planet and its subsidiaries, including the marketing of OnlineSupplier, and (2) Gugliuzza knew or at least was recklessly indifferent to the fact that OnlineSupplier was misleading (the “Underlying Judgment”). Commerce Planet, 878 F.Supp.2d at 1078–83. The Court ultimately awarded the FTC restitution for consumer redress in the amount of $18.2 million under Section 13(b) of the FTC Act. Id. at 1092.

B. The Bankruptcy Court Order

In November 2012, Gugliuzza filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. (Dkt. Nos. 19–1–19–17, Excerpts of Record on Appeal [“ER”] at 2699–2717.) Subsequently, the FTC filed an adversary complaint in Gugliuzza's bankruptcy proceeding, alleging that the debt Gugliuzza owes pursuant to the Underlying Judgment is nondischargeable under 11 U.S.C. § 523(a)(2) (A) because it is a debt arising from “false pretenses, a false representation, or actual fraud.” (ER at 2164–2304.) On October 28, 2013, the Bankruptcy Court denied without prejudice the FTC's motion for summary judgment and rejected the FTC's argument that the Underlying Judgment had a preclusive effect on the nondischargeability issue under Section 523(a)(2)(A). (ER at 2153–55.)

In May 2014, the FTC again moved for summary judgment on same grounds, (ER at 1085–1120), and this time, on August 18, 2014, the Bankruptcy Court granted the motion, (ER at 28–34). The Bankruptcy Court found that Gugliuzza was collaterally estopped from litigating the issue of nondischargeability by reasoning that this Court's findings and determination of Gugliuzza's liability in the Underlying Action satisfied all the elements of nondischargeability under Section 523(a)(2)(A). (ER at 28–34.) The Bankruptcy Court found that the relevant issues in the nondischargeability analysis were identical to the issues in the Underlying Judgment because this Court had already established that Gugliuzza (1) made false representations to consumers; (2) knew he was making false representations because he was recklessly indifferent to the fact that OnlineSupplier was misleading; (3) made the false representations with the intention and purpose of deceiving the consumers because he was recklessly indifferent; and (4) misled consumers because they reasonably relied on his deceptive representations. (ER at 28–34.) The Bankruptcy Court further held that the issues relevant to Section 523(a)(2)(A) were actually litigated and critical to this Court's Underlying Judgment. (ER at 31.) Gugliuzza timely appealed the Bankruptcy Court Order, contending that the Bankruptcy Court incorrectly applied the doctrine of collateral estoppel. (Dkt. No. 19, Appellant's Opening Brief.)

III. DISCUSSION

A. Standard of Review

A district court has jurisdiction to hear appeals from final judgments of the bankruptcy courts. 28 U.S.C. § 158(a)(1) ; see also Silver Sage Partners, Ltd. v. City of Desert Hot Springs (In re City of Desert Hot Springs), 339 F.3d 782, 787 (9th Cir.2003). On appeal, a district court must review a bankruptcy court's legal conclusions de novo and its factual findings for clear error. Neilson v. United States (In re Olshan), 356 F.3d 1078, 1083 (9th Cir.2004). “A bankruptcy court's grant of summary judgment is reviewed de novo ... [to] determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the bankruptcy court correctly applied the relevant substantive law.” Paulman v. Gateway Venture Partners III (In re Filtercorp, Inc.), 163 F.3d 570, 578 (9th Cir.1998) (internal quotation marks and citation omitted); O'Malley Lumber Co. v. Lockard (In re Lockard), 884 F.2d 1171, 1174 (9th Cir.1989) (finding that a bankruptcy court's application of collateral estoppel is reviewed de novo).

B. Collateral Estoppel

Collateral estoppel bars relitigation of issues that have been previously adjudicated between the same parties. Clark v. Bear Stearns & Co., 966 F.2d 1318, 1320 (9th Cir.1992). The doctrine of collateral estoppel essentially serves to protect litigants from relitigating identical issues and from the costs and vexation of multiple lawsuits, while conserving judicial resources and preventing inconsistent decisions. Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980). “To foreclose relitigation of an issue under collateral estoppel: (1) the issue at stake must be identical to the one alleged in the prior litigation; (2) the issue must have been actually litigated in the prior litigation; and (3) the determination of the issue in the prior litigation must have been a critical and necessary part of the judgment in the earlier action.” Clark, 966 F.2d at 1320.

On appeal, Gugliuzza argues that the issues in the Underlying Judgment do not have a preclusive effect in determining nondischargeability under Section 523(a)(2)(A). In the Underlying Judgment, Gugliuzza was found liable under Section 5(a) of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” See 15 U.S.C. § 45(a)(1). An individual may be held liable for corporate violations of the FTC Act if the individual (1) directly participated in the wrongful practice or act or had authority to control it, and (2) had knowledge of the wrongful practice or act, was recklessly indifferent to the truth or falsity of the misrepresentation, or was aware of the high probability of fraud along with an intentional avoidance of the truth. FTC v. Stefanchik, 559 F.3d 924, 931 (9th Cir.2009). Section 13(b) of the FTC Act gives federal courts broad authority to grant appropriate remedies, such as restitution, for violations of the FTC Act. FTC v. Pantron I Corp., 33 F.3d 1088, 1102 (9th Cir.1994).

Under the Bankruptcy Code, a debt will not be discharged if it was obtained by “false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). To make a claim under Section 523(a)(2)(A), a creditor must prove (1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) the debtor's knowledge of the falsity or deceptiveness of his statement or conduct; (3) the debtor's intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) the creditor sustained the alleged loss and damages as the proximate result of the representations having been made. Turtle Rock Meadows Homeowners Ass'n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir.2000). Because the Bankruptcy Code generally authorizes broad discharge of debt to provide “honest but unfortunate debtors” a fresh start, debts that are excepted from discharge usually involve intentional wrongdoing or fraud. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; Jennen v. Hunter (In re Hunter), 771 F.2d 1126, 1130 (8th Cir.1985).

1. Misrepresentation, Fraudulent Omission or Deceptive Conduct

The findings in the Underlying Judgment preclude Gugliuzza from relitigating issues under the first element of a Section 523(a)(2) (A) claim. For the first element, the creditor must prove “misrepresentation, fraudulent omission or deceptive conduct” by the debtor. In re Slyman, 234 F.3d at 1085. In the Underlying Action, this Court...