Fed. Trade Comm'n v. Lake (In re Lake)
| Citation | 628 B.R. 664 |
| Decision Date | 22 April 2021 |
| Docket Number | Case No.: 8:17-bk-14478-MW,Adv No: 8:18-ap-01035-MW |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California |
| Parties | IN RE: Dennis Edward LAKE, Debtor(s). Federal Trade Commission, Plaintiff(s), v. Dennis Edward Lake, Defendant(s). |
Michael P. Mora and Stacy R. Procter for Plaintiff Federal Trade Commission.
Dennis Edward Lake, pro se, Defendant.
This case follows a pattern that has recurred through the years. An individual engages in deceptive conduct in the marketplace that violates provisions of the Federal Trade Commission Act, 15 U.S.C. §§ 41 et seq. The Federal Trade Commission ("FTC") brings an action against the individual in United States District Court seeking monetary and perhaps injunctive relief, 15 U.S.C. §§ 53(b), 57b, and prevails in that action, obtaining monetary relief in the form of a money judgment against the individual. The individual then files a bankruptcy petition and attempts to get the FTC's money judgment discharged in bankruptcy. The FTC responds by commencing an adversary proceeding in the bankruptcy case seeking a bankruptcy court determination that the FTC's money judgment is excepted from discharge on the ground that the individual committed actual fraud. 11 U.S.C. § 523(a)(2)(A). During the adversary proceeding, the FTC files a motion for summary judgment asking the bankruptcy court to determine that all the elements of fraud under Bankruptcy Code section 523(a)(2)(A) were actually litigated and necessarily decided in the FTC's favor in the District Court action, thereby entitling the FTC to summary judgment based upon the issue preclusion doctrine (also sometimes known as collateral estoppel). FTC v. Gugliuzza (In re Gugliuzza) , 527 B.R. 370 (C.D. Cal. 2015) ; Porcelli v. Porcelli , 325 B.R. 868 (Bankr. M.D. Fla. 2005) ; FTC v. Harrell (In re Harrell) , No. CIV.A. 98-06980, 1999 WL 33486091 (Bankr. D.S.C., April 22, 1999) ; FTC v. Lederman (In re Lederman), No. SV 94-22688 AG, 1995 WL 792072 (Bankr. C.D. Cal., June 26, 1995) ; FTC v. Austin (In re Austin) , 138 B.R. 898 (Bankr. N.D. Ill. 1992).
As in the cases cited above, the FTC has filed a motion for summary judgment (the "Motion") based upon alleged issue preclusion resulting from an earlier United States District Court action. The FTC moves for summary judgment against debtor-defendant Dennis Lake ("Mr. Lake") and contends that it is entitled to summary judgment based upon the allegedly issue-preclusive effects of determinations made by the United States District Court in Federal Trade Commission v. Lake , 181 F. Supp. 3d 692 (C.D. Cal. 2016) (the "District Court Civil Action"). Moreover, the FTC has an additional arrow in its issue preclusion quiver – the determinations made by the United States District Court for the Central District of California (based upon a plea agreement) in a criminal action brought by the United States Department of Justice against Mr. Lake. United States v. Dennis Edward Lake , No. SA CR 17-185-AG (C.D. Cal.).
Mr. Lake opposes the Motion.
Factual background is provided by facts found by the United States District Court for the Central District of California in the District Court Civil Action.
Mr. Lake obtained clients by contracting with other businesses whose customers were distressed homeowners and who referred those homeowners to Mr. Lake for advocacy services. Mr. Lake's role and task was to work with banks on the so-called "back end" to help homeowner-consumers to obtain loan modifications. Federal regulations generally prohibit third parties from obtaining an advance fee in exchange for providing services aimed at inducing a lender to modify a home mortgage loan. (The term "home mortgage loan" is used here generically; most of the loans Mr. Lake likely worked on were secured by trust deeds, not mortgages). Despite knowing that advance fees were illegal and that the persons referring him business were taking them, Mr. Lake believed he was shielded from liability because he was doing only so-called "back end work" (meaning that he himself was not marketing to consumers directly or asking them for advance fees himself).
The FTC successfully sued Mr. Lake in United States District Court for violating applicable Federal regulations, namely, the MARS Substantial Assistance Rule and the TSR Substantial Assistance Rule. In the District Court Civil Action, the United States District Court initially awarded monetary relief to the FTC in the amount of $2,104,031.56. This amount was shown by declaration to be the amount of money collected from consumers in transactions violating Federal regulations. Additionally, a permanent injunction was entered against Mr. Lake enjoining him from future activities in violation of Federal regulations. The amount of the money judgment was subsequently amended to $2,349,885.00. The grounds for granting this relief to the FTC were that Mr. Lake had violated the MARS Substantial Assistance Rule and the TSR Substantial Assistance Rule.
Seeking a discharge of his liability to the FTC under the District Court Civil Action judgment and of his other debts, Mr. Lake filed a voluntary chapter 7 petition on November 13, 2017. On February 9, 2018, the FTC timely filed a complaint against Mr. Lake alleging that his indebtedness to the FTC arising under the District Court judgment is excepted from discharge under 11 U.S.C. § 523(a)(2)(A) as indebtedness obtained by false pretenses, a false representation or actual fraud. Mr. Lake answered the complaint on March 12, 2018, disputing the FTC's allegations material to its cause of action against him.
After Mr. Lake filed his bankruptcy petition, he was indicted by a federal grand jury for mail fraud, conspiracy to commit mail fraud and aiding and abetting with respect to the mortgage modification activities described above (the "District Court Criminal Action"). He entered a plea of guilty to Conspiracy to Commit Mail Fraud in violation of 18 U.S.C. § 1349 () as charged in Count 1 of the indictment and was sentenced on or about January 28, 2020 to a term of three years' probation, six months' of home detention, payment of the costs of home detention (not to exceed $12 per day), 500 hours of community service and payment of a special $100 assessment. Restitution was not ordered because it was determined that "complex issues of fact related to the cause and amount of the victims' losses" and would "complicate or delay the sentencing process to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process." The Honorable Andrew Guilford, the United States District Judge imposing sentence, waived all fines based upon a finding that "the defendant has established that he is unable to pay and is not likely to become able to pay any fine."
The Court notes in this connection that Mr. Lake has presented evidence to this Court that he has been diagnosed with stage four mantle cell lymphoma
cancer, underwent six rounds of high dose chemotherapy between March 2019 and August 2019, received a bone-marrow transplant and was hospitalized for 18 days after he went into septic shock. His physician advised him that the type of cancer he has is generally incurable. The District Court (criminal) judgment does not indicate why Judge Guilford found Mr. Lake was unable to pay any fine and not likely to become able to pay any fine, but it seems at least possible that the foregoing medical issues played a role in this matter.
For his part, Mr. Lake contends that his illness played a major role in his decision to accept a plea agreement:
Reporter's Transcript, March 17, 2021 Hearing on Motion ("R.T.") at 23.
The FTC argues in the Motion that the doctrine of issue preclusion entitles it to summary judgment in this adversary proceeding. The FTC correctly states in the Motion that in order for a creditor to prevail on a claim under 11 U.S.C. § 523(a)(2)(A) for fraud, five elements must be established by a preponderance of the evidence: (1) misrepresentation, fraudulent or deceptive conduct by the debtor; (2) knowledge by the debtor of the falsity of the statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) loss to the creditor proximately caused by his, her or its reliance on the debtor's statement or conduct. Motion at 14 of 24, lines 13-20. Turtle Rock Meadows Homeowners Assn. v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000). The FTC asserts that these five elements have been already proven up in the District Court Civil Action and the District Court Criminal Action against Mr. Lake and now cannot be re-litigated by Mr. Lake because of the application of the doctrine of issue preclusion.
The FTC also correctly states the requirements of issue preclusion: (1) the party against whom issue preclusion is asserted was a party in the first proceeding; (2) the first proceeding ended with a final judgment on the merits; (3) the issue in question was necessarily decided in the first proceeding; and (4) the issue in the first proceeding is identical to the issue in the second proceeding (i.e., the one in which issue preclusion is being asserted) or, at the very...
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...of justifiability cuts both ways, and reasonableness goes to the probability of actual reliance."). See also Federal Trade Comm. v. Lake, 628 B.R. 664, 674-75 (Bankr.C.D.Cal. 2021).6 The parties agree that each of these elements must be proven to prevail under Section 523(a)(2)(A). See Plai......
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