U.S. v. National Financial Services, Inc.

• Decision Date: 11 October 1996
• Docket Number: No. 95-2796,95-2796
• Citation: 98 F.3d 131
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. NATIONAL FINANCIAL SERVICES, INCORPORATED, a corporation; Robert J. Smith, individually and as an officer of said corporation; N. Frank Lanocha, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 131

98 F.3d 131

65 USLW 2257

UNITED STATES of America, Plaintiff-Appellee, v. NATIONAL FINANCIAL SERVICES, INCORPORATED, a corporation Robert J. Smith, individually and as an officer of said corporation; N. Frank Lanocha Defendants-Appellants.

No. 95-2796.

United States Court of Appeals, Fourth Circuit.

Argued May 8, 1996.

Decided Oct. 11, 1996.

ARGUED: Matthew Scott Sturtz, Joseph William Hovermill, Miles & Stockridge, P.C., Baltimore, MD, for Defendants-Appellants. Jacqueline H. Eagle, Office of Consumer Litigation, Civil Division, United States Department of Justice, Washington, D.C., for Plaintiff-Appellee. ON BRIEF: Christopher W. Keller, Thomas E. Kane, Division of Credit

Practices, Federal Trade Commission, Washington, D.C., for Plaintiff-Appellee.

Before RUSSELL and ERVIN, Circuit Judges, and NORTON, United States District Judge for the District of South Carolina, sitting by designation.

Affirmed by published opinion. Judge ERVIN wrote the opinion, in which Judge RUSSELL and Judge NORTON joined.

OPINION

ERVIN, Circuit Judge:

National Financial Services, Inc. (NFS), Robert J. Smith, and N. Frank Lanocha are debt collectors who, primarily on behalf of companies selling magazine subscriptions, send out computer-generated dunning letters en masse. They appeal the imposition of civil penalties for violations of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq., and the Federal Trade Commission Act (FTCA), 15 U.S.C. §§ 45(m) and 53(b). The appellants object, first to the grant of summary judgment against them, contending that they raised material issues of fact for trial. Second, they argue that the district court abused its discretion when it determined that NFS and Smith must pay a civil penalty of $500,000 and that Lanocha must pay $50,000. We affirm.

I. Background

NFS is a collection agency primarily serving magazine subscription clearinghouses. According to Robert J. Smith, the owner and president of NFS, the company handled about 2,200,000 accounts each year in 1986 and 1987. About half of NFS's accounts were placed by American Family Publishers (AFP). Every few weeks, AFP would provide NFS with magnetic tapes containing the names, addresses, and unpaid balances--averaging about $20.00--for 5,000 to 70,000 delinquent accounts. NFS fed that data into its computer, which merged the customer information onto pre-printed collection notices, or "dunning letters".

The text of the letters, prepared by Smith, varied over time. A representative letter examined by the district court specified a deadline for payment, and then stated:

[I]t is now being processed by our NATIONWIDE COLLECTION AGENCY DIVISION to enforce IMMEDIATE PAYMENT from you. Notification is hereby given that the date assigned above is your DEADLINE.

If you fail to pay your bill by the DEADLINE, we will then take the appropriate action. Remember your attorney will also want to be paid. An envelope is enclosed for your payment.

Our AUDIOTEX telecommunications system remain on line to answer your inquiry, twenty-four hours per day, seven days per week. Call anytime (301) 366-3217.

YOUR ACCOUNT WILL BE TRANSFERRED TO AN ATTORNEY IF IT IS UNPAID AFTER THE DEADLINE DATE!!!

The back of the letter included a "validation notice," which read:

If you do not dispute the validity of this debt or any portion of it within 30 days after receipt of this notice, we will assume it is valid. If you dispute the validity of this debt or any portion of it in writing within 30 days we will mail verification of the debt to you. At your written request, within the 30 days, we will provide you with the name and address of the original creditor if different from the current creditor.

Those consumers who contested the amount owed were removed from the NFS system.

Customers who did not pay after receiving a series of the NFS "deadline notices"--about 85% of the accounts--received one or more form letters on the letterhead of "N. Frank Lanocha, Attorney at Law." Lanocha was selected by Smith in response to AFP's suggestion that attorney letterhead notices would increase collection rates. Lanocha, who had no separate agreement with AFP relating to collection letters, prepared the text and gave a copy to Smith. Smith would feed the "attorney at law" dunning text into the NFS computer, merge it with the AFP data, and mail out the letters. Several versions of these letters were sent on AFP accounts between 1983 and 1991. Four "Attorney at Law" letters contained in the record included the following text:

PLEASE NOTE I AM THE COLLECTION ATTORNEY WHO REPRESENTS AMERICAN FAMILY PUBLISHERS. I HAVE THE AUTHORITY TO SEE THAT SUIT IS FILED AGAINST YOU IN THIS MATTER.... UNLESS THIS PAYMENT IS RECEIVED IN THIS OFFICE WITHIN FIVE DAYS OF THE DATE OF THIS NOTICE, I WILL BE COMPELLED TO CONSIDER THE USE OF THE LEGAL REMEDIES THAT MAY BE AVAILABLE TO EFFECT COLLECTION....

* * * * * *

I am the collection attorney hired by American Family Publishers to protect their interests in the United States. I have filed suits and obtained judgments on small balance accounts just like yours. My authority to collect these accounts includes the enforcement of judgments ...

* * * * * *

LAW OFFICES--DEMAND NOTICE. YOU HAVE TEN DAYS TO PAY YOUR BILL IN FULL. CONTINUED FAILURE TO PAY WILL RESULT IN FURTHER COLLECTION ACTIVITY. ONLY YOUR IMMEDIATE PAYMENT WILL STOP FURTHER LEGAL ACTION.

* * * * * *

YOUR ACCOUNT MAY NOW BE FOR SALE.... ACCOUNTS, LIKE YOURS, THAT ARE SOLD ... RUN THE RISK THAT THE BUYER WILL FILE SUIT AGAINST THEM. JUDGMENT CAN RESULT IN ASSETS BEING SEIZED. INSTRUCTIONS HAVE BEEN GIVEN TO TAKE ANY ACTION, THAT IS LEGAL, TO ENFORCE PAYMENT.

The notices were not signed by Lanocha. Nor did he receive or review the information on the AFP computer tapes--either in general or in relation to any particular account. Lanocha did not read or review the letters prepared by the NFS computers under his name. He did not have a list of customers who received his letters. According to AFP's Vice President of Finance, Stephen F. McCarthy, Lanocha did not confer with AFP regarding the text of the letters and, in fact, had no contact with AFP regarding any aspect of the collection activities from 1983 until 1990. McCarthy declared that AFP never paid Lanocha any money for any purpose. Lanocha did not forward payments or reports on collections to AFP. Rather, NFS paid AFP half of each account collected and, in its monthly performance reports to AFP, made no distinction between payments received from the NFS letters and payments from the "attorney at law" collections.

Although Lanocha filed fifteen lawsuits in 1984, he did not file any lawsuits during the 1989 to 1991 period of time covered by this prosecution.

Smith and Lanocha have had a long history of dealings with the Federal Trade Commission (FTC). In February 1980, in response to consumer complaints, the FTC sent NFS an access letter seeking to review the company's debt collection practices. After Smith and Lanocha provided information and documents, the FTC recommended the elimination of references to "legal proceedings," "legal costs," "court costs," and the possibility that NFS and Lanocha would "recommend court action." The FTC found that the letters created a false impression that NFS played a role in whether a consumer was sued and misrepresented Lanocha's role in the process. In September 1981, Smith wrote to the FTC that the attorney letters would be discontinued, and enclosed revised collection notices. The FTC responded that the new notices still misrepresented the intent to sue, and asked NFS to immediately implement the changes it suggested. Smith responded that NFS would not purchase new forms until March 1992. The FTC began an investigation in 1987. On January 29, 1990, the Commission informed counsel for Smith and Lanocha that it was preparing to recommend a complaint be issued, and offered an opportunity to discuss settlement. The case was subsequently referred to the Department of Justice. On January 25, 1991, the Government filed an action for civil penalties and injunctive relief against NFS, Smith and Lanocha, alleging violations of 15 U.S.C. §§ 1692e(5), 1692e(10) and 1692g. The defendants moved for summary judgment and, in turn, the government moved for partial summary judgment. The district court granted the government's motion, finding that the defendants had improperly threatened consumers with legal action (under § 1692e(5)), had made false threats to sue (under § 1692e(10)), and had sent notices containing contradictory information about a consumer's time to dispute the debt (under § 1692g). The court then ordered the parties to submit memoranda on the appropriate remedies and what, if any, issues remained for a jury.

In response, the government asked for an injunction and at least $1.5 million in civil penalties. The government also moved to reopen discovery on remedies, and discovery was reopened for sixty days. The government conducted additional discovery during that time, but the defendants did not. The defendants also refused to provide any financial information until after the court determined that they had the requisite knowledge to support the assessment of penalties. The government moved to compel, and the court granted the motion.

On December 20, 1993, the court entered an order of permanent injunction against the defendants. On November 18, 1994, a hearing was conducted on the assessment of penalties. On July 20, 1995, the court found that the defendants' actions were deliberate, repeated, and numerous; that the violations produced substantial benefits to the defendants; and that the conduct constituted violations of Lanocha's professional responsibilities. Accordingly, the court imposed civil penalties of $500,000 on Smith and NFS and $50,000 on Lanocha.

II. Summary Judgment

The defendants contend that they were entitled to a jury trial to resolve disputed...