Court finds FTC judgment nondischargeable in bankruptcy

Earlier this month, a yearlong fight between the Federal Trade Commission and Charles Francis Gugliuzza ended with a ruling that the FTC’s $18 million judgment against Mr. Gugliuzza was not dischargeable in bankruptcy.  The original judgment arose out of the online sale of Online Auction Starter Kits for consumers who were interested in selling on eBay.  A federal court in California had earlier held that disclosures for ongoing charges were not “clear and conspicuous.”

Mr. Gugliuzza filed bankruptcy, listing the judgment among the debts that he sought to discharge (be relieved of).   The FTC arguing that the judgment was not dischargeable because the court’s 2012 findings established that Mr. Gugliuzza had acted either recklessly or intentionally.  Here are the FTC’s opening memorandum and reply memorandum.  Here is Mr. Gugliuzza’s memorandum arguing for dischargeability.

The bankuptcy judge ended up siding with the FTC, holding that the 2012 trial court findings were binding, and established that Mr. Gugliuzza had acted at least recklessly.

FTCLaw NOTE:  It’s unclear whether the parties addressed the fact that, when the FTC chooses to sue pursuant to Section 13(b) of the FTC Act (as it nearly always does these days),  it is not allowed to get a legal award of damages against a defendant.  Instead, the FTC can get only equitable “restitution.”

This is an important distinction, because a damages judgment can be collected against a variety of funds, such as future wages, inheritance, etc.  A restitution judgment can only be collected against funds actually traceable to the fraud.  In other words, a defendant who has a restitution judgment could win the lottery or get a high-paying job somewhere, and the FTC could not touch that money.  That is a major drawback for the FTC when it files under Section 13(b), but it apparently is worth it because otherwise the FTC would have to jump through certain procedural hoops, and defendants often fail to recognize this important limitation.