The FTC recently obtained a record $1.2B judgment against former racecar driver Scott Tucker and others over an alleged deceptive payday loan scheme that charged consumers undisclosed and inflated fees. Even still, questions still linger over how the FTC will go about collecting that judgment, including claims by the defendants that the FTC is not a “super creditor.”
FTC Sues Over Payday Loan Scheme
In April 2012, the FTC announced that it had “taken action against a payday lending operation that allegedly piled on undisclosed and inflated fees, and collected on loans illegally by threatening borrowers with arrest and lawsuits.”
Defendants Misrepresented Payday Loan Services
According to the FTC’s complaint, “Since at least 2002, Defendants have offered consumers payday loans … through a series of websites.” The FTC alleged that, through their websites, “Defendants represent[ed] that they [would] withdraw the consumer’s scheduled payment from the consumer’s bank account when the consumer’s loan is due,” and that the defendants’ loan contracts state that “the total payment for satisfying the payday loan is the sum of the principal borrowed plus a stated finance charge.” However, the FTC alleged that the defendants’ actual payday loan services were much difference than they advertised to consumers.
The FTC alleged that “[r]ather than withdraw[ing] the scheduled payment on one specific date, Defendants typically iniate[d] withdrawals on multiple occasions, assessing multiple finance charges to the consumer.” Therefore, the FTC said that “in numerous instances a consumer end[ed] up paying significantly more to satisfy his loan than the ‘Total of Payments’ that Defendants conspicuously represent[ed] … in their loan disclosures.”
Additionally, the FTC alleged that the defendants would “condition their extension of credit to a consumer upon a consumer’s pre-authorization of electronic fund transfers on successive paydates.” The FTC said that this practice “allow[ed] Defendants to automatically initiate fund withdrawals from the consumer’s bank accounts.”
Defendants “Threatened” Consumers as Part of Debt Collection Services
Beyond their payday lending tactics, the FTC also took issue with the defendants debt collection activities, which the FTC alleged involved “threaten[ing] consumers with arrest or legal action if consumers’ alleged debts [were] not paid.”
Defendants Charged With Violations of FTC Act, TILA, and EFTA
Based upon the foregoing conduct, the FTC charged the defendants with violations of Section 5 of the FTC Act, including claims of false and misleading representations over the defendants’ payday loan services and deceptive collection practices. The FTC also charged the defendants with violations of the Truth in Lending Act (“TILA”) and Regulation Z, as well as violations of the Electronic Fund Transfer Act (“EFTA”) and Regulation E.
District Court Agrees to Bifurcated Proceedings
In December 2012, the district court, pursuant to a stipulation of the parties, signed an order for preliminary injunction and bifurcation. Under the stipulated preliminary injunction order, “during Phase 1 of the proceedings, the Court would adjudicate both the merits of the FTC’s claims and ‘the legal question of whether, and to what extent, the FTC has authority over Indian tribes whose sovereignty is asserted in this case and/or [the Tribal Chartered Defendants] for alleged violations of the FTC Act.’”
In light of the bifurcated nature of the proceedings, in March 2013, the FTC moved for partial summary judgment against the defendants regarding their sovereign immunity defense. Defendants responded to the FTC’s allegations by arguing that “the FTC lacked authority to enforce the FTC Act, the Truth in Lending Act (TILA), and Electronic Fund Transfer Act (EFTA) against tribes and tribal businesses.” The defendants had “previously claimed immunity from state legal proceedings, despite their tenuous connections to American Indian tribes.”
Defendants’ Tribal Immunity Arguments Rejected
The district court ultimately disagreed with the defendants’ sovereign immunity arguments, finding that “payday lenders cannot avoid key federal consumer protection statutes simply by aligning themselves with American Indian tribes.” In his report and recommendation, Magistrate Judge Ferenbach “concluded that the FTC Act has ‘broad reach’ and applies generally, giving the agency ‘the authority to bring suit against Indian Tribes, arms of Indian Tribes, and employees and contractors of arms of Indian Tribes.’” The Magistrate Judge also “found that the FTC has authority to bring its TILA and EFTA claims.” District Judge Gloria Navarro subsequently affirmed the Magistrate Judge’s findings.
District Court Deals Another Blow to Defendants’ Case
In June 2014, Judge Navarro dealt another blow to the defendants’ case when she ruled that “the defendants deceived consumers about the costs of their loans by imposing undisclosed charges and inflated fees.” Specifically, Judge Navarro found that the defendants’ payday loan services “were deceptive because by failing to disclose charges and inflating fees, they hid from consumers the true cost of the payday loans they offered.” Judge Navarro said in her ruling that “the key portions of defendants’ loan documents were ‘convoluted,’ ‘buried,’ ‘hidden,’ and ‘scattered.’ And she further cited evidence indicating that the defendants’ ‘employees were instructed to conceal how the loan repayment plans worked in order to keep potential borrowers in the dark.’”
$1.2B Judgment Imposed Against Tucker and Others
Following several settlements by other defendants in the case, including AMG Services, Inc. and Red Cedar Services, Inc., the FTC again moved for summary judgment against the remaining defendants. Among the remaining defendants was racecar driver, and purported leader of the payday loan scheme, Scott Tucker. Just as before, Judge Navarro sided with the FTC, finding that Tucker “ran the operation and was individually responsible for the unlawful conduct.” Under the court’s order, Tucker and the other remaining defendants are liable for approximately $1.3 billion, and further are banned “from any aspect of consumer lending, and prohibits them from conditioning the extension of credit on preauthorized electronic fund transfers, misrepresenting material facts about any good or service, and engaging in illegal debt collection practices.”
FTC Moves for Order Directing Third Parties to Turn Over Assets
Following the court’s order, the FTC moved the court for an order directing the defendants to turnover assets. In its motion, the FTC requested the court to enter an order directing third-parties, holding assets belonging to the defendants, “to turn over frozen assets to the FTC, in partial settlement of the judgment amounts.”
Defendants Argue the FTC is not a “Super Creditor”
Tucker, as well as the other defendants, opposed the FTC’s motion to turnover frozen assets, claiming that the court should deny the FTC’s motion for two reasons. First, the defendants argued that the motion should be denied because “the motion fails to establish that the Court maintains jurisdiction over third parties in the post-judgment context, as well as accounts held by such third parties.” According to the defendants, the entry of judgment dissolved the prior preliminary injunction, and, as a result, “[t]he FTC is compelled to confront third parties … in the ordinary course, as a judgment creditor, and pursuant to the rules and procedures for debt collection.”
Second, the defendants argued that “the FTC’s motion violates the Federal Debt Collection Procedures Act of 1990.” The defendants set forth in their opposition that the FDCPA “sets out four debt collection mechanisms the United States may use once it has obtained a judgment.” However, according to the defendants, the FTC is attempting “to circumvent the procedural requirements and priority constraints imposed by the FDCPA” by seeking “a blanket order requiring third parties to turn over ‘any asset or account frozen pursuant to the Asset Freeze Order.’”
In their briefing, the defendants complain that the FTC “[i]n essence, … asks the Court to designate it a ‘super creditor’ and disregard all preexisting claims senior creditors might have perfected against assets previously made captive under the preliminary injunction order,” and that the FTC has identified no legal authority permitting the court to “ignore the ‘exclusive civil procedures for the United States to collect a judgment.’” Accordingly, defendants say such an attempted asset grab by the FTC violates the FDCPA.
All Eyes on the FTC’s Reply
The FTC is set to respond to the defendant’s opposition by October 16th. FTCLaw.com will continue to follow the FTC’s attempt to collect formerly frozen assets held by third parties and will report any significant decisions on this point. If the FTC is unable to convince the court to order assets in the hands of third parties following a judgment, it may have a significant impact on the FTC’s ability to recover in cases where final judgments have been entered.
Photo Cred.: wsj.com