Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—D. Kan.: FTC denied writ of garnishment to obtain judgment in telemarketing suit, (Sep 23, 2013)

By Jody Coultas, J.D.

The federal district court in Topeka, Kansas, has granted State Farm Mutual Automobile Insurance Company’s motion to quash a writ of garnishment filed by the FTC, seeking to collect a judgment by garnishing an errors and omissions insurance policy issued by State Farm to a defendant that was found to have violated the Telemarketing and Consumer Fraud and Abuse Prevention Act (FTC v. Affiliate Strategies, Inc., September 20, 2013, Rogers, R.).

The FTC and four states proved that Affiliate Services violated the Telemarketing and Consumer Fraud and Abuse Prevention Act while marketing a “Grant Guide” by misrepresenting that buyers would have success in obtaining government grants by buying the product. Defendant Maggie Chapman violated the Telemarketing Sales Rule (TSR), by providing substantial assistance or support to any seller or telemarketer when that person knows or consciously avoids knowing that the seller or telemarketer is engaged in any act or practice that violates regulations prohibiting

In its damages award, the court noted that Chapman had collected $1,682.950 in the course of scheme and awarded the plaintiffs that amount. The FTC filed a writ of garnishment to collect the award by garnishing an errors and omissions insurance policy issued by State Farm to Chapman. State Farm filed a motion to quash.

Chapman’s actions were not covered by the insurance policy, according to the court. The insurance policy at issue provided that State Farm shall pay those sums for which Chapman and/or her company “become legally obligated to pay as Damages … as a result of a Wrongful Act in performing Insured Services for others.” The term “Wrongful Act” is defined as a negligent act, error, or omission. The conduct ascribed to Chapman and Affiliate was intentional and conscious wrongdoing and conscious avoidance of knowledge of other defendants’ wrongdoing rather than negligence. Chapman violated the TSR by misrepresenting, directly or indirectly, material aspects of the performance and central characteristics of the grant-related goods and services sold. Also, the FTC’s argument that State Farm waived its claim by providing a defense to the claims against Chapman was dismissed because an insurer may perform its contractual duty to defend while reserving the right to assert a potential coverage defense.

The court denied State Farm’s argument that the judgment did not qualify as damages under the insurance policy. The policy defined “Damages” as a money judgment, award, or settlement, except those for which insurance is prohibited by law. The term did not include fines or penalties, or fee, deposits, commissions, or charges for goods or services. The argument could be made that state law prohibited insurance coverage for a judgment depriving Chapman of “ill-gotten gains. While Arizona courts consider public policy in construing insurance policy provisions, they do not always hold that damages awarded as restitutionary relief are prohibited by public policy.

Coverage was excluded by the “regulatory authority” exclusion in the State Farm policy, according to the court. The language of the “regulatory authority” exclusion was sufficiently clear and obvious to an insured that it should not be considered contrary to reasonable expectations. The exclusion was not hidden within boilerplate language in the policy, nor did the parties misunderstand the exclusion. Case law did not support a finding that State Farm’s failure to raise the exclusion in some reservation of rights letters or other litigation contradicted the reasonable expectations of the insured.

Coverage is also excluded by the clause barring coverage of claims alleging “Gain, Profit or Advantage to which the Insured is not Legally Entitled.” The damages awarded arose from claims alleging gain, profit, or advantage to which Chapman was not legally entitled.

Finally, coverage was also excluded by a clause providing that State Farm was not obligated to pay damages for acts which are dishonest, fraudulent, or intentionally committed while knowing it was wrongful. Chapman was ordered to pay damages for actions which were intentionally committed while knowing they were wrongful. This finding satisfies the exclusion claimed by State Farm.

The case is No. 09-4104-RDR.

Attorneys: D. Brad Bailey, Office of United States Attorney, for FTC. Micah R. Bruner (Bruner Law Offices, LLC) and Kelly Nash (Hill, Johnson & Schmutz, LC) for Wealth Power Systems LLC. Micah R. Bruner (Bruner Law Offices LLC) for Aria Financial LLC.

Companies: Affiliate Strategies, Inc.; State Farm Mutual Automobile Insurance Company

Cases: ConsumerProtection FederalTradeCommissionNews KansasNews