Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: Marketer can’t avoid judgment through bankruptcy, FTC brief says, (Nov 10, 2015)

By Linda O’Brien, J.D., LL.M.

The district court correctly determined that the doctrine of collateral estoppel precluded a former marketer from challenging an earlier ruling that a judgment obtained by the FTC against him was exempt from bankruptcy discharge under the fraud exception, according to a brief filed by the FTC with the U.S. Court of Appeals in San Francisco (In re Charles F. Gugliuzza, November 5, 2015).

Charles Gugliuzza and his company, Commerce Planet, Inc., operated the “OnlineSupplier” website that marketed a free “Online Auction Starter Kit” on how to turn a profit from buying and selling on auction websites. Gugliuzza’s website concealed the fact that consumers who ordered the kits were automatically enrolled in a membership plan that placed fees on their credit cards.

In 2009, the FTC sued Gugliuzza and Commerce Planet for engaging in deceptive and unfair practices in violation of Section 5(a) of the FTC Act. After a bench trial, the district court found Gugliuzza individually liable and entered an injunction and $18.2 million judgment against him. Specifically, the court held that Gugliuzza made material misrepresentations on the website; he knew the representatives were false and deceptive; consumers actually and reasonably relied on the representations and were misled by them; and his deceptive marketing directly caused consumer injury.

Gugliuzza filed a Chapter 7 bankruptcy petition, seeking discharge of the FTC judgment. The bankruptcy court granted the FTC’s motion for summary judgment on the ground that Gugliuzza’s debt was exempt from discharge under the fraud exception. On appeal, the district court affirmed the bankruptcy court’s holding that its earlier ruling satisfied four of the five elements of the fraud exception, but reversed the decision on the remaining “intent to deceive” factor. Gugliuzza then appealed the district court’s finding of preclusion on the factors of deception, justifiable reliance, and damages.

Jurisdiction. According to the FTC brief, the appellate court lacks jurisdiction, since the district court’s order was not final. Under the U.S. Supreme Court decision in Bullard v. Blue Hills Bank, 135 S.Ct. 1686 (2015), the same criteria governing finality in civil cases also govern finality in bankruptcy proceedings. The district court did not resolve the central issue of whether Gugliuzza’s judgment debt to the FTC was exempt from discharge; rather, it reversed one aspect of the bankruptcy court’s decision and remanded the matter for further fact finding. Taking up the merits of the dispute would create a risk of piecemeal litigation and judicial inefficiency.

Collateral estoppel. The district court correctly determined that collateral estoppel precluded Gugliuzza from relitigating the three elements of the fraud exception that he now challenges, the brief argued. First, the standard to prove deception under the FTC Act is identical to the first element of the fraud exception that a credit must demonstrate “misrepresentation, fraudulent omission, or deceptive conduct by the debtor.” Second, the prior district court ruling concluded that Gugliuzza concealed and omitted material facts, which alone satisfies the fraud exception. Third, the FTC’s undisputed evidence of actual reliance by showing that the merchant’s misrepresentations were widely disseminated and material satisfied the reliance element of the fraud exception. Gugliuzza’s argument that the fraud exception requires proof of individual reliance should be rejected as contrary to Congressional intent that “dishonest debtors” should not benefit from their wrongdoing, the FTC brief noted.

Furthermore, Gugliuzza cannot relitigate whether his deceptive conduct caused consumer harm, the brief contended. The fraud exception requires a creditor to show damage “proximately caused by its reliance on the debtor’s statement or conduct.” The prior district court ruling found that hundreds of thousands of consumers suffered harm as a result of Gugliuzza’s deceptive marketing. The matter was actually litigated and was a necessary part of the court’s monetary judgment. Thus, the finding of harm satisfies all the criteria for collateral estoppel, the brief concluded.

Attorneys: Megan Bartley and Kimberly Nelson for the Federal Trade Commission.

Companies: Commerce Plant, Inc.

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