A recent ruling by a Florida Bankruptcy Judge sheds light on a tenacious team within the FTC’s Bureau of Consumer Protection. But first, let’s set the time machine to 2008 when the FTC entered into a settlement with BlueHippo, a computer financing company that pitched electronics to consumers with “less than perfect credit, bad credit, no credit.”
The FTC sued BlueHippo for a host of illegal practices, many related to the company’s refund policies. The defendants settled that case, agreeing to pay as much as $5 million in consumer redress. But just a year later, the FTC went back to court, alleging that BlueHippo was already in violation of the order because it didn’t clearly disclose the terms of its refund policy. According to the FTC, rather than giving consumers their money back, BlueHippo purported to offer “store credit,” but failed to disclose that major strings were attached. Consumer didn’t learn about the onerous policies until they tried to use their “credit,” only to have BlueHippo tell them they’d have to shell out more cash first. As a result, more than 55,000 people paid money to BlueHippo, but got nothing in return.
The trial judge granted the FTC’s contempt motion against the corporate defendants and BlueHippo CEO Joseph Rensin, but entered a remedy of only $609,000. After the FTC appealed, the United States Court of Appeals for the Second Circuit reversed and remanded the matter to the trial court, which entered a judgment against Mr. Rensin for $13.4 million, the financial harm the court determined that consumers suffered as a result of the scheme.
Mr. Rensin refused to pay the contempt judgment, and according to the FTC, he tried to evade it by filing for bankruptcy. That’s when the FTC’s bankruptcy team stepped in. At a trial before the Bankruptcy Judge, Mr. Rensin argued (among other things) that he was unaware of certain aspects of his company’s refund policies and that his in-house counsel had been responsible for them – testimony the Court expressly rejected as not credible.
Mr. Rensin also claimed that the $13.4 million he owed was dischargeable in bankruptcy. The FTC disagreed, citing a provision in the law that a debt is not discharged “to the extent obtained by . . . false pretenses, a false representation, or actual fraud . . . .” The Bankruptcy Judge held, “What constitutes ‘false pretenses’ in the context of § 523(a)(2)(A) has been defined as ‘implied misrepresentations or conduct intended to create and foster a false impression.’” You’ll want to read the Memorandum Opinion for the details, but the Court concluded that consumers “relied on what BlueHippo told them, which was fatally misleading and amounted to fraudulent misrepresentation and concealment.”
The FTC’s bankruptcy team also argued that an additional provision applied: § 523(a)(6), which “does not discharge an individual debtor from any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity.” The Bankruptcy Judge concluded that the FTC “met its burden in proving that Mr. Rensin’s conduct was wrongful and without just cause and thus was malicious within the meaning of § 523(a)(6). Mr. Rensin used BlueHippo to create a series of transactions aimed at defrauding consumers for the purpose of filling the coffers of BlueHippo. There was nothing defensible about his actions.”
What’s more, the Court ruled, “Based on the credible evidence admitted in this case, not only did Mr. Rensin go along with this fraud, but he was at the helm of and guided BlueHippo in its every action in connection with this fraud.” The Court put it this way:
As the captain of the ship, with not only direct oversight but regular operational involvement in every aspect of the business relevant to this fraud, and with full knowledge of the financial benefits reaped from the fraud, at a time when BlueHippo was otherwise cash strapped, there is no doubt that Mr. Rensin orchestrated the entire affair.
The effect of the ruling is that the FTC may proceed in its efforts to recover money for consumers injured by BlueHippo’s practices. But even at this intermediate stage, the case offers two important reminders: 1) It’s unwise for companies and corporate officers to assume that bankruptcy will necessarily shield them from the financial consequences of their illegal conduct toward consumers; and 2) If it’s necessary to follow a defendant to Bankruptcy Court to protect consumers’ interests, the FTC has an experienced team ready to go there.