District Court allows FTC suit against owners of credit repair operation to proceed
On February 13, the U.S. District Court for the Eastern District of Michigan denied a motion to dismiss filed by certain defendants in a credit repair scheme. As previously covered by InfoBytes, last May the FTC sued a credit repair operation that allegedly targeted consumers with low credit scores promising its products could remove all negative information from their credit reports and significantly increase credit scores. At the time, the court granted a temporary restraining order against the operation for allegedly engaging in deceptive practices that scammed consumers out of more than $213 million. The temporary restraining order was eventually vacated, and the defendants at issue (two individuals and two companies that allegedly marketed credit repair services to consumers, charged consumers prohibited advance fees in order to use their services without providing required disclosures, and promoted an illegal pyramid scheme) moved to dismiss themselves from the case and to preclude the FTC from obtaining permanent injunctive and monetary relief.
In denying the defendants’ motion to dismiss, the court held, among other things, that “controlling shareholders of closely-held corporations are presumed to have the authority to control corporate acts.” The court pointed to the FTC’s allegations that the individual defendants at issue were owners, officers, directors, or managers, were authorized signatories on bank accounts, and had “formulated, directed, controlled, had the authority to control, or participated in the acts and practices set forth in the complaint.” The court further held that the FTC’s allegations raised a plausible inference that the individual defendants have the authority to control the businesses and demonstrated that they possessed, “at the most basic level, ‘an awareness of a high probability of deceptiveness and intentionally avoided learning of the truth.’”
The court also disagreed with the defendants’ argument that the permanent injunction is not applicable to them because they have since resigned their controlling positions of the related businesses, finding that “[t]his development, if true, does not insulate them from a permanent injunction.” The court found that “the complaint contains plausible allegations of present and ongoing deceptive practices that would authorize the [c]ourt to award a permanent injunction ‘after proper proof.’” In addition, the court said it may award monetary relief because the FTC brought claims under both sections 13(b) and 19 of the FTC Act and “section 19(b) contemplates the ‘refund of money,’ the ‘return of property,’ or the ‘payment of damages’ to remedy consumer injuries[.]”