21 F. Supp. 2d 424 (D.N.J. 1998)
failing to disclose in the first sales presentation that there will be another sales pitch; that the principal purpose of the credit analyst’s return call is to sell a $900 “program;” that any credit card applications forwarded to the consumer will have an additional processing fee and further criteria; that the Program is premised upon the consumer doing all the work; that NCMG will have few staff persons available to aid and assist the person; and that those NCMG representatives who may aid the consumer are not experts in the federal credit reporting laws.
Numerous affirmative acts engaged in by NCMG are unlawful. NCMG misrepresents that customers will receive a “personal credit analysis” when, in fact, there is nothing individualized about the credit analysis. Although the Defendants indicate NCMG recently began ordering credit reports again, this has not been the standard practice of NCMG and there is no assurance this practice will continue.
The Defendants have also misrepresented that a consumer must qualify for the Initial Analysis when in actuality the qualification process involves no more than ensuring the customer is not in bankruptcy or engaged in credit counseling.
Additionally, the Defendants misrepresented NCMG credit analysts are trained and certified. This representation indicates advanced knowledge; however, these representative receive limited training and are certified by NCMG and not an independent entity.
NCMG also misrepresented there was a high likelihood that consumers who qualified for the Initial Analysis would receive a pre-approved secured credit card when there was no strong likelihood that customers would receive such a credit card. Customers still were required to meet the individual criteria set forth by the credit card issuer.
A number of omissions in the advertisements and representations of NCMG employees also establish violations of Section Two. NCMG failed to inform consumers the principal service it is selling is the Program. Although the availability of other materials offered by NCMG is sometimes mentioned during the initial telephone call, the price and self-help nature of the Program is not conveyed to the customer. This omission is intentional and designed to avoid immediately alienating potential customers with the large fees associated with the Program. Consumers are more likely to purchase the credit services offered by NCMG when led to believe that only a $ 95.00 fee will be charged. Once NCMG lures customers to purchase the Initial Analysis, it is easier for a credit analyst to convince consumers to purchase the Program.
All of the above representations and omissions were likely to mislead a reasonable consumer and in many instances did. These mistaken impressions, deliberately created by defendant, are the type of misleading statements constituting illegal action the CFA seeks to prohibit and punish.
The State of New Jersey contends the informative purpose of the material distributed by the Defendants becomes virtually irrelevant in light of the exorbitant price demanded of consumers for such materials. The State of New Jersey argues “NCMG gives so little value that the underlying goods and services offered are unconscionable.” The State of New Jersey contends intervention is warranted when the goods or services offered by a company are offered at a price so exorbitant as to shock the conscience. The State of New Jersey argues the prices charged for the services and materials offered by NCMG are unconscionable. The State of New Jersey also contends the $ 95.00 fee for the Initial Analysis “is exorbitant and unconscionable because the consumer receives nothing for this charge except the mistaken belief that he or she will get a personalized ‘confidential analysis.’” Further, the State of New Jersey contends the $ 95.00 fee is unconscionable because it does not include a credit card or an independent review of the credit situation of a consumer.
The Defendants argue the materials offered to consumers “provide valuable educational resources to persons who are in need of information on how to navigate through the maze of the nation’s credit laws.”
The Romain case is analogous to the instant matter. In Romain, the Court looked at the practices of a business engaged in the door-to-door solicitation of educational books in poorer urban areas. The materials were sold at prices of between two to three times their market value which the Court found to be unconscionable, especially when coupled with the fact that “the goods sold ha[d] little or no value to the consumer for the purposes for which he [or she] was persuaded to buy them and which the seller pretended they would serve.” The books were sold under a contract which set forth in small print terms and conditions including a no-refund policy, mandatory insurance and a waiver of defenses. In addition, the Court found that the solicitations included misrepresentations and deceptions and that the collection practices of the defendant practices were unfairly aggressive.
NCMG similarly preys upon economically disadvantaged individuals, as did the defendants in Romain. The practices of NCMG are unconscionable in numerous respects. As in Romain, NCMG is selling services at exorbitant prices which “have little or no value to the customer for the purposes for which he [or she] was persuaded to buy [the service] and which the seller pretended [the service] would serve.” As indicated, the touchstone of “unconscionability” is conduct lacking in “good faith, honesty in fact and observance of fair dealing.”
The imposition of the $ 95.00 fee is unconscionable considering the consumer is mislead as to what payment of the fee entails. Basically, NCMG receives $ 95.00 from a consumer and provides services of limited value in return. This demonstrated conduct lacking in good faith and fair dealing. The Defendants attempt to align themselves with such companies as American Express, which offers what appears to be legitimate credit monitoring services at the cost of $ 49.95 instead of the exorbitant price charged by NCMG.
Additionally, unbeknownst to a consumer, any information provided as a result of the initial analysis can be independently obtained. This alone does not suffice to constitute an unconscionable practice, but when combined with the representations and advertisements of NCMG, one must reach the conclusion that the practice is unconscionable. Moreover, the $ 95.00 fee does not include a secured credit card, as some consumers were lead to believe. The $ 95.00 fee also is grossly excessive in relation to the costs of NCMG.
The State of New Jersey argues the refund polices on both the initial analysis and the Program are unconscionable “because the rules are rigged so that the consumer can never meet the conditions for a refund.”
The Defendants counter this argument by contending NCMG has implemented changes in its refund policies. The Defendants note the current refund policy of NCMG for the Program provides for a five-business day right of recission effective when the materials are postmarked. Ornitz stated the credit analysts now advise consumers of the right to recission.
Once the $ 95.00 fee for the Initial Analysis is debited from the cheeking account of a consumer, NCMG merely has to qualify the consumer in order to defeat any refund request. Contrary to its express representations, NCMG does not verify any information provided by the consumer except to check basic information such as name and address and the micro-encoding information which allows NCMG access to the checking account of a consumer.
Customers wishing to cancel the Initial Analysis were transferred to a special extension where an experienced NCMG employee would attempt to save the sale. Employees handling such calls were trained to deny all cancellation requests. The most that could be done for a customer was to post-date the $ 95.00-debit so that it would be deducted from the checking account of the consumer at a later date.
In December 1997, these employees were instructed they could cancel orders for the Initial Analysis if a customer so desired. The employee was still expected to try to save the sale or give a free Initial Analysis to the consumer.
Additionally, it is only after a consumer has enrolled in the Program that he or she receives the materials which include the Disclosure Agreement, the Guarantee and the Payment Terms. Up until the latest revision to the scripts followed by the credit analysts, information concerning the right of recission was not discussed with consumers. If a consumer does locate the recission provision it is most likely too late to exercise the right to cancel within the time frame allotted by NCMG.
As mentioned, the Defendants indicate NCMG has implemented changes in its refund policy. These changes were only recently instituted and there is no indication they will become a permanent practice at NCMG. Accordingly, the refund policy of NCMG constitutes and “unconscionable commercial practice” as defined in Cox because it implies a lack of “good faith, honesty in fact and observance of fair dealing.”
For the reasons previously set forth concerning the likelihood of future violations of Section 5 of the FTCA, there is a reasonable likelihood of future violations of Section Two as well.
The Plaintiffs also allege the practices of the Defendants violate the TSR. The Plaintiffs argue by engaging in unauthorized check debiting and by failing to comply with the provisions of the TSR, the Defendants have violated 16 C.F.R. § 310.3(a)(3) (“Section 310.3(a)(3)”) and § 310.3(a)(5) (“Section 310.3(a)(5)”). The Plaintiffs also argue the Defendants have violated 16 C.F.R. § 310.3(a)(1) (“Section 310.3(a)(1)”) by failing to disclose the actual costs of goods and services, the additional application fees required for the credit card applications provided by NCMG, and that applicants must meet the minimum credit-granting criteria of the lender. Further, the Plaintiffs contend the Defendants have violated 16 C.F.R. § 310.4(a)(4) (“Section 310.4(a)(4)”) by requesting or receiving payment in advance of obtaining an extension of credit when a NCMG seller or telemarketer has guaranteed or represented a high likelihood of success in obtaining or arranging such an extension of credit for a person.
The TSR prohibits a seller or telemarketer from obtaining or submitting for payment a draft on a bank account without the express verifiable authorization of the owner of the account. The TSR permits a seller or telemarketer to obtain express verifiable authorization by any one of three methods: (1) written authorization, (2) taped oral authorization (“Method Two”), or (3) written confirmation of a prior oral agreement (“Method Three”). The TSR sets forth specific information that must be included in authorizations under Method Two and Method Three. Authorizations using Method Three must include a statement regarding the procedures by which the customer can obtain a refund from the seller or telemarketer in the event the confirmation is inaccurate.
The Defendants contend they properly verify the authorizations of customers who purchase either the Initial Analysis or the Program. The Defendants argue the fact that they lost some of the taped verifications when NCMG relocated does not establish a pattern of impermissible activity. The Defendants also indicate they have strengthened controls over obtaining, recording and retaining customer verifications.
Customer certifications, however, demonstrate NCMG often debits the cheeking accounts of consumers without obtaining the express verifiable authorization from those consumers using any of the methods permitted by the TSR. As to the debit for the advance fee for the Initial Analysis, NCMG has failed to produce tape recorded authorizations for approximately sixty percent of those transactions. As to the subsequent debits for the Program, NCMG has no verifiable authorization for almost forty percent of the transactions.
Defendants appear to be relying on Method Two and Method Three of the TSR to establish proper verification procedures were followed. The consumer certifications mentioned above establish oral authorizations were not given in many instances but NCMG still debited the accounts of consumers. Method Two, therefore, does not lend support to the contentions of the Defendants. Adequate oral authorizations do not exist in numerous instances.
The written confirmations used by NCMG also fail to comply with the requirements of Method Three of the TSR because they contain only four of the six pieces of information required by Section 310.3(a)(3). First, the confirmations fail to identify the date of the oral authorization. Of course an accurate date of oral authorization would be impossible to identify because most consumers never authorized the subsequent debits.
Second, to use Method Three, a seller or telemarketer must inform consumers about the procedures by which the customer can obtain a refund in the event the confirmation is inaccurate. Consumers were not informed about the right of recission before authorizing a purchase from NCMG. Moreover, as previously discussed, the procedure specified by NCMG is in reality not a refund procedure at all, because it is unlikely to be discovered, virtually impossible to exercise, and not honored when it is discovered and followed. Therefore, the right of rescission cannot constitute “a procedure by which the customer can obtain a refund” within the meaning of the TSR.
The Plaintiffs contend the failure of NCMG to disclose the total costs to purchase and any material restriction, limitation, or condition of a good or service being offered constitutes serious violations of the TSR.
The Defendants contend NCMG fully discloses the nature of the goods provided in compliance with Section 310.3(a)(1) and (a)(5). The Defendants argue NCMG now advises consumers during the initial telephone call that the Initial Analysis includes the pulling of the credit report of the consumer and that NCMG provides educational materials. The Defendants also contend these actions do not violate Section 310.4(a)(4) because NCMG does not represent that it is a lender or a provider of credit and it does not guarantee to consumers a high likelihood of success in arranging a loan or other extension of credit. The Defendants contend NCMG merely provides a free credit card application to consumers.
NCMG telemarketers disclose the $ 95.00 fee for the Initial Analysis but fail to disclose, until after the consumer has paid the $ 95.00, the total costs of the Program. In addition, NCMG does not disclose that the “complimentary credit card application” requires additional fees ranging from $ 50.00 to $ 100.00. NCMG also does not disclose the material condition that consumers would be required to meet the minimum lending criteria of a lender before receiving a credit card.
The above described information is material because many consumers would not have ordered the Initial Analysis if it did not include, as they were led to believe, a complimentary pre-approved credit card. This fact is material to consumers in light of the representation that ninety-five percent of the credit card applications submitted by NCMG customers were approved. Also, many consumers were led to believe the $ 95.00 was the only cost associated with the services offered by NCMG. If consumers would have been made aware of the existence of the Program and its cost before ordering the Initial Analysis it is unlikely they would have ordered services from NCMG. The failure of the Defendants to disclose the total cost of services offered and to make other material disclosures violates the TSR.
The Plaintiffs also argue the advertisements of the Defendants represent a high likelihood of success in obtaining credit by conveying that the Defendants can assist consumers in obtaining pre-approved credit cards. Specifically, Section 310.4(a)(4) prohibits a seller or telemarketer from requesting or receiving payment of any fee or consideration in advance of the customer obtaining a loan or other extension of credit when the seller or telemarketer has guaranteed or represented a high likelihood of success in obtaining or arranging a loan or other extension of credit for the customer.
The Package sent to consumers after they first call “1-800-YES-CREDIT” includes a sheet of paper entitled “Common Questions and Answers.” That sheet states:
Q: “When will I receive my “pre-ap-proved ” credit card application?”
A: After approximately [thirty] days from the time of your Credit Analysis, you will receive a complimentary, pre-ap-proved, unsecured, major credit card application with no security deposit required! This may help to build and re-establish new credit with the major credit agencies.
(emphasis in original). The offer of a pre-approved credit card promises a high likelihood of success in obtaining credit. Similar representations were made in the advertisements produced by NCMG.
Consumer certifications also demonstrate that defendants both request and receive funds in advance of delivering services, separate violations of Section 310.4(a)(4). Only consumers who pay the $ 95.00 receive the credit card applications.
It appears the Defendants question the constitutionality of Section 310.4(a)(4) and contend it imposes an unreasonable burden upon free speech by postponing the time when NCMG is able to collect payments from customers for its services. Section 310.4(a)(4), however, does not bar the sale of “educational” materials produced by NCMG as the Defendants claim, but merely regulates when payment may be collected in a situation where a company has represented or guaranteed a high likelihood of success of an extension of credit as NCMG did here.
The Plaintiffs have established the Defendants violated Section 310.4(a)(4).
For the reasons set forth concerning the likelihood of future violations of Section 5 of the FTCA and the CFA, there is a reasonable likelihood of future violations of the TSR as well.
The Plaintiffs contend the NCMG is a credit repair organization as defined in the CROA, 15 U.S.C. § 1679a(3) (“Section 1679a(3)”). Section 1679a(3) provides in pertinent part:
The term “credit repair organization”—
(A) means any person who uses any instrumentality of interstate commerce or the mails to sell, provide, or perform (or represent that such person can or will sell, provide, or perform) any service, in return for the payment of money or other valuable consideration, for the express or implied purpose of—
(i) improving any consumer’s credit record, credit history, or credit rating; or
(ii) providing advice or assistance to any consumer with regard to any activity or service described in clause (i).
(emphasis added).
Although the Defendants do not provide services to repair credit histories, they do represent that they will perform services, monitor, and provide advice to assist consumers improve their credit ratings. The Defendants promise NCMG will provide consumers with a personal credit analysis by a trained credit analyst who “will provide [them] with information with respect to [their] profile so that [they] may attempt to establish and/or re-establish [their] credit.” The Plaintiffs argue the CROA applies because, as evidenced by the above statements, the Defendants represent that, for a fee, they will provide a service that will assist consumers in improving their credit ratings.
The Defendants have been aware, since April 1997, that the FTC likely viewed NCMG as a credit repair organization under the CROA. NCMG had requested the FTC provide an informal opinion letter with respect to this issue. In response, the 22 April 1997 Letter from the FTC was sent indicating that under the situation described in the letter from counsel for NCMG, NCMG would be considered a credit repair organization.
The 22 April 1997 Letter from the FTC indicated if NCMG delivered its products to consumers without any communication between NCMG and the consumer, NCMG would not be providing a service for the purposes of the CROA. NCMG was told, however, that if NCMG representatives communicated with consumers “in any way ” about the credit situation of a consumer it would be providing a service covered by the CROA. (emphasis in original).
The Defendants argue the FTC never intended “for educational and credit monitoring programs of the type being offered by NCMG to be governed by the CROA, its present litigation stance notwithstanding.” In support of this contention, the Defendants rely upon commentary to the CROA.
Commentary, however, is not binding. This is especially true when the commentary conflicts with the plain language of the statute at issue. Accordingly, the CROA, as evidenced by its plain language, explicitly covers the services offered by NCMG and the commentary is not entitled to conclusive weight.
The Plaintiffs contend NCMG fails and has failed to provide consumers with a written statement containing prescribed language concerning consumer rights before any contract or agreement is executed as required by the CROA. The Plaintiffs further argue NCMG fails and has failed to provide a written and dated contract containing specific information required by 15 U.S.C. § 1679d(a). Other than Defendants arguing NCMG is not and was not a credit repair organization, as previously discussed and rejected, these contentions are undisputed.
The Plaintiffs also contend NCMG fails and has failed to provide consumers with cancellation notices which comply with 15 U.S.C. § 1679e (“Section 1679e”). The right to cancel set forth in the Disclosure Agreement does not comply with Section 1679e because it fails to include the specific requisite language and because it does not comply with minimal time allotments for cancellation. Section 1679e requires that consumers be allowed three business days to cancel, not including the date of the contract. Section 1679e also states cancellation is effective upon mailing or delivery, not upon receipt. Under the previous return policy utilized by the Defendants, consumers were effectively required to mail the Package back the same date it was received.
NCMG has recently implemented a five day return policy, but as mentioned earlier, there is no guarantee such a policy will continue. The Defendants have violated Section 1679e.
The CROA prohibits credit repair organizations from charging or receiving a fee for a service before “such service is fully performed.” In the instant matter, the Plaintiffs argue consumer certifications establish the Defendants ask for and receive $ 95.00 for a credit analysis and never perform such an analysis.
The Defendants contend Section 1679b(b) unconstitutionally restricts pure speech because the statute “bar[s] the sale of [NCMG’s] educational material.” The Program offered by NCMG spans a two-year period. Defendants contend restricting its right to collect payment on purchases of the Program until after the two-year period is completed “has a chilling effect on the rights of consumers to receive information.”
The Plaintiffs contend the Defendants inaccurately characterize their First Amendment rights. The Plaintiffs argue Section 1679b(b) does not serve as a bar on sales, but “merely prohibits any credit repair organization from charging any money for the performance of any service before such service is fully performed.” The Plaintiffs also contend the Defendants are free to charge any conscionable price the market will bear for its services. The Plaintiffs further argue the right of NCMG to receive payment is protected because it must enter into a contract with each consumer prior to providing any services.
The Plaintiffs argue the CROA does not interfere with the First Amendment rights of NCMG even though its services include the communication of information. “The power of the [G]overnment to regulate the professions is not lost whenever the practice of a profession entails speech.” Just as offer and acceptance are communications incidental to the regulable transaction called a contract, the professional’s speech is incidental to the conduct of the profession. If the government enacts generally applicable licensing provisions limiting the class of persons who may practice the profession, it cannot be said to have enacted a limitation on freedom of speech or the press subject to First Amendment scrutiny.
The Plaintiffs argue if the Government can, without offending the First Amendment, preclude someone from practicing a profession, then it can regulate the profession. In particular, the Plaintiffs argue there is no offense to the First Amendment when Congress regulates the time at which a credit repair organization may receive payment for a service. This is especially true, the Plaintiffs contend, when the regulation is imposed to “‘protect the public from unfair or deceptive advertising and business practices.’”
The Plaintiffs also contend this regulation is further supported by the fact that these business practices “ ‘have worked a financial hardship upon consumers, particularly those of limited economic means and who are inexperienced in credit matters.’ ” Accordingly, the Plaintiffs conclude by contending there is no First Amendment violation even if the delayed payment provision of the CROA makes it more costly for NCMG to offer its services.
The Defendants rely upon Simon & Schuster, Inc. v. Members of New York State Crime Victims Bd., to support their argument. In Simon & Schuster, the Supreme Court reviewed New York’s “Son of Sam Law” requiring income received by an accused or convicted criminal from works describing the crime committed be deposited in an escrow account for five years. These funds were to be made available to the victims of the crime and other creditors of the criminal.
The Court observed the “Son of Sam Law” established a financial disincentive to publish works concerning past criminal acts. The Court concluded the “Son of Sam Law” singled out speech on one subject and imposed a financial burden that it placed on no other income or speech. The Court further observed in order to justify this differential treatment, “ ‘the [s]tate must show that its regulation is necessary to serve a compelling state interest and is narrowly drawn to achieve that end.’ ”
The Court opined the state had a compelling interest in compensating individuals victimized by these criminals, but little, if any, interest in restricting such compensation to the criminal’s speech concerning the illegal acts. The Court held the “Son of Sam Law” was not narrowly tailored to advance the interests of the state because it would also encompass works not enabling a criminal to profit from his illegal actions while a victim is uncompensated.
The argument of the Plaintiffs is persuasive. Unlike the “Son of Sam Law” which prohibited profiting from a crime, the Defendants are not prohibited from offering their services; they are merely required to perform the services before customers incur a resulting charge. This does not impinge upon the rights of the Defendants under the First Amendment.
The Defendants are able to offer their services to the public in ways which will cause little if any financial impact upon them. If all NCMG does, as it contends, is offer educational and credit material to consumers, there is no reason why a customer could not be charged each time the customer called up to order particular material.
The efforts of Congress to regulate the credit repair profession are further driven by its intent to “protect the public from unfair or deceptive advertising and business practices.” Contrary to the arguments voiced by the Defendants, Section 1679b(b) does not “bar the sale of “educational” materials produced by NCMG as the Defendants claim, but merely regulates when payment may be collected.”
For the reasons set forth concerning the likelihood of future violations of Section 5 of the FTCA, the CFA, and the TSR, there is a reasonable likelihood of future violations of the CROA as well.
The statutory test for issuance of a preliminary injunction also involves a balancing of the equities, giving greater weight to the public interest. In this case, immediate injunctive relief is necessary to protect the public from further financial harm caused by the misrepresentations of and violations by the Defendants of the FTCA, the CFA, the TSR and the CROA.
The Plaintiffs argue it is in the public interest to issue a preliminary injunction in the instant case. The Defendants, however, contend the public interest would not be advanced if NCMG were preliminarily enjoined from “distributing true and accurate informational materials.” Further, the Defendants argue the public interest is not benefitted by the actions of the State of New Jersey spurning the attempts of NCMG to conform its conduct with applicable statutes.
The proposed preliminary injunction is designed to restrain NCMG and the Individual Defendants from making the false and deceptive statements that have permeated their business operations and mislead unsuspecting innocent consumers. Such a prohibition does not work any undue hardship on the Defendants. The Defendants do not have the right to persist in conduct that violates Federal or state law.
Although the actual credit materials disseminated by the Defendants contains factually accurate information, it is the means by which the Defendants are advertising and solicitating customers that is problematic. The sheer number of telephone calls received by NCMG further supports the need to take action to protect the public. The imposition of this preliminary injunction provides the needed protection to those members of the public who suffer from economic difficulties, which are compounded by the predatory conduct of the Defendants.
Individual liability pursuant to Section 5 of the FTCA for the acts of a corporation can be based upon either an individual having: (1) directly participated in the viola-tive actions, (2) played a part in controlling, directing or formulating the policies and practices of the company which violate Section 5, or (3) the authority to control the actions of other individuals combined with the actual or constructive knowledge that those individuals were committing misrepresentations. This same standard should be applied in determining whether members of a limited liability company, such as NCMG, should be held individually hable.
The Plaintiffs argue the Individual Defendants are liable for the challenged acts and practices because they had the ability to control violations and had actual knowledge that the violations were taking place.
G. Buzzetti is the Chief Executive Officer, President, and a co-owner of NCMG. He manages the day-to-day affairs of NCMG and supervises the telemarketers. Among other things, he has responded to complaints forwarded from the BBB and has held himself out as a manager. The signature of G. Buzzetti appears on some of the canceled demand drafts and some of the refund checks. He participated in the misrepresentations by producing a number of the advertisements.
Ferguson is the Chief Financial officer, Vice President, and co-owner of NCMG. He works daily at NCMG and assists in managing the daily affairs of NCMG. Also, Ferguson supervises the distribution and compliance departments at NCMG. He signs refund checks.
The Plaintiffs have established the reasonable probability they will be able to prove the Individual Defendants either orchestrated the deceptive practices of NCMG or, at the very least, knew about these practices through the managerial roles they played and encouraged and permitted these practices to continue. Accordingly, individual liability for the imposed in-junctive relief is appropriate.
Section 13(b) of the FTCA states “[t]hat in proper cases the [FTC] may seek, and after proper proof, the court may issue, a permanent injunction.” Section 13(b) provides a Federal court with broad power to fashion appropriate remedies for violations of the FTCA. The remedial authority provided in Section 13(b) is not limited to the power to issue an injunction; rather, this power includes the ability “to grant any ancillary relief necessary to accomplish complete justice.” This power possessed by a Federal court includes the authority to order restitution. “A corporation is liable for monetary relief under Section 13(b) if the FTC shows that the corporation engaged in misrepresentations or omissions of a kind usually relied on by reasonably prudent persons and that consumer injury resulted.”
Part of the relief sought by the Plaintiffs is restitution to those consumers defrauded by the misrepresentations made by NCMG. To preserve the possibility of such relief, the Plaintiffs argue a freeze of the assets of the Defendants and the appointment of a receiver to prevent concealment or dissipation of assets pending final resolution of this case is needed. In essence, the Plaintiffs contend an asset freeze is necessary in the instant case so as to preserve assets for effective final relief in the form of consumer redress.
It has been determined a reasonable consumer would be misled by the advertisements and oral representations made by NCMG. Advertisements of the credit services offered by NCMG are widely disseminated. The Plaintiffs have submitted certifications from but a few of the individuals throughout the country who have fallen victim to the deceptive practices of NCMG. Presently, there is no way to determine how many consumers across the country were similarly misled. The certifications demonstrate the bank accounts of consumers were debited, often repeatedly, by the Defendants without proper authorization; Because Plaintiffs are likely to prevail in their claim for consumer redress, a freeze of the assets of all Defendants is appropriate to preserve those assets for possible restitution awards.
This form of temporary relief is also warranted considering NCMG appears to be experiencing financial difficulties. NCMG has failed to stay current with one of its primary suppliers, United Parcel Services (“UPS”). Recently, UPS has ceased doing business with NCMG because of an undisputed, outstanding bill in the amount of $ 98,600.00. NCMG indicated to UPS it did not have the funds available to satisfy the bill.
The Plaintiffs contend this freeze should extend to the assets of the Individual Defendants. A freeze of the assets of the Individual Defendants is warranted because their knowledge of, encouragement of and participation in the practices which violated the FTCA, the CFA, the CROA, and the TSR and their failure to act within their authority to control those practices makes them liable for monetary damages.
When, as in this case, business operations are permeated by misrepresentations and fraud, the likelihood that assets may be dissipated during the pendency of the legal proceedings is strong. In the instant matter, absent a freeze, meaningful consumer redress is unlikely, especially in light of the recent economic difficulties experienced by NCMG. The Individual Defendants, however, should be able to withdraw funds for normal personal expenses.
The Plaintiffs contend appointing a receiver over NCMG is also essential to maintain the status quo, and to prevent the destruction of documents and the concealment or dissipation of company assets when the Defendants have engaged in fraud or deceptive conduct. The Plaintiffs further argue the many deceptive practices engaged in by the Defendants and the propensity to change these practices only if economically justifiable further warrant the appointment of a receiver.
The Defendants contend the appoint of a receiver is unnecessary because in the instant matter there are no violations of previous agreements or court orders, no evidence of flight and no serious threat of the dissipation of assets. The Defendants further argue they have been cooperating with the State of New Jersey for more than thirteen months during its investigation of NCMG and have turned over all requested information. Also, in support of this argument, the Defendants contend NCMG pays its taxes and employs nearly 250 individuals who would be adversely affected by such an appointment, “especially on the paucity of the investigatory record.”
The appointment of a receiver, while an extraordinary remedy, is appropriate where “fraud, or the imminent danger of property being lost, injured, diminished in value or squandered, and where legal remedies are inadequate.” Precisely that situation exists here. A temporary receiver can preserve records and make an accounting that will assist in (1) identifying the assets of the Defendants, (2) determining the size and the extent of the fraud, and (3) identifying the individuals injured.
The Plaintiffs argue when the FTC has made a showing of deceptive practices in circumstances where dissipation of assets and destruction of documents are foreseeable, courts have not hesitated to appoint receivers in the past. Accordingly, it appears the appointment of a temporary receiver is appropriate and necessary to maintain the status quo in the instant matter considering the aforementioned deceptive practices of the Defendants and the threat of the dissipation of assets.
Before a preliminary injunction may be issued, the applicant for the injunction usually must give security in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained. Rule 65 specifically excepts the Federal Government and its agencies from this requirement. Accordingly, the FCC need not post bond in the instant matter. Consequently, the State of New Jersey is not automatically exempted from this requirement.
The Third Circuit has interpreted the bond requirement pursuant to Rule 65 quite strictly. The issuance of an improper interlocutory order “may harm the defendant and a bond provides a fund to use to compensate incorrectly enjoined defendants.” The bond requirement also “deters rash applications for interlocutory orders; the bond premium and the chance of liability on it cause plaintiff to think carefully beforehand.”
The protection afforded by the imposition of a bond is important for two reasons. Generally, with rare exceptions, a defendant wrongfully enjoined only has recourse against the bond. As the Supreme Court has observed: “A party injured by the issuance of an injunction later determined to be erroneous has no action for damages in the absence of a bond.” And since a preliminary injunction is granted before a trial is held on the merits, the possibility it was incorrectly imposed is a reality.
In Hoxworth, the court observed, “[w]hile there are exceptions, the instances in which a bond may not be required are so rare that the requirement is almost mandatory.” Notwithstanding this strict reading of Rule 65(c), there may be instances in which a strict reading of the Rule 65(c) is inappropriate.
In Temple University v. White, the Circuit recognized an exception to the bond requirement pursuant to Rule 65(c). Also, a court should consider the effect the bond requirement would have on the “enforcement of important [F]ederal rights or ‘public interests,’ arising out of comprehensive federal health and welfare statutes.”
Thus, the exception proffered in Temple University involves a balance of the equities of the potential hardships that each litigant would suffer as a result of the imposition of a preliminary injunction. When the balance of these equities overwhelmingly favors the party seeking the injunction, a district court has the discretion to waive the Rule 65(c) bond requirement.
The scope of the possible loss to NCMG is unclear. According to the evidence, NCMG receives a daily estimate of 5,000 weekday and 1,500 weekend “inbound” call from consumers. On average, five to nine percent of these consumers purchase the Initial Analysis offered by NCMG for $ 95.00. The number of consumers who then go on to purchase the Program is unknown.
The State of New Jersey is not an impecunious party. There is no reason that it cannot set aside adequate revenues to satisfy a bond requirement in the instant matter. No economic hardship or duress will be imposed upon the State of New Jersey by the imposition of a bond. In addition, the State of New Jersey, through the New Jersey Attorney General, is explicitly charged with protecting the public interest by enforcing the CFA. In some instances, the bond requirement could conceivably impede the ability of the State of New Jersey to fulfil its role. But that is not the situation here.
Based upon the above analysis, it has been determined that, under the standard set forth in Temple University, the State of New Jersey should not be exempt from the bond requirement. At the same time, a large bond is unnecessary.
The computation of the bond amount may be set “in such sum as the court deems proper.” In the instant matter, the State of New Jersey is attempting to provide for the public interest by enforcing a law enacted to protect consumers from unfair commercial practices. As indicated, although the State of New Jersey is not exempt from the bond requirement, the posting of a large bond is not required. Under the circumstances, a $ 10,000 bond will suffice.
For the reasons stated, the Order to Show Cause seeking a Preliminary Injunction is granted.