Bankruptcy Court Lets FTC Collect Contempt Fine Despite Bankruptcy

The U.S. Bankruptcy Court for the Southern District of Florida recently held that a debt represented by a $13.4 million compensatory damages award entered by a federal district court against a former CEO is not subject to discharge in the CEO’s personal bankruptcy case.

The case, In re: Joseph K. Rensin, dealt with the bankruptcy case of a former CEO and sole owner of a company that marketed computers and related products to customers.  The underlying case, which had been brought by the FTC against the company and its CEO, was centered on “extra terms” the company included in its refund policy regarding the use of store credit.  The FTC alleged that the company failed to inform potential customers about these extra terms, leading to around $14 million in allegedly fraudulent revenue.  In 2008, that case resulted in a consent order which, among other things, prohibited the company and its officers and agents from making any representations regarding their store credit policy prior to clearly disclosing all terms.  In 2009, the FTC checked in on the company’s compliance with the consent order, and alleged that the company was receiving orders and payment from customers with no intent of ever providing anything in return.

The district court where the consent order had been entered then issued an order holding both the company and the CEO in contempt of the consent order, as they had failed to disclose the extra terms of the store credit refund policy to customers prior to receiving payment. After an initial appeal by the FTC to the Second Circuit, the district court entered judgment against the company and the CEO, holding them jointly and severally liable in the amount of $13.4 million—the total revenue, less penalties already paid.  The CEO then filed for bankruptcy, attempting discharge the $13.4 million award.  The FTC contested the attempted discharge, claiming that the penalty was exempt from discharge.

The bankruptcy court agreed, finding that the CEO had full knowledge of, and personally participated in the underlying conduct, with the knowledge and expectation that the company would receive substantial income as a result, and holding that the $13.4 million award was exempted from discharge on two independent bases: 1) as money obtained by false pretenses, a false representation, or actual fraud; and 2) as the result of a willful and malicious injury by the debtor to another entity.  The CEO has appealed the bankruptcy court’s ruling to the district court, where it is currently pending.