District Court Temporarily Shuts Down Phantom Debt Collection Operation at FTC’s Request

On February 8, 2019, the U.S. District Court for the Western District of North Carolina issued a temporary restraining order (TRO), at the FTC’s request, against ten companies and six individuals alleged to have collected over $4.3 million of phantom debts from consumers through unlawful debt collection operations, in violation of Section 5 of the FTC Act (i.e., UDAP) and multiple provisions of the FDCPA.

The FTC claimed that, since at least 2014, the defendants purchased, sold, placed for collection, and collected on debt portfolios containing counterfeit debts or debts arising from purported loans to which consumers never agreed – i.e., phantom debts.  The defendants allegedly employed a variety of unlawful practices to induce consumers to pay, including false threats to take legal action, misrepresentations that they are or are associated with a law firm, and unlawful contacts with third parties about the debts.  In some instances, the defendants allegedly used consumers’ private personal and sensitive financial information to convince them that the purported debts were real.  Also, the defendants  allegedly informed consumers of dire consequences of the supposed lawsuits – including having to pay a steep judgment amount along with court costs and attorneys’ fees, and potential criminal actions – before offering to settle the matter with a payment over the phone via the consumer’s credit or debit card.  Additionally, the defendants allegedly routinely failed to identify calls as being from a debt collector attempting to collect a debt, and to provide written notice within five days after initial contact that the debt will be assumed valid unless the consumer disputes it, and that if the consumer disputes it in writing, verification of the debt will be obtained.

The court issued the TRO upon determining that the FTC is likely to prevail on the merits and that good cause exists to believe that: (i) immediate and irreparable harm will result from the defendants’ ongoing FTC Act and FDCPA violations; (ii) the defendants have caused consumer harm of at least $4.3 million; and (iii) immediate and irreparable damages to the court’s ability to grant effective final relief for consumers will occur unless the defendants are immediately restrained by court order.  The TRO, among other things: (i) prohibits the defendants from engaging in collection activities that violate the FTC Act and FDCPA, and from destroying or failing to create and maintain records relating to their assets and business practices; (ii) requires the defendants to provide an accounting of the debt portfolios distributed, placed, collected on, sold, or acquired since June 2014, as well as complete financial statements and a full accounting of assets; (iii) freezes the defendants’ assets derived from activities that are the subject of the lawsuit; (iv) appoints a receiver to control the defendants’ affairs, assets, and records; (v) provides immediate access to the defendants’ business premises and records; and (vi) authorizes limited expedited discovery regarding the defendants’ assets, transactions, and operations.

On February 15, 2019, a hearing was held on the FTC’s motion for preliminary injunction, during which the parties agreed to extend the TRO until the morning of March 4.  If the parties fail to reach an agreement as to the pending preliminary injunction motion by then, an evidentiary hearing is scheduled to be held at that time.