The Ninth Circuit refused to allow various defendants to escape liability for a variety of alleged mortgage relief scams, affirming judgments based on violations of the FTC Act and the federal Mortgage Assistance Relief Services (MARS) Rule.
In an unpublished decision, the U.S. Court of Appeals, Ninth Circuit affirmed summary judgment in favor of the Federal Trade Commission (FTC), including a finding of contempt for using frozen funds in violation of a court order.
What happened
In 2016, the FTC filed suit in California federal court against Charles T. Marshall, four other individuals and multiple corporate entities, including Brookstone Law Group and Advantis Law Group. According to the agency, the defendants engaged in a mortgage relief scam by falsely telling homeowners they could take part in a “mass joinder” lawsuit that would prevent foreclosure and provide financial awards of up to $75,000.
The defendants claimed that the law firms would file lawsuits against lenders for mortgage fraud with the aim of voiding mortgage notes, promising consumers “to give you your home free and clear, and/or to award you relief and monetary damages,” the FTC said.
In reality, the mass joinder lawsuit was a ruse, the agency alleged. Although the defendants did sue several banks, they did not win any cases. Most of cases were dismissed for lack of pursuit; further, the law firms lacked the ability to litigate all of the cases they touted.
Between January 2011 and June 2016, the defendants brought in roughly $18 million from the scam, the agency said, with homeowners paying $895 or more for a “legal analysis” of their potential case. Homeowners were told they had a good case and then charged additional thousands of dollars in recurring monthly fees, the FTC alleged.
In September 2017, a federal court judge granted summary judgment in favor of the FTC against Marshall for violations of the FTC Act and the MARS Rule. The court ordered Marshall to pay the agency $1.78 million and agreed with the FTC that a permanent ban from marketing or selling any kind of secured or unsecured debt relief product or service was necessary.
Marshall appealed. He argued that the district court erred by disregarding his declaration and finding him personally liable.
While the Ninth Circuit agreed that the district court should have considered at least portions of the declaration—which “may have been self-serving, but [did contain] some statements that were ‘based on personal knowledge, legally relevant and internally consistent’”—it still wouldn’t have helped his case.
“[E]ven taking the statements in the declaration as true, any reasonable jury would conclude on this record that Marshall is personally liable for violations of the FTC Act and MARS Rule,” the federal appellate panel wrote.
The FTC produced sufficient evidence to show that the law firms operated together as a common enterprise, sharing corporate officers and resources (including a website, office spaces, staff members, and nearly identical sales scripts and advertising materials), the court said.
“These undisputed facts were sufficient to show that the three corporate entities functioned as a common enterprise, even if Marshall’s statements that he did not know [Advantis Law] existed and that he did not know that [Advantis Law] was part of the enterprise are taken as true,” the panel wrote.
The court also found sufficient undisputed facts to hold Marshall individually liable for injunctive relief at summary judgment, as the agency demonstrated that Marshall participated directly in the acts or practices, or had the authority to control them. Marshall was a co-owner and state-registered corporate officer of one of the law firms, directed individuals to start marketing the firm and signed documents on the firm’s behalf. Nor did he dispute the FTC’s evidence that the law firms violated both the FTC Act and the MARS Rule as alleged by the agency.
“Thus, we conclude that Marshall failed to create a genuine dispute as to whether he was personally liable for the common enterprise’s FTC Act and MARS Rule violations, such that injunctive relief against him was proper,” the court said.
Finally, the undisputed facts established that Marshall was “at least recklessly indifferent” to the law firm’s misrepresentations, making him jointly and severally liable for the corporation’s unjust gains, in violation of the FTC Act. He knew that other members of the firm had previously operated schemes accepting unearned advanced fees for loan modification work that was never performed and admitted to knowing “there was a problem” with the law firms.
Marshall’s defense that he did not personally sign certain materials and that another defendant assured him the materials were legal was unavailing, the Ninth Circuit said, as “it was reckless to rely on … a non-lawyer with a history of running fraudulent schemes for such assurances.”
The panel also upheld a civil contempt order against Marshall for withdrawing $24,500 from his personal account in violation of a temporary restraining order (TRO) entered by the district court. The TRO made clear that Marshall’s personal bank accounts were included in the asset freeze and Marshall conceded he had actual notice of the prohibition, the court said.
Why it matters
This is not the first time the Ninth Circuit has weighed in on these issues. This most recent opinion provides an important reminder about the dangers of personal liability for individuals, however. In Marshall’s case, the federal appellate panel affirmed a summary judgment order for $1.78 million, finding him jointly and severally responsible for violations of the FTC Act and MARS Rule. While the FTC has had the MARS Rule on its radar in recent months, this case bears mention because individual liability is increasingly becoming a cudgel against such bad behavior.