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Unfair and Deceptive Acts and Practices: 13.6.3.10 Civil Penalties in Bankruptcy

Section 523(a)(7) of the Bankruptcy Code exempts from discharge in a chapter 7 case a “fine, penalty, or forfeiture payable to and for the benefit of a governmental unit”.598 To be excepted from discharge, the fine, penalty, or forfeiture must not be “compensation for actual pecuniary loss” to the government.599 If a penalty meets all elements of this definition, it is nondischargeable in a chapter 7 case, even if it was imposed in a civil proceeding.600

Unfair and Deceptive Acts and Practices: 13.6.4.4 Who Is Liable for a Restitution Order?

A number of courts, including the Wisconsin and Nebraska Supreme Courts, have held that inclusion of the language required by the FTC Holder Rule in a seller’s contracts is grounds to obtain restitution against the assignee creditor, even when the assignee was not involved in the wrongdoing.652 Since individual consumers can bring claims against the assignee, the state should have the same right.

Unfair and Deceptive Acts and Practices: 13.6.4.5 Determining the Restitution Amount

Calculating a restitution award is relatively straightforward where the seller never delivers goods or services for which the consumer has paid,657 or where those goods or services are worthless. The state need only establish that the product was never delivered or was worthless, that the UDAP statute was violated, and that a certain class of individuals paid for the product. The restitution order then requires the seller to return the money paid.

Unfair and Deceptive Acts and Practices: 13.6.4.7 Types of Restitution Relief Available

When seeking far-reaching or innovative forms of restitution, enforcement agencies should stress not only the necessity of the remedy to adequately compensate victimized consumers, but also its necessity to ensure adequate deterrence by not allowing the seller to retain its ill-gotten gains. For example, restitution payments should not be based on whether consumers respond to notification that they have a right to restitution.

Unfair and Deceptive Acts and Practices: 13.6.4.8.2 Procedural vehicles for protecting a restitution award

Where a restitution order requires the seller to pay certain consumers, and the company has filed bankruptcy, there are practical problems for individual consumers in collecting from the bankrupt debtor. It would be useful for the attorney general to intervene before the bankruptcy court on behalf of the individuals owed restitution and argue that the restitution obligation is nondischargeable.702

Unfair and Deceptive Acts and Practices: 13.6.4.9 Ensuring Payment of Restitution Obligation

Where there is a danger that the merchant will skip town before it can be held in contempt for failing to pay restitution, the court can order that the restitution amount be placed in escrow immediately, and that the seller not engage in any further business until full restitution is made.709 Where the state cannot trust the seller to make the proper refunds, the money can be paid to the state enforcement agency, which can take the responsibility of distributing the restitution money.710

Unfair and Deceptive Acts and Practices: 13.6.4.11 Restitution’s Relation to Private Suits

Often there will be one or more private suits, or even a private class action, parallel to the state enforcement action. Sometimes private suits and attorney general suits are joined for management purposes. Where the actions are not joined, in general both actions can proceed. The filing of a private suit by an individual does not stop an attorney general enforcement action. The purposes of the two suits are fundamentally different, as the state’s suit is a law enforcement action intended to protect the public.

Unfair and Deceptive Acts and Practices: 13.6.5 Asset Attachment Orders

In egregious cases, state enforcement agencies may seek judicial orders for attachments or freezes on bank accounts or other assets that can be specifically identified. States must be prepared to justify the use of such a drastic remedy, but under the right circumstances, especially if there is evidence that the defendant will conceal or dissipate assets during the pendency of the action, courts will grant such relief.737

Unfair and Deceptive Acts and Practices: 13.6.6 Receivership and Dissolution

A number of state UDAP statutes allow the state attorney general to seek an order appointing a receiver to administer a violator’s assets.745 Once appointed, a receiver has the power, subject to court approval, to collect the defendants’ assets and distribute them for the benefit of both victims of the unlawful practices and the defendants’ general creditors.746 Non-parties who are given notice of the receivership order may be held in contempt if they knowingly aid or abet a violation.

Unfair and Deceptive Acts and Practices: 13.6.7 Settlement and Releases

When a case is settled, the release should be drafted with care to avoid any unintended implication that individual damage claims are released. The Minnesota Supreme Court construed a release that resolved an attorney general suit as barring private suits by consumers.753 The court focused on the broad description of the claims released, which encompassed all claims that the state could have asserted based on past conduct.

Unfair and Deceptive Acts and Practices: 9.1.1 Introduction

A future-service contract is an agreement by which a consumer commits to pay for services to be rendered over a period of time. Differing forms of future-service contracts may appear at first to have little to do with each other, e.g., vocational schools, buying clubs, health spas, and campground resorts. But it is striking how similar the UDAP issues are in each of these contracts.

Unfair and Deceptive Acts and Practices: 9.1.2.1 The Seller’s Contract Provision

Critical to any future-service contract scam is making it difficult for a consumer to obtain a refund after canceling. The investment in expensive selling techniques will not pay off if consumers can rethink the transaction in the quiet of their own homes and then back out of the deal. Consequently, any future-service scheme will have an elaborate system whereby the consumer forfeits all or much of the contract obligation even if the consumer cancels before few, if any, services are provided.

Unfair and Deceptive Acts and Practices: 9.1.2.3 Contract Law Defenses May Provide Additional Protections

The next step is to determine as a matter of state contract law what the consumer’s rights and obligations are if the consumer stops paying the note, effectively breaching the contract. There are several contract law issues as to whether the seller may sue on the note for the full amount (in the case of a non-cancelable contract) or for some lesser amount specified by the contract (in the contract’s refund provision).

Unfair and Deceptive Acts and Practices: 9.1.2.4 UDAP Approaches

Another approach in a future-service contract cancellation case is to argue that UDAP principles allow the consumer to cancel with a full or large refund since the seller should be limited to no more than actual lost profits as damages. There is little case law in this area, but FTC cases find unfair the mere inclusion of forfeiture clauses in adhesion contracts. In particular, it is unfair to utilize a contract provision whereby, upon default, the consumer forfeits all payments made in a land sale, and receives no title to the land.11

Unfair and Deceptive Acts and Practices: 9.1.3.3 When a Health Club Closes Down

A Maryland case found it a UDAP violation for a health club to close without giving refunds to members, and ordered refunds for all members.51 New York courts have also found fraudulent a health club’s closing without notice, not allowing members to recover their possessions, not paying owed refunds, and continuing to solicit business even though it knew it would close.52 Another court has found, however, that a company that bought a health club’s assets, subject to existing memberships, at a bankru