Filing personal bankruptcy does not insulate an individual from being held in contempt for failing to pay a multimillion-dollar disgorgement awarded to the Federal Trade Commission, according to District Judge Paul A. Crotty of New York.
The man’s chapter 7 petition did prevent him, at least temporarily, from being jailed for civil contempt.
Judge Crotty’s March 28 opinion was the latest installment in litigation going back to 2008 between the FTC and a company that sold computer equipment to consumers with bad credit. That year, the company consented to a final judgment and permanent injunction regarding its business practices. Two years later, however, the district court held both the company and its chief executive in civil contempt for violating the injunction.
After the Second Circuit remanded the case for a recalculation of damages, Judge Crotty entered final judgment in April 2016 holding the executive personally liable for $13.4 million in compensatory damages based on the company’s revenue from sales to consumers that violated the prior injunction. According to Judge Crotty, the award was “a form of disgorgement or equitable restitution, the recovery of which is available through contempt damages.”
The executive’s appeal from the judgment is pending.
When the executive failed to pay any part of the $13.4 million, the FTC filed civil contempt proceedings asking Judge Crotty to jail him until he purged his contempt by paying the judgment. Two days before his papers were due in the contempt proceeding, the executive filed a personal chapter 7 petition in Florida. He then immediately filed a suggestion of bankruptcy in the New York district court.
Judge Crotty held that the contempt proceedings were covered by Section 362(b)(4), which excepts the government’s police and regulatory powers from the automatic stay. Therefore, he said, the personal bankruptcy did “not deprive this court of its authority to make a civil contempt finding and determine the appropriate sanction,” nor did it “strip this court of its ability to exercise its civil contempt powers to vindicate its authority.”
However, Judge Crotty held that the personal bankruptcy would bar the FTC from enforcing contempt sanctions until the “termination or modification of the automatic stay.”
Before deciding what relief he could grant in view of the bankruptcy, Judge Crotty recited authority for the proposition that a contemnor is not insulated from contempt short of showing “‘complete inability, due to poverty or insolvency, to comply.’”
Judge Crotty said that the executive was living in a $1 million home in Florida purchased in 2014 without a mortgage. He was also the beneficiary of about $2 million in offshore trusts and annuities, one of which paid him $15,000 a month. In the year following the $13.4 million judgment, the executive lived a lavish lifestyle without making a payment, “however small,” toward restitution, the judge said.
Although Judge Crotty refused to incarcerate the executive, he held the man in contempt and directed him, within 30 days, to “meet in good faith with the FTC and negotiate a payment schedule pursuant to which he shall pay the FTC a portion of [the judgment] each month.”
If he fails to comply, Judge Crotty said he “may impose additional sanctions, including incarceration.”