Preventing telemarketers from discharging their debt in bankruptcy

Many telemarketers envision their life-cycle as make illegal calls, get sued, file bankruptcy, make more illegal calls, get sued, . . .

Telemarketer John Preston Thompson has completed one full cycle. He illegally called Diana Mey, got sued, and then filed for bankruptcy to discharge his illegal telemarketing judgement debt.

Ms. May sued two men individually - a Judson Phillips and a John Preston Thompson - and obtained a $1.5 million dollar default judgement against them. They turned around a filed for bankruptcy.

Ms. Mey pursued him in bankruptcy, attempting to prevent Mr. Thompson from discharging the judgement. Ms. May was only partially successful, but as usual, lets try to learn from her efforts and come back better next time.

Diana Mey v John Preston Thompson.pdf

Download PDF • 979KB

As the bankruptcy court put it:

A self-described consumer advocate seeks to recast $1.5 million in statutory damages and attorneys’ fees based on violations of strict liability laws regulating the use of “robocalls” into a claim for “willful and malicious injury” pursuant to 11 U.S.C. § 523(a)(6). She argues that the callers intended to commit fraud and consequently intended her harm. However, the standard for satisfying § 523(a)(6) is quite high, with the focus on intent to cause the injury at issue. In this case, it would require proof that the mere act of placing unwanted robocalls was intended or substantially certain to cause harm. Evidence of intent to commit fraud, engaging in a fraudulent scheme, or generalized business misconduct does not prove that the debtor intended to cause the injury reflected in the judgment debt. Because the exacting standard of § 523(a)(6) was not met, the plaintiff’s claim that the debt be declared nondischargeable is denied. As an alternative theory, the plaintiff seeks to bar the debtors’ discharges under 11 U.S.C § 727(a)(4)(A) due to omissions in their sworn bankruptcy filings ["because they failed to provide full and complete information to questions on their statements of financial affairs"]. In that regard, the plaintiff is partially successful, satisfying her burden as to one debtor but not as to the other.

These two defendants participated in the underlying trial court TCPA violations, but not in good faith. Eventually the trial court struck their pleadings and defenses, and later issued an "Order Granting Default Judgment" addressing the defendants' discovery abuse. As part of this order, the trial court found that the defendants were acting as each other's alter-ego's, or basically as one identity.

When the trial court eventually got around to entering a money judgment against the two defendants, it found the violations were "willful and knowing" and trebled the TCPA damages.

All of the following allegations are established: Defendants phoned Ms. Mey repeatedly despite her registration on the Do Not Call registry; Defendants continued to call Ms. Mey after at least 9 attempts to stop their calling; the calls were misleading; agents on some occasions became belligerent and hung up on Ms. Mey; agents made repetitive calls within an hour; and calls continued over a span of three years and even after litigation in this case was filed.

Despite these findings, the bankruptcy court held that the “willful and knowing” standard under the TCPA is not the equivalent of the “willful and malicious injury” standard under § 523(a)(6) of the Bankruptcy Code.

The bankruptcy court held a trial on the § 523(a)(6) question of were the underlying TCPA violations “willful and malicious injury” and 11 U.S.C § 727(a)(4)(A) question of incomplete disclosure of their financial situation in the bankruptcy filing.

At trial, Ms. Mey introduced extensive evidence about the calls, as well as documentation purporting to show that the Defendants or their alter egos were engaged in similar fraudulent activity involving other parties in other locations. In connection with her consumer advocacy, Ms. Mey has technology to record telemarketing calls and voicemails. She does not just hang up on unwanted calls but often engages with callers to identify the caller and obtain information about their compliance, or lack thereof, with telemarketing laws. Her goal with caller engagement is to obtain evidence for a future lawsuit, and her stated goal for the lawsuits is to deter continued violations of the TCPA and equivalent state statutes. Of course, when she is successful in this pursuit, the result can be substantial damage awards, including separate damages for violation of both state and federal statutes, treble damages and/or maximum penalties, and attorneys’ fees . . . She used at least three pseudonyms when communicating with the callers.

This court explained that the reason why the TCPA's "willful or knowing" doesn't automatically satisfy § 523(a)(6)'s “willful and malicious injury” is the conjunction / disjunction. § 523(a)(6) is a higher bar to clear:

The injury must be both willful and malicious . . . expressly adopting a two-pronged approach where “willful” and “malicious” are separate elements that must be proven). The injury also must be caused by the debtor . . . “Under this provision, the willful and malicious injury has to be an injury ‘by the debtor to another entity or to the property of another entity[.]’”

Here is the big take away if you are building a case at the trial court level you hope will prevent the defendant bankrupting out of: At trial, Ms. Mey was required to prove that the debt arising from the Judgment is for an injury that was (1) willful, (2) malicious, and (3) caused by the Debtors.

The bankruptcy court brought up an interesting dilemma. Typically to prove a TCPA claim, the plaintiff is arguing that the calls stemmed from a profit motive [Ms. Mey did not argue that the purpose of the calls was to harass or invade her privacy].

That distinction is critical in this case. Logically, there would be no profit motive for telemarketers to pursue calls merely for the purpose of harassing or inconveniencing call recipients. Telemarketers make their money from successful sales of whatever product they are selling, even if, with disreputable telemarketers, it involves some fraud or misrepresentation to consummate a sale. But § 523(a)(6) deals with a different type of intent than the more frequently asserted fraud claims under § 523(a)(2). To fit under § 523(a)(6), the goal of the offender must be to cause harm, whereas the goal of the typical fraudster under § 523(a)(2) is to profit financially from any fraud that is committed.

This opinion from the bankruptcy court pointed out what it perceived as a flaw in Ms. Mey's argument because sought to prevent discharge under § 523(a)(6), but not under § 523(a)(2), and this court felt that the defendant's actions fit better under § 523(a)(2). One lesson learned here would be to move to prevent discharge under both § 523(a)(2) and § 523(a)(6)

§ 523(a)(6) deals with a different type of intent than the more frequently asserted fraud claims under § 523(a)(2). To fit under § 523(a)(6), the goal of the offender must be to cause harm, whereas the goal of the typical fraudster under § 523(a)(2) is to profit financially from any fraud that is committed. The flaw in Ms. Mey’s case is not a lack of any injury, since an injury may be inferred from the Judgment debt, but a lack of proof of intent to cause any such inferred injury [that fit under § 523(a)(6)].

Another distinction to be mindful of is that willful under the TCPA might not be the same as willful under § 523(a)(6):

This standard has been described as “stringent,” . . . Willfulness requires “a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” . . . “[D]ebts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” . . . The willfulness standard has been likened to intentional torts, which “generally require that the actor intend ‘the consequences of an act,’ not simply ‘the act itself.’” . . . The plaintiff must show that a defendant acted with subjective intent to harm or with substantial certainty that harm would occur. . . . Within the Sixth Circuit, this standard is subjective and asks “whether the debtor himself was motivated by a desire to inflict injury.” Since defendants will rarely admit to acting with an intent to injure, intent may be proven with circumstantial evidence . . .

Ms. Mey was a bit boxed in because she didn't move under§ 523(a)(2), but § 523(a)(2) which as we discussed, requires a showing of intent to injure. She tried using FTC enforcement actions against the defendants, but that came up short. Neither the FTC Stipulated Judgment nor the FTC Default Order contain findings about the applicable defendants’ intent as opposed to their actions . . . They are not probative of the companies’ intent to cause Ms. Mey injury at the time calls were being made to her two to five years earlier, and not probative as to the debtor Defendants’ intent.

The bankruptcy court discussed a strategy that I've heard circulating in the pro-se TCPA plaintiff's hallway

At trial, Ms. Mey needed to prove that the Defendants intended to cause Ms. Mey harm by the act of robocalling or that the Defendants were substantially certain that harm would result from such calls. The intent element is tied to the injury actually incurred and that gives rise to the debt. Although Ms. Mey did not argue that the Defendants intended that the robocalls themselves would injure her, any effort to pursue that approach would have been futile based on the evidence that was presented. There were approximately 104 calls included in the Judgment debt. While the total number of calls may seem large, the average number over a three-year period is not sufficient to demonstrate an intent to harass . . . Any intent to injure Ms. Mey specifically is further abated by the fact that Ms. Mey used at least three pseudonyms with the callers. From the callers’ perspective, they were calling four different people and not placing all 125 calls to Ms. Mey . . . The companies or their agents continued making calls after Ms. Mey asked them to stop calling and after she filed suit against them. These facts may demonstrate that someone was sloppy, negligent, or reckless in failing to comply with applicable laws and/or ensuring that call center agents were complying with applicable laws, but they do not show a subjective intent by the Debtors or alter ego companies to cause Ms. Mey harm. Likewise, that fact alone does not prove subjective knowledge by the Debtors or alter ego companies of the substantial likelihood that harm would result from the calls. Finally, Ms. Mey argues that some of the allegations in her West Virginia complaint about harassing or deceptive intent are deemed admitted and indicative of intent. They were deemed admitted in the West Virginia Litigation by virtue of the sanction stripping the defendants of their defenses and the entry of default, but that does not mean that they are preclusive in this proceeding. For collateral estoppel to apply, any findings of fact must be necessary or essential to the Judgment.

Ms. Mey didn't win most of this round in bankruptcy court, but she highlighted the need to include or switch tracks to § 523(a)(2) vs the § 523(a)(6) argument she used. She caught Mr. Phillips because he withheld information in his bankruptcy filing:

The trustee and creditors were deprived of the opportunity to examine Mr. Phillips’ interests in these businesses for any value to the bankruptcy estate. Based on Mr. Phillips’ knowing and fraudulent omission of the businesses from his sworn bankruptcy schedules and SOFA, he is denied discharge pursuant to 11 U.S.C. § 727(a)(4)(A).

but this was luck on Ms. Mey's part than replicable strategy because it didn't work on Mr. Thompson:

Unlike Mr. Phillips’ omissions, Mr. Thompson was not playing an active role in any of the undisclosed corporate entities at the time of his bankruptcy filing, and in fact, most of the entities never conducted any business. The Court found Mr. Thompson credible when testifying that he was not aware that he had been designated an officer or director of these entities. Because the businesses never developed, it is understandable that Mr. Thompson did not think to disclose them in his bankruptcy filings. An honest mistake is not cause for denial of discharge.

A win is a win and Ms. Mey walks away sticking it to half of the personally named TCPA defendants, but more importantly to the TCPA community she showed how a future case can get further, but this bankruptcy court is showing that the bar is pretty high. The clowns in this lawsuit were pretty egregious.

Do you have a question or a telemarketing, debt collection, or bankruptcy case that would make a great blog article? We might even review your pro-se complaint or motion in a blog post. Email peter@nwdebtresolution.com and/or nathen@nwdebtresolution.com and we may answer it for everyone!

Are telemarketers harassing you in Washington, Oregon, or Montana? My Washington State TCPA plaintiff law practice can help, just give us a call at 206-800-6000 or email peter@nwdebtresolution.com.

The thoughts, opinions and musings of this blog are those of Peter Schneider, a consumer advocate and Washington State plaintiff's TCPA attorney at Northwest Debt Resolution, LLC. They are just that, his thoughts, opinions and musings and should be treated as such. They are not legal advice. If you are looking to file a lawsuit for TCPA violations and unwanted calls please contact me for a consultation.

Return to blog articles

Our blog articles organized into popular topics