Fed. Trade Comm'n v. Hornbeam Special Situations, LLC

391 F.Supp.3d 1218

FEDERAL TRADE COMMISSION, Plaintiff,

v.HORNBEAM SPECIAL SITUATIONS, LLC, et al., Defendants.

CASE NO. 1:17-CV-03094-WMR

United States District Court, N.D. Georgia, Atlanta Division.

Signed July 24, 2019

Amanda C. Basta, Elizabeth J. Averill, Hong Park, Pro Hac Vice, Kimberly L. Nelson, Pro Hac Vice, Korin Ewing Feli, Omolara Bewaji Joseney, Reenah L. Kim, Federal Trade Commission, Washington, DC, Anna Mirshak Burns, R. Michael Waller, Federal Trade Commission, Atlanta, GA, for Plaintiff.

Alexis Miller Buese, Lauren M. De Lilly, Michael L. Mallow, Sidley Austin, LLP, Los Angeles, CA, Jessica Rutledge Watson, Jeffrey L. Mapen, Nelson Mullins Riley & Scarborough, LLP, Atlanta, GA, for Defendants EDebitPay, LLC, Dale Paul Cleveland, William R. Wilson.

Leonard L. Gordon, Pro Hac Vice, Venable, LLP, New York, NY, Mary M. Gardner, Matthew S. Renick, Venable, LLP, Washington, DC, Julia Blackburn Stone, Michael A. Caplan, Caplan Cobb LLP, Atlanta, GA, for Defendants iStream Financial Services, Inc., Kris Axberg, Richard Joachim.

Earl G. Robinson, Atlanta, GA, pro se.

Bryan B. Lavine, Katie Lamb Balthrop, Keith Jerrod Barnett, Tiffany Nichols Bracewell, Troutman Sanders, LLP, Atlanta, GA, for Defendant James McCarter.

Mark Ward, Woodland Hills, CA, pro se.

Allison S. H. Ficken, Edward Joseph Dovin, Dovin Ficken, LLC, Atlanta, GA, for Defendant Patricia Brandmeier Robinson.

Andrew Case, Richard Lawson, Manatt, Phelps & Phillips, LLP, New York, NY, Julia Blackburn Stone, Michael A. Caplan, Caplan Cobb LLP, Atlanta, GA, for Defendant Guadalupe L. Andrews.

ORDER

WILLIAM M. RAY, II, United States District Court Judge

This case comes before the Court on Defendants' respective Motions to Dismiss [Docs. 225, 226, 227, 228, 229, 232, and 233]. Upon consideration of the arguments presented by the parties, the applicable law, and all appropriate matters of record, the Court finds and rules as follows.

I. BACKGROUND

In its Second Amended Complaint [Doc. 223], the Federal Trade Commission ("FTC") brings suit against three categories¹ of defendants:

1. Hornbeam Parties -Hornbeam Special Situations, LLC; Cardinal Points Holdings, LLC; Cardinal Points Management, LLC d/b/a Clear Compass Digital Group; and Gyroscope Management Holdings, LLC (corporate entities together, the "Hornbeam Entities"); and individual Defendants Patricia Robinson, as Executor for the estate of Jerry L. Robinson, Earl G. Robinson, Mark Ward, and James McCarter.

2. EDP Parties -EDebitPay, LLC; Platinum Online Group, LLC d/b/a Premier Membership Clubs; and clickXchange Media (corporate entities together, the "EDP Entities"). Also included are individual Defendants Dale Paul Cleveland and William R. Wilson.²

3. iStream Parties -iStream Financial Services, Inc., along with Kris Axberg and Richard Joachim.

In its Complaint, the FTC alleges violations of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 53(b) and 57b, the Restore Online Shoppers' Confidence Act ("ROSCA"), 15 U.S.C. § 8401 et seq. , and the Telemarketing and Consumer Fraud and Abuse Prevention Act ("Telemarketing Act"), 15 U.S.C. §§ 6101 – 6108 [Doc. 223 ¶ 1]. The Complaint describes a scheme by which Defendants acquired the financial information of subprime customers and made unauthorized debits to their bank accounts to pay for online coupons that went largely unused [Doc. 223 ¶ 43-45]. The EDP Parties operated this scheme from July 2010 to September 2013 [Doc. 223 ¶ 25] before selling the operation to the Hornbeam parties, which operated the scheme until June 2016 [Doc. 223 ¶ 32-33]. Throughout this time, the iStream Parties played an essential role in the scheme, providing payment processing to the other Defendants despite knowing about high return rates for electronic checks and frequent customer complaints [Doc. 223 ¶ 83-99].

In its Complaint, FTC alleges facts and circumstances which demonstrate the ongoing nature of Defendants' activities. Prior to this current action, the EDP Parties had been under FTC scrutiny in another matter. After resolving the conflict with a stipulated order, the EDP Parties were held in contempt after the court found they violated the order and continued the illegal activity from at least the day of the order [Doc. 223 ¶¶ 50-53]. Similarly, the EDP Parties settled investigations into their scheme from the states of Oregon and Iowa [Doc. 223 ¶¶ 142-43, 148, 186], yet continued to operate the scheme. After selling the operation to the Hornbeam Parties, Wilson formed a new company, AdMediary, LLC, which began targeting the financial information of subprime customers and recruiting employees from the EDP Parties and Hornbeam Parties [Doc. 223. ¶¶ 194-99, 265].

Likewise, after purchasing the operation with full knowledge of its practices and the legal scrutiny that it was under, the Hornbeam Parties continued to operate the scheme and worked to prolong it [Doc. 223 ¶¶ 225-25, 234-37, 310]. They made fake transactions to mask high return rates, sought a new processing bank, and only stopped the scheme when their replacement bank stopped cooperating [Doc. 223 ¶¶ 344-45].

Finally, the iStream Parties continued working with the EDP Parties and Hornbeam Parties despite knowing about the high return rates [Doc. 223 ¶¶ 109, 243, 467-80] and the legal scrutiny [Doc. 223¶¶ 476-77, 480]. They helped the Hornbeam Parties find a new processing bank and maintain its relationship with the main processing bank, and they approved accounts the Hornbeam Parties used to mask high return rates [Doc. 223 ¶¶ 579-83]. Additionally, iStream continues to provide payment processing services to a variety of customers [Doc. 223 ¶ 594].

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 8(a)(2), a complaint must provide "a short and plain statement of the claim showing that the pleader is entitled to relief[.]" This pleading standard does not require "detailed factual allegations," but it does demand "more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Chaparro v. Carnival Corp., 693 F.3d 1333, 1337 (11th Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ).

Rule 12(b)(6) requires a plaintiff to plead "enough facts to state a claim to relief that is plausible on its face." Chandler v. Sec'y of Fla. Dep't of Transp., 695 F.3d 1194, 1199 (11th Cir. 2012) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The Supreme Court has defined the standard, explaining:

A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.

Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955 ). Therefore, the claim can only survive a motion to dismiss if the complaint's factual allegations are "enough to raise a right to relief above the speculative level[.]" Twombly, 550 U.S. at 555, 127 S.Ct. 1955. "[A] formulaic recitation of the elements of a cause of action will not do." Id.

After eliminating allegations in the pleading that are merely legal conclusions, the Court must examine the well-pleaded factual allegations and assume their veracity when determining whether those facts plausibly give rise to an entitlement to relief. Iqbal, 556 U.S. at 679, 129 S.Ct. 1937.

III. DISCUSSION

Defendants generally argue that the FTC has failed to allege facts sufficient to allow the FTC to sue under 15 U.S.C. § 53(b). The Court does not agree.

Under 15 U.S.C. § 53(b), the FTC is authorized to bring suit in a district court to obtain a preliminary injunction "[w]henever the [FTC] has reason to believe ... that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the [FTC]." Defendants argue that the FTC only alleges past misconduct rather than showing they are "about to violate" the law and, therefore, that the FTC has failed to state a claim under § 53(b). In response, the FTC argues that there is an "internal standard" component to § 53(b), emphasizing the "whenever the Commission has reason to believe" language of the statute. Additionally, the FTC contends that its factual allegations are sufficient to show that Defendants are about to violate the law if not for government intervention.

The Third Circuit has recently addressed the pleading requirement under § 53(b) at the motion to dismiss stage. In FTC v. Shire ViroPharma, Inc., 917 F.3d 147 (3d Cir. 2019), the Court of Appeals for the Third Circuit held that the FTC must plead facts showing a current or impending violation of the law to survive a motion to dismiss on a § 53(b) claim. "We conclude that this language is unambiguous; it prohibits existing or impending conduct. Simply put, [ § 53(b) ] does not permit the FTC to bring a claim based on long-past conduct without some evidence that the defendant ‘is’ committing or ‘is about to’ commit another violation." Id. at 156. The Court of Appeals "reject[ed] the FTC's contention that [ § 53(b) ] ... can be satisfied by showing a violation in the distant past and a vague and generalized likelihood of recurrent conduct.... [T]he FTC must make a showing that a defendant is violating or is about to violate the law." Id. at 159.

Defendants argue that the decision in Shire ViroPharma supports dismissal of the FTC's § 53(b) claim in this case. However, the Third Circuit did not address the merits of the FTC's internal standard argument. "The FTC also asserts that [ § 53(b) ]'s ‘reason to believe’ language confers upon it unreviewable discretion to file suit.... We decline to consider this argument because the FTC failed to raise it in the District Court." Id. at 159, n.17. Although the Third Circuit went on to doubt the persuasiveness of the...