United States v. MyLife.com (In re MyLife.com)

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In re: MyLife.com Inc., Debtor.

United States Of America, Plaintiff, v. MyLife.com Inc., Defendant.

No. 2:22-bk-14858-ER, Adv. No.: 2:23-ap-01094-ER

United States Bankruptcy Court, C.D. California, Los Angeles Division

July 31, 2023

Date June 7, 2023

MEMORANDUM OF DECISION: (1) GRANTING IN PART AND DENYING IN PART MOTION FOR SUMMARY JUDGMENT FILED BY THE UNITED STATES AND (2) DENYING MOTION TO REJECT STIPULATED JUDGMENT FILED BY THE DEBTOR ^[1]

Ernest M. Robles United States Bankruptcy Judge

Time 10:00 a.m.

Location Ctrm. 1568 Roybal Federal Building 255 East Temple Street Los Angeles, CA 90012

At the above-captioned date and time, the Court conducted hearings on (1) the motion for summary judgment (the "MSJ") filed by the United States of America (the "US") and (2) the motion of MyLife.com Inc. (the "Debtor") to reject a stipulated judgment.^[2] For the reasons set forth below, the MSJ is GRANTED IN PART and DENIED IN PART. Specifically, the Debtor is precluded from contesting its liability under the first, second, fourth, and fifth elements of § 523(a)(2)(A), but is not precluded from contesting its liability under the third element of § 523(a)(2)(A) (intent to deceive). The only issue that remains for trial is whether the Debtor intended to deceive those consumers to whom it made misrepresentations. The Debtor's motion to reject the Stipulated Judgment (as defined below) is DENIED.

I. Background

The Debtor filed a voluntary Chapter 11 petition on September 2, 2022 (the "Petition Date"). Jeffrey Tinsley ("Tinsley") is the Debtor's CEO and holds a 49% interest in the Debtor. The Debtor operates a website that allows subscribers to run background checks on individuals.

On July 27, 2020 (prior to the Petition Date), the United States of America (the "US") filed a complaint against the Debtor and Tinsley in the District Court (the "District Court Complaint"), seeking relief for (1) deceptive business practices in violation of § 5(a) of the Federal Trade Commission Act (the "FTC Act"), 15 U.S.C. § 45(a), (2) violation of the Telemarketing Sales Rule (the "TSR"), 16 C.F.R. § 310.3(a)(1)-(2), and (3) violation of the Restore Online Shoppers Confidence Act ("ROSCA"), 15 U.S.C. § 8403 (collectively, the "Consumer Protection Statutes"). See Case No. 2:20-cv-6692-JFW (Central District of California) (the "District Court Action").

On October 19, 2021, the District Court entered summary judgment in favor of the United States [Complaint, Ex. B] (the "District Court Summary Judgment Order"). In a 17-page decision, the District Court found that the Debtor had violated the Consumer Protection Statutes by, among other things, (1) maintaining a website that was likely to mislead consumers in violation of § 5 of the FTC Act, (2) violating the TSR by making misleading telemarketing calls to consumers, and (3) violating ROSCA by failing to provide customers simple mechanisms to stop recurring credit-card charges. See generally District Court Summary Judgment Order.

On December 15, 2021, the District Court approved a Stipulated Order for Permanent Injunction and Equitable Monetary Relief [Complaint, Ex. C] (the "Stipulated Judgment") entered into between the US, on the one hand, and Tinsley and the Debtor, on the other hand. The Stipulated Judgment provided in relevant part:

The facts alleged in the Complaint shall be taken as true, without further proof, in any subsequent civil litigation by or on behalf of the Commission, including in a proceeding to enforce its rights to any payment or monetary judgment pursuant to this Order, such as a nondischargeability complaint in any bankruptcy case.

The facts alleged in the Complaint establish all elements necessary to sustain an action by the Commission pursuant to Section 523(a)(2)(A) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(A), and this Order will have collateral estoppel effect for such purposes.

Stipulated Judgment at § VIII(B)-(C).

The Stipulated Judgment further stated that "Defendants waive all rights to appeal or otherwise challenge or contest the validity of this Order." Id. at "Findings," ¶ 5. It also stated that "Defendants neither admit nor deny any of the allegations in the Complaint, except as specifically stated in their answer to the Complaint." Id. at "Findings," ¶ 3.

The Stipulated Judgment entered a monetary judgment of $28,945,968 against the Debtor to be paid to the United States (the "US Debt"), and contained a schedule for payment of the judgment. The Debtor made only two payments under the payment schedule, in the total amount of $3,166,666.66.

On March 6, 2023, the U.S. filed a Complaint to Determine that its Debt is Excepted from Discharge Under 11 U.S.C. § 1141(d)(6)(A) [Adv. Doc. No. 1] (the "Complaint") against the Debtor. The Complaint seeks declaratory judgment under 28 U.S.C. § 2201(a) declaring that the Stipulated Judgment is excepted from discharge under §§ 1141(d)(6)(A) and 523(a)(2)(A).

On May 9, 2023, the Court issued a Memorandum of Decision Denying Debtor's Motion to Dismiss Complaint [Adv. Doc. No. 43].

A. Summary of Papers Filed in Connection with the US's Motion for Summary Judgment

The U.S. moves for summary judgment on two alternative grounds. First, the U.S. argues that the District Court Summary Judgment Order precludes the Debtor from contesting the non-dischargeability of the U.S. Debt. Second, the U.S. argues that the Debtor waived its right to a discharge in the Stipulated Judgment, and that the waiver is enforceable.

The Debtor opposes the MSJ. It argues that to the extent the Stipulated Judgment waives the Debtor's right to challenge the dischargeability of the U.S. Debt, the waiver is unenforceable as a violation of public policy. The Debtor further asserts that disputed issues of material fact prevent the entry of summary judgment.

In connection with its opposition to the MSJ, the Debtor filed a motion to reject the Stipulated Judgment pursuant to § 365, on the ground that the payments required under the Stipulated Judgment are burdensome to the estate. The Debtor contends that if the Stipulated Judgment is rejected, the U.S. cannot rely upon the Stipulated Judgment in support of the MSJ.

The U.S. maintains that rejection of the Stipulated Judgment "would be a futile act as it would not alter the U.S. Debt or permit the Debtor to resume harming consumers in violation of the District Court's injunction …." Bankr. Doc. No. 179 at p. 5. The U.S. further asserts that the Stipulated Judgment is not an executory contract, and is therefore not subject to rejection, because the U.S. does not have material ongoing obligations under the Stipulated Judgment.

II. Discussion

Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material facts and the movant is entitled to judgment as a matter of law." Civil Rule 56 (made applicable to these proceedings by Bankruptcy Rule 7056). The moving party has the burden of establishing the absence of a genuine issue of material fact and that it is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "[S]ummary judgment will not lie if the dispute about a material fact is "genuine," that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). "A fact is 'material' only if it might affect the outcome of the case[.]" Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014). If the moving party shows the absence of a genuine issue of material fact, the nonmoving party must "go beyond the pleadings and by her own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324 (quoting Civil Rule 56(e)). The court is "required to view all facts and draw all reasonable inferences in favor of the nonmoving party" when reviewing the Motion. Brosseau v. Haugen, 543 U.S. 194, 195 n.2 (2004).

A. The Stipulated Judgment Does Not Contain Conflicting Provisions

The Debtor asserts that the Stipulated Judgment contains conflicting provisions and that accordingly, summary judgment is not appropriate. The Court has reviewed the provisions of the Stipulated Judgment which the Debtor characterizes as being inconsistent, and finds that there is no conflict or inconsistency between those provisions.

The Stipulated Judgment enters a monetary judgment of approximately $29 million against the Debtor (for simplicity, figures used throughout the remainder of Section II.A. are approximate). To incentivize the Debtor to pay the judgment, the Stipulated Judgment provides that if the Debtor makes payments aggregating $16 million by December 31, 2025, the remaining $13 million of indebtedness will be suspended.

The Stipulated Judgment anticipated that the Debtor might not make the payments set forth in the payment schedule and might instead seek bankruptcy protection-which is in fact what occurred. To address that possibility, the Stipulated Judgment contains the following provision:

The facts alleged in the [District Court] Complaint shall be taken as true, without further proof, in any subsequent civil litigation by or on behalf of the Commission, including in a proceeding to enforce its rights to any payment or monetary judgment pursuant to this Order, such as a nondischargeability complaint in any bankruptcy case.

The facts alleged in the [District Court] Complaint establish all elements necessary to sustain an action by the Commission pursuant to Section 523(a)(2)(A) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(A), and this Order will have collateral

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