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Federal Trade Commission v. E.M.A. Nationwide, Inc.

United States District Court, Sixth Circuit

August 27, 2013

FEDERAL TRADE COMMISSION, Plaintiff,
v.
E.M.A. NATIONWIDE, INC. et al. Defendants.

AMENDED OPINION & ORDER [Resolving Doc. Nos. 153 & 157]

JAMES S. GWIN, District Judge.

Plaintiff Federal Trade Commission (FTC) brings this action against various individuals and corporations (Defendants), alleging violations of the Federal Trade Commission Act (FTC Act), 15 U.S.C. §§ 41-58, the Telemarketing Sales Rule (TSR), 16 C.F.R. § 310, and the Mortgage Assistance Relief Services Rule (MARS Rule), 16 C.F.R. § 322.[1] Generally, Plaintiff says that Defendants violated these laws through its marketing and sale of debt-related services, such as debt settlement, loan modification, and mortgage assistance relief.[2] Plaintiff FTC now moves for summary judgment. The remaining defendants did not file a response. For the following reasons, Plaintiff FTC's motion to admit consumer complaints is DENIED, and Plaintiff FTC's motion for summary judgment is GRANTED.

I. Background

Defendants Dan Michaels and James Benhaim operated a series of related corporations in the United States and Canada. To make sales, these corporations would contact consumers, use scripted telemarketers to lure the consumers into signing debt consolidation contracts, and then do very little or nothing. Defendants' telemarketers would tell consumers that they were calling from a current lender's wholesale department (they weren't), [3] that they had special relationships with the consumer's creditors (they didn't), [4] or that they could save consumers hundreds of dollars a month (they couldn't).[5] Consumers often paid thousands of dollars in up-front fees, [6] with little to show for it.

In September 2012, the FTC filed the instant complaint and a motion for a temporary restraining order against three American corporations (E.M.A. Nationwide, New Life Financial Solutions, and 1UC), four Canadian corporations (7242701 Canada, 7242697 Canada, 7246293 Canada, and 7246421 Canada), and five individuals (James Benhaim, Dan Michaels, Phillip Hee Min Kwon, Joseph Shamolian, and Nissim Ohayon).[7] Over the next few months, the FTC entered into stipulated preliminary injunctions with all Defendants, [8] and eventually entered into stipulated permanent injunctions with Defendants Kwon[9] and Shamolian.[10]

The FTC now moves for summary judgment "against Defendants Dan Michaels, James Benhaim, and all seven corporate Defendants."[11] On the day before their brief in opposition was due, all three American corporations, three of the four Canadian corporations, and Defendant Michaels moved for an extension of time to respond.[12] This Court denied that motion.[13] Because all Defendants failed to respond, the FTC's motion for summary judgment is unopposed.

II. Analysis

As an initial matter, this Court may not grant Plaintiff's unopposed motion for summary judgment without conducting its own, searching review. The Sixth Circuit has said that "a district court abuses its discretion when it grants summary judgment solely because the non-moving party has failed to respond to the motion within the applicable time limit."[14] Rather, the moving party must independently demonstrate an "absence of a disputed question of material fact and a ground that would entitle the moving party to judgment as a matter of law."[15] This Court is therefore "required, at a minimum, to examine the movant's motion for summary judgment to ensure that he has discharged that burden."[16]

1. Motion to Admit Consumer Complaints

Before turning to the FTC's motion for summary judgment, the Court first decides whether it may consider certain evidence. The FTC asks this Court to admit certain consumer complaints under Rule 807 of the Federal Rules of Evidence.[17] The complaints were made by consumers of Defendants' services and were usually made to consumer protection units in various municipalities nationwide. Some contain detailed information about the consumer's contract and debt negotiations, while others are barely intelligible. The FTC says that the complaints contain circumstantial guarantees of trustworthiness.

Rule 807, the residual hearsay exception rule, admits certain hearsay evidence that is not specifically covered by one of the exceptions contained in Rules 803 and 804. Under the rule, a hearsay statement can be admitted if:

(1) the statement has equivalent circumstantial guarantees of trustworthiness; (2) it is offered as evidence of a material fact; (3) it is more probative on the point for which it is offered than any other evidence that the proponent can obtain through reasonable efforts; and (4) admitting it will best serve the purposes of these rules and the interests of justice.[18]

The Sixth Circuit has allowed the use of Rule 807, even if there is an exception in Rules 803 or 804 that is on point.[19] This "close-enough theory" permits the admission of hearsay evidence "under the residual exception even when it just misses admissibility under an established exception."[20] Regardless, the legislative history of Rule 807 demonstrates that the residual exception is to be "used very rarely, and only in exceptional circumstances."[21]

The consumer complaints do not have sufficient indicia of trustworthiness. To be sure, they were submitted by consumers to government or non-profit organizations, and most consumers may have made their best efforts to convey accurate information. But, the consumers often made the complaints with hopes of receiving some type of refund or other financial benefit.[22] The complaints were not made under oath. The complaints allege acts by entities not named in this lawsuit. And, the complaints list events that, perhaps not created in anticipation of litigation, were created with knowledge that litigation was possible.

Taken together, these concerns warrant exclusion of the evidence. The first requirement for admission under Rule 807 is that the evidence has "equivalent circumstantial guarantees of trustworthiness" as evidence admitted under other hearsay exceptions.[23] But other exceptions have greater guarantees of trustworthiness than the consumer complaints here. Rule 803(4), for example, allows for a statement made for medical diagnosis, because it is unlikely a declarant would lie about her health in order to gain an advantage in litigation. Similarly, Rule 803(2) provides for the admission of an excited utterance if "the declarant was under the stress of excitement" that the startling event or condition caused. Underpinning this exception is the belief that a declarant would not have the time or wherewithal to create falsehoods when faced with imminent danger or shock. These types of guarantees of truthfulness are simply not present in the consumer complaints.

This is not to say that the consumer complaints necessarily contain false information; rather, that a hearsay statement is presumed inadmissible unless it fits into one of the enumerated exceptions. The FTC's motion to admit these unverified consumer complaints is therefore denied.

2. Motion for Summary Judgment

A. Violation of the Federal Trade Commission Act (FTC Act)

Plaintiff FTC says that Defendants violated Section 5 of the FTC Act by representing that Defendants would obtain for consumers: "debt settlements that will make consumers' payments substantially more affordable" (Count I); "reductions in outstanding principal amounts that will substantially reduce the amount of debt the consumers owe" (Count II); and "mortgage loan ...


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