Several high profile bankruptcies have occurred in recent years. Most would consider a bankruptcy proceeding a last resort. But some, seeking to expunge a debt, have contemplated that bankruptcy may be a safe way to avoid the long-arm of the law. The Federal Trade Commission, however, has taken great steps to ensure that an FTC judgment firmly stays on a wrongdoer’s balance sheet. In late December of last year, the FTC convinced a bankruptcy court that a party subject to a contempt order could not shield itself from the FTC’s collection efforts by filing for bankruptcy.

First, a little background: In 2008, the FTC settled its lawsuit against BlueHippo Funding LLC, BlueHippo Capital LLC (together, “BlueHippo”), as well as the sole owner of both companies, Joseph Rensin. The FTC alleged that the defendants offered to finance the sale of personal computers to consumers with low credit ratings, and that they violated, among other laws, the FTC Act by failing to clearly disclose that consumers’ payments were not refundable. BlueHippo agreed to a settlement that included a monetary judgment of at least $3.5 million and up to $5 million. The order also prohibited the defendants from making any representation regarding any refund policy “without disclosing clearly and conspicuously, prior to receiving any payment from customers all material terms and conditions” of any refund. Mr. Rensin was not a party to the order.

Then, in 2009, the FTC filed a contempt action against BlueHippo and Mr. Rensin, alleging that they continued to offer the financing program without properly disclosing the refund policy. The FTC sued Mr. Resnin for contempt even though he was not a defendant on the initial order alleging that he knew of the order and acted in active concert with BlueHippo. The court held that the defendants violated the order and awarded additional consumer redress in the amount of $609,000. The FTC appealed the redress award, and ultimately, the court entered a $13.4 million judgment against the defendants in 2016.

The bankruptcy at issue: When the FTC came looking to collect its $13.4 million judgment from Defendants, Mr. Rensin refused to pay and, instead, filed for bankruptcy, seeking to discharge the award. The FTC objected, arguing that the award was not subject to discharge under the U.S. Bankruptcy Code. In its December 2018 order, the bankruptcy court found that Mr. Rensin was the “captain of the ship,” had direct oversight of the companies’ operations, and had full knowledge of, and personally participated in, the implementation and use of the offending refund policy. Based on this finding, the court held that the defendants’ contempt judgment was non-dischargeable under Section 523(a)(2)(A) of the Code. Specifically, the court found that the debt was non-dischargeable because: (i) it was a debt for services obtained by “false pretenses, false representation, or actual fraud;” (ii) the defendants made “knowingly false representations customers and also concealed material facts;” and (iii) “[m]any thousands of BlueHippo’s customers relied on those misrepresentations and concealments. . . .”

In addition, the court determined that the contempt judgment was non-dischargeable under Section 523(a)(6). Specifically, the court held that Mr. Rensin would still be responsible for paying the contempt judgment because Mr. Rensin’s debt was created for “a willful and malicious injury” to another party. The court found that Mr. Rensin intended for BlueHippo to take money from customers with poor credit without any intention to provide the promised computers in exchange. The court further found that there was no doubt that Mr. Rensin knew and intended to take millions of dollars from consumers. Accordingly, the court held that Mr. Rensin willfully and maliciously injured consumers, and thus could not discharge his contempt judgment.

So what’s the takeaway? First, you can be liable for contempt of an FTC order even if you’re not a named defendant if you have knowledge of the order and act in active concert with the party under order. Second, bankruptcy will not stop the FTC from proceeding against you or allow you to evade an FTC judgment if the conduct at issue involves knowingly false or malicious conduct.