500 B.R. 693
Bankr. S.D.N.Y.2013Background
- Velo Holdings’ reorganization plan placed Vertrue and Adaptive’s credit/identity-theft and lifestyle/shopping business (the “ACU Business”) into a "harvest" after plan confirmation on Feb. 4, 2013 — the businesses ceased third‑party marketing but continued servicing and billing existing and organically acquired customers.
- The Plan and Confirmation Order enjoin parties from interfering with plan implementation and from prosecuting or asserting claims against the reorganized debtors and ACU LLC; the Plan’s definition of "Claims" incorporates 11 U.S.C. §101(5) and includes administrative expenses.
- The Florida Attorney General previously investigated Vertrue (including a 2004 settlement) and served a civil investigative demand and later a subpoena seeking information about customer enrollments and billing from Feb. 1, 2013 forward, focusing on allegedly unauthorized charges post‑confirmation.
- Movants (reorganized debtors) moved to enforce the Plan and confirmation injunctions, seek contempt and sanctions against Florida, arguing the subpoena seeks prepetition claims that were discharged and interferes with plan implementation.
- Florida responded that it is investigating potential post‑confirmation deceptive billing (a continuing violation of state law) and has not initiated litigation; it seeks only information about alleged unauthorized charges and will limit any enforcement to post‑confirmation conduct.
- The bankruptcy court held a hearing and denied the Movants’ motion without prejudice, finding Florida’s investigation as presently framed does not violate the Plan or Confirmation Order, but preserving Movants’ right to renew if Florida pursues prepetition claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Florida’s subpoena/investigation violates the Plan/Confirmation injunctions by pursuing discharged prepetition claims | Movants: subpoena is a means to pursue claims that existed prepetition and thus are discharged; it interferes with plan implementation and harvest strategy | Florida: subpoena targets post‑confirmation unauthorized billing (continuing violations) and does not seek to collect discharged debts | Court: Denied enforcement — investigation limited to post‑confirmation conduct is not barred; motion denied without prejudice to raise if Florida asserts prepetition claims |
| Whether discovery/issue of subpoena constitutes a barred "action" or "process" under §524(a)(2) | Movants: discovery is a continuation of proceedings barred by discharge and should be enjoined | Florida: has not initiated litigation; CID/subpoena is investigatory and can target post‑confirmation conduct | Court: Issuing a subpoena for an investigation is not yet an action barred by §524; prior cases relied on involved discovery used to continue litigation, which is not present here |
| Whether ongoing billing to prepetition customers can be actionable post‑confirmation | Movants: billing existing customers is continuation of prepetition relationships and any consumer harm is reasonably avoidable by disclosures/cancellations | Florida: bills themselves can be deceptive/unauthorized and constitute continuing violations irrespective of prepetition enrollment | Court: Agreed bills can constitute new deceptive acts; post‑confirmation deceptive billing is actionable and not automatically discharged |
| Entitlement to contempt and sanctions against Florida | Movants: Florida willfully violated confirmation injunction by issuing subpoena after notice of bankruptcy; sanctions warranted for increased legal expense | Florida: no violation of court order occurred; investigation limited to post‑confirmation conduct | Court: Denied contempt/sanctions — Florida has not willfully violated any court order or injunction at this stage |
Key Cases Cited
- United States v. LTV Corp. (In re Chateaugay Corp.), 944 F.2d 997 (2d Cir. 1991) (defines when a claim exists for discharge purposes)
- Tam Travel, Inc. v. Delta Airlines, Inc., 583 F.3d 896 (6th Cir. 2009) (claims based on conduct continuing unchanged from prepetition may be discharged; independent post‑confirmation conduct is not)
- Browning v. MCI, Inc. (In re WorldCom, Inc.), 546 F.3d 211 (2d Cir. 2008) (postpetition damages relating to prepetition conditions may be discharged)
- In re Torwico Elecs., Inc., 8 F.3d 146 (3d Cir. 1993) (obligations to remedy continuing dangers are not dischargeable)
- O'Loghlin v. County of Orange, 229 F.3d 871 (9th Cir. 2000) (illegal conduct after discharge is not barred by prior discharge)
- Curtis Mfg. Co. v. Plasti‑Clip Corp., 888 F. Supp. 1212 (D.N.H.) (post‑confirmation investigatory use of prepetition information may be limited to informing claims about post‑confirmation conduct)
- FTC v. INC21, 745 F. Supp. 2d 975 (N.D. Cal. 2010) (billing can be deceptive where consumers did not agree to charges)
- FTC v. Kennedy, 574 F. Supp. 2d 714 (S.D. Tex. 2008) (unauthorized charges on consumer bills can be deceptive practices)
- Torres v. Chase Bank, USA, N.A. (In re Torres), 367 B.R. 478 (Bankr. S.D.N.Y. 2007) (standards for contempt and sanctions under discharge injunction)