Everything becomes a tax story eventually, That is what provides me with a lot of “I was today years old” experiences as tax stories are the one thing that I follow religiously. So I first learned about the field of Telephone Consumer Protection Act (TCPA) litigation from reading the proposed findings and recommended dispositions in the case of Ruben Escano v Innovative Financial Partners LLC and Josh Benson. Innovative Financial Partners is a subsidiary of Humana.
About TCPA Litigation
The Telephone Consumer Protection Act (47 USC 227) places restrictions on the use of automatic telephone dialing systems and calls using an artificial or prerecord voice. Included in the act is “a right of private action” to recover the greater of actual monetary loss from violations of the act or $500 in damages for each such violation. If the violation can be proved to be knowing or willful the amount is tripled.
Note that the damages are per violation not per call. A single call can violate the statute in more than one way, Eric J. Troutman, known, at least on his own website as “the Czar” here gives an account of how one plaintiff managed to stack violations to bring the tab to $2,850 per call to obtain a default judgement of $570,000 for 200 calls.
There have been stunning class action verdicts under TCPA. A class-action against ViSalus, a multi-level marketing company resulted in a jury verdict of $925,220,000 for 1,850,440 prerecorded calls. According to a piece by Jen Frost on Insurance Business, the average class action settlement in TCPA cases is $6.6 million.
There is another sort of TCPA litigation besides class actions. The people sympathetic to the defense of companies facing claims refer to these people as “serial plaintiffs”. I understand there may be some objection to that characterization.
One of the signs that this is a thing is that you can learn about it on Tik Tok.
About This Case
Ruben Escano v Concord Auto Protect, Ruben Escano v Symmetry Financial Group, Ruben Escano v Holiday Network Group, Ruben Escano v RCI LLC, Ruben Escano v Insurance Supermarket, Ruben Escano v Monitroinics International and the case under discussion Ruben Escano v Innovative Financial, to the contrary notwithstanding I am not going to call Ruben Escano a serial plaintiff. Rather I will turn to Magistrate Judge Gregory J Fouratt’s evaluation of him in his findings and recommendations.
Judge Fouratt describes Mr.Escano as the most capable pro se litigant the Court has ever encountered. He is articulate, intelligent, scholarly, poised, mature, thorough and organized. His subject-matter expertise, familiarity and facility with civil litigation make him a match for even the most experienced opposing counsel. There is more. I’m thinking he’ll be getting calls from law firms who want to hire him as a consultant.
Anyway Judge Fouratt may have been laying the praise on a little thick because of the bad news that is coming. We’ll get to that, but first we should consider the complaint.
Mr. Escano was suing about phone calls most of which began with the pre-recorded message: “I’m calling to let you know that we have been granted a limited health enrollment period for a few weeks”. There were at least nineteen calls to Mr. Escano’s cell phone which is listed on the FTC National Do Not Call Registry. In Mr. Escano’s view the calls violated the TCPA in seven different ways for a total of 115 violations. There were also 95 violations of New Mexico law.
Mr. Escano managed to negotiate a settlement with the attorneys. The amount was confidential. Tax then reared its ugly head turning this litigation into a negative experience not only for the out of pocket defendant, but also for the plaintiff who will likely be net out of pocket.
Form W-9
After they had made a binding agreement to settle the case, the defense lawyers told Mr. Escano that in order to get paid he needed to provide his social security number on Form W-9. He refused. There was back and forth and ultimately he was told that they could pay him without the W-9. What he was either not told or did not understand was that failure to provide the W-9 subjected him to withholding. So when he received a check for 76% of the agreed amount he argued that the defendant had reneged. And when he refused to follow through with the agreement and argued that it had been voided the defendant’s counsel argued that he was responsible for subsequent legal expenses.
The Hearing
There was a hearing on October 17th 2023. You can experience the hearing by reading this, but I have to warn you that that is a substantial piece of lifespan that you will never get back. Judge Fouratt cautioned everybody to not mention the amount of the settlement in open court and much to my disappointment, they followed through on that. Mr. Escano provided a clue in the hearing. Acting as his own attorney he was questioning Alexander Terepka, the defendant’s attorney.
He notes that the legal fees now proposed to be charged to him amount to around $163,000 and wonders why the defendant didn’t just pay him the amount of the withholding which was a lot less than that. In a subsequent motion he states that the legal fees had gone substantially past the amount of the withholding when they crossed $50,000.
Dionne McKinney a tax information reporting professional from Humana testified. Mr.Escano grilled her on procedure. It was beyond tedious. Then Mr. Escano himself took the stand. He was being examined on his assertion that information on the backup withholding had been withheld from him. Attorney Terepka had referred him to the instructions for Form W-9. (Reilly’s Seventh Law of Tax Planning – Read the instructions.) Attorney Meadows who was examining him pretty well rubbed his nose in it after warming Mr. Escano up by telling him what a great legal researcher he was.
Mr. Escano’s own testimony turned into a discussion with the judge. From that we learn that in his numerous previous settlements he had only been asked for a W-9 once and he managed to avoid giving it. There was never a discussion of backup withholding. He thought that because of the withholding he was paying the tax a year early and he might be losing out on the effect of deductions and he was not sure 24% was the correct rate. The judge stopped him and asked him if he realized that if the withholdings exceeded his tax he would get a refund. Escaono indicated that he knew that is what the defendants were arguing, but he wasn’t absolutely sure.
The Outcome
Judge Fouratt ruled that the defendant did not breach the agreement with Mr. Escano by withholding and remitting to the IRS 24% of the settlement amount. He further ruled that the defendants are entitled to attorneys fees for the expenses involved in the action to enforce the settlement agreement. The defendants were seeking $262,358.03. Judge Fouratt awarded them $144,605.43. There were carve backs on both hours and rates.
This result is a nightmare for Mr. Escano. In his motion objecting to the fees Mr. Escano noted that after two and a half weeks the the defendants had already run up $50,000 in legal fees “which is far more than the backup withholding amount”. So how much was the withholding? If it was $40,000 then the entire settlement was around $167,000. If it was $25,000 the entire settlement is just over $100,000. So there is a good chance that Mr. Escano is upside down before you even consider the tax situation.
The tax situation gives me a bit of headache, because the deductibility of the legal fees is questionable. Is Mr. Escano carrying on a trade or business with his lawsuits? He voided the check in 2023 and it will reissue in 2024. Will the income fall in the same year as the deduction, assuming there is one?
Other Thoughts
This case illustrates how spotty Form 1099 compliance is. The Humana people paying the bills seem to be doing everything by the book. Given that it would seem that Mr. Escano should not have been surprised that not coughing up the W-9 led to backup withholding. But he was surprised because it had not happened before in numerous settlements. You can actually find IRS audit guides where it is mentioned that there might be more money in 1099 noncompliance than in disallowing deductions. I have not seen it happen in practice many times, but when it does it is really ugly.