FTC, et al v. Kevin Trudeau
Filed opinion of the court by Judge Easterbrook. AFFIRMED. Richard A. Posner, Circuit Judge; Frank H. Easterbrook, Circuit Judge and Diane S. Sykes, Circuit Judge. [6808040-1]  [15-3472]
United States Court of Appeals
For the Seventh Circuit
FEDERAL TRADE COMMISSION,
HOGAN MARREN BABBO & ROSE, LTD., and FARUKI
IRELAND & COX, P.L.L.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 03 C 3904 — Robert W. Gettleman, Judge.
ARGUED SEPTEMBER 14, 2016 — DECIDED DECEMBER 29, 2016
Before POSNER, EASTERBROOK, and SYKES, Circuit Judges.
EASTERBROOK, Circuit Judge. This decision marks the end
of litigation about Kevin Trudeau’s frauds—or so we hope.
Earlier decisions affirmed his criminal conviction and sen-‐‑
tence and his adjudication in civil contempt after he refused
to surrender the profits made from violating orders of the
Federal Trade Commission. See United States v. Trudeau, 812
F.3d 578 (7th Cir. 2016); FTC v. Trudeau, 662 F.3d 947 (7th Cir.
2011). The contempt judgment is approximately $38 million,
and Trudeau claims to be destitute. Believing that this is just
another of his lies, the FTC demanded that firms it thought
to be affiliated with Trudeau turn over business records.
Website Solutions, one of these entities, hired Hogan
Marren Babbo & Rose, Ltd., and Faruki Ireland & Cox, P.L.L.
(collectively the Law Firms) to represent it in responding to
the FTC’s demand. After considering some of the documents
ultimately revealed, the district judge concluded that Web-‐‑
site Solutions is under Trudeau’s control and that all of its
assets are available to satisfy his obligations. The judge ap-‐‑
pointed a receiver to marshal the assets of Website Solutions
and Trudeau’s other entities. The receiver collected a net of
approximately $8 million, which the FTC wants to distribute
to Trudeau’s defrauded customers. In October 2015 the dis-‐‑
trict court approved the receiver’s plan; this order also re-‐‑
jected the Law Firms’ request for compensation from funds
in the receiver’s custody. In November the judge authorized
the receiver to send $4 million to the FTC; in December the
judge approved the receiver’s compensation; in February
2016 the judge accepted the receiver’s final report and au-‐‑
thorized the receiver to send all remaining funds to the FTC.
That order closed the receivership estate.
The Law Firms have appealed—but from the October
2015 order rather than any of the later orders. This led us to
question whether the order is appealable, because as of Oc-‐‑
tober 2015 all $8 million remained in the receiver’s control.
The Law Firms could have waited until the estate-‐‑closing
order without jeopardizing their claim to reimbursement. At
oral argument we directed the parties to file supplemental
memoranda addressing appellate jurisdiction. After receiv-‐‑
ing these submissions, we conclude that the October 2015
order functioned as approval of the receiver’s proposed plan
of distribution. If this were a bankruptcy proceeding rather
than a receivership, the October 2015 order would have been
labeled a plan of reorganization (or perhaps a plan of liqui-‐‑
dation). And in bankruptcy the confirmation of such a plan
is appealable as a “final decision” even though funds remain
in the estate. See Bullard v. Blue Hills Bank, 135 S. Ct. 1686
(2015) (recognizing that an order confirming a plan of reor-‐‑
ganization is appealable, while holding that an order declin-‐‑
ing to approve such a plan is not). So we conclude that the
October 2015 order is “final” under 28 U.S.C. §1291 and
move to the merits.
No one has appealed from the district court’s conclusion
that Trudeau controls Website Solutions and that all of its
assets are available to reimburse the persons he defrauded.
Nor has anyone appealed from the district court’s approval
of the plan of distribution. The Law Firms, the sole appel-‐‑
lants, contend only that their fees should be paid ahead of
compensation for Trudeau’s victims.
The Law Firms depict their role as helping the receiver
understand Website Solutions’ business and recover its as-‐‑
sets; the FTC, by contrast, contends that the Law Firms did
little but obstruct discovery in an effort to keep the FTC from
laying hands on assets that Trudeau was trying to hide. We
need not decide which characterization is correct, because
either way the Law Firms face an insuperable hurdle: well
before they were hired by Website Solutions to deal with the
FTC’s discovery demands, the federal judiciary had directed
Trudeau to turn over all proceeds of his improper commer-‐‑
cial activities. That order created a lien on Website Solutions’
assets (once the judge found that they were under Trudeau’s
control) that was senior to any claim created later. As a
proxy for Trudeau, Website Solutions had no right to make
commitments to pay third parties with funds belonging to
Trudeau’s victims. Cf. Caplin & Drysdale, Chartered v. United
States, 491 U.S. 617 (1989); United States v. Monsanto, 491 U.S.
600 (1989). And lawyers, particularly, had to understand that
their claims to compensation would be junior to those as-‐‑
serted by the FTC on the victims’ behalf.
In bankruptcy, law firms that represent the estate (or the
trustee) can be compensated ahead of other creditors, but
only if they receive the court’s approval for their hiring and
demonstrate that their activities are necessary and benefit
the estate. See 11 U.S.C. §§ 327, 330, 1103; Baker Botts L.L.P. v.
ASARCO LLC, 135 S. Ct. 2158 (2015). Neither the Law Firms
nor Website Solutions obtained the court’s approval for their
engagement and proposed course of conduct, nor did they
demonstrate to the district judge’s satisfaction afterward that
what they had done was necessary or helped the estate. (The
judge implied agreement with the FTC’s submission that the
Law Firms did more to obstruct the discovery than to pro-‐‑
mote it.) Indeed, the Law Firms have not even tried to show
that they would have satisfied the requirements for compen-‐‑
sation had this been a bankruptcy rather than a receivership.
We don’t see why the use of the receivership device should
make the Law Firms better off.
There was another potential route to compensation:
Website Solutions might have asked the district court to or-‐‑
der the FTC to ensure that Website Solutions would be rea-‐‑
sonably compensated for its expenses in responding to the
subpoenas. See Fed. R. Civ. P. 45(d)(3)(C)(ii). But Website
Solutions did not make such a request.
The Law Firms stress that Rule 45 is not the only way
that lawyers may be paid for their work in civil litigation,
and that is correct. But Website Solutions was holding other
people’s money and so could not make financial commit-‐‑
ments to third parties. That’s why the Law Firms needed the
district court’s approval. They concede that the judge had
discretion to say yes or no. And given the fact that anyone
hired by Website Solutions presumptively stands in line be-‐‑
hind Trudeau’s victims, the district court did not abuse that
discretion by saying “no.”
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