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] [6808040] [15-3472]

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Case: 15-3472 Document: 50 Filed: 12/29/2016 Pages: 5 In the United States Court of Appeals For the Seventh Circuit ____________________   No.  15-­‐‑3472   FEDERAL  TRADE  COMMISSION,   Plaintiff-­‐‑Appellee,   v.   KEVIN  TRUDEAU,   Defendant.   Appeal  of:   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   Case: 15-3472 2   Document: 50 Filed: 12/29/2016 Pages: 5 No.  15-­‐‑3472   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   Case: 15-3472 No.  15-­‐‑3472   Document: 50 Filed: 12/29/2016 Pages: 5 3   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   Case: 15-3472 4   Document: 50 Filed: 12/29/2016 Pages: 5 No.  15-­‐‑3472   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-­‐‑ Case: 15-3472 No.  15-­‐‑3472   Document: 50 Filed: 12/29/2016 Pages: 5 5   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.”   AFFIRMED  

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