Federal Trade Commission v. Emerica Media Corporation et al

Filing 196

ORDER denying 126 Motion for Attorney Fees; granting in part and denying in part 171 Motion for Attorney Fees; denying 133 Motion to release funds; denying 173 Motion for release of attorneys' fees. Signed by Judge Dana L. Christensen on 12/8/2015. (NOS, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
MISSOULA DIVISION

FILED
DEC 0 8 2015
Clerk, U.S District Court
District Of Montana
Missoula

FEDERAL TRADE COMMISSION,

CV 13-03-M -DLC

Plaintiff,
ORDER

vs.
AMERICAN EVOICE, LTD., EMERICA
MEDIA CORPORATION, FONERIGHT,
INC., GLOBAL VOICE MAIL, LTD.,
HEARYOU2, INC., NETWORK
ASSURANCE, INC., SECURATDAT,
INC., TECHMAX SOLUTIONS, INC.,
VOICE MAIL PROFESSIONALS, INC.,
STEVE V. SANN, TERRY D. LANE,
a/k/a TERRY D. SANN, NATHAN M.
SANN, ROBERT M. BRAACH,
Defendants.
and
BIBLIOLOGIC, LTD.,
Relief Defendant.

Before the Court are multiple motions filed by Defendants requesting the
release of frozen or restrained assets to be used for attorneys' fees. First,
Defendants Steven V. Sann ("Sann"), Terry Lane, and Emerica Media
Corporation, and Relief Defendant Bibliologic, Ltd., (collectively "Defendants")
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move the Court to release $150,000 from currently restrained assets to be applied
towards attorneys' fees (Doc. 126). Second, Relief Defendant Bibliologic, Ltd.,
("Bibliologic"), on behalf of all Defendants except Robert Braach, moves the
Court to release funds from currently restrained assets to pay for future attorneys'
fees, or in the alternative, to allow its attorneys to withdraw from representation in
this case (Doc. 171 ). Third, Bibliologic moves the Court to release funds to pay
for future attorneys' fees to defend against an adversary action filed in Bankruptcy
Court (Doc. 173). Fourth, the Schwartz Law Firm, Inc., Nevada bankruptcy
attorneys for Sann, moves the Court for approval to use funds currently held in
SLF's trust account to pay for past legal fees and costs (Doc. 133.) For the
reasons explained below, the Court will deny these motions as they pertain to the
use of assets for attorneys' fees, but will grant the alternative motion for attorney
withdrawal.

BACKGROUND
On May 8, 2013, this Court issued a Stipulated Preliminary Injunction (Doc.
55) in this matter freezing Defendants and Bibliologic's assets. The Preliminary
Injunction provided that Defendants Sann and Terry Lane a/k/a Terry Sann ("the
Sanns") may use a portion of the frozen funds on a monthly basis to pay for living,
business, or other expenses. This carve-out from the asset freeze allowed the
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Sanns to use $4,914 to pay their mortgage and mortgage-related expenses, and
$12,930 for personal and business expenses. Further, Bibliologic is allowed under
the Preliminary Injunction to use $15,000 from the frozen assets to pay for
property maintenance expenses, property leasing expenses, property taxes, and
insurance. The Preliminary Injunction further provides that "[r]estrained assets
may be released to pay a Defendant's or Relief Defendant's other reasonable and
necessary living expenses, business expenses, or attorneys' fees only upon further
order of this Court, or with the written consent of the FTC." (Doc. 55 at 12.)
Four months after the Preliminary Injunction was issued, Sann was indicted
on criminal charges of wire fraud and money laundering. On November 21, 2013,
the Court issued an order allowing Sann to access $150,000 from the frozen assets
to pay attorneys' fees and other expenses for his criminal defense. These funds
were deposited with the Clerk of Court and withdrawn incrementally to pay for
Sann's defense. Present counsel for Sann states, upon information and belief, that
roughly $50,000 remain on deposit with the Court.
On September 29, 20 14, Sann filed a Chapter 11 bankruptcy petition in the
United States Bankruptcy Court for the District of Nevada. This bankruptcy
petition was then transferred to the United States Bankruptcy Court for the District

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of Montana and converted to a Chapter 7 proceeding. 1 In re Steven Vincent Sann,
No. 14-61370-11 (Bankr. D. Mont.). Christy L. Brandon (the "Trustee") was
appointed as Trustee for the bankruptcy estate and has since been substituted in
this matter in place of Sann for all aspects of the case implicating the property of
the bankruptcy estate.
On August 20, 2015, this Court issued an order (Doc. 169) finding that the
assets frozen under the Preliminary Injunction were now property of the
bankruptcy estate and modified the Preliminary Injunction to permit the Trustee to
administer the estate. This modification allowed the Trustee to take possession of
the estate and use a portion of frozen assets to pay: (1) approved creditors; (2)
fees and expenses of professionals approved by the Bankruptcy Court; and (3) fees
payable to the Trustee. This modification also deleted Parts IV.A and IV.D of the
Preliminary Injunction, which provided the carve-out for living expenses and
mortgage payments to the Sanns. However, this modification had no effect on the
provision of the Preliminary Injunction which allowed the release of assets upon
order of this Court for Defendants' "reasonable and necessary living expenses,
business expenses, or attorneys' fees." (Doc. 55 at 12.) This section of the

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The Bankruptcy Court's Order converting the bankruptcy estate from Chapter 11 to
Chapter 7 is presently before this Court on appeal. In re Steven Vincent Sann, CV-15-57-MDLC. The merits of that appeal will be addressed in a separate order.
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Preliminary Injunction forms the basis for Defendants' motions.
DISCUSSION
I. Motions For Release of Attorneys' Fees (Docs. 126 and 171 )
Defendants first move the Court through two separate motions to permit the
payment of attorneys' fees from the frozen assets under the Preliminary Injunction.
The first motion (Doc. 126) requests the release of$150,000 of the frozen assets to
pay for attorneys' fees already earned by Defendants' counsel. This motion
suggests that the funds can initially be taken from the unused funds held on
deposit by the Court for Sann's criminal defense, again represented to be
approximately $50,000.
The second motion (Doc. 171 ), brought by Bibliologic on behalf of the
other Defendants, requests the release of additional frozen assets to pay for future
attorneys' fees to be incurred on an on-going basis. This motion also requests
that, if the Court decides not to release the restrained assets for attorneys' fees,
then defense counsel should be permitted to withdraw from representation in this
action.
These dual motions bring substantially the same arguments, mainly that: ( 1)
other courts have permitted frozen assets to be used for attorneys' fees; (2) it is
unfair to allow frozen assets to be used for the Trustee's fees, but not other
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Defendants; and (3) this case involves complex litigation and Sann cannot be
expected to proceed without the benefit of attorney representation. The Court is
not persuaded by these arguments.
In general, there is no constitutional right to defense counsel in civil cases.
Sanchez v. United Parcel Serv. Inc., 2015 WL 5257064, at * 1 (9th Cir. Sept. 10,

2015) (citing United States v. Sardone, 94 F.3d 1233, 1236 (9th Cir.1996)).
District courts thus retain the discretion whether to "forbid or limit payment of
attorney fees out of frozen assets." Commodity Futures Trading Commn. v. Noble
Metals Intern., Inc., 67 F.3d 766, 775 (9th Cir. 1995) (affirming district court's

total prohibition of payment of attorneys' fees from frozen assets). Courts may
consider many factors in determining whether the release of restrained assets to
pay for defense counsel is appropriate, including whether the total amount of
frozen assets would be insufficient to compensate any potential victims of the
alleged fraud. !d. (stating that "[a]ccording to the record, the frozen assets fell far
short of the amount needed to compensate [the defendants'] customers").
Here, two factors counsel against the release of frozen assets for attorneys'
fees. First, there is the distinct possibility that, if the FTC prevails over
Defendants in this suit, the amount of assets available for equitable relief would be
less than the total amount sought by the FTC. In its briefing, the FTC asserts that
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Defendants are responsible for over $70 million in unauthorized telephone charges
and have retained $25 million in net revenues. Defendants do not dispute these
figures in their briefing, but counter that the vast majority of their alleged victims
already had a remedy available to them through two class action lawsuits in the
Northern District of California. See Moore v. Verizon Commc'ns, No. C 09-1823
SBA, 2013 WL 4610764 (N.D. Cal. Aug. 28 2013); Nwabueze v. AT&T Inc., C
09-01529 SI, 2013 WL 6199596 (N.D. Cal. Nov. 27, 2013), appeal dismissed
(Mar. 19, 2014). Thus, Defendants argue, the frozen funds are not needed to
compensate the alleged victims.
Contrary to this argument, however, a cursory review of Nwabueze and
Moore reveal that Defendants, including Sann, are not named parties in those

suits. See Moore, 2013 WL 4610764; Nwabueze, 2013 WL 6199596. The Court
thus has great doubts that the alleged consumer victims of Defendants have a
current viable remedy before them. Further, the FTC not only seeks restitution for
Defendants' allegedly deceived consumers, it also seeks disgorgement of any
illegally obtained assets. (Doc. 1 at 17.) If the FTC prevails in this suit, the Court
has a responsibility to ensure that any illegally obtained assets are available for not
only restitution to the victims, but also to satisfy a disgorgement judgment. See
Commodity Futures Trading Commn. v. Kimberlynn Creek Ranch, Inc., 276 F.3d
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187, 193 (4th Cir. 2002) (stating that the district court had the "authority to impose
a preliminary injunction freezing assets in order to preserve the future availability
of permanent equitable relief," including disgorgement relief).
Second, even if the Court disregarded the potential equitable relief sought
by the FTC, it cannot ignore the existence of Sann' s current bankruptcy
proceeding and the related adversary complaints against the entity Defendants. In
this Court's order dated August 20, 2015, the Court recognized that Sann's frozen
assets were now the property of the bankruptcy estate. 2 (Doc. 169 at 2.) If the
FTC is ultimately unsuccessful in this suit, any assets frozen under the Preliminary
Injunction may be needed to compensate Sann's creditors. Allowing the further
withdrawal of additional funds from the frozen assets would ultimately deplete the
bankruptcy estate and deprive any potential creditors of reimbursement.
Additionally, the Court acknowledges the fact that it previously allowed
Sann to access $150,000 of the frozen assets to be used for his criminal defense.
However, in this Court's order dated November 21, 2013, which released these
funds, the Court noted the unique circumstances in allowing Sann to access these
funds-namely the need to balance Sann's "right to counsel and the FTC's interest

2

Notwithstanding the recognition, the Court also outlined that any property contained in
the bankruptcy estate may be subject to the constructive trust sought in this case. (Doc. 169 at 34.)
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in preserving assets to satisfy any judgment for restitution or disgorgement."
(Doc. 80 at 4.) Here, in the context of this civil proceeding, the constitutional
right to counsel is simply not present.
Finally, though Defendants second motion for attorneys' fees (Doc. 171)
requests the release of fees for the benefit of all Defendants and is substantially
similar to the arguments made in favor of the first motion, the brief in support of
the second motion makes various arguments distinguishing Bibliologic from the
other Defendants. Mainly, Bibliologic argues that it should be entitled to the
release of frozen assets for attorneys' fees because it is merely a relief defendant
and has not been accused of any wrongdoing. In contrast to this argument, the
Trustee asserts that Bibliologic and its assets are directly linked to Defendants'
alleged unlawful activities. Further, the Trustee has provided evidence that
Bibliologic was used by Sann to pay for his various attorneys, including a wire
transfer of$425,000. These claims are not disputed in Defendants' reply briefs.
The Court is thus persuaded that releasing frozen funds to be used for attorneys'
fees for any Defendant would be inappropriate and declines to do so.
For the reasons explained above, the Court will deny Defendants' motions
for the release of frozen funds to provide for attorneys' fees (Docs. 126, 171).
However, the Court will partially grant Defendants' second motion (Doc. 171) as
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it pertains to the request for attorney withdrawal. The Court finds good cause for
attorney withdrawal and will allow it. 3
II. Release of Attorneys' Fees to Defend Adversary Action (Doc. 173)
Bibliologic also moves the Court for the release of frozen funds to be used
in defending against an adversarial proceeding filed by the Trustee in Bankruptcy
Court. In its brief in support of the motion, Bibliologic provides the same
arguments stated in the two previous motions discussed above. As such, the Court
will deny this motion for the reasons explained in Section I.
III. Motion to Release Funds Held in Trust Account (Doc. 133)
Lastly, the Schwartz Law Firm, Inc., ("SLF"), moves the Court for approval
to use $17,000 in funds currently held in their trust account to pay for past legal
fees and costs. SLF, who provided representation in Sann's bankruptcy
proceeding, provides that these funds were specifically carved out of the stipulated
Preliminary Injunction under Part IV.C. This provision of the Preliminary
Injunction states that "Relief Defendant Bibliologic may pay property maintenance
expenses, property leasing expenses, property taxes, and insurance, in an amount
not to exceed $15,000 each calendar month." (Doc. 55 at 12.) SLF explains that,

3

The Court anticipated this possible outcome in the scheduling order issued in this case
(Doc. 193), by establishing deadlines that should allow Defendant Sann to represent himself in
the ongoing proceedings.
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pursuant to this carve-out, Bibliologic paid Sann, LLC, $4,000 per month in
property leasing expenses. Sann, LLC, then collected $17,000 ofthese funds and
used them to pay SLF's retainer. Thus, SLF argues, because these funds were
expressly carved out by the Preliminary Injunction, they are not subject to the
asset freeze order. The Court is not convinced and will deny this motion for two
reasons.
First, the FTC asserts that Sann, LLC, is essentially the alter-ego of Sann
due to his 98% ownership in the company. In its reply brief, SLF does not dispute
this and, instead, applies a strained reading of the Preliminary Injunction in an
attempt to distinguish the lease payments as an allowable carve-out to the asset
freeze. Essentially, SLF is contending that because these payments are allowed
under the Preliminary Injunction, it does not matter that they were authorized by
Bibliologic, an entity whose assets were allegedly derived from Defendants'
unlawful activities, and then paid to company that is the alter-ego of Sann, who
subsequently paid the retainer of Sann's attorneys. The Court finds this to be
nothing more than an attempt to circumvent the asset freeze, justifying the Court's
finding that the best course of action in this case is to treat these funds as frozen
assets, pending the resolution of this proceeding.
Second, if Defendants are successful in this action and prove that these
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assets were not derived from illegal activities, these funds may be the property of
the bankruptcy estate. Due to this possibility, the Court finds that these funds will
be considered frozen assets subject to the Stipulated Preliminary Injunction in
order to preserve them for consideration by the Bankruptcy Court.
Accordingly, IT IS ORDERED:
(1) Defendants' motion for attorneys' fees (Doc. 126) is DENIED.
(2) Defendants' motion for attorneys' fees, or in the alternative, for attorney
withdrawal (Doc. 171) is partially GRANTED with regards to attorney
withdrawal. The motion is DENIED in all other respects.
(3) Defendant Bibliologic' s motion for the release of attorneys' fees to
defend against the adversary action in Bankruptcy Court (Doc. 173) is DENIED.
(4) Defendants' motion to release funds held in the Schwartz Law Firm's
trust account (Doc. 133) is DENIED.
Dated this

8~ day ofDecember, 2015.

Dana L. Christensen, Chief udge
United States District Court

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