FEDERAL TRADE COMMISSION v. NHS SYSTEMS, INC., ET AL

Filing 207

MEMORANDUM AND ORDER THAT THE PORTION OF THE 7/7/2011 ORDER AWARDING COMPENSATORY DAMAGES TO THE RECEIVER BEGINNING AS OF 9/8/2008, THROUGH 7/6/2011, & EXCLUDING EXPENSES RELATED TO TELEDRAFT'S APPEAL IS AFFIRMED, ETC. THIS MATTER IS REFERRED TO THE HONORABLE M. FAITH ANGELL FOR FURTHER FINDINGS ON THE AMOUNTS WHICH WERE EXCLUDED FROM THE AWARD OF COMPENSATORY DAMAGES IN THE 7/7/2011 ORDER, ETC. THE STAY ENTERED 8/18/2011 IS EXTENDED UNTIL THE HONORABLE M. FAITH ANGELL HAS MADE A FINAL DETERMINATION AS TO THE AMOUNT OF COMPENSATORY DAMAGES OWED BY TELEDRAFT. SIGNED BY HONORABLE LOUIS H. POLLAK ON 11/30/11. 11/30/11 ENTERED AND COPIES E-MAILED AND MAILED TO PRO SE AND UNREPRESENTED PARTIES.(kw, )

UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
FEDERAL TRADE COMMISSION,
Plaintiff,

CIVIL ACTION
No. 08-2215

v.
NHS SYSTEMS, INC., et al.,
Defendants.

November 29, 2011
MEMORANDUM & ORDER
On May 3, 2011, I found Teledraft, Inc. to be in contempt of a prior order of this
court, issued September 24, 2009, which had directed Teledraft to turn over
$262,224.03 to a court-appointed Receiver (“the Turnover Order”). I then referred the
matter to the Honorable M. Faith Angell for an evidentiary hearing on the appropriate
amount of compensatory damages to be awarded to the Receiver for losses attributable
to Teledraft’s disobedience. After a hearing on July 7, 2011, Judge Angell ordered that
Teledraft pay $56,181.55 to compensate the Receiver. Now pending before the court
are objections from both Teledraft and the Receiver as to the amount of damages. For
the reasons that follow, I will affirm the order in part and vacate it in part.
I.

Background
The elements of this dispute are well known to the parties, and I summarize them

only briefly for context. These contempt proceedings are an outgrowth of a civil action

filed on May 13, 2008, by the Federal Trade Commission against several individuals
and business entities alleged to have engaged in unlawful telemarketing.
On May 14, 2008, at the instance of the FTC, this court entered an ex parte
temporary restraining order (“the XTRO”) which in part enjoined any “ACH Network
or other payment processor” from transferring or otherwise dissipating any assets held
by or for the defendants. The order of May 14, 2008, also placed defendant NHS
Systems, Inc. and its affiliates into receivership and appointed Wayne Geisser as
Receiver. On June 10, 2008, this court entered a stipulated preliminary injunction (“the
SPI”), which, in similar language, enjoined any “ACH Network or other payment
processor” from transferring or otherwise dissipating assets held by or for the
defendants.
Teledraft, while not one of the defendants named by the FTC in its May 13, 2008
complaint, is a payment processor of the sort contemplated in both the XTRO and the
SPI. See FTC v. NHS Sys., Inc., 708 F. Supp. 2d 456, 459 (E.D. Pa. 2009). In July
2008, the Receiver became aware of certain funds held by Teledraft for the defendants,
which the Receiver asserted to be property of the Receivership estate. Id. at 461–62.
Teledraft refused to return the funds sought by the Receiver.
On September 8, 2008, the FTC moved this court for an order requiring Teledraft
to turn over $264,224.03 to the Receiver. That figure consisted of $57,328.89 which
Teledraft had on hand and $206,895.14 which—according to the FTC and the

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Receiver—Teledraft should have had on hand but which had been improperly deducted
or otherwise dissipated by the payment processor. On September 24, 2009, as
previously noted, this court ordered Teledraft to turn over $264,224.03 to the Receiver.
Teledraft filed a notice of appeal of the Turnover Order on October 5, 2009, and
sought a stay of the order pending resolution of the appeal. By order dated December
10, 2009, I granted a thirty-day stay of the portion of the Turnover Order requiring
Teledraft to pay over the disputed funds. Teledraft’s appeal was subsequently
dismissed by the Court of Appeals for want of jurisdiction. FTC v. NHS Sys., Inc., No.
09-3899 (3d Cir. Jan. 8, 2010). The dismissal order from the Court of Appeals noted
that “[n]on-parties [such as Teledraft] usually must be held in contempt of district court
discovery orders before they have a right to appeal.” Id.
Apparently, standing in contempt was thought to be a worthwhile price to pay for
securing appellate review. Teledraft continued to refuse to obey the Turnover Order,
and on March 17, 2010, the FTC moved this court for an order to show cause why
Teledraft should not be held in contempt. On March 31, 2010, Teledraft opposed the
sanctions sought by the FTC and instead asked the court merely to enter a finding of
contempt for purposes of manufacturing an appealable order.
On May 12, 2011, I held Teledraft in contempt of the Turnover Order and
ordered it to pay the Receiver at least $57,328.89 within seven days; to pay the balance
of the $264,224.03 within fourteen days; and to “pay compensatory sanctions to the

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Receiver—in an amount to be determined by the Honorable M. Faith Angell, United
States Magistrate Judge—for any and all losses arising from Teledraft’s disobedience,”
Contempt Order of May 12, 2011 ¶ 5 (Docket No. 154) (emphasis added). In an
accompanying opinion, however, I declined to hold Teledraft in contempt of either the
XTRO or the SPI—both of which applied to Teledraft notwithstanding that Teledraft
was not a named defendant, and both of which Teledraft disobeyed. Memorandum
Opinion of May 12, 2011, at 8 (Docket No. 153).
Teledraft filed a notice of appeal from the contempt order on May 19, 2011, and
moved on the same day for a stay of the order. The contempt order was subsequently
stayed nunc pro tunc from May 12, 2011 until the determination of compensatory
damages by Judge Angell.
On July 7, 2011, following a hearing and written submissions, Judge Angell
ordered Teledraft to pay compensatory sanctions to the Receiver of $56,181.55—a
figure said to represent all of the Receiver’s losses and counsel fees from “just prior to
the filing of the contempt motion by the FTC (on September 8, 2008)1 through the
sanctions hearing before [Judge Angell] (July 6, 2011).” Judge Angell excluded,
however, all of the Receiver’s damages related to Teledraft’s two appeals—calculated
as time spent and fees incurred (1) between the filing of Teledraft’s first notice of

1

In fact, September 8, 2008, was not the date of the FTC’s contempt motion but
rather the date the FTC moved for the Turnover Order; as noted above, the contempt
motion was filed on March 17, 2010.
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appeal on October 5, 2009 and dismissal of that appeal on January 8, 2010, and (2) after
the filing of the second notice of appeal on May 19, 2011, except as necessary to
prepare for the sanctions hearing. Judge Angell also excluded, without elaboration,
some expense entries whose relationship with the “investigation, preparation and
presentation of the contempt petition” she deemed to have been inadequately
demonstrated.
Objections to Judge Angell’s order were then filed in this court by the FTC, the
Receiver, and Teledraft. The form of their objections was somewhat anomalous—a
joint stipulation incorporating by reference their prior submissions to Judge Angell. By
order dated August 18, 2011, I ruled that such generalized objections failed to comply
with Federal Rule of Civil Procedure 72, and I extended the deadline to file
particularized objections to Judge Angell’s order for an additional fourteen days. I also
extended the stay of the contempt order pending this court’s resolution of such
particularized objections as might be forthcoming. On September 15, 2011, Teledraft
and the Receiver each filed renewed objections, which are now before the court.
II.

Objections
Teledraft argues that the proper starting date for compensatory sanctions ought to

be September 24, 2009 (the date of the Turnover Order) rather than September 8, 2008,
the date employed by Judge Angell (the date the FTC moved for the Turnover Order).
Teledraft does not take issue with Judge Angell’s other calculations and requests that

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the total amount of sanctions be reduced to $5,334.30.
The Receiver has lodged three objections. First, he contends that Judge Angell
erred in selecting September 8, 2008, as the starting date for compensatory sanctions.
He argues that Judge Angell unduly limited the compensation awarded to costs related
to “the investigation, preparation and presentation of the contempt petition” and that,
under this court’s finding of contempt, the Receiver is instead entitled to equitable
compensation for all of Teledraft’s disobedient conduct—running from May 14, 2008,
when the XTRO was issued. Second, the Receiver objects to Judge Angell’s
unelaborated exclusion of certain fees and expenses. Third, the Receiver argues that
Judge Angell erred when excluding expenses related to Teledraft’s two appeals; the
Receiver’s position is that those two time periods of appeal-related exclusions ought to
run from the date of the stay of this court’s orders, rather than the date Teledraft filed its
notices of appeal. The Receiver requests that the total amount of sanctions be increased
to $121,236.73.
III.

Discussion
Judge Angell’s order on compensatory sanctions concerns a nondispositive

matter and will be set aside by this court only if it is “clearly erroneous or contrary to
law.” 28 U.S.C. § 636(b)(1)(A); Fed. R. Civ. P. 72(a). “A finding is ‘clearly erroneous’
when although there is evidence to support it, the reviewing court on the entire evidence
is left with the definite and firm conviction that a mistake has been committed.” United

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States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948). Clear error thus requires
something more than simple disagreement.
From differing perspectives, both the Receiver and Teledraft quarrel with Judge
Angell’s choice of the proper starting date for compensatory sanctions. There is no
question that, under this court’s May 12, 2011 opinion and order and the authorities
cited therein, the Receiver is entitled to compensation for the costs of investigating,
preparing, and presenting the motion for an order to show cause why Teledraft should
not be held in contempt. That motion was filed on March 17, 2010, and the costs
associated with it are undoubtedly a proper basis for an award of compensatory damages
against a contemnor; neither the Receiver nor Teledraft says otherwise.
Judge Angell also awarded compensation for a period of time she described as
spanning “the contempt litigation,” beginning on September 8, 2008. That period might
be more accurately described as spanning “the turnover litigation,” as September 8,
2008, was the date on which the FTC moved this court for the Turnover Order.
I find that Judge Angell’s choice of September 8, 2008 as the starting point for
compensatory sanctions was neither clear error nor contrary to law. The date should not
be later in time, as Teledraft seeks. In holding Teledraft in contempt of the Turnover
Order, I specifically noted existing authority for the equitable award of “payment for the
costs of past non-compliance.” Memorandum Opinion of May 12, 2011, at 12 (Docket
No. 153) (quoting John T. v. Del. Cnty. Intermediate Unit, 318 F.3d 545, 554 (3d Cir.

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2003)).2 The point of such an award is to compensate an opposing party in equity for
losses demonstrably tied to a contemnor’s disobedience. Teledraft has been in
continuous disobedience of this court’s orders since at least September 8, 2008. The
Receiver would not have incurred the costs and expenses associated with the turnover
litigation had Teledraft obeyed this court’s preceding orders.
At the same time, I find that the starting date for compensatory damages should
be no earlier than September 8, 2008. Although I have previously held that Teledraft
was subject to both the XTRO (issued May 14, 2008) and the SPI (issued June 10,
2008), I have declined to hold Teledraft in contempt of either of those prior injunctions.
Memorandum Opinion of May 12, 2011, at 7–8 (Docket No. 153). Teledraft is only in
contempt of the Turnover Order. Setting the starting date for sanctions at May 14,
2008—the Receiver’s preferred date—would fail to effectuate this distinction.
September 8, 2008, is a sensible balance of the equities under the circumstances.
I now turn to the Receiver’s two remaining objections. First, as explained above,
Judge Angell excluded fees and expenses incurred during the pendency of Teledraft’s

2

See also In re Linerboard Antitrust Litig., 361 F. App’x 392, 399 (3d Cir. 2010)
(“The purpose of a compensatory fine is to restore the injured party to the position he
would have held had the contemnor complied with the injunction.”); Robin Woods, Inc.
v. Woods, 28 F.3d 396, 401 (3d Cir. 1994) (“[T]here can be no doubt that the district court
had the authority to order [the contemnors] to compensate [plaintiff] for the time and
expense its management incurred in enforcing the district court’s injunction.”);
McDonald’s Corp. v. Victory Invs., 727 F.2d 82, 87 (3d Cir. 1984) (“[C]ivil contempt
may be employed to coerce the defendant into compliance with the court's order and to
compensate for losses sustained by the disobedience.”).
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two appeals; the Receiver objects that the starting point for any such exclusion should
not be—as Judge Angell reckoned—the dates on which Teledraft filed notices of
appeal, but rather the dates on which this court stayed its orders.3 The purpose of the
appeal-related exclusions was that those fees and expenses were not necessarily
attributable to Teledraft’s disobedience. Although Teledraft’s notices of appeal did not
suspend its obligations under the Turnover Order (or the contempt order), it was not
clear error to use the dates of the notices of appeal as a fair measure of when the
Receiver’s expenses ceased to be necessarily attributable to disobedient conduct in the
district court. The dates of the stays is not a clearly superior choice for these purposes.
Second, Judge Angell excluded time and expenses that she found “do not, based
on the description provided by the Receiver and his Counsel, specifically relate to the
investigation, preparation and presentation of the contempt petition.” The Receiver
complains both that all the fees and costs it submitted to Judge Angell should have been
included in the compensatory damages award and that Judge Angell has described her

3

The Receiver objects only to the use of the notice-of-appeal dates. He does not
object in general to Judge Angell’s decision to exclude expenses related to the appeals;
any argument for an award of expenses relating to the appeals would now be waived. Cf.
Schauffler v. United Assoc. of Journeymen & Apprentices of Plumbing & Pipe Fitting
Indus., 246 F.2d 867, 870 (3d Cir. 1957) (“The determination of assessable items of cost
in civil contempt is within the discretion of the court whose dignity has been offended,
and it is not an abuse of that discretion to impose as a penalty the expenses incurred in
defending the propriety of the original imposition in an appeal court.”). I note also that
Teledraft’s second appeal was stayed on June 17, 2011, nunc pro tunc to May 12, 2011,
so the Receiver’s objection only has any consequence as to Teledraft’s first appeal.
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exclusions so sparely that the Receiver is unable to challenge them. The Receiver never
moved for reconsideration or specification of Judge Angell’s order and so perhaps
should not be heard to complain before this court. Nevertheless, I agree that, because
they are unexplained, it is impossible to discern and review these selective exclusions in
Judge Angell’s calculations. Further, Judge Angell’s reference to only those fees
specifically related to “investigation, preparation and presentation of the contempt
petition” is arguably inconsistent with the broader authority to award equitable relief for
the costs of a contemnor’s disobedience (as described above).
Accordingly, in the order that follows, I will refer the matter once more to Judge
Angell for the limited purpose of resolving the Receiver’s objection to these unspecified
exclusions of time and expenses.
****
AND NOW, this 29th day of November, 2011, upon consideration of the July 7,
2011 Order of the Honorable M. Faith Angell (Docket No. 171) as well as the
objections and responses thereto (Docket Nos. 193–195), it is hereby ORDERED that:
(1)

The portion of the July 7, 2011 Order awarding compensatory damages to
the Receiver beginning as of September 8, 2008, through July 6, 2011,
and excluding expenses related to Teledraft’s appeals is AFFIRMED;

(2)

The portion of July 7, 2011 Order excluding other expenses as “not . . .
specifically relate[d] to the investigation, preparation and presentation of
the contempt petition” (viz., the final sentence of the second paragraph of
the July 7, 2011 Order) is VACATED;

(3)

This matter is REFERRED to the Honorable M. Faith Angell, pursuant to
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28 U.S.C. § 636(b)(1)(A), for further findings on the amounts, referenced
in paragraph (2), above, which were excluded from the award of
compensatory damages in the July 7, 2011 Order and which are said by
the Receiver to be unexplained; and
(4)

The stay entered August 18, 2011 (Docket No. 186) is EXTENDED until
the Honorable M. Faith Angell has made a final determination as to the
amount of compensatory damages owed by Teledraft.

BY THE COURT:

/s/ Louis H. Pollak
Pollak, J.

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