matthew r. lewis (7919) katherine e. priest (14758) ray … · 2014. 5. 9. · detailed in motion...

1

Matthew R. Lewis (7919) Brett L. Tolman (8821) Katherine E. Priest (14758) RAY QUINNEY & NEBEKER P.C. 36 South State Street, Suite 1400 P.O. Box 45385 Salt Lake City, Utah 84145-0385 Telephone: (801) 532-1500 Fax: (801) 532-7543 Attorneys for Defendants Dahm International, LLC, Dominion of Virgo Investments, Inc., eCommerce Support, LLC, Essent Media, LLC, EVI, LLC, Nemrow Consulting, LLC, Novus North, LLC, Purple Buffalo, LLC, 365DailyFit, LLC, Vensure International, LLC, VI Education, LLC, Jessica Bjarnson, Phillip Edward Gannuscia, Chad Huntsman, Richard Nemrow, Jeffrey Nicol, and Thomas J. Riskas, III

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF UTAH

FEDERAL TRADE COMMISSION,

Plaintiff,

v. APPLY KNOWLEDGE, LLC, et al.,

Defendants.

ESSENT MEDIA DEFENDANTS’

OBJECTION TO ORDER AWARDING REASONABLE FEES TO RECEIVER DETAILED IN MOTION FOR ORDER

APPROVING WIND UP OF RECEIVERSHIP ESTATE AND

RELATED RELIEF INCLUDING APPROVING AND AUTHORIZING PAYMENT FROM RECEIVERSHIP

ASSETS OF TEMPORARY RECEIVER’S AND PROFESSIONALS’

FEES AND EXPENSES DISCHARGING RECEIVER

Case No. 2:14-CV-00088

Defendants Dahm International, LLC, Dominion of Virgo Investments, Inc., eCommerce

Support, LLC, Essent Media, LLC, EVI, LLC, Nemrow Consulting, LLC, Novus North, LLC,

Case 2:14-cv-00088-DB Document 138 Filed 05/07/14 of 22

2

Purple Buffalo, LLC, 365DailyFit, LLC, Vensure International, LLC, VI Education, LLC,

Jessica Bjarnson, Phillip Edward Gannuscia, Chad Huntsman, Richard Nemrow, Jeffrey Nicol,

and Thomas J. Riskas, III (the “Essent Media Defendants”), by and through undersigned counsel,

hereby object to this Court’s order awarding reasonable fees to Receiver, outlined in the

Receiver’s Motion for Order Approving Wind Up of Receivership Estate and Related Relief

Including Approving Final Accounting, Approving and Authorizing Payment from Receivership

Assets of Temporary Receiver’s and Professionals’ Fees and Expenses Discharging Receiver,

and Approving Turnover of Receivership Assets (the “Motion”).

INTRODUCTION

The Temporary Receiver in this matter asks this Court to sanction its extraordinary

request for nearly half a million dollars in fees and costs incurred in just 36 days of activity. This

Court should deny the Receiver’s request because the fees are not reasonable or consistent with

principles of equity. The rates charged by the Temporary Receiver and its counsel are nearly

double reasonable fees charged by Utah professionals for the same work and are not reasonable

for the Utah market. The award of fees would also not be equitable given that the Receiver

caused millions of dollars in damage to the Essent Media Defendants’ businesses by shutting

down legitimate websites and business activity that is entirely unrelated to the allegations in the

FTC’s complaint. Accordingly, the Essent Media Defendants respectfully request that the fees

sought by the Temporary Receiver and its counsel be reduced by at least 50 percent for the

reasons discussed below.

Moreover, if anyone is required to pay any reasonable fees and expenses, it should be the

FTC, which requested this Receiver, elected to proceed ex parte (without a shred of evidence

that Defendants would attempt to hide assets or be uncooperative), and then failed to present a


3

complete and accurate picture of the Essent Media Defendants’ business activities to this Court.

Finally, the Receiver should not be released until the parties have a chance to conduct

discovery and get a complete picture of the Receiver’s actions in this case.

FACTS

A. The Temporary Receiver was selected by the FTC because the Temporary Receiver would do the FTC’s bidding. 1. The Temporary Receiver appointed in this matter is Robb Evans & Associates

LLC (“Temporary Receiver”). The Temporary Receiver has prior experience in numerous cases

filed by the FTC. Utah legal firms and accountants also have experience serving as receivers in

FTC enforcement actions.1

2. The Temporary Receiver is located in Sun Valley, California. The law firm of

McKenna Long & Aldridge (“McKenna”), of Los Angeles, is the Receiver’s primary counsel.

The Temporary Receiver has used McKenna in other actions in which the Temporary Receiver

has served as a receiver. Temporary Receiver also used the firm of Prince Yeates and

Geldzahler as local counsel.

3. The FTC recommended the appointment of Robb Evans as Temporary Receiver.

[Doc. 4] In its recommendation for Receiver, the FTC indicated that “the firm is willing to

discount its rates because the government is the plaintiff, and if any outside personnel are used, it

will insist that they also discount their rates.” Id. However, it does not appear that the FTC

disclosed the specific rates to be charged. The FTC also did not compare the rates to be charged

by these out of state entities with the rates of in-state firms that also have experience in similar

1 For example, Robert Wing served as the Receiver in the matter of FTC v. Infusion Media et al., Case No. 2:09-cv-01112-GMN-VCF, filed on June 22, 2009 in the United States District Court for the District of Nevada.


4

cases. The FTC accordingly did not disclose that the “discounted” rates would be approximately

double what Utah professionals would likely charge.

B. The Temporary Receiver acted on behalf of the FTC, not the Court.

4. Although the prior experience of Temporary Receiver presumably provides a

certain level of expertise, it also creates a relationship where the receiver realizes that the FTC is

a source of millions of dollars in work and the receiver becomes beholden to the FTC, rather than

this Court—which is what appears to have happened in this case. As demonstrated by the

extraordinary fees incurred in this case in just a few weeks, the Receiver had a direct profit

motive to support the FTC because by doing so it stood to make millions of dollars in this case

alone. The Temporary Receiver also presumably sought to cement its relationship with the FTC,

which had recommended the Receiver in past actions as well as this action and would, hopefully,

continue to recommend the Receiver in future cases as well.

5. Although the FTC has tried to portray the Temporary Receiver as “the Court’s

Receiver,” it was clear from the outset that the Receiver intended to support the FTC more than

this Court. Specifically, the Receiver attempted to bolster the FTC’s attempt to obtain a

preliminary injunction in this matter rather than operate the business as to preserve value.

6. It is notable that the Receiver, although nominally an agent of the Court, failed to

return to the Court to seek direction once it presumably learned that a significant portion of the

Essent Media Defendants’ business was completely unrelated to the allegations in the FTC’s

complaint. Rather, the Receiver forged ahead—shutting down the business in a matter of days—

without any apparent thought of seeking additional guidance from the Court. Of course, the

Receiver’s decision to do so directly benefited the FTC in its attempt to obtain a preliminary

injunction order.


5

7. After Temporary Receiver was appointed in this matter, it met with key agents of

the Essent Media Defendants to discuss the Essent Media Defendants’ operations. Agents of

Temporary Receiver and its counsel met with Jessica Bjarnson, who is knowledgeable regarding

the Essent Media Defendants’ accounting practices, for several days. Declaration of Jessica

Bjarnson, ¶ 4, attached hereto as Exhibit B.

8. During the meetings with Ms. Bjarnson, she explained the nature of the Essent

Media Defendants’ business operations. Id. at ¶ 9. She specifically explained to the Temporary

Receiver that the QuickBook files were incomplete for 2013 and could not be relied upon in their

current state. Id.

9. The Temporary Receiver ignored Ms. Bjarnson’s explanation and proceeded to

prepare an unreliable analysis for its report submitted to this Court. Id. at ¶ 10. This Report also

appears intended to assist the FTC obtain a preliminary injunction as it parrots the FTC’s legal

theories without independent analysis.

C. The Temporary Receiver shut down businesses without appropriate analysis.

10. Additionally, the prior work of Temporary Receiver appears to have led it to

formulate a preconceived position that the Essent Media Defendants’ businesses should be shut

down, rather than conducting a fair and independent evaluation for the benefit of this Court.

Declaration of Richard Son, ¶ 5, attached hereto as Exhibit A.

11. On February 12, 2014, the day it entered the Essent Media Offices, the Temporary

Receiver informed the employees of Essent Media that there was a “99% chance that Essent

Media was dead and that there was no chance [that] Essent Media would ever make it through

the legal process.” Son Decl., ¶ 5.


6

12. Additionally, an agent for the Temporary Receiver stated that the Temporary

Receiver’s main focus was to shut down the company and provide information to the FTC. Id.

13. The Temporary Receiver proceeded to shut down the activities of the Essent

Media Defendants without proper analysis of the various portions of Essent Media.

14. The Temporary Receiver also informed the outside company that performed

customer service for the health and wellness portion of the Essent Media Defendants’ business

that it would not be paid for future work and that it should turn off the toll free customer service

telephone numbers. Declaration of Todd Westra, ¶ 9, attached hereto as Exhibit C.

15. The Receiver’s supposed rationale was that it was trying to avoid cost. However,

the Receiver appears to have failed to consider the hundreds of thousands of dollars in

chargebacks that would be incurred by the receivership estate as a result of disgruntled customers

who could no longer access customer service related to the products purchased from Essent

Media.

D. The Temporary Receiver caused substantial damage.

16. The Temporary Receiver also caused significant damage to the Essent Media

Defendants. Specifically, the Temporary Receiver shutdown the health and wellness activities of

the Essent Media Defendants, which was generating millions of dollars in revenues. Although

the Temporary Receiver now claims that this portion of the business shut down on its own, this

assertion is misleading. The Temporary Receiver took several immediate actions that doomed

this side of the business. First, the Temporary Receiver immediately advised vendors with

outstanding invoices that they would not be paid. Westra Decl. at ¶ 9; See also Tab 1 to the

Declaration of Phillip Gannuscia. This is what brought fulfillment to a stop. Although the


7

Temporary Receiver may not have explicitly stopped fulfillment itself, once it let vendors know

that they would not be paid, the cessation was inevitable and immediate.

17. The Temporary Receiver terminated all customer service lines for the health and

wellness products. As described above, the Temporary Receiver advised the outside company

responsible for customer service to turn off the toll-free numbers and to stop responding to

customer calls. Declaration of Phillip Gannuscia, ¶ 19, attached hereto as Exhibit D. This was

done before the Temporary Receiver could adequately analyze the legality or profitability of the

health and wellness side of the Essent Media Defendants’ business.2

18. The Temporary Receiver also took other steps that caused significant damage to

the Essent Media Defendants. For example, the Temporary Receiver cancelled websites that had

a potential value of half a million dollars, the Receiver did this within days of its initial entry

without sufficient time to consider the value of these websites. Id. The Receiver also stopped

monthly payments for the various business expenses required for Essent Media’s operations. It

would not be equitable to pay the Receiver under these circumstances. First, the Receiver has

caused millions of dollars in damages.

ARGUMENT

Based on the facts detailed above, the Essent Media Defendants object to the

reasonableness of the fees detailed in the Temporary Receiver’s Motion. Moreover, given the

2 In a blatant attempt to justify its decision to terminate the business operations for the health and wellness portion of the Essent Media Defendants, the Temporary Receiver engaged in the review of at least 50 websites to determine the product offered, and the negative option continuity plans, more than two weeks after the Temporary Receiver terminated the health and wellness portion of Essent Media’s business on February 12, 2014. See Exhibit 3, Johnson Decl. at p. 8 of 71.


8

millions of dollars in damages caused by the Temporary Receiver,3 it would be inequitable to

pay the Temporary Receiver the exorbitant fees it requests. To the extent any fees or expenses

are awarded, the fees should be paid by the FTC.

A. THE TEMPORARY RECEIVER’S REQUESTED FEES ARE UNREASONABLE AND INEQUITABLE.

When determining the reasonableness of professional fees, it should be kept in mind that

“[n]o receivership is intended to generously reward court appointed officers.” SEC v. Kirkland,

No. 6:06-cv-183-Orl-28KRS, 2008 WL 4144424, at *5 (M.D. Fla. Sept. 5, 2008) (citation

omitted). “A receiver’s fee should be measured by the value of the services rendered…[and] the

results that are accomplished by the receiver.” 65 Am Jur. 2d Receivers § 228 (2014).

Furthermore, applicable considerations in determining fees for receivers and attorneys include:

1. the time and labor required, but not necessarily [ ] actually expended, in the proper performance of their duties;

2. the fair value of such time, labor, and skill measured by conservative business standards;

3. the degree of activity, integrity, and dispatch with which the work is conducted; 4. the difficulty of his or her task or the extent of responsibility assumed; 5. the amount of money or the value of property in the receivership estate; and 6. the results obtained. Id.

1. The Receiver’s requested fees are unreasonable as they far exceed the fair value of such time, labor, and skill measured by conservative business standards.

The Receiver’s requested fees are unreasonable as the requested fees are far outside of

the range paid to Utah professionals. A reasonable hourly rate is the “prevailing rate in the

relevant market for individuals of similar skill and experience.” SEC v. Digges, No. 6:06-cv-

137-Orl-19KRS, 2007 WL 4884110, at *2 (M.D. Fla. Nov. 13, 2007) (citation omitted). 3 When referring to the Temporary Receiver in connection with the reasonableness of fees, the Essent Media Defendants are referring to the Temporary Receiver along with its counsel, and all agents and employees of the Temporary Receiver and its counsel.


9

Therefore, in considering a reasonable hourly rate, this Court should look to the market rates in

“the district where the district court sits.” FTC v. Consumer Health Benefits Ass’n, No. 10 Civ.

3551 (ILG)(RLM), 2011 WL 5513182, at *2 (E.D.N.Y. Nov. 10, 2011) (citation omitted).

Furthermore, hourly rates awarded in other cases are relevant to the determination of an

appropriate hourly rate. See Digges, 2007 WL 4884110, at *2 (citation omitted).4 As such, the

Essent Media Defendants have provided the Court with a helpful comparison of rates awarded in

the Infusion Media case, an FTC receivership case originating in the District of Nevada. While

the Infusion Media case originated in the District of Nevada, it is a particularly instructive

comparison to the case at hand because local Utah professionals were used in the administration

of the Infusion Media receivership estate. Specifically, Robert Wing of Prince Yeates &

Geldzahler was counsel for the receiver—who is local counsel in this matter. Additionally,

Rocky Mountain Advisory of Salt Lake City was appointed as the Receiver.

The most recent Motion for Authorization to Pay Fees, Costs, and Receivership Claims

(“Infusion Media Motion”) filed in the Infusion Media case was filed on October 19, 2012, or

less than two years ago. See Infusion Media Motion, filed Oct. 19, 2012, Case No. 2:09-cv-

01112-GMN-VCF, D. Nevada, Doc. 126. The Infusion Media Motion provides, in great detail,

the billing rates for all professionals involved in the case. Id. Specifically, the rates sought by

Rocky Mountain Advisory as the receiver ranged between $125.00 and $250.00 per hour. Id.

4 It is also important to note that “[t]he party requesting fees bears the burden of showing that the requested rates are in line with those prevailing in the community for similar services by lawyers of reasonably comparable skill, experience, and reputation.” United Phosphorus Ltd. v. Midland Fumigant, Inc., 205 F.3d 1219, 1234 (10th Cir. 2000) (internal quotation marks omitted). Accordingly, the Temporary Receiver has not presented a shred of evidence demonstrating that its rates, or the rates of its counsel, are in line with Utah professionals with reasonably comparable skill, experience, and reputation.


10

Furthermore, the rates sought for receiver’s counsel at Prince Yeates & Geldzahler ranged

between $210.00 and $295.00 per hour. Id.

In contrast, the Temporary Receiver seeks fees up to $382.50 per hour in the

administration of the Receivership Estate in this case. See Declaration of Kenton Johnson in

support of Receiver’s Motion. Although the rates were supposedly discounted, the rates are

almost $100.00 more per hour than the fees awarded to the receiver in the Infusion Media case.

Additionally, McKenna seeks fees ranging from $229.50 to $594.00 per hour for its services. See

Declaration of Gary Owen Caris in support of Receiver’s Motion. These requested rates are

almost double the hourly rates awarded in the Infusion Media case.

The fees requested in this case are patently unreasonable considering the case law

requiring reasonableness in the relevant market. Of course, the relevant market in this case is

Utah. It is curious that both the Temporary Receiver and its counsel hail from California, a

market substantially overpriced in comparison to the Utah market. Indeed, the difference in

markets is reflected in the substantial difference in fees charged for the same work—that is,

performing the duties of a Temporary Receiver and counsel in an FTC receivership case. The

fact that the same firm acting as local counsel in this case acted as counsel in the Infusion Media

case demonstrates that Utah professionals are capable of handling this type of case at much

lower rates. The Temporary Receiver as not provided any evidence to suggest that its, or its

counsel’s, California rates are appropriate or applicable in a Utah receivership. As such, this

Court should reduce the Receiver’s requested fees by at least 50% percent, which would be in

line with Utah market rates.


11

2. The Receiver’s Requested Fees are Unreasonable as the Receiver did not Sufficiently Detail its Services in its Billing Records and Billed for Inappropriate Travel Time.

As a general matter, professionals, in their request for payment of fees, must provide

sufficient detail in order for the Court to determine whether the time expended was reasonable

and necessary. See, e.g., United Phosphorus Ltd. v. Midland Fumigant, Inc., 205 F.3d 1219,

1233 (10th Cir. 2000) (stating that a party must “submit meticulous, contemporaneous time

records that reveal, for each lawyer for whom fees are sought, all hours for which compensation

is requested and how those hours were allotted to specific tasks” for proof of reasonable fees);

Tomlinson v.Combined Underwriters Life Ins. Co., No. 08-CV-259-TCK-FHM, 2009 WL

2392950, at *1(N.D. Okla. July 29, 2009) (stating that redacted billing entries that “deprive the

court of the ability to determine whether time spent on a particular task was reasonable” are

insufficient); US v. Peters, No. 08-5348 ADM/JSM, 2010 WL 1959900, at *2 (D. Minn. May 17,

2010) (stating that an entry for the “research of case law” lacked sufficient detail for the award of

fees for that entry).

The Receiver’s Motion and accompanying exhibits are replete with vague and redacted

entries which do not provide sufficient detail for the proof of reasonable fees. In fact, it is

impossible to determine what types of services are being performed, and what issues are being

analyzed based on many of the entries. See, e.g., Exhibit 1 to the Declaration of Gary Owen

Caris, in support of Receiver’s Motion, p. 24 (“prepared and sent e-mail to Kane and Lee

regarding [ ]); p. 25 (“analyzed e-mail from Gans to Benson; Prepared and send e-mail to Gans

regarding the same); p. 26 (“analyzed e-mail between Kane and J. Johnson regarding [ ]); p.13

(“prepared and sent e-mail to Kane and Lee regarding [ ]); Exhibit 3 to the Declaration of Kenton

Johnson, in support of Receiver’s Motion, p. 31 (“onsite work analyzing business operations and


12

discussions with managers and vendors”); p. 32 (“work on Court report”); p. 32 (“Discuss case

issues with FTC”); p. 34 (“Study materials and documents”).

Additionally, the Receiver provides entries for travel and duplicative services. For

example, the Temporary Receiver bills 5.30 hours for “travel from Los Angeles to Orem.” Id. at

p. 1. This entry, among other entries for travel, is inappropriate as this Court “agrees with [the]

principle” that “travel time should not be compensated at the full hourly rate because such time is

inherently unproductive.” Brigham Young Univ. v. Pfizer, Inc., 262 F.R.D. 637, 649 (D. Utah

2009) (reducing all billing entries attributed only to travel by 50%).5

3. The Receiver’s requested fees are unreasonable as the Receiver did not provide any benefit to the Receivership Estate.

“The receiver must exercise ordinary care and prudence, that is, the same care and

diligence that an ordinary prudent person would exercise in handling his or her own estate, or

under like circumstances.” Kirkland, 2008 WL 4144424, at *4. In effect, the receiver actions

must benefit the estate. The Receiver did not provide a single benefit to the Receivership Estate.

In this case, the Receiver’s actions did anything but benefit the Essent Media Defendant’s

portion of the Receivership Estate. In fact, when the Temporary Receiver terminated the business

operations of the health and wellness portion of Essent Media’s business and failed to pay the

ordinary business expenses related to that business, the Essent Media Defendants suffered more

than $2,000,000 in damages. Gannuscia Decl. at ¶¶ 17- 20. Additionally, Essent Media has been

unable to restore the health and wellness portion of its business because of the harm done by the

Temporary Receiver. Furthermore, because the Temporary Receiver terminated any customer

service support for any of its business operations, the Essent Media Defendants have incurred 5 Moreover, the extensive amount of travel time, which alone is more than $38,000 of the requested fees and expenses, further supports the notion that experienced Utah professionals should have been used as receiver and counsel.


13

more than $1.3 million in chargebacks. Id. ¶ 18. These additional claims against the Essent

Media Defendants did not benefit the Essent Media Defendants.

Furthermore, the Temporary Receiver presents no evidence that it brought in any

additional funds or assets into the Receivership Estate to increase the amount of funds available

to potential victims. The Temporary Receiver cites Gaskill for the proposition that an increase in

monetary value of the estate is not the only way to measure a benefit to the estate. Gaskill v.

Gordon, 27 F.3d 248, 253 (7th Cir. 1994). However, the Gaskill Court further states that “if a

receiver reasonably and diligently discharges his duties, he is entitled to compensation.” Id. The

Receiver makes no showing that he reasonably and diligently discharged his duties. In fact, the

evidence demonstrates the contrary.

The Temporary Receiver did not reasonably and diligently discharge his duties in this

case for several reasons. The Receiver failed to engage in a proper analysis as to whether Essent

Media’s health and wellness business could operate legally and profitably. In fact, the Receiver

terminated all business operations of the health and wellness portion of Essent Media’s business

within a few days of its appointment, even after the business operations of the health and

wellness business were explained to it.

4. The Professional Fees Sought by the Temporary Receiver are Unreasonable as the Temporary Receiver did not Properly Perform its Duties outlined in the Temporary Restraining Order.

It is well settled that “the receiver must exercise ordinary care and prudence, that is, the

same care and diligence that an ordinary prudent person would exercise in handling his or her

own estate, or under like circumstances.” Kirkland, 2008 WL 4144424, at *4. It is clear that the

Receiver did not act in such a manner with regards to this case. Section XIII of the Temporary

Restraining Order (“TRO”) entered on February 11, 2014 outlines several duties for the


14

Temporary Receiver to perform in relation to the receivership estate. Specifically, Section

XIII(R) requires the Temporary Receiver to “file reports with the Court.” See TRO, §XIII(R).

Additionally, the TRO required the Receiver to manage the assets of the Receivership

Defendants. Id. at §XIII(E). While the Receiver did file a report with the Court which provided

an accounting of the Receivership Defendants assets, the filed report is unreliable because it

incorporates inaccuracies from the Essent Media Defendants’ unaudited accounting records. The

Temporary Receiver was advised of the issues but did not note them for the Court.

It is evident that the Temporary Receiver did not accurately depict the accounting of the

Essent Media Defendants’ in its filed report to this Court, and therefore, the fees aggregated in

preparing the analysis for the report are unreasonable as the quality of the Receiver’s work is

seriously lacking. It seems hardly reasonable that the Essent Media Defendants be responsible

for the payment of the Receiver’s fees when the Receiver did not accurately account for the

assets of the receivership estate.

B. THE FTC IS RESPONSIBLE FOR THE RECEIVER’S REQUESTED FEES To the extent the Temporary Receiver’s fees are reasonable, the FTC should be

responsible for the payment of those fees pursuant to well-settled precedent. Generally, this

Court is vested with considerable discretion in determining who will pay the costs of a

receivership. Burnrite Coal Briquette Co. v. Rigs, 274 U.S. 208, 214 (1927); ABM Janitorial

Servs.-N. Cen., Inc. v. Pami Ryan Town Centre LLC, Nos. 08-CV-100-LRR, 08-CV-123-LRR,

2009 WL 4506548, at *2 (N.D. Iowa Dec. 3, 2009) (same). While it is generally true that a

receiver is paid out of receivership property, such payment is appropriate only where “the

receiver’s acts have benefited that property.” See S.E.C. v. Madison Real Estate Grp., LLC,

2:08-CV-00243 CW, 2009 WL 2947197, at *1 (D. Utah Sept. 11, 2009). Furthermore,


15

“where the appointment of the receiver was irregular or inequitable,” courts hold that “the

party who procured the appointment, not the receivership fund, is liable for the

expense of the receivership.” United States v. Guess, No. 04CV2184-LAB (AJB), 2005

WL 1819382, at *4 (S.D. Cal. June 28, 2005); Bowerstock Mills & Power Co. v. Joyce, 101

F.2d 1000, 1002 (8th Cir. 1939) (same); Dir. of Office of Thrift Supervision, U.S. Dep’t of

Treasure v. Lopez, 141 F.R.D. 165, 167 (S.D. Fla. 1992) ([T]here is substantial case law that a

court in the exercise of [its] equitable powers may compel the party who procured the receiver

to meet the expenses of the receivership . . . even if the government is a party.”

(emphasis added)); Pioche Mines Consol., Inc. v. Dolman, 333 F.2d 257, 276 (9th Cir. 1964)

(“The court has discretion to charge the receiver’s expenses either to the corporation or to the

party who wrongfully obtained the receiver’s appointment. . . . [T]he costs of the receivership

that would not have arisen but for the appointment should be charged against the party invoking

the receivership. . . .”); Mintzer v. Arthur L. Wright & Co., 171 F. Supp. 263, 264 (E.D. Pa.

1959) (“It is often stated that in the case of an improper receivership liability for the attendant

costs is to be decided in accordance with equitable principles. . . . [I]t seems established that

such costs will normally be charged to those procuring the improper appointment.”); Carr v.

Acacia Country Club Co., No. 97989, 2012 WL 4849012, at *3 (Ohio Ct. App. Oct. 11, 2012)

(“When the appointment of a receiver is improper or invalid, the party at whose in[si]stance

the receiver was appointed, and not the receivership fund, must pay all costs and expenses

incurred as a result of the appointment.”); Wipf v. Hutterville Hutterian Brethren, Inc., 834

N.W.2d 324, 333 (S.D. 2013) (“Generally, when a party requests the appointment of a

receiver, and thereafter the appointment is deemed without legal authority, it is the requesting

party and not the receivership funds that are liable for the expenses of the receivership.”).


16

While Section XIX of the TRO states that the assets of the receivership are to be

used to compensate the Receiver and its agents, the existing case law demonstrates that

the receivership estate may not be liable for the reasonable fees of the Receiver when the

Receiver’s appointment is overbroad or does not benefit the receivership estate. Based

upon these principles, and the arguments detailed below, the FTC should bear the cost of

the Receiver’s requested fees in this case.

1. The Temporary Receiver’s appointment was overbroad based upon the FTC’s failure to provide the Court with the complete picture.

The FTC, acting ex parte in seeking the Temporary Restraining Order in this case, had a

duty to “inform the tribunal of all material facts known to the lawyer which [would] enable the

tribunal to make an informed decision, whether or not the facts are adverse.” Utah R. Prof.

Cond. 3.3. The Court in Leviton Manufacturing discussed the particular need for candor in ex

parte proceedings and stated that

Our legal and regulatory system necessarily include[ ] some ex parte proceedings…[which] are dependent on the scrupulous candor and integrity of the single interested party before the decisionmaker. In the absence of the clarifying and probing of an adversary, the decisionmaker must be able to count on the applicant’s compliance with its duty to the institution of the court…not simply its duty to the narrower interests of its particular client.

Leviton Mfg. Co., Inc. v. Shanghai Meihao Elec., Inc., 613 F.Supp. 2d 670, 712 (D. Md. 2009),

vacated on other grounds, Leviton Mfg. Co., Inc. v. Universal Sec. Instruments, Inc., 606 F.3d

1353 (Fed. Cir. 2010).

In this case, the Temporary Receiver froze all of the assets of the Essent Media

Defendants, including the assets relating to the health and wellness portion of Essent Media’s

business. Additionally, the Temporary Receiver failed to maintain the ordinary business

operations of the health and wellness portion of Essent Media. The FTC did not mention the


17

health and wellness portion of Essent Media’s business when seeking the ex parte temporary

restraining order and neither the FTC nor the Temporary Receiver brought this portion of Essent

Media’s business to the Court’s attention once they learned of its existence.

In its motion, the FTC omitted several key facts which would have “enable[d] the

tribunal to make an informed decision.” Utah R. Prof. Cond. 3.3. In fact, in its preliminary

injunction ruling, the Court stated that it did not have “enough before [it] to even think about

prohibiting the Gannuscia defendants from continuing their work in the…health and

wellness…side of their business.” Hearing Tr., March 20, 2014, 68:15. Additionally, the Court

recognized that the FTC did not provide the complete picture when seeking the TRO and stated

that the health and wellness portion of Essent Media’s business “was not before me, and is not

before me now.” Id. at 68:15-16. The Court further stated that “[it didn’t] think that it was

correct for the receiver to conclude that it was an illegal business and that it was improper for

them to have access to the money generated by that business” and that it was “only dealing with

what is before me.” Id. at 68:17-22. Based upon the FTC’s omissions and incomplete

representations, this Court entered the TRO and appointed the Temporary Receiver—which

caused substantial damage to the Essent Media Defendants. Therefore, the FTC wrongfully

obtained the Temporary Receiver’s appointment and the Receiver’s fees should be charged

against the FTC, as the party invoking the receivership. Pioche Mines Consol., Inc. v. Dolman,

333 F.2d 257, 276 (9th Cir. 1964).

2. The Temporary Receiver’s actions did not benefit the receivership estate, and therefore payment of the Temporary Receiver’s Fees out of the receivership estate is inappropriate.

The Temporary Receiver in no way benefitted the receivership estate when it terminated

the business operations of the health and wellness portion of Essent Media’s business and failed


18

to pay the ordinary business expenses related to that business. The Temporary Receiver further

exposed the Essent Media Defendants to substantial increases in potential liability for damages

when it terminated all customer service operations because existing customers could not access

the products they purchased, nor could Essent Media respond to any complaints regarding any

product they sold. The Essent Media Defendants could not provide any customer support during

the tenure of the appointed Temporary Receiver, which caused substantial damage to Essent

Media’s profit and customer good-will. Specifically, the Essent Media Defendants have

experienced over $2,000,000 in damage in the health and wellness portion of their business,

which includes damages from the Temporary Receiver’s failure to pay ordinary business

expenses including vendor invoices and lost revenues. Gannuscia Decl. at ¶¶ 17 - 20.

Additionally, the health and wellness portion of Essent Media’s business has been unable to

restore its business based on the harm done by the temporary receiver. Id. at ¶ 21.

It is also important to note that the FTC received a great benefit from the Temporary

Receiver’s action as it received unlimited access to the Essent Media Defendant’s business

records, employees, customer databases, customer service information, and financial

information. Essentially, the FTC had six weeks of unrestrained discovery to build its case

against the Essent Media Defendants.

When taken all together, it is clear that the FTC received the benefit of the appointment

of the Temporary Receiver—not the receivership estate. Additionally, when considering the

Court’s ruling that the health and wellness portion of Essent Media was not the subject of the

Preliminary Injunction, nor was it ruled upon in the TRO, the fact that the Temporary Receiver

destroyed a lawful and profitable business and rendered it worthless is particularly egregious.

Based upon the damage to the receivership estate by the Temporary Receiver, the receivership


19

estate should not bear the cost of the Temporary Receiver’s damage as the Temporary Receiver’s

acts have not benefitted the property. See S.E.C. v. Madison Real Estate Grp., LLC, 2:08-CV-

00243 CW, 2009 WL 2947197, at *1 (D. Utah Sept. 11, 2009).

3. The FTC Assumed the Risk of Incurring Liability for the Receiver’s Fees by Proceeding ex parte in Seeking a Restraining Order Against the Essent Media Defendants.

The Federal Rules of Civil Procedure discuss allocation of risk when a party seeks a

temporary restraining order. Particularly, Rule 65(c) of the Federal Rules of Civil Procedure state

that “[t]he court may issue a…temporary restraining order only if the movant gives security in an

amount that the court considers proper to pay the costs and damages sustained by any party

found to have been wrongfully enjoined or restrained.” Fed. R. Civ. P. 65(c). “The purpose of

requiring security prior to issuance of an injunction or temporary restraining order is to guarantee

payment of costs and damages incurred by a party who is wrongfully enjoined or restrained.”

Interlink International Financial Services, Inc. v. Block, 145 F.Supp. 2d 312, 314 (S.D.N.Y.

2001) (citing 13 Moore’s Federal Practice 93d. ed. 1997)). Therefore, when a party seeks a

temporary restraining order, they proceed at the risk that the enjoined party may suffer damages

due to an improper temporary restraining order. Additionally, by posting a bond, the seeking

party recognizes that it may have to pay damages associated with an issued temporary restraining

order.

While the “United States, its officers, and its agencies” are excepted from the bond

requirement under Rule 65, the “United States is…potentially liable for damages

for…wrongfully seeking an injunction…despite the fact that no bond [is] posted.” Marine

Construction & Dredging, Inc. v. Army Corps of Engineers, 892 F.2d 83, at *3 (9th Cir. 1989)

(unpublished). The Marine Dredging case demonstrates that the United States is still exposed to


20

the risk of damages even though no bond is required of it. This is because the “United States can

guaranty its ability to pay damages and is entitled to seek injunctions without posting bonds”

because “the government treasuries serve as guarantees that any award of damages can be

collected.” Id.

The bond analysis above demonstrates that risk is statutorily allocated to parties

proceeding ex parte in seeking a temporary restraining order. In this case, the FTC proceeded ex

parte in seeking a restraining order against the Essent Media Defendants. By doing so, the FTC

assumed the risk that it could potentially be wrong in its understanding of the facts at hand. It is

clear that the FTC failed to present this Court with a complete picture of Essent Media’s

operations. Had the FTC proceeded in the traditional, adversarial way, the complete picture

would have been brought to the attention of the Court from the beginning, preventing the entry

of a wrongful injunction. Ultimately, proceeding ex parte led to the improper closure of the

health and wellness portion of Essent Media’s business, and caused enormous damage to Essent

Media—all of which could have been prevented if the FTC had not proceeded ex parte. For these

reasons, it is proper that the FTC pay the Receiver’s requested fees.

C. THE RECEIVER SHOULD NOT BE RELEASED UNTIL DISCOVERY IS COMPLETED.

The Essent Media Defendants further request that this Court not release the Temporary

Receiver “from all claims and liabilities arising out of and/or pertaining to the receivership

herein,” as requested by the Temporary Receiver, until after discovery is completed in this case.

Motion, p. 3. As discussed above, the Receiver’s actions caused millions of dollars in damage to

the Essent Media Defendants—which may be the subject of future litigation in this matter.

Therefore, this Court should not release the Temporary Receiver from liability until discovery is

completed.


21

DATED this 7th day of May, 2014.

RAY QUINNEY & NEBEKER P.C.

/s/ Katherine E. Priest Matthew R. Lewis Brett Tolman Katherine E. Priest Attorneys for Essent Media Defendants


22

CERTIFICATE OF SERVICE

I hereby certify that on this 7th day of May 2014, I electronically filed the foregoing

ESSENT MEDIA DEFENDANTS’ RESPONSE TO MOTION FOR ORDER

APPROVING WIND UP OF RECEIVERSHIP ESTATE AND RELATED RELIEF

INCLUDING APPROVING FINAL ACCOUNTING, APPROVING AND

AUTHORIZING PAYMENT FROM RECEIVERSHIP ASSETS OF TEMPORARY

RECEIVER’S AND PROFESSIONALS’ FEES AND EXPENSES DISCHARGING

RECEIVER, AND APPROVING TURNOVER OF RECEIVERSHIP ASSETS;

MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF with the

Clerk of Court using the CM/ECF system which sent notification of such filing to the following:

Blair R. Jackson -- [email protected] Brent H. Johnson -- [email protected] Gary Owen Caris -- [email protected], [email protected] Jared C. Bennett -- [email protected], [email protected] Jonathan O. Hafen -- [email protected], [email protected] Lesley Anne Hawes -- [email protected] Matthew J. Ball -- [email protected], [email protected], [email protected] P. Connell McNulty -- [email protected] Philip L. Martin -- [email protected] Sara M. Nielson -- [email protected], [email protected], [email protected], [email protected] Svetlana S. Gans -- [email protected]

/s/ Katherine E. Priest 1281412


mailto:[email protected]



















matthew r. lewis (7919) katherine e. priest (14758) ray … · 2014. 5. 9. · detailed in motion...

Documents