Law Firms for Famous Fraudster Denied Fees From Receiver

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By Daniel Gill

Two law firms purporting to represent a company affiliated with infamous infomercial fraudster Kevin Trudeau weren’t entitled to recover fees from the federal receivership established to collect funds for the benefit of Trudeau’s victims ( FTC v. Trudeau , 2016 BL 433910, 7th Cir., No. 15-3472, 12/29/16 ).

Judge Frank H. Easterbrook of the U.S. Court of Appeals for the Seventh Circuit held that two law firms hindered rather than helped the federal receiver recover assets and therefore weren’t entitled to be compensated by the receivership estate.

Kevin Trudeau was convicted of crimes related to fraud in a number of advertising and “infomercial” ventures and was then adjudicated in contempt for refusing “to surrender profits made from violating orders of the Federal Trade Commission,” the court said. The contempt judgment was for approximately $38 million.

The FTC successfully argued that a company called Website Solutions was under Trudeau’s control and that all of its assets should be available to satisfy the judgment against him, the court said. The district court appointed a receiver to marshal the company’s assets along with those of other entities controlled by Trudeau, it said.

After the receiver collected about $8 million, the district court approved the receiver’s plan to distribute the funds to victims and denied the applications of Hogan Marren Babbo & Rose, Ltd., and Faruki Ireland & Cox, P.L.L., two law firms engaged by Website Solutions, for compensation from those same funds. The law firms appealed the denial of their fees.

The circuit court compared the attorneys’ request for fees from the receivership estate to a fee request which might be made in a bankruptcy case. “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,” the court said.

The court noted that neither the firms nor Website Solutions sought court approval for the firms’ engagement or their “proposed course of conduct,” and that ultimately their actions were more obstructive than helpful to the receiver’s efforts.

The court also pointed out that the firms may have sought recovery of fees related to complying with the receiver’s discovery requests under Federal Rules of Civil Procedure, Rule 45(d)(3)(C)(ii). That section permits a court under certain circumstances to order reasonable fees for complying with a subpoena request.

Circuit Judges Richard Posner and Diane S. Sykes joined in the decision.

Patrick E. Deady, Hogan Marren Babbo & Rose, Ltd., Chicago, argued for the law firms. The FTC was represented by Michael D. Bergman, Office of the General Counsel, Washington.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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