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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 Page 1 of 22
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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
Case 2:14-cv-00088-DB Document 138 Filed 05/07/14 Page 2 of 22
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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.
Case 2:14-cv-00088-DB Document 138 Filed 05/07/14 Page 3 of 22
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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.
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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.
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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
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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.
Case 2:14-cv-00088-DB Document 138 Filed 05/07/14 Page 7 of 22
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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.
Case 2:14-cv-00088-DB Document 138 Filed 05/07/14 Page 8 of 22
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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.
Case 2:14-cv-00088-DB Document 138 Filed 05/07/14 Page 9 of 22
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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.
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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
Case 2:14-cv-00088-DB Document 138 Filed 05/07/14 Page 11 of 22
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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.
Case 2:14-cv-00088-DB Document 138 Filed 05/07/14 Page 12 of 22
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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
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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,
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“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.”).
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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
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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
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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
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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
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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.
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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
Case 2:14-cv-00088-DB Document 138 Filed 05/07/14 Page 21 of 22
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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
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