United States District Court, D. Nevada
ORDER GRANTING IN PART THE CORPORATE DEFENDANTS'
MOTION FOR LIMITED MODIFICATION OF ASSET FREEZE FOR FUNDS TO
PAY ATTORNEY'S FEES (ECF NO. 65)
P. GORDON UNITED STATES DISTRICT JUDGE.
Corporate Defendants move for an order modifying the
Preliminary Injunction with Asset Freeze (ECF No. 56) to
allow for withdrawal of funds to pay the Corporate
Defendants' counsel. The Corporate Defendants contend
that because they can appear in court only through counsel,
due process requires that they be allowed to access the
receivership funds to pay for counsel to represent them in
this matter. The Corporate Defendants request a one-time
payment of $36, 700 to pay for the amount incurred through
the preliminary injunction hearing. They also request a
monthly allowance of $30, 000 for attorney's fees.
Federal Trade Commission opposes the request, arguing that no
court holds that corporate defendants in civil cases have a
constitutional right to use frozen funds to pay for their
defense. The FTC contends that the Corporate Defendants
already have counsel who has been paid at least $50, 000 so
far, so there is no concern that the Corporate Defendants
will go unrepresented. The FTC also argues that the amounts
requested are unreasonable and would divert receivership
funds that should be preserved for distribution to injured
consumers. Finally, the FTC contends that any disbursed funds
should be used to pay only the Corporate Defendants'
attorney's fees, not defendant Blair McNea's fees.
Receiver also objects, stating that the Receiver's
expenses are to receive priority status for payment out of
the receivership funds. The Receiver echoes the FTC's
concern that the receivership funds are being used to pay the
Corporate Defendants' counsel instead of being preserved
for distribution to injured consumers.
Corporate Defendants assert that their due process rights
will be violated if funds are not distributed to pay counsel,
but they cite no authority for that proposition. The United
States Supreme Court has held that in the context of a
forfeiture of assets in a criminal case, "neither the
Fifth nor the Sixth Amendment to the Constitution requires
Congress to permit a defendant to use assets adjudged to be
forfeitable to pay that defendant's legal fees."
United States v. Monsanto, 491 U.S. 600, 614
(1989). The Ninth Circuit has repeatedly held that
whether to allow the payment of attorney's fees out of
frozen assets lies within the district court's
discretion. See Commodity Futures Trading Comm 'n v.
Noble Metals Int'l, Inc., 67 F.3d 766, 775 (9th Cir.
1995) ("A district court may, within its discretion,
forbid or limit payment of attorney fees out of frozen
assets."); Fed. Sav. & Loan Ins. Corp. v.
Ferm, 909 F.2d 372, 374 (9th Cir. 1990) ("Appellate
court decisions . . . have consistently permitted district
courts to limit or to review the amount payable to attorneys
from frozen assets before a final judgment on the merits has
been reached."); F.T.C v. World Wide Factors,
Ltd., 882 F.2d 344, 347 (9th Cir. 1989) ("Courts
regularly have frozen assets and denied attorney fees or
limited the amount for attorney fees."). "These
decisions recognized the importance of preserving the
integrity of disputed assets to ensure that such assets are
not squandered by one party to the potential detriment of
another." Ferm, 909 F.2d at 374.
have already determined that the FTC has demonstrated a
likelihood of succeeding on the merits. ECF No. 56 at 5-6.
Consumer redress, should the FTC ultimately prevail, will
come largely from the frozen assets, which assets are
significantly less than the probable amount of consumer harm.
Those factors weigh heavily against a discretionary release
of funds to pay the Corporate Defendants' attorney's
fees. The Corporate Defendants' request for a monthly
allowance of $30, 000 is unreasonable on its face in light of
the limited amount of the frozen assets in comparison to the
likely consumer injury. See Noble Metals Int'l,
Inc., 67 F.3d at 775 (stating the fact that consumer
losses far exceeded the frozen assets may be "reason
enough" under the circumstances to deny the use of
frozen assets to pay the defendants' attorney's
Corporate Defendants' counsel knew when they took the
case that the defendants were subject to an asset freeze. ECF
Nos. 16 (TRO); 33 (verified petition for attorney Ruscitti),
24 (verified petition for attorney Wild). The Corporate
Defendants' attorneys thus took a known risk of
the attorneys have not gone unpaid. There is some evidence
that McNea and his corporate entities have access to other
sources of funding. McNea paid his attorneys $50, 000
already. The Corporate Defendants assert that the $50, 000
retainer was depleted, but they provide no evidence that in
addition to the $36, 700 they now request, another $50, 000 was
expended just in the preliminary injunction phase. ECF No. 82
many factors weigh against allowing any disbursement for
attorney's fees, at least some of the Corporate
Defendants may have viable defenses to liability. The
Corporate Defendants can appear in this action only through
counsel. See In re Am. W. Airlines, 40 F.3d 1058,
1059 (9th Cir. 1994) ("Corporations and other
unincorporated associations must appear in court through an
attorney."). Consequently, in my discretion, I will
allow a one-time distribution of$50, 000.
THEREFORE ORDERED that the Corporate Defendants'
emergency motion for limited modification of asset freeze
(ECF No. 65) is GRANTED in part.
ORDERED that the Receiver shall distribute $50, 000 to the
Corporate Defendants' counsel, Claude Wild, III for
attorney's fees incurred in representing the Corporate
Defendants only. The Receiver has the discretion to determine
from which account owned by the Corporate Defendants to
withdraw the funds.
FURTHER ORDERED that if the Corporate Defendants seek further
distributions for attorney's fees, those requests must be
supported with an in camera submission of billing
statements along with a strategy for moving forward in the
case for the Corporate Defendants. The Corporate Defendants
and their counsel are on notice that there is no guarantee
that future requests for disbursements for attorney's
fees will be approved.