Opinion
Case No. 04CV2184-LAB (AJB).
June 28, 2005
ORDER RE APPLICATION OF TEMPORARY RECEIVER FOR APPROVAL OF FEES AND EXPENSES [Dkt No. 122]
This matter is before the Court on the Application of the Temporary Receiver, William A. Leonard, Jr., for approval of $212,972.37 in fees and costs associated with the performance of duties authorized under the government's unnoticed Temporary Restraining Order issued November 3, 2004 ("TRO"). No party contests the legitimacy or amount of the claimed fees and expenses. As discussed below, the Court finds the Application adequately supports the claimed expenses, and the Temporary Receiver is entitled to recover those sums.
However, the parties dispute who should pay the receivership costs. The Temporary Receiver acknowledges the Court's discretion to apportion the costs. He contends that both defendants and plaintiff United States "used the receiver's report," and "[a]ll benefited from the efforts of the receiver and his professionals" and "used those efforts." Appl. 18:8-9. He represents the government stated that "the efforts of the receiver were significant in helping the government understand the operations of the receivership defendants." Appl. 18:8-9. The Temporary Receiver suggests "it would not be inequitable for this court to award the fees against the receivership estates, against the government, or apportioned among the parties." Appl. 18:6-8.
The United States argues the fees and expenses should be borne by the res, which the Temporary Receiver administered: "The United States suggests that the Court apportion those costs among the various funds, in proportion to the assets held in those funds." USA Resp. p. 7, n. 9. Alternatively, if the Court finds the Temporary Receiver "was improvidently appointed, the Court has discretion to apportion the fees and expenses of the receiver equitably among the parties to the case, including the party that procured the receivership." USA Resp. 2:13-15. An appropriate allocation decision considers the "extent that each defendant would otherwise have had to incur those expenses, and the extent that each defendant benefitted from the receiver's work." USA Resp. 2:15-19; see Commodity Future Trading Comm'n v. Frankwell Bullion Ltd., 99 F.3d 299, 306 (9th Cir. 1996).
Defendant Doctors Benefit Insurance Holdings, Ltd. ("DBIC") filed Opposition to the allocation of any of the receivership costs to the defendants, with joinder in that Opposition by the other named defendants. For the reasons discussed below, and in the Order Re Recovery Of xélan Foundation's Attorneys' Fees And Costs, filed concurrently with this Order, the Application is GRANTED, with liability for the receivership costs to be borne by the United States government.
I. DISCUSSION
A. Background
The United States brought this action for injunctive relief against several entities in the xélan family of companies, and six individuals associated with the management of one or more of the defendant entities, alleging they engaged in schemes to defraud the United States of tax revenues. The Complaint was based on 18 U.S.C. § 1345 (a fraud injunction statute) and 26 U.S.C. § 7402(a) (a tax injunction statute). Concurrently with its sealed Complaint, filed October 29, 2004, the United States filed an unnoticed ex parte application for a TRO and the appointment of a temporary receiver with powers to engage accountants and attorneys. The United States represented at the time "the defendants control more than $500 million in assets derived from their fraudulent tax avoidance schemes, all of which is in danger of dissipation." Appl. 1:6-8.
On November 3, 2004, District Judge Thomas J. Whelan entered the government's proposed TRO, without modification of its broad terms, and immediately appointed William A. Leonard, Jr. Temporary Receiver without bond. Judge Whelan set an OSC hearing for November 18, 2004 to decide, among other things, whether a preliminary injunction should issue and whether a Receiver should be appointed. Dkt No. 6. Judge Whelan ordered the Complaint unsealed on November 3, 2004, to coordinate this action with the government's planned execution of search warrants in a related criminal investigation.
The undersigned District Judge granted the Temporary Receiver's ex parte applications to appoint particular counsel and accountants to assist in his work for the duration of the TRO. Dkt Nos. 79, 80. The preliminary injunction hearing was continued to December 3, 2004 at the parties' request. After a lengthy hearing, this Court dissolved the TRO, denied the entry of any preliminary injunction, terminated the Temporary Receiver's appointment, and ordered the immediate return of all assets frozen or property seized pursuant to the TRO. Dkt Nos. 110, 116. On December 17, 2004, the government dismissed the case. Dkt No. 119.
B. Temporary Receiver's Application
The Temporary Receiver seeks: (1) approval of $44,514.05 for his own fees and expenses incurred in performing his duties from the time of his appointment pursuant to the government's TRO issued November 3, 2004 through December 7, 2004; (1) approval of $122,184.70 in fees and expenses for the legal services performed on behalf of the Temporary Receiver by his attorneys of record, Sullivan, Hill, Lewin, Rez Engel, for the period November 3, 2004 through December 28, 2004; and (3) approval of $46,273.62 in fees and expenses for accounting services performed on his behalf by accountants Douglas Wilson Companies for the period November 3, 2004 through December 3, 2004. The Application is supported by declarations, descriptions of services, billing records reflecting the claimants' time and activities on behalf of the receivership, an evaluation of compensation factors, and a lodestar calculation, among other things.
The accepted "lodestar" method for calculating reasonable attorneys' fees multiplies the hours a professional spent on a case by a reasonable hourly compensation rate. Pennsylvania v. Delaware Valley Citizens' Council for Clear Air, 478 U.S. 546 (1986); Jordan v. Multnomah County, 815 F.2d 1258 (9th Cir. 1987); D'Emanuele v. Montgomery Ward Co., Inc., 904 F.2d 1379 (9th Cir. 1990), overruled on other grounds by Burlington v. Dague, 505 U.S. 557 (1992) (there is a strong presumption that a lodestar figure computed by the lodestar/multiplier method of awarding attorneys' fees represents reasonable attorneys' fees). Adjustments to a lodestar or touchstone figure may then be made on an exceptional basis in consideration of such factors as: time and labor required; novelty and difficulty of the questions; skill requisite to perform the service properly; preclusion of other employment due to acceptance of case; customary fee; time limitations imposed by the client or the circumstances; the amount involved and the results obtained; and experience and ability fo the attorneys/professionals. See Quesada v. Thompson, 850 F.2d 537, 539 n. 1. (9th Cir. 1988), citing Kerr v. Screen Extras Guild, Inc., 526 F.2d 67 (9th Cir. 1975).
Judge Whelan's Order granting the TRO indisputably authorized the Temporary Receiver to engage legal counsel and accountants for purposes within the scope of his assignment to identify, seize, and secure defendants' assets:
It is further ordered that William A. Leonard, Jr. is hereby appointed as Temporary Receiver in this action, such appointment to be effective immediately, without bond. The Temporary Receiver shall be authorized to retain counsel and other professionals upon ex parte application, the fees for which shall be paid upon Order of this Court. The Temporary Receiver shall take possession of the assets identified in Exhibit A and secure the premises where the defendants maintain records that are the subject of this Order, pending further order of this Court.
Nov. 3, 2004 Order Granting TRO.
This Court later granted the Temporary Receiver's ex parte application to employ the law firm of Sullivan, Hill, Lewin, Rez Engel under a general retainer to provide him with such legal services as: "(a) To locate, recover and safeguard assets subject to the receivership, including any necessary litigation. (b) To investigate and analyze claims against the receivership estate. (c) To advise, consult with, and otherwise represent the Receiver in connection with such other general, contract, business, or litigation matters as may be necessary for the duration of this receivership." Appl. 3:6-11; see Dkt No. 80. James P. Hill, Esq. was the supervising attorney on the case, at an hourly billing rate of $350.00. Donald G. Rez, Esq., at the same billing rate, also assumed responsibility for the case. The firm's resume and members' hourly billing rates are attached as exhibits to declarations provided in support of the Application.
This Court also approved the Temporary Receiver's application to employ Douglas Wilson Companies as his accountants under a general retainer to provide him with such services as: (a) general accounting, accounting report preparation, financial statements, tax filings; (b) forensic accounting; (c) locate, recover and safeguard assets subject to the receivership, including participation in any necessary litigation; (d) investigate and analyze claims against the receivership estate; (e) advise and consult with the receiver in connection with such other general, contract, business, or litigation matters as may be necessary, for the duration of the receivership. Appl. 3:1-9; see Dkt No. 79. The company's resume, schedule of rates, and billing records are attached as exhibits to the declarations provided in support of the Application. Payment was to follow periodic fee applications approved by the Court. The receivership was terminated along with the TRO before any fee application was presented pursuant to the appointments.
The Temporary Receiver summarizes his authorized undertakings and the assistance he required in this case (Appl. pp. 10-14), noting:
Assets of at least $580 million were seized and additional assets reviewed. Some of those assets had to be tracked down. Tens of millions of dollars which the Government believed to be missing had to be traced and explained. Bank account records had to be reviewed. Physical possession of property was undertaken. Scores of lawyers had to be dealt with. Vendors, account holders, creditors, employees, customers, Greenbook, Viatical Liquidity LLC, Counsellors [ sic], and numerous other constituencies of the various entities had to be dealt with.
Appl. 10:16-22.
The Responses and Joinders filed in response to the Application do not challenge the Temporary Receiver's authority, the legitimacy of the work claimed to have been performed, the rates charged, nor the total charges submitted for payment approval. The parties sole dispute is who should pay the receivership costs. The Court has reviewed the descriptions of tasks performed, obstacles overcome in the execution of the Temporary Receiver's obligations, attempts to continue entity operations where appropriate, and the detail of the time and efforts by the payment claimants and finds them appropriate and reasonable in activity and amount billed.
C. Legal Standards
A court appoints a receiver to act as its agent under its direction. In re Vicente Medical Partners Ltd., 962 F.2d 1402, 1408-09 (9th Cir. 1992). "The district court appointing the receiver has discretion over who will pay the costs of the receiver," and protects the receiver's right to be paid for proper services and reimbursed for proper costs and expenses.Securities and Exchange Commission v. Elliott, 953 F.2d 1560, 1576 (11th Cir. 1992). The Ninth Circuit has counseled that "when the District Court shall come to consider the question of what allowances and compensation may be proper . . ., it is to be presumed the burden will be equitably placed." Presidio Mining Co. v. Overton, 286 F. 848 (9th Cir. 1923). "[A] district court has discretion to award receivership costs against the United States." Frankwell Bullion, 99 F.3d at 306 ((holding the Government should pay the majority of the expenses billed by a receiver appointed pursuant to the government's ex parte TRO obtained against a foreign corporation based on alleged statutory violations after it was determined at the later preliminary injunction hearing that an injunction was unwarranted). "[T]hose costs of the receivership that would not have arisen but for the appointment should be charged against the party invoking the receivership. . . . On the other hand, expenses that the corporation would have had to incur had there been no receiver, and expenses that confer a genuine benefit upon the corporation, should be charged to it." Id. at 306, quoting Pioche Mines, 333 F.2d at 276.
The Temporary Receiver observes a regularly and lawfully appointed receiver is generally paid out of the receivership funds rather than by the party who procured the appointment. Appl. pp. 16-17. However, courts have also found "where the appointment of the receiver was irregular or inequitable, . . . the party who procured the appointment, and not the receivership fund, is liable for the expenses of the receivership." Bowersock Mills Power Co. v. Joyce, 101 F.2d 1000, 1002 (8th Cir. 1939).
D. Merits
The government contends defendants "may not obtain valuable services from a receiver, at the expense of the party that obtained the receiver," citing inter alia Pioche Mines Consolidated, Inc. v. Dolman, 333 F.2d 257 (9th Cir. 1964) andFrankwell Bullion, 99 F.3d at 306. USA Resp. 8:5-7, n. 12. The United States acknowledges the individual defendants derived no benefit from the receivership, and for that reason, among others, they should be absolved from liability to pay any portion of the receivership expenses. Rather, the United States argues "the Court should direct that the Temporary Receiver's fees and expenses be paid by the organizational defendants from funds that the Temporary Receiver marshaled and managed during the month he controlled them under Judge Whelan's [TRO] Order." USA Resp. 7:6-9, 9:13-15 ("if the Court decides to apportion the fees and costs, it should apportion them among the institutional defendants that benefitted from his work").
The government characterizes the services the Temporary Receiver provided as "invaluable services not only to the United States, but also to the non-debtor defendants, to the doctors who participated in xélan, and to the four debtors in bankruptcy and their creditors — including the financial counselors whom xélan once employed." USA Resp. 3:5-8. The government contends the Temporary Receiver "also performed tasks — including locating over $1 million in checks that xélan had placed into file cabinets in its headquarters — that benefitted all the organizational defendants, and others who are not defendants to this lawsuit." USA Resp. 2:20-24 (emphasis added).
The Temporary Receiver contends: "Most pressing were questions and concerns about dissipation of assets." Appl. 4:12-13. The inference these funds were somehow improperly concealed is undermined by the Temporary Receiver's explanation: "Over $1 million in cashier's checks had been received by the xélan entities (from First National Bank) on the eve of the receivership but had not been presented for payment." Appl. 4:12-14 (emphasis added). Since xélan was ousted from control over any of its assets through the court-ordered receivership, sinister inferences from the presence of the checks on the company premises are considerably diluted.
The government summarily contends "the Temporary Receiver performed tasks that the xélan entities in bankruptcy, the xélan Foundation, and the non-debtor xélan entities would otherwise have had to incur." USA Resp. 2:19-20. It argues the four xélan debtors in bankruptcy "would have had to pay for the services necessary to put their affairs and records in order" — "they would have had to pay for Mr. Leonard's services as a Chapter 11 Trustee, even if Judge Whelan had not appointed him as Temporary Receiver." USA Resp. 8:11-16; see USA Resp. 3:12-14 ("Perhaps the biggest benefactors of the Temporary Receiver's work were the four xélan debtors that had filed voluntary Chapter 11 petitions on June 30, 2004, as well as their employees and their creditors"). However, those "biggest beneficiaries" are not before this Court, and therefore not eligible to have the Temporary Receiver's costs allocated to them.
The government asserts that "given the failures of recordkeeping at the Foundation, described in detail in the Temporary Receiver's preliminary report, defendant xélan Foundation would have had to pay someone to put its affairs and records in order," including "tasks that the Temporary Receiver has now accomplished." USA Resp. 8:16-22. The Temporary Receiver's work purportedly also "reduce[d] the costs the Foundation must necessarily incur to put its own records in order, and transition to an independent administrator." USA Resp. 9:1-3. The Foundation disputes those characterizations.
The government also argues that because the Foundation requires independent management following Mr. Guess' resignation from the Board, and the retirement of the one remaining Foundation employee, "the Temporary Receiver provided valuable services not only to the Foundation but to doctors and charities as well." USA Resp. 5:9-20. Participating doctors in other xélan-related entities "like Doctors Benefit Insurance Company (DBIC)" who "allegedly place their money with xélan through DBIC's alleged insurance policies" also purportedly benefitted from "the determined work of the Temporary Receiver and his professionals to identify, locate and freeze funds that these defendants had told the doctors belonged to them — but which, in fact, [allegedly] were being diverted to pay lawyers." USA Resp. 5:22-6:5. The doctor "beneficiaries" are not before the Court.
Finally, the government maintains "because xélan, Inc. performed services that were critical to the operation of the other xélan entities, Mr. Leonard's work for xélan, Inc. provided real value to the non-debtor xélan entities as well." USA Resp. 9:3-6. According to the United States, the "Temporary Receiver added tangible value to these defendants' businesses" — in particular, the "tracking down" of the checks located in filing cabinets at their headquarters. USA Resp. 6:7-12; see fn 2, above.
The defendants jointly contend through the DBIC response that to compel any of them to pay any of the receivership costs would be inequitable and contrary to Ninth Circuit precedent. They dispute that any of them would have incurred the claimed expenses if the Temporary Receiver not been appointed. They contend none of the Temporary Receiver's activities "genuinely benefitted" any of them or the receivership estate. They characterize the government's purpose in pursuing the appointment as merely gathering information to advance its criminal investigations. DBIC identifies a long-standing dispute between the government and itself over whether premiums paid on behalf of the insured doctors for supplemental disability insurance and other insurance products are tax deductible. DBIC contends that rather than addressing that dispute through the multiple audits of policy holders presently ongoing, "the Government attempted to bypass those appropriate and orderly determinations by proffering unsubstantiated allegations of fraud" in a complaint and unnoticed ex parte application for the TRO. DBIC Resp. 1:2-10. "Indeed, the Receiver's own account of the activities undertaken by himself, his accountants and his lawyers demonstrates that they spent nearly all of their time familiarizing themselves with Defendants' operations, accounting for and freezing Defendants' assets and preparing the Receiver's report," and "none of the Receiver's expenses and fees were incurred actually operating DBIC," and none "related to the costs of doing business that DBIC might have incurred had no receivership been in place." DBIC Resp. 1:14-20. DBIC charges the government sought the TRO and preliminary injunctive relief with the objective to put DBIC out of business and the expectation "the Receiver would administer the dissolution of DBIC." DBIC Resp. 2:1-12. Requiring it to pay any part of the Temporary Receiver's fees and costs "would only further harm DBIC's policyholders and reduce the funds otherwise available to them — the very harm the Government claimed it was trying to avoid by bringing this action." DBIC Resp.2:7-10.
Defendants characterize the appointment of the Temporary Receiver as "erroneous," precluding reimbursement of his expenses from the receivership funds, other than costs he paid that the defendants would have had to pay had no Receiver been appointed or expenses that conferred a "genuine benefit" on the receivership funds. They deny any such effect occurred in this case. DBIC Resp. 2:18-21. See Frankwell Bullion, 99 F.3d 299. DBIC argues the Temporary Receiver's "invoices show none of the billed fees and expenses would have been incurred by DBIC had no receiver been appointed, and nothing the Receiver did benefited DBIC's funds." DBIC Resp. 5:22-24. The joinders of the other defendants echo the contentions they received no benefit and would not otherwise have incurred the costs billed by the Temporary Receiver, foreclosing any viable reason to require them to absorb any of the receivership costs. DBIC Resp. 2:23-27.
Moreover, DBIC argues the government's actions "actually caused significant depletions of DBIC's assets, including the payment of substantial legal fees to respond to the Government's actions and contentions," so that requiring DBIC to pay for any of the Receiver's "services" would be unfair and contrary to Frankwell Bullion. DBIC Resp. 5:24-28. DBIC distinguishes the Temporary Receiver's authority on the basis his cases did not involve the "erroneous" appointment of a receiver or, when they did, the result was consistent with the Frankwell Bullion factors See DBIC Resp. p. 4.
The formula applied in Frankwell and Pioche should be applied here, because there can be no dispute that the Receiver should not have been appointed. The Government represented that a receiver was needed because the Defendants were allegedly dissipating fraudulently obtained assets. TRO Application at 26. Yet this Court found that "[t]he government produced no evidence that any of the defendants are dissipating their assets or that any of the assets seized under the TRO are traceable to criminal activity. . . . ¶ Moreover, even if all of the Government's contentions had been supported, the Receiver's appointment would have been massively overbroad. The Court observed that "the scope of the remedy far exceeds defendants' tax liability exposure should the government prevail on the merits."
DBIC Resp. 4:25-5:14, quoting Order Denying Preliminary Injunction at 10:15-17, 11:11-17.
In consideration of the scope and circumstances of the government's TRO, the findings following the preliminary injunction hearing, the Franklin Bullion factors, the absence of a demonstrated "genuine benefit" to defendants from the freezing of all their assets, the costly and disruptive seizure of their records and property, their litigation expenses incurred to defend this action and then to undo the interference, the government's objectives in seeking and obtaining the TRO, the value the government acknowledges it received from the Temporary Receiver's activities and report, and the discussion in the Order Re Recovery Of xélan Foundation's Attorneys' Fees And Costs, issuing concurrently herewith, the Court finds it is appropriate to allocate the total expenses of the Temporary Receiver to the United States government.
III. CONCLUSION AND ORDER
For the foregoing reasons, IT IS HEREBY ORDERED:
1. The Temporary Receiver's Application For Approval Of Fees And Costs is GRANTED.
2. The unchallenged fees and costs were authorized, adequately substantiated, and reasonable, warranting awards in the amount of $44,514.05 to the Temporary Receiver, in the amount of $122,184.70 to the Temporary Receivers' attorneys, the law firm of Sullivan Hill Lewin Rez Engel, and in the amount of $46,273.63 to the Temporary Receiver's accountants, Douglas Wilson Companies.
3. The fees and costs awarded shall be paid by plaintiff United States as the beneficiary of the work performed by or on behalf of the Temporary Receiver.
IT IS SO ORDERED.