Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-15-03472/USCOURTS-ca7-15-03472-0/pdf.json

Parties Involved:
Faruki Ireland & Cox, P.L.L.
Appellant
Federal Trade Commission
Appellee
Hogan Marren Babbo & Rose, LTD.
Appellant

Document Text:

In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 15-3472

FEDERAL TRADE COMMISSION,

Plaintiff-Appellee,

v.

KEVIN TRUDEAU,

Defendant.

Appeal of:

HOGAN MARREN BABBO & ROSE, LTD., and FARUKI 

IRELAND & COX, P.L.L.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 03 C 3904 — Robert W. Gettleman, Judge.

____________________

ARGUED SEPTEMBER 14, 2016 — DECIDED DECEMBER 29, 2016

____________________

Before POSNER, EASTERBROOK, and SYKES, Circuit Judges.

EASTERBROOK, Circuit Judge. This decision marks the end 

of litigation about Kevin Trudeau’s frauds—or so we hope. 

Earlier decisions affirmed his criminal conviction and sentence and his adjudication in civil contempt after he refused 

Case: 15-3472 Document: 50 Filed: 12/29/2016 Pages: 5
2 No. 15-3472

to surrender the profits made from violating orders of the 

Federal Trade Commission. See United States v. Trudeau, 812

F.3d 578 (7th Cir. 2016); FTC v. Trudeau, 662 F.3d 947 (7th Cir. 

2011). The contempt judgment is approximately $38 million, 

and Trudeau claims to be destitute. Believing that this is just 

another of his lies, the FTC demanded that firms it thought 

to be affiliated with Trudeau turn over business records.

Website Solutions, one of these entities, hired Hogan 

Marren Babbo & Rose, Ltd., and Faruki Ireland & Cox, P.L.L.

(collectively the Law Firms) to represent it in responding to 

the FTC’s demand. After considering some of the documents 

ultimately revealed, the district judge concluded that Website Solutions is under Trudeau’s control and that all of its 

assets are available to satisfy his obligations. The judge appointed a receiver to marshal the assets of Website Solutions 

and Trudeau’s other entities. The receiver collected a net of 

approximately $8 million, which the FTC wants to distribute 

to Trudeau’s defrauded customers. In October 2015 the district court approved the receiver’s plan; this order also rejected the Law Firms’ request for compensation from funds 

in the receiver’s custody. In November the judge authorized 

the receiver to send $4 million to the FTC; in December the 

judge approved the receiver’s compensation; in February 

2016 the judge accepted the receiver’s final report and authorized the receiver to send all remaining funds to the FTC. 

That order closed the receivership estate.

The Law Firms have appealed—but from the October 

2015 order rather than any of the later orders. This led us to 

question whether the order is appealable, because as of October 2015 all $8 million remained in the receiver’s control. 

The Law Firms could have waited until the estate-closing 

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No. 15-3472 3

order without jeopardizing their claim to reimbursement. At 

oral argument we directed the parties to file supplemental 

memoranda addressing appellate jurisdiction. After receiving these submissions, we conclude that the October 2015 

order functioned as approval of the receiver’s proposed plan 

of distribution. If this were a bankruptcy proceeding rather 

than a receivership, the October 2015 order would have been 

labeled a plan of reorganization (or perhaps a plan of liquidation). And in bankruptcy the confirmation of such a plan 

is appealable as a “final decision” even though funds remain 

in the estate. See Bullard v. Blue Hills Bank, 135 S. Ct. 1686 

(2015) (recognizing that an order confirming a plan of reorganization is appealable, while holding that an order declining to approve such a plan is not). So we conclude that the 

October 2015 order is “final” under 28 U.S.C. §1291 and 

move to the merits.

No one has appealed from the district court’s conclusion 

that Trudeau controls Website Solutions and that all of its 

assets are available to reimburse the persons he defrauded. 

Nor has anyone appealed from the district court’s approval 

of the plan of distribution. The Law Firms, the sole appellants, contend only that their fees should be paid ahead of 

compensation for Trudeau’s victims.

The Law Firms depict their role as helping the receiver 

understand Website Solutions’ business and recover its assets; the FTC, by contrast, contends that the Law Firms did 

little but obstruct discovery in an effort to keep the FTC from 

laying hands on assets that Trudeau was trying to hide. We 

need not decide which characterization is correct, because 

either way the Law Firms face an insuperable hurdle: well 

before they were hired by Website Solutions to deal with the 

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FTC’s discovery demands, the federal judiciary had directed 

Trudeau to turn over all proceeds of his improper commercial activities. That order created a lien on Website Solutions’

assets (once the judge found that they were under Trudeau’s 

control) that was senior to any claim created later. As a 

proxy for Trudeau, Website Solutions had no right to make 

commitments to pay third parties with funds belonging to 

Trudeau’s victims. Cf. Caplin & Drysdale, Chartered v. United 

States, 491 U.S. 617 (1989); United States v. Monsanto, 491 U.S. 

600 (1989). And lawyers, particularly, had to understand that 

their claims to compensation would be junior to those asserted by the FTC on the victims’ behalf.

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. See 11 U.S.C. §§ 327, 330, 1103; Baker Botts L.L.P. v. 

ASARCO LLC, 135 S. Ct. 2158 (2015). Neither the Law Firms 

nor Website Solutions obtained the court’s approval for their 

engagement and proposed course of conduct, nor did they 

demonstrate to the district judge’s satisfaction afterward that 

what they had done was necessary or helped the estate. (The 

judge implied agreement with the FTC’s submission that the 

Law Firms did more to obstruct the discovery than to promote it.) Indeed, the Law Firms have not even tried to show 

that they would have satisfied the requirements for compensation had this been a bankruptcy rather than a receivership.

We don’t see why the use of the receivership device should 

make the Law Firms better off.

There was another potential route to compensation: 

Website Solutions might have asked the district court to orCase: 15-3472 Document: 50 Filed: 12/29/2016 Pages: 5
No. 15-3472 5

der the FTC to ensure that Website Solutions would be reasonably compensated for its expenses in responding to the 

subpoenas. See Fed. R. Civ. P. 45(d)(3)(C)(ii). But Website 

Solutions did not make such a request.

The Law Firms stress that Rule 45 is not the only way 

that lawyers may be paid for their work in civil litigation, 

and that is correct. But Website Solutions was holding other 

people’s money and so could not make financial commitments to third parties. That’s why the Law Firms needed the 

district court’s approval. They concede that the judge had 

discretion to say yes or no. And given the fact that anyone 

hired by Website Solutions presumptively stands in line behind Trudeau’s victims, the district court did not abuse that 

discretion by saying “no.”

AFFIRMED

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