Opinion ID: 173386
Heading Depth: 2
Heading Rank: 2

Heading: Retention of Defense Counsel

Text: In late 2004, the FTC began investigating Appellants for their role in the fraud. In meetings with Castro and his former lawyer Peter Spivack, FTC staff members expressed their belief that Appellants could be held liable for violations of the FTC Act and the Franchise Rule. The FTC provided Spivack with a draft complaint alleging such violations, and from November 2004 until early February 2005, the parties engaged in protracted negotiations in an effort to avoid a civil lawsuit. In the context of those negotiations, Castro provided the FTC with sworn financial disclosure statements, which included information regarding two custodial accounts held by Relief Defendant Phyllis Watson, Castro's mother-in-law, for the benefit of Castro's minor children. According to the financial disclosures, the custodial accounts contained $839,494. In contrast, the aggregate reported value of all of Castro's personal bank accounts was approximately $25,000. On January 6, 2005, FTC staff members questioned Castro about the origin of the funds in the custodial accounts. Castro claimed that the funds had been held in trust for his children for a number of years. He did not disclose during the interview, however, that earlier that very day, Watson had withdrawn roughly $888,000 from the custodial accounts in the form of a cashier's check and signed the check over to Castro and his wife. On January 14, 2005, Castro signed a retainer agreement with attorney Jeffrey Benice. According to Benice, Appellants paid him a one-time lump sum of $375,000 pursuant to a flat fee arrangement, in which Benice agreed to fully represent Appellants throughout the duration of their litigation with the FTC. The agreement designated all fees as earned upon receipt, apparently with the intent that the funds would immediately become Benice's property upon payment. Castro also engaged attorney Marc Forsythe as co-defense counsel, paying Forsythe $500,000 under a similar up-front fee arrangement. [5] It is undisputed that Castro paid Benice and Forsythe using the funds that had been surreptitiously withdrawn from the custodial accounts eight days earlier. At the time of the fee arrangement, the custodial funds represented more than 90 percent of Castro's liquid assets. Benice stated that, at the time of payment, he understood [Appellants] were in a dispute with the FTC and that the FTC could eventually take action against them. He denied, however, having any knowledge that the FTC intended to seek a freeze on Appellants' assets in connection with this litigation. Benice also stated that, prior to accepting payment, he investigated financial records for Castro and NSD, discussed the case with his clients and co-counsel, and learned of Castro's cooperation with the FBI investigation. Though his declaration before the district court made no mention of this fact, Benice asserted at oral argument before this panel that he was absolutely aware of the draft complaint provided by the FTC. Benice further stated at oral argument that his co-counsel Marc Forsythe had conferred with Spivack before assuming the case. At that time, neither Benice nor Castro reported to the FTC that the custodial account funds had been used to pay legal fees. On February 2, 2005, the FTC discontinued its settlement negotiations with Castro after Castro refused to comply with further requests for information regarding the custodial accounts. On March 31, 2005, the Federal Trade Commission filed a civil complaint in the United States District Court for the District of Nevada against Castro, High, NSD, and three other companies owned by Castro. [6] The FTC sought both a permanent injunction to bar Appellants from selling the sham business opportunities and equitable monetary relief to disgorge the proceeds of the kiosk scheme. On April 7, 2005, District Judge Lloyd George issued a temporary restraining order freezing all of Appellants' assets, including those held by third parties. In a faxed letter dated April 27, 2005, the FTC informed Benice that it believed the funds he had received pursuant to his arrangement with Castro were properly subject to the freeze.