Opinion ID: 790487
Heading Depth: 3
Heading Rank: 1

Heading: The Appellants' Fees Were Subject to the Asset Freeze Order

Text: 23 The appellants' arguments fail to persuade us that the district court erred. As mentioned above, the initial ex parte temporary restraining order stated that the terms of the order covered the named parties as well as all other persons or entities in active concert or participation with the defendants. The district court's determination that Alliance, Valdine, and Henriksen were acting in concert with the named defendants, and thus were subject to the asset freeze, is a finding of fact that is reviewed for clear error. Cf. Portland Feminist Women's Health Ctr. v. Advocates for Life, Inc., 877 F.2d 787, 789-90 (9th Cir.1989) (holding that the court of appeals could not review whether the district court's determination that a contemptor was acting in concert with a party named in an injunction was clearly erroneous because the appellant-contemptor failed to provide the necessary hearing transcripts in the record). 24 The record provides substantial evidence supporting the district court's determination. REA's investigation established that nearly all of the money flowing into and out of Alliance and Valdine's bank accounts came from, and was sent to, other Kimoto-controlled entities. REA found no business justification for any of these transfers. The incipient joint operation center is also highly relevant because it shows that Valdine and Assail were essentially operating as one company. Thus, we affirm the district court's finding that the appellants' fees were paid with funds subject to the asset freeze order. 25 2. The Appellants Had a Duty to Inquire As to the Source of Their Fees 26 The next question, then, is whether an attorney has a duty to inquire as to the source of his fee when he is put on notice that his fee may derive from a pool of frozen assets. Although this court has yet to confront this issue directly, we hold that for several reasons an attorney does hold such a duty. First, we think that accepting a fee from a pool of assets frozen by a court order is sufficiently akin to accepting a fee from the proceeds of criminal activity to make the principle applicable to the latter situation instructive here. As a general matter of professional ethics, an attorney may not accept the fruits of the crime as a fee, for knowingly accepting the fruits of crime in return for valuable services is simply a form of aiding and abetting crime. . . . 1 GEOFFREY C. HAZARD, JR. & W. WILLIAM HODES, THE LAW OF LAWYERING § 9.32, at 9-136 (3d ed. Supp.2005). For this reason, an attorney must `audit' a client sufficiently so as to avoid becoming part of a criminal scheme that includes disposing of ill-gotten gains. Id. The instant case did not involve criminal charges, although it bears mentioning that both lawyers were retained for potential criminal representation. Even though criminal charges apparently did not materialize, it is clear that Kimoto committed multiple, egregious violations of the FTCA. Further, the fees in question were derived from Kimoto's fraudulent scheme. Thus, it seems entirely appropriate to apply to the instant case this general ethical obligation to audit a client before accepting potentially tainted fees. 27 Additionally, [t]his court adheres to the well established doctrine that [a]n attorney, after being admitted to practice, becomes an officer of the court, exercising a privilege or franchise. As officers of the court, attorneys owe a duty to the court that far exceeds that of lay citizens. Carroll v. Jaques Admiralty Law Firm, P.C., 110 F.3d 290, 294 (5th Cir.1997) (internal citations and quotation marks omitted) (second alteration in original). For us to hold that an attorney has no duty to investigate the source of his fees in the instant circumstances would essentially be a statement that an officer of the court has no duty to investigate whether he himself is violating a valid court order. We are not willing so to hold. 28 In rather similar circumstances to the instant case, the Ninth Circuit followed this officer-of-the-court rationale in holding that an attorney did have a duty of inquiry. CFTC v. Co Petro Marketing Group, Inc., 700 F.2d 1279 (9th Cir.1983). In Co Petro, the district court appointed a receiver over a firm and permanently enjoined it from transferring or diverting any of its resources. The next day, the firm sent a $60,000 check to its law firm to cover its existing legal bill and to establish a trust account for future services. The law firm cashed the check before it received a copy of the district court's order. The receiver later petitioned the district court to force the law firm to return the funds. The district court granted the petition. On appeal, the Ninth Circuit affirmed the district court's order, noting that: 29 [a]s an officer of the court, appellant was under a duty to inquire as to the exact terms of the district court's decision [to freeze his client's assets] before depositing the check. Consequently, we agree with the district court that [the appellant] violated the permanent injunction against transfer of [the frozen] assets when it deposited the check. 30 Co Petro, 700 F.2d at 1285. 31 The Sixth Circuit's decision in McGraw v. Connelly ( In re Bell & Beckwith ), 838 F.2d 844 (6th Cir.1988), provides yet another rationale for imposing a duty of inquiry on attorneys. In McGraw, a bankruptcy trustee sought to recover $150,000 of a bankrupt firm's assets that were paid to an attorney to represent the firm's managing director in a criminal case. At the time the fee was paid, the firm had been placed into receivership and all of its assets had been frozen. The attorney acknowledged that the funds were fraudulently conveyed and that he held them pursuant to a constructive trust. However, he argued that he received the funds as a bona fide purchaser for value, and thus his rights to the funds were superior to the trustee's. The Sixth Circuit disagreed with this claim, finding that a party cannot be a bona fide purchaser where the circumstances surrounding the conveyance would lead a reasonable person to doubt the validity of the transfer. Id. at 849. Where such reasonable doubt exists, the court found that a party has a duty to make further inquiry. The court summarized its conclusion by stating that the attorney was under a duty of inquiry as to the source of his fee, and this [sic] his inquiry would have clearly revealed that his fee was derived from fraudulently obtained assets. Id. 32 Finally, the asset forfeiture provisions in the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1963 (2000), and the Continuing Criminal Enterprise Statute (CCE), 21 U.S.C. § 853 (2000), while not applicable here, are nonetheless instructive. Under both statutes, property (including money) derived from criminal activity is subject to forfeiture irrespective of whether the criminal defendant still possesses the property. 18 U.S.C. § 1963(c) (2000); 21 U.S.C. § 853(c) (2000). However, the statutes also provide that a third-party transferee may defeat forfeiture if the petitioner is a bona fide purchaser for value of the right, title, or interest in the property and was at the time of purchase reasonably without cause to believe that the property was subject to forfeiture under this section. . . . 18 U.S.C. § 1963( l )(6)(B) (2000); 21 U.S.C. § 853(n)(6)(B) (2000). Based on this statutory language, it stands to reason that if an attorney has been paid with funds tainted under either RICO or the CCE and wishes to retain them, he must demonstrate that he conducted an inquiry sufficient to allow him to be reasonably without cause to believe that the property was subject to forfeiture. In In re Moffitt, Zwerling & Kemler, P.C., 846 F.Supp. 463 (E.D.Va.1994), the court took exactly this approach. In Moffitt, a law firm was retained by a client who was indicted under the CCE for the sale of narcotics. The client paid the firm's $103,800 retainer in cash using primarily $100 bills he kept stored in a cracker box. Aside from admonishing the client that the law firm could not accept funny money, the firm made no efforts to ascertain the source of the funds. When the government sought forfeiture of the funds, the firm claimed that it was protected under § 853(n)(6)(B). The court rejected this claim, stating: 33 when confronted with circumstances essentially similar to those at bar attorneys should inform prospective clients that they cannot pay fees with drug proceeds and that such proceeds are subject to forfeiture, even in the attorney's hands. If the prospective client answers that the money comes from legitimate sources, attorneys should take whatever further steps or ask whatever further questions may be suggested by the circumstances to satisfy themselves that it is objectively reasonable to believe the answer. 34 Id. at 474. The Fourth Circuit affirmed this approach, stating: We can find no fault with the district court's conclusion. United States v. Moffitt, Zwerling & Kemler, P.C., 83 F.3d 660, 665 (4th Cir.1996). 35 Based on the above cases and commentary, there is a clear principle that an attorney is not permitted to be willfully ignorant of how his representation is funded. While each case is distinguishable from the instant case in some way, when taken together, they teach that when an attorney is objectively on notice that his fees may derive from a pool of frozen assets, he has a duty to make a good faith inquiry into the source of those fees. Failure to make such an inquiry in the face of this duty will result in disgorgement of the funds. 36 3. The Appellants Did Not Discharge their Duty of Inquiry 37 The final query is whether the appellants received sufficient notice to trigger this duty of inquiry and whether they discharged the duty. The circumstances of Draskovich's fee payment should have alerted him that something was awry. He knew that his client was accused of perpetrating massive telemarketing fraud, that all of his assets were frozen, and that supposedly unrelated third parties were paying his fees. These facts should have raised Draskovich's suspicions. Indeed, in the context of RICO and the CCE, the Supreme Court has stated that the mere fact that an attorney has read the indictment against his client is enough to put him on notice that his fees are potentially tainted and to destroy his status as a bona fide purchaser for value. Caplin & Drysdale v. United States, 491 U.S. 617, 633 n. 10, 109 S.Ct. 2646, 105 L.Ed.2d 528 (1989) (given the requirement that any assets which the Government wishes to have forfeited must be specified in the indictment, the only way a lawyer could be a beneficiary of § 853(n)(6)(B) would be to fail to read the indictment of his client) (internal citations omitted); United States v. Monsanto, 491 U.S. 600, 604 n. 3, 109 S.Ct. 2657, 105 L.Ed.2d 512 (1989) (An attorney seeking a payment of fees from forfeited assets under § 853(n)(6) would presumably rest his petition on subsection (B) quoted above, though (for reasons we explain in Caplin & Drysdale . . .) it is highly doubtful that one who defends a client in a criminal case that results in forfeiture could prove that he was without cause to believe that the property was subject to forfeiture.) (internal citations and quotation marks omitted). Once on notice, Draskovich needed to do far more than simply take his client at his word that the fees were not tainted in order to make a reasonable claim for fees. Trusting Kimoto's truthfulness unconditionally was especially unreasonable considering that he was accused of fraud, an allegation going directly to his honesty. 38 Kajioka may not be quite as culpable as Draskovich, which may account for the district court's decision to allow Kajioka to keep some of the fees paid to him. According to Kajioka, his client initially assured him that REA had made some mistake in seizing his office. The record suggests that REA apparently did make a few such mistakes when it initially raided Assail's offices, so Kajioka may not have been patently unreasonable in initially taking his client at his word. However, during Kajioka's January 23, 2003 call with REA, he was given information that put him on notice that REA probably did not simply knock on the wrong door. This notice triggered a duty of inquiry, which Kajioka did not discharge. Any claim he may have for work completed before the January 23 call with REA is accounted for by the $10,000 the district court awarded him. Kajioka does not argue that this fee award was inappropriate for the several day's worth of services he then provided. 39 Thus, the district court properly concluded both that Draskovich and Kajioka improperly accepted their retainers and that they should turn over all (or substantially all, in the case of Kajioka) the retainers to REA for distribution to the victims of Kimoto's fraudulent scheme. 40 C. The District Court's Orders did not Violate the Sixth Amendment 41 Draskovich and Kajioka argue that the district court's orders violate their respective clients' Sixth Amendment rights because the orders deny the clients representation by counsel of their choice. In the appellants' view, this Sixth Amendment interest must trump the FTC's interest in obtaining restitution. 42 The appellants' Sixth Amendment argument is totally without merit. The most important reason the argument fails is that this is a civil case. The Sixth Amendment right to counsel is inapplicable in civil cases. See Goonsuwan v. Ashcroft, 252 F.3d 383, 385 n. 2 (5th Cir.2001) (It is well settled that, because deportation hearings are considered civil in nature, there is no Sixth Amendment right to counsel.); Sanchez v. United States Postal Serv., 785 F.2d 1236, 1237 (5th Cir.1986) (per curiam) ([T]he sixth amendment right to effective assistance of counsel does not apply to civil proceedings.). 43 D. The District Court Afforded Draskovich and Kajioka Due Process 44 Draskovich and Kajioka claim that their due process rights were violated because in rendering its decisions, the district court relied solely on affidavits and self-serving reports from REA. They claim that where a contemptor asserts genuine issues of material fact, it is inappropriate for a court to issue contempt sanctions without a full, impartial hearing. The appellants assert that there were several disputed issues of fact at the relevant district court hearings. They claim that in the face of these disputed issues, they were provided with only a summary proceeding in which they did not have the opportunity to face their accusers, hear the basis of their accusers' conclusions, cross-examine them, or call witnesses. 45 As with the appellants' Sixth Amendment argument, this due process argument is without merit. The appellants' attempt to characterize themselves as contemptors must fail for the simple reason that they were never held in contempt. This is an appeal regarding disputes between a receiver and two nonparties to the underlying case. The court resolved the dispute and backed up its resolution with the threat of contempt. Every court order is backed with the implicit threat of contempt if the order is violated. See United States v. Fidanian, 465 F.2d 755, 757 (5th Cir.1972) (It is settled law that the power to punish for contempt is an inherent power of the federal courts and that it includes the power to punish violations of their own orders.). In this case, the threat was merely made explicit. Thus, the contempt issue is simply a red herring. 46 Although this court has not confronted directly the issue of what process is due where a receiver and a nonparty both claim the same property, the Ninth Circuit has stated clearly that in such circumstances summary proceedings satisfy due process so long as there is adequate notice and opportunity to be heard. Commodities Futures Trading Comm'n v. Topworth Int'l, Ltd., 205 F.3d 1107, 1113 (9th Cir.2000). It is wrong for the appellants to claim that they did not have an opportunity to respond to the claim that they did not rightfully possess the funds in question. In Kajioka's case, on October 2, 2003, the court held a hearing on the issue of whether the funds were transferred in violation of the asset freeze order. Kajioka was present at the hearing and refused the offer to cross-examine the witnesses. The fact that this hearing occurred negates Kajioka's contention that the district court relied exclusively on documentary evidence in reaching its determination. After this hearing, the court also permitted Kajioka to submit two legal memoranda briefing the relevant legal issues as well as documentary evidence. Draskovich also had an opportunity to respond. On October 2 and 30, 2003, Draskovich submitted to the court memoranda and supporting documentary evidence arguing for his position. Because the appellants actually did make the effort to respond to the charges against them, they clearly had notice of the claims. In Draskovich's case, the notion that he did not have notice is particularly fantastic because he took part in negotiating the stipulated judgment that set out the procedures by which he petitioned the court to keep his retainer.