Court Opinion

ID: 37760
Source: CourtListenerOpinion
Date Created: 2010-04-25 19:57:59+00
Date Added: 2024-06-11T17:15:46.903949
License: Public Domain

United States Court of Appeals
                                                             Fifth Circuit
                                                          F I L E D
            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT                 March 8, 2005

                   ))))))))))))))))))))))))))         Charles R. Fulbruge III
                         No. 03-40738                         Clerk
                       Summary Calendar
                   ))))))))))))))))))))))))))

                  FEDERAL TRADE COMMISSION,

                          Plaintiff,

                              vs.

          CERTIFIED MERCHANT SERVICES, LTD; ET AL.,

                         Defendants,

CERTIFIED MERCHANT SERVICES, LTD; CERTIFIED MERCHANT GP, INC.;
  CERTIFIED MERCHANT SERVICES, INC.; JONATHAN FRANKEL; CRAIG
                     FRANKEL; CMS-LP, LLC,

                    Defendants-Appellants,

                              vs.

                        GARRETT VOGEL,

                          Appellee,

                         FRED GUMBEL,

                       Movant-Appellee.

                   ))))))))))))))))))))))))))
                      Consolidated with
                         No. 04-40596
                   ))))))))))))))))))))))))))

                  FEDERAL TRADE COMMISSION,

                          Plaintiff,

                              vs.

          CERTIFIED MERCHANT SERVICES, LTD; ET AL.,

                         Defendants,

CERTIFIED MERCHANT SERVICES, LTD; CERTIFIED MERCHANT GP, INC.;
   CERTIFIED MERCHANT SERVICES, INC.; JONATHAN FRANKEL; CRAIG
                      FRANKEL; CMS-LP, LLC,

                Defendants–Appellants–Cross-Appellees,

                                 vs.

                            GARRETT VOGEL,

                      Appellee–Cross-Appellant.

          Appeals from the United States District Court
                for the Eastern District of Texas
                            4:02-CV-44

Before JONES, BARKSDALE, and PRADO, Circuit Judges.

PER CURIAM:*

     The district court ordered receiver Garrett Vogel to

disgorge 20% of his fees for breaching his fiduciary duty to

Certified Merchant Services (“CMS”) and to the court.     Both CMS

and Vogel have appealed the district court’s order.      CMS argues

that Vogel’s breach requires him to disgorge all of his fees;

Vogel argues that the facts do not support a 20% disgorgement.

Because the district court did not abuse its discretion, we

affirm.

I. Background

     CMS is an independent sales organization that acts as an

intermediary between credit card companies and merchants that

     *
       Pursuant to 5TH CIRCUIT RULE 47.5, the court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIRCUIT
RULE 47.5.4.

                                  2
accept credit cards.   The Federal Trade Commission (“FTC”)

brought suit against CMS pursuant to 15 U.S.C. § 53, seeking the

appointment of a receiver “to immediately halt [CMS’s] fraudulent

business practices” and turn the company around.    The district

court appointed Garrett Vogel as receiver of CMS.     Vogel then

assembled a receivership team whose members included Fred Gumbel.

Gumbel had 25 years of experience in the credit-card industry and

was charged with managing CMS’s back office and data-processing

operations.

     CMS appeals two orders of the district court: the May 7,

2003 “Fee Order” and the May 5, 2004 “Bond Order.”1    In the Fee

Order, the district court approved Vogel and Gumbel’s fee

requests, but reduced Vogel’s request by $20,000, the amount of

the premium on Vogel’s personal bond which the court found Vogel,

not CMS, should have paid.   The court also reduced Vogel’s

compensation by another $500 for time improperly spent at

meetings with Visa and MasterCard, discussed further below.     The

court likewise reduced Gumbel’s compensation by $875 for time

spent at those meetings.

     In the Bond Order, the district court took three actions:

(1) it ordered that Vogel’s compensation be reduced by an

additional 20% because he breached his fiduciary duty to CMS and

to the court in certain instances, (2) it denied CMS’s request

     1
      The district court entered final judgment in the case on
May 5, 2004.

                                 3
for reimbursement for the renewal premium on Vogel’s personal

bond, and (3) it ordered CMS to pay certain expenses that CMS

alleges were hidden from it and from the court.

     On appeal, CMS argues that Vogel and Gumbel’s breaches of

fiduciary duty entitle it to three types of relief: (1) complete

disgorgement of all fees paid to both Vogel and Gumbel, (2)

reimbursement for various unspecified expenses that Vogel

allegedly concealed from CMS and the court, and (3) reimbursement

for the renewal premium on Vogel’s personal bond.2    By cross

appeal, Vogel argues that the district court erred in ordering

him to disgorge any compensation.

II. Standard of Review

     We review the district court’s decision as to a receiver’s

compensation for a clear abuse of discretion.     Crites, Inc. v.

Prudential Ins. Co. of Am., 322 U.S. 408, 418 (1944); Commodity

Credit Corp. v. Bell, 107 F.2d 1001, 1001 (5th Cir. 1939).

III. Discussion

                          Fee Forfeiture

     2
      In the conclusion paragraph of its opening brief, CMS asks
the court to award it both “the original and renewal premiums on
Vogel’s personal bond.” In the May 7, 2003 Fee Order, however,
the district court ordered Vogel’s compensation to be reduced by
$20,000, which was the amount owed for the original premium on
Vogel’s personal bond. Accordingly, we will only consider CMS’s
claim for the amount allegedly owed to it for renewal premium on
Vogel’s personal bond.

                                4
     The district court found that Vogel had breached his

fiduciary duty in three instances.   First, during an Electronic

Transaction Association conference in Orlando, Florida, Gumbel

made a speech during which he stated that the FTC had authorized

him to conduct FTC-approved audits of companies.   This was a

misrepresentation; Gumbel was not authorized by the FTC to make

such audits, and Vogel’s failure to correct the situation

constituted a breach of his fiduciary duty.

     Second, Vogel allowed Gumbel to make a sales pitch to Visa

and MasterCard representatives for Gumbel’s company, Payment

Insights.   During this meeting, Gumbel offered to conduct

industry audits using confidential information taken from CMS,

and Vogel stood to personally profit from these audits.   Neither

Vogel nor Gumbel asked the court for permission to make such a

pitch or use CMS data in such a manner, nor did they allow other

CMS representatives to attend the meeting.

     Third, the district court found that Vogel had breached his

fiduciary duty to the court by causing CMS to pay certain fees

and expenses incurred by him without first reporting them to the

court.   The court found that Vogel took this action in order to

conceal these expenses from the court because it had previously

warned Vogel that the receivership fees and expenses were too

high.

     In the Fee Order, the court had found that Vogel should not

                                 5
be compensated for the time spent making the sales pitch to Visa

and MasterCard; accordingly, his fees had already been reduced by

$500.   The court then balanced the following five factors to

determine whether and in what amount Vogel should be required to

disgorge additional compensation for his breaches of fiduciary

duty:

     (1) whether the trustee acted in good faith or not; (2)
     whether the breach of trust was intentional or
     negligent or without fault; (3) whether the breach of
     trust related to the management of the whole trust or
     related only to a part of the trust property; (4)
     whether or not the breach of trust occasioned any loss
     and whether if there has been a loss it has been made
     good by the trustee; (5) whether the trustee’s services
     were of value to the trust.

RESTATEMENT (SECOND)   OF   TRUSTS § 243, cmt c (1959).   Balancing these

factors, the court found that Vogel did not act in good faith and

that the breaches were intentional.          On the other hand, the court

also found that Vogel’s actions did not cause any loss to CMS and

his services were valuable to the receivership, implementing many

necessary changes at CMS.          Although the court did not

specifically discuss the third Restatement factor——whether

Vogel’s actions related to his management of the receivership as

a whole or only in part——it is clear from the district court’s

order that it found Vogel to have breached his duty only in the

three aforementioned ways.          Thus, Vogel’s actions did not

permeate the entire receivership but only affected it in part.

Accordingly, the court ordered Vogel to disgorge an additional

                                        6
20% of his fees, or $41,914.05.   In doing so, the court expressly

rejected CMS’s argument that Vogel should be required to disgorge

all fees and compensation.

     CMS argues that the district court abused its discretion in

failing to order full disgorgement of Vogel and Gumbel’s fees.

This argument fails for at least two reasons.

     First, it is not clear that CMS raised its fee forfeiture

argument as to Gumbel before the district court.   The district

court’s order only discusses Vogel’s breaches of fiduciary duty

and only orders that Vogel’s compensation be reduced.   The court

made no explicit finding as to whether Gumbel breached a

fiduciary duty to CMS, if he in fact had one.3

     Second, CMS principally relies on four cases to make its

claim that reversal is warranted: Burrow v. Arce, 997 S.W.2d 229

(Tex. 1999); PSL Realty Co. v. Granite Investment Co., 395 N.E.2d
641 (App. Ct. Ill. 1979), overruled by 427 N.E.2d 563 (Ill.

1981); Crites, Inc. v. Prudential Insurance Co. of America, 322
U.S. 408 (1944); Woods v. City National Bank & Trust Co. of

Chicago, 312 U.S. 262 (1941).   None of these cases, however,

stands for the proposition that any breach of fiduciary duty by a

     3
      Gumbel questions whether he owed a fiduciary duty to CMS
because he did not have an exclusive agreement with CMS but was
also consulting for other companies at the same time of the CMS
receivership. We need not decide this issue, however, because we
hold that the district court did not abuse its discretion in
failing to order disgorgement of any of Gumbel’s fees.

                                  7
receiver results in a per se denial of any compensation.     PSL,

Woods, and Futuronics are clearly distinguishable.4   And Arce and

Crites actually support Vogel and Gumbel’s position because they

reaffirm that the issue of a receiver’s compensation is left to

the sound discretion of the trial court.5   Thus, although the

cases cited by CMS may show that full disgorgement is appropriate

in some instances, CMS has not shown that full disgorgement was

required here.

     Similarly, Vogel argues that the district court abused its

discretion in ordering a 20% disgorgement; that is, it should

have ordered less or none at all.   The basis of Vogel’s

contention is his testimony that his breaches were unintentional.

Yet in finding that Vogel’s breaches were intentional, the

     4
      See PSL, 395 N.E.2d at 574 (holding that a receiver of
rental property that purchased all first-lien mortgages on the
property without notice to or approval by the court, accelerated
all payments due under the mortgages, and then filed suit to
foreclose the mortgages was not entitled to compensation); Woods,
312 U.S. at 479 (involving a bankruptcy court’s power to deny a
trustee compensation under chapter X of the Chandler Act);
Futuronics, 655 F.2d at 468 (affirming the district court’s
denial of compensation to two law firms that had entered into an
illicit fee-splitting arrangement in violation of the Bankruptcy
Rules and actively concealed the arrangement from the court).
     5
      See Arce, 997 S.W.2d at 241–42 (“Denying the lawyer all
compensation would sometimes be an excessive sanction, giving a
windfall to a client. The remedy of [fee forfeiture] should
hence be applied with discretion.”); Crites, 322 U.S. at 418
(“[W]hether [receivers] should be allowed any fees at all, and if
so the amount thereof, are normally matters within the sound
discretion of the District Court and are not reviewable except
where a clear abuse of discretion is apparent.”).

                                8
district court apparently rejected Vogel’s testimony; we find no

good reason to disturb this finding.      The district court did not

abuse its discretion in ordering a 20%——and only a

20%——disgorgement of Vogel’s fees or in failing to order

disgorgement of any of Gumbel’s fees.      We therefore affirm this

aspect of the district court’s judgment.

                          Renewal Premium

     In February 2003, months after Vogel’s term as receiver had

ended, CMS paid the renewal fee on Vogel’s bond.      CMS filed a

motion for recovery on Vogel’s original bond in May 2003, but did

not request reimbursement for the renewal premium at that time.

It was not until February 2004 that CMS sought to recover for the

renewal premium on Vogel’s bond.       The district court denied CMS’s

motion.

     On appeal, CMS asserts that Vogel’s intentional breaches of

fiduciary duty require Vogel to reimburse CMS for the renewal

premium on his personal bond.   CMS fails to develop this argument

any further, however, and fails to show how the district court

abused its discretion.   Accordingly, we hold that the district

court did not abuse its discretion in rejecting CMS’s request to

require Vogel to pay the renewal premium on his personal bond.

                          Hidden Expenses

     Finally, CMS argues that despite finding that Vogel breached

his fiduciary duty by ordering CMS to pay certain expenses, the

                                   9
district court awarded no remedy for this breach of trust.    This

argument misapprehends the nature of Vogel’s breach.    The

district court held that “Vogel breached his fiduciary duty to

the Court by ordering [CMS] to pay certain fees and expenses

incurred by him without reporting them to the Court.”    (Emphasis

added).   Thus, it was not the incurring of the fees that

constituted the breach, but rather Vogel’s failure to report

those expenses to the court before causing CMS to pay them.     In

fact, the court stated that it “gave [CMS] an opportunity to

offer evidence that those expenses were not reasonable, [but]

evidence was never presented that persuaded the Court that such

expenses and fees were not necessary or were unreasonable.”     The

district court ordered Vogel to disgorge 20% of his fees in part

because Vogel breached his fiduciary duty by failing to report

these expenses to the court.   The court’s failure to require

further disgorgement was not an abuse of discretion.

IV. Conclusion

      We reject both CMS’s and Vogel’s challenges to the district

court’s judgment with respect to the compensation of the

receivership team and thereby affirm the judgment of the district

court.

     AFFIRMED.

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