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Federal Trade Commission v. QT

April 8, 2008

FEDERAL TRADE COMMISSION, PLAINTIFF,
v.
QT, INC., Q-RAY COMPANY, BIO-METAL, INC., QUE TE PARK, A.K.A. ANDREW Q. PARK, AND JUNG JOO PARK, DEFENDANTS.



The opinion of the court was delivered by: Morton Denlow United States Magistrate Judge

Magistrate Judge Morton Denlow

MEMORANDUM OPINION AND ORDER

On December 22, 2006, the Court granted in part and denied in part Defendants' motion to release frozen funds to pay their attorneys' fees. The Court ordered any interest earned on the frozen accounts to be released to Defendants' law firm, Ungaretti & Harris, LLP, ("Ungaretti") on the condition that Ungaretti subject itself to this Court's jurisdiction in the event the Federal Trade Commission ("FTC") were to seek review of the order. On December 7, 2007, the FTC moved this Court to reconsider the December 22 order in light of newly discovered evidence that demonstrates possible misrepresentations and misconduct by Ungaretti. For the reasons stated below, this Court denies the motion for reconsideration.

I. PROCEDURAL HISTORY

This case commenced on May 27, 2003, when the FTC filed its complaint and motion for a temporary restraining order, alleging that Defendants violated various provisions of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 45(a), 52, 53(b).

A. Preliminary Injunction Order and Supplemental Orders

On June 11, 2003, Judge John W. Darrah entered a stipulated Preliminary Injunction Order, which included a provision freezing $17 million of Defendants' assets. Provisions for attorneys' fees and expenses were included as follows:

D. Notwithstanding the $17 million [in frozen assets], Defendants may pay reasonable, usual, ordinary, and necessary business and living expenses, and attorneys' fees, costs, and expenses of up to $2.5 million from existing assets. Defendants may also pay such reasonable, usual, ordinary, and necessary business and living expenses, and attorneys' fees, costs and expenses from any income of any type generated after the date of this Order. Defendants shall produce a monthly balance sheet and accounting of such expenses and income to the Federal Trade Commission no later than five (5) days after the end of each month.

E. [O]nce Defendants secure and retain $17 million in assets . . ., any additional existing assets over the $17 million may be used to pay reasonable, usual, ordinary, and necessary business and living expenses, and attorneys' fees, costs and expenses . . .

Def. Rep., Ex. B., Preliminary Injunction Order, p.5 ¶ III.D&E.

On June 13, 2003, the Court entered a supplemental order ("First Supplemental Order") to the Preliminary Injunction clarifying the amount of frozen assets.Supplemental Order, Dock. No. 36, June 13, 2003. In April 2005, Ungaretti filed a motion to again modify the Preliminary Injunction Order to consolidate the various frozen accounts into a single segregated separate account so that a better interest rate could be achieved. Ungaretti attached a proposed order to its motion, stating in part in a whereas clause that "the interest and dividend earnings from the cash assets . . . are not . . . available to be used for any purpose, including in the business of QT, Inc. or Q-Ray Company, by Que Te Park or Jung Joo Park." Def. Rep., Ex. A. Judge Ian H. Levin entered the proposed stipulated order, titled the Second Supplemental Order to the Stipulated Order for Preliminary Injunction with Asset Transfer Restrictions and other Equitable Relief ("Second Supplemental Order"), on April 26, 2005. Second Supplemental Order,Dock. No. 86, Apr. 26, 2005; Def. Rep., Ex. A. The Second Supplemental Order specifically provided that "This Order does not otherwise amend or alter the Stipulated Order of the Supplemental Order to the Stipulated Order." Id. At 3.

B. Final Judgment Order

Following a seven-day bench trial, on September 8, 2006, the Court entered its Memorandum Opinion and Order, finding that all Defendants other than Jung Joo Park violated the FTC Act, and ordering refunds to consumers, disgorgement of Defendants' profits, and a permanent injunction to be set forth in a final judgment order. FTC v. QT, Inc., 448 F. Supp. 2d 908, 975-76 (N.D. Ill. 2006). The final judgment was entered on November 13, 2006. In addition to its injunctive provisions, the Final Judgment Order requires Defendants (other than Jung Joo Park) to provide refunds to any unsatisfied consumers up to a total of $87,019,840 plus pre-judgment interest, but to disgorge a minimum of $22.5 million in profits regardless of the amount of refunds sought by consumers. The assets frozen under the Preliminary Injunction Order belonging to Jung Joo Park were released, but the remaining assets were to remain frozen. The Court's Final Judgment Order further provided that: the Court reserves the right to permit, if allowed by law, some of the restricted assets . . . to be used to pay Defendants' reasonable attorneys fees and costs . . . up to [$1.3 million]. Within seven (7) days from the date of entry of this Order, Defendants shall file an up-to-date petition identifying the reasonable attorneys' fees and costs incurred in this matter . . . [T]he Court may enter a supplemental order concerning attorneys' fees and costs incurred in this matter.

Final Judgment Order, Dock. No. 211, Nov. 13, 2006, p. 18 ¶ XIV.

C. The Court's Order to Release the Interest Earned on the Frozen Funds to Pay Defendants' Attorneys' Fees

On December 22, 2006, upon consideration of Defendants' petition to release frozen funds to pay their attorneys' fees, the Court ordered release of the interest earned on the frozen funds to pay Defendants' attorneys' fees, totaling $522,100.40, but denied release of the underlying frozen funds. FTC v. QT, Inc., 467 F. Supp. 2d 863 (N.D. Ill. 2006). Separating the issues of release of the underlying frozen funds and release of the interest earned on the frozen accounts, the Court concluded that on the basis of the Preliminary Injunction Order, Ungaretti could have reasonably relied on the interest as a source of funds from which its fees would be paid. Id. at 867-68. Thus, the Court ordered any interest earned on the frozen accounts to be released to the Ungaretti firm on the condition that Ungaretti subject itself to this Court's jurisdiction in the event the FTC were to seek review of the order. Id. at 870. The Court denied release of the underlying frozen funds, however, until such time as Defendants could demonstrate that despite their fiscal prudence, insufficient unfrozen assets have been available to pay their legal bills. Id. at 869-70.

On February 21, 2007, the FTC moved the Court to reconsider the December 22 order in light of newly discovered evidence that Defendants allegedly misrepresented the existence and status of certain assets at the time the motion for release of frozen funds was made, and had already received interest on certain frozen accounts. Two days later, Defendants filed for bankruptcy, and such proceedings are ongoing. On March 12, 2007, this Court denied the FTC's motion for reconsideration, finding that evidence of Defendants' failure to disclose the existence or status of certain assets, while relevant to a motion to release the underlying funds, is irrelevant with respect to the interest. FTC. v. QT, Inc., 359 B.R. 889, 892 (Bankr. N.D. Ill. 2007). This Court also found the fact that Defendants had already received some interest on the accounts was irrelevant, as was any alleged misrepresentations made by Defendants. Id. Because the decision to release the frozen interest was based on the equities as they relate to the Ungaretti firm, this Court stated that only alleged misconduct or misrepresentation by the firm would make reconsideration appropriate. Id

D. The FTC's Current Motion for Reconsideration

Currently before this Court is the FTC's motion to reconsider the December 22 order based upon alleged newly discovered evidence demonstrating misrepresentations and possible misconduct by Ungaretti. The FTC alleges that on or about April 17, 2007, during the course of Defendants' bankruptcy case, the FTC learned that QT, Inc., with the assistance of an Ungaretti partner, amended its 2003 tax return to take a deduction of nearly $9.4 million by asserting that the assets that had been frozen by the Court's Preliminary Injunction Order ...


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