United States District Court, N.D. Illinois, Eastern Division
ORDER ON DEFENDANTS' MOTION TO MODIFY PRELIMINARY
INJUNCTION, PLAINTIFF'S MOTION TO STRIKE JURY DEMAND AND
DEFENDANTS' PETITION FOR ATTORNEY'S FEES
MATTHEW F. KENNELLY UNITED STATES DISTRICT JUDGE
Federal Trade Commission (FTC) sued Credit Bureau Center, LLC
(CBC), Michael Brown, Danny Pierce, and Andrew Lloyd, seeking
a permanent injunction and equitable relief for alleged
violations of the Federal Trade Commission Act, the Fair
Credit Reporting Act (FCRA), and the Restore Online
Shoppers' Confidence Act (ROSCA). Together with the
filing of the suit, the FTC sought an ex parte
temporary restraining order, including an asset freeze and
appointment of a receiver. Another judge of this Court,
acting as emergency judge in the undersigned judge's
absence, granted the motion.
then moved for a preliminary injunction. Pierce and Lloyd
agreed to entry of a preliminary injunction against them. In
February 2017, the Court held an evidentiary hearing on the
FTC's motion with regard to CBC and Brown and then issued
a written decision granting a preliminary injunction. FTC
v. Credit Bureau Center, LLC, 235 F.Supp.3d 1054 (N.D.
Ill. 2017). The preliminary injunction, among other terms,
prohibits the defendants from making certain types of
misrepresentations and material omissions and from violating
the ROSCA and certain regulations under the FCRA; continues
the asset freeze; requires defendants to maintain certain
records and report certain types of new business activity;
and continues the appointment of a receiver with authority to
take possession of and manage assets and documents in the
defendants' control. See dkt. no. 59. In July
2017, the Court held Brown in contempt for violating certain
provisions of the preliminary injunction order and imposed a
compensatory sanction in the amount of $141, 522.
See dkt. no. 106.
and CBC later retained new counsel. They have now moved to
modify the preliminary injunction to eliminate the asset
freeze, dismiss the receiver, and return all documents and
property seized or turned over as a result of the TRO or the
preliminary injunction. New counsel has also petitioned for
$30, 000 in attorney's fees from the frozen funds.
Finally, the FTC has moved to strike a jury demand recently
filed by Brown and CBC.
Motion to modify preliminary injunction
and CBC argue that the preliminary injunction's asset
freeze and receivership are improper because they are
intended to hold assets for disgorgement and restitution,
remedies that Brown and CBC contend are not properly
authorized under the FTC Act. Specifically, they argue that
the Supreme Court, in addressing purportedly parallel
securities fraud statutes in Kokesh v. SEC, 137
S.Ct. 1635 (2017), "found that disgorgement and
restitution were penalties designed to deter
potential violators and therefore not authorized under the
securities statute." Defs.' Mot. to Modify Prelim.
Inj. at 1.
a considerable overstatement of Kokesh. The Supreme
Court held in that case that disgorgement under the
securities laws "operates as a penalty" and thus is
governed by the five-year statute of limitations in 28 U.S.C.
§ 2462 for any "action, suit or proceeding for the
enforcement of any civil fine, penalty, or forfeiture
pecuniary or otherwise." Kokesh, 137 S.Ct. at
1645. That is all; the Court did not say anything about
whether disgorgement and restitution were, as defendants
claim, "authorized" under the securities statute.
To the contrary, the Court specifically stated that
"[n]othing in this opinion should be interpreted as an
opinion on whether courts possess authority to order
disgorgement in SEC enforcement proceedings."
Id. at 1642 n.3.
there is no contrary Supreme Court authority, controlling
Seventh Circuit law, which specifically authorizes
disgorgement and restitution in FTC suits, still governs.
See, e.g., FTC v. Febre, 128 F.3d 530, 534 (7th Cir.
1997); FTC v. Amy Travel Serv., Inc., 875 F.2d 564,
571-72 (7th Cir. 1989). The Court sees nothing in the
"principles" of Kokesh, Defs.' Mot. to
Modify Prelim. Inj. at 1, undermining these decisions. And
although defendants point to questioning during oral argument
of Kokesh before the Supreme Court that suggests
some justices may question whether the securities laws confer
authority for disgorgement and restitution, it is rather
reckless to contend that questions at oral argument render
existing precedent infirm.
also argue that the seizure or required turnover of their
documents and electronic records, as well as passwords,
violates the Fourth Amendment; they ask the Court to require
the FTC and the receiver to relinquish these materials.
Defendants have forfeited this argument on multiple
occasions, including by their failure to object to use of
these materials during the preliminary injunction hearing and
their failure to object to the terms of the preliminary
injunction on this basis. Even were the argument not
forfeited, it lacks merit. There is no authority applying the
Fourth Amendment's exclusionary rule in a civil
proceeding like this one, and in any event the evidence
submitted in support of the temporary restraining order and
the preliminary injunction was more than sufficient to
establish probable cause authorizing the Court's entry of
an order permitting seizure or turnover of the materials in
these reasons, the Court denies defendants' motion to
modify the preliminary injunction.
Motion for attorney's fees
dealing with previous counsel's petition for
attorney's fees, the Court reviewed the principles
governing a request to carve out from frozen assets funds to
be used for attorney's fees and expenses. See
dkt. no. 112 (order of Aug. 3, 2017). Those same principles
govern here. Counsel has no legitimate reliance interest,
because he came into the case with no understanding or
representations regarding the availability of any of the
frozen funds for fees. And as the Court stated in the earlier
order, there is a significant interest in maintaining funds
to satisfy claims by consumers. On the other hand, Brown and
CBC have a legitimate interest in obtaining representation.
considering these factors, the Court concludes, in its
equitable discretion, that $15, 000 should be released from
the frozen funds to pay counsel, about half the amount
requested. Counsel needs to understand, however, that this is
it. The Court will not entertain further fee petitions prior
to the final disposition of the case, barring an
extraordinary change of circumstances.
Motion to ...