Federal Trade Commission v. Certified Merchant Services, Ltd. , 126 F. App'x 651 ( 2005 )

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
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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.
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Consolidated with
No. 04-40596
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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that this opinion should not be published and is not precedent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
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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
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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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