Fed. Trade Comm'n v. A1 Janitorial Supply Corp.

FEDERAL TRADE COMMISSION, Plaintiff, v. A1 JANITORIAL SUPPLY CORP., CENTURY MANUFACTURING CORP.,COMMERCIAL MAINTENANCE CHEMICAL CORP, GLOBAL DIRECT RESOURCES, INC.,ERIC STERNBERG, and MATTHEW STERNBERG, Defendants.

17 C 7790

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

February 24, 2020

Judge John Z. Lee

MEMORANDUM OPINION AND ORDER

Two years ago, the Federal Trade Commission ("FTC") filed suit against Defendants Eric and Matthew Sternberg ("the Sternbergs") along with A1 Janitorial Supply Corp., Century Manufacturing Corp., Commercial Maintenance Chemical Corp., and Global Direct Resources, Inc. ("the Company Defendants"). At the time, the Court appointed a Receiver, Gregg Szilagyi ("the Receiver"), to assume control of the Company Defendants. Now that the underlying dispute has been resolved, the Receiver, as well as his lawyers and accountants, have filed applications requesting that the Court approve their fees and expenses [332], [333], [334]. For the reasons below, those applications are granted in part and denied in part.

Background

The Receiver has been involved with this case since the beginning. Within days of the FTC's filing of the complaint, Compl., ECF No. 1, the Court entered a temporary restraining order ("TRO") freezing the Defendants' assets and appointing the Receiver to administer them. TRO at 16-20, ECF No. 16. Not long after, the Court approved a stipulated preliminary injunction that appointed the Receiver for the pendency of this action. Stipulated Preliminary Injunction Order ("PI Order"), at 17, ECF No. 45.

Over the past two years, the Receiver has completed numerous tasks, including:

• Hiring attorneys from Fox Rothschild, LLC ("Fox Rothschild") and accountants from Cendrowski Corporate Advisors, LLC ("CCA") to assist him. See 11/21/17 Order, ECF No. 41.

• Securing the premises of the Company Defendants, ending their operations, and monitoring their compliance with the asset freeze. See Receiver's Mot. Incorporate ¶ 9, ECF No. 249.

• Assuming control of Ecoclean Solutions, a non-party organization owned by the Sternbergs. See 9/21/18 Order at 2, ECF No. 225.

• Negotiating the Ecoclean Agreement, a contract that permitted Ecoclean to remain operational and continue doing business. Ecoclean Agreement ¶¶ 1-2, ECF No. 249-3.

Ultimately, the FTC and Defendants settled this dispute. See Stipulated Final Judgment and Order at 1, ECF No. 340. With the litigation complete, the Receiver, his lawyers, and his accountants have submitted applications asking this Court to approve their fees and expenses. See Fox Rothschild's Fee Application ("Fox Fee App."), ECF No. 332; Receiver's Fee Application ("Rec. Fee App."), ECF No. 333; Cendrowski Corporate Advisors' Fee Application ("CCA Fee App."), ECF No. 334. The Court's only remaining task is to rule on those applications.

Legal Standard

District courts enjoy broad discretion in determining the amount of a fee award. Hensley v. Eckerhart, 461 U.S. 424, 437 (1983). The key question is "what the [professionals] would receive if [they] were selling [their] services in the market rather than being paid by court order." Matter of Cont'l Ill. Sec. Litig., 962 F.2d 566, 568-69 (7th Cir. 1992). "Although there is no precise formula for determining a reasonable fee, the court generally begins by multiplying the hourly rate by the hours worked to calculate a 'lodestar' amount." Schlacher v. Law Offices of Phillip J. Rotche & Assocs., P.C., 574 F.3d 852, 856 (7th Cir. 2009). The court may adjust that figure to reflect various factors including "the complexity of problems faced, the benefits to the receivership estate, the quality of the work performed, and the time records presented." U.S. S.E.C. v. Wealth Mgmt. LLC, No. 09-C-506, 2011 WL 4479518, at *1 (E.D. Wis. Sept. 26, 2011).

Most of the time, "there is a strong presumption that the lodestar figure is reasonable." Perdue v. Kenny A., 559 U.S. 542, 554 (2010). To benefit from thatpresumption, the fee application must contain "sufficient descriptive detail." Fed. Trade Comm'n v. Cent. Coast Nutraceuticals, Inc., No. 10 C 4931, 2011 WL 2135208, at *1 (N.D. Ill. May 25, 2011) (citation omitted). To that end, applicants should "describe[e] the services rendered . . . [and] explain what results were obtained." Fed. Trade Comm'n v. Capital Acquisitions & Mgmt. Corp., No. 04 C 7781, 2005 WL 3676529, at *3-4 (N.D. Ill. Aug. 26, 2005). In the same vein, the "party objecting to a fee application may not do so based on the general proposition that the fee sought is simply too much." Id. at *4. Rather, "[t]he objector must, at some point, identify any allegedly improper, insufficient, or excessive entries and direct the court's attention to them." Id.

Analysis

Defendants contest the vast majority—$551,329.11 of $629,023.52—of the fees that the Receiver and his professionals request. Defs.' Resp. Appl. Final Approval ("Defs.' Resp.") at 2, ECF No. 344. Before ruling on the Defendants' objections, the Court addresses a threshold matter. Having reviewed the applications submitted by the Receiver and Fox Rothschild, the Court finds that they contain "sufficient detail" to merit a presumption of reasonableness. See Cent. Coast, 2011 WL 2135208, at *1; Capital Acquisitions, 2005 WL 3676529, at *3, Thorncreek Apartments III, LLC v. Mick, 886 F.3d 626, 638 (7th Cir. 2018) (describing "the lodestar figure" as "presumptively reasonable") (citing Perdue, 559 U.S. at 553-54).¹ As a result, theDefendants bear the burden of demonstrating that specific entries within those applications are unreasonable.

Although Defendants wisely devote most of their firepower to disputing specific categories of fees, they also level two blanket objections. First, they criticize the Receiver and his professionals for requesting $629,023.52 in fees and expenses when the Receivership Estate holds only $58,000 in assets. Defs.' Resp. at 5. But a reasonable fee application is not necessarily proportional to the size of the estate. See Gaskill v. Gordon, 27 F.3d 248, 253 (7th Cir. 1994) ("Even though a receiver may not have increased . . . the value of the collateral, if a receiver reasonably and diligently discharges his duties, he is entitled to compensation.") (citation omitted). So, while a small estate may sometimes suggest that a large fee application is unreasonable, the only way to know for sure is by examining specific time entries.

Second, Defendants spend pages arguing that "the Receiver and his professionals directly caused the Receivership to lose significant assets, as well as caused additional damages to a non-party."² Id. at 6; see also id. at 3-11. But objectors have an obligation to "identify any allegedly improper, insufficient, or excessive entries" as specifically as they can. Capital Acquisitions, 2005 WL 3676529, at *4. Because the Defendants do not identify any entries—or even categories ofentries—related to this objection, it cannot be sustained. With these threshold rulings in mind, the Court turns to the Defendants' specific objections.

I. Ecoclean Solutions

By far the largest category of fees that the Defendants dispute relates to Ecoclean Solutions. In a prior order, the Court rejected the Receiver's contention that Ecoclean was an "affiliate" of Defendants or otherwise within the scope of the receivership's direct authority as defined in the PI Order. 9/21/18 Order at 5 (citing PI Order at 17). So, the Defendants say, it was unreasonable for the Receiver to dedicate substantial resources to monitoring Ecoclean. Defs.' Resp. at 14. In defending the reasonableness of their Ecoclean-related expenditures, the Receiver and his professionals advance three arguments.

To begin, the Receiver argues that Defendants' objection is improper because it does not identify any specific fees related to Ecoclean. Receiver's Reply at 7, ECF No. 347 (citing Cont'l Ill., 962 F.2d at 570). But Defendants specifically highlight $48,374.56 of attorneys' fees and $171,279.50 in costs related to Ecoclean in their objection. Furthermore, the gist of Defendants' argument is that the Receiver lacked any authority to administer Ecoclean and, thus, should not be entitled to any fees that it incurred in doing so. Because they challenge an entire category of fees, the Court can rule on this objection without requiring Defendants to separately identify each and every Ecoclean-related entry in the fee applications.

Next, the Receiver submits that the asset freeze provision in the preliminary injunction order gave him power over Ecoclean. In that provision, the Court chargedthe Receiver with "conserv[ing], hold[ing], and manag[ing] all Receivership assets." PI Order at 17. According to the Receiver, "[t]he vast majority of the assets that Defendants claim belong to Ecoclean are likely assets of the Receivership Defendants." Rec.'s Rep. at 8. However, in its September 21, 2018, order, the Court found that the Receiver had waived any argument that the asset freeze provision in the PI Order gave him power over Ecoclean. 9/21/18 Order at 5 n.4 (citing Kerr v. Farrey, 95 F.3d 472, 481 (7th Cir. 1996)). And even if this were not so, it is not at all clear from the record that the majority of Ecoclean's assets belong to the Defendants. In fact, the Receiver's own briefing identifies evidence that could support the opposite conclusion. See Receiver's Reply at 8.

Lastly, the Receiver points out that the PI Order permitted him to "enter into contracts . . . as advisable or necessary." PI Order at 19. In the Receiver's judgment, the Ecoclean Agreement was such an agreement, because it was necessary for the administration of the estate and benefited it. As a general matter, district courts enjoy broad discretion to appoint an equity receiver and to supervise the administration of the receivership. See Pennant Mgmt., Inc. v. First Farmers Fin., LLC, No. 14-cv-7581, 2015 WL 4511337, at *4 (N.D. Ill. July 24, 2015) (citing Liberte Capital...