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United States v.Petters: BANKRUPTCY | ATTORNEY FEES - authorization of fees for criminal defense

United States of America,
Civil No. 08-5348 ADM/JSM
Thomas Joseph Petters; Petters Company,
Inc., a/k/a PCI; Petters Group Worldwide, LLC;
Deanna Coleman, a/k/a Deanna Munson;
Robert White;
James Wehmhoff;
Larry Reynolds, and/or dba Nationwide International
Resources, aka NIR;
Michael Catain and/or dba Enchanted
Family Buying Company;
Frank E. Vennes, Jr., and/or dba Metro Gem
Finance, Metro Gem, Inc., Grace Offerings
of Florida, LLC, Metro Property Financing,
LLC, 38 E. Robinson, LLC, 55 E. Pine, LLC,
Orlando Rental Pool, LLC, 100 Pine Street
Property, LLC, Orange Street Tower, LLC,
Cornerstone Rental Pool, LLC, 2 South
Orange Avenue, LLC, Hope Commons, LLC,
Metro Gold, Inc.,
Douglas A. Kelley,
Gary Hansen,
1Receiver Kelleys request also sought authorization to make interim payments for legal services
performed on behalf of the Receivership and for legal work done on behalf of certain current and
former employees of Petters Company, Inc., P.C.I., Petters Group Worldwide, LLC, or their
subsidiaries. These legal fees were not objected to and were authorized for payment pursuant to
the Courts Orders dated March 16, 2009 [Docket No. 215] and March 20, 2009 [Docket No.
Douglas A. Kelley, Esq., and Steven E. Wolter, Esq., Kelley & Wolter, P.A.,
Minneapolis, MN, on behalf of Receiver Douglas A. Kelley.
Frank J. Magill, Jr., Esq., and Gregory G. Brooker, Esq., United States Attorneys Office,
Minneapolis, MN, on behalf of Plaintiff United States of America.
Jon M. Hopeman, Esq., Eric J. Riensche, Esq., and Jessica M. Marsh, Esq., Felhaber
Larson, Fenlon & Vogt, P.A., Minneapolis, MN, and Paul C. Engh, Esq., Engh Law
Office, Minneapolis, MN, on behalf of Defendant Thomas Joseph Petters.
This matter is before the Court pursuant to Receiver Douglas A. Kelleys
(Receiver Kelley) request [Docket No.191] seeking an order authorizing him to make a
second set of payments from frozen receivership assets for legal work performed on
behalf of certain individual defendants named in the above captioned case.1
Plaintiff United States of America (the Government) has filed a Response
(Governments Response) [Docket No. 212], stating its concern that receivership assets
be preserved and maintained for restitution to victims. The United States does not
commit itself to a position of how this goal is best accomplished. Rather, the Response
outlines the possible options and the law supporting judicial discretion in the
disbursement of receivership funds.
The law firms representing Defendant Petters, Felhaber, Larson, Fenlon & Vogt,
P.A. (Felhaber) and the Engh Law Office (Engh) (collectively, Petters counsel),
have filed a Reply [Docket No. 224 ] to the Governments Response. Petters Counsels
Reply, March 23, 2009. Petters counsel assert that they are entitled to full payment of
fees and costs incurred in representing Defendant Petters and demand assurance that such
payments will not later be subject to any cap or claw-back provisions under forfeiture
For the reasons set forth below, Receiver Kelleys request is granted in part and
denied in part.
On October 3, 2008, the Court issued an ex parte Temporary Restraining Order
(TRO) [Docket No. 6] pursuant to 18 U.S.C. 1345, based on a probable cause
showing that, inter alia, (1) Defendants were engaged in a large scale Ponzi scheme
involving more than billion dollars, (2) Defendants were carrying out the fraud scheme
in violation of federal mail, wire, and banking fraud laws, and (3) Defendants assets
would be dissipated and unavailable for restitution and/or forfeiture if not restrained.
TRO 3-4, Oct. 3, 2008. Shortly thereafter, the parties stipulated to the entry of a
preliminary injunction and appointment of receiver. Stip. for Entry of Prelim. Inj., Oct.
15, 2008 [Docket No. 54]; Stip. for Entry of Prelim. Inj., October 16, 2008 [Docket No.
58]. Two receiverships were ultimately established. The receivership at issue in this
current Motion (the Receivership) encompasses the assets of all Defendants, see,
Second Am. Order for Entry of Prelim. Inj., dated December 8, 2008 [Docket No. 127],
with the exception of Defendant Frank E. Vennes, Jr. (Defendant Vennes), who has not
been charged with a crime in this matter. Receiver Kelley is the Court appointed
Receiver for the Receivership at issue here. Second Am. Order 13, A. The second
receivership encompasses the assets of Defendant Vennes and is not at issue in the current
Motion. Order for Entry of Prelim. Inj., October 6, 2008 [Docket No. 59].
In the weeks following the entry of the Preliminary Injunction and Order for
Receivership, Defendants Deanna Coleman, Robert White, James Wehmhoff, Larry
Reynolds, and Michael Catain (collectively, the Individual Defendants) entered pleas of
guilty to criminal charges in the related criminal cases. Defendant Thomas Joseph Petters
is contesting the charges and preparing for trial while detained in custody. He is
presumed to be innocent of the charges against him.
The stipulated terms of the Receivership require Receiver Kelley to apply to the
Court for approval of any payment or debt incurred by the Defendants, including attorney
fees. Second Am. Order,16, 4. Receiver Kelleys first motion for approval of attorney
fees [Docket No. 134], which included attorney fees for some of the Individual
Defendants, was not contested, and the Court approved the fees in their entirety after an
in camera review of the attorney invoices. Order Approving Fees, December 23, 2008
[Docket Nos. 162, 165].
On February 17, 2009, Receiver Kelley filed a motion for approval of a second
interim disbursement of attorney fees. Among the fees requested, and those that are the
subject of this Order, are the attorney fees incurred in representing Defendants Petters,
Wehmhoff, Reynolds and Catain. Id.
In its Response, the Government has expressed concern about depletion of
receivership assets if payments for attorney fees of defendants are continually authorized
from frozen funds without any limitations and without regard to the availability of funds
in an individual defendants receivership account to pay for such fees. Governments
Resp. 3. Also, the Government states its intent to seek forfeiture of Defendants assets to
obtain funds that will ultimately be available for victim restitution. Id.10-11. The
Government waves several cautionary flags and advises the Court of its discretion to limit
fees but, significantly, does not interpose an objection to the Receivers Motion.
Taking strong umbrage to the Governments position, Petters counsel, in a reply
laden with emotion, urge the payment of Defendant Petters attorney fees. They argue
that: (1) such payment does not contradict the intended purpose of the injunction, (2)
defense fees and costs should not be capped, (3) the concept of individual accounts within
the receivership is fictitious, and (4) the Government should not be entitled to use
forfeiture claw-back provisions to later disgorge fees that have been paid in representing
Defendant Petters. Petters Counsels Reply at 6, 8, 9 and 12.
The purpose of freezing assets in a receivership under 18 USC 1345 is to preserve
the status quo and prevent assets from being dissipated or diverted. SEC v. Capital
Counsellors, Inc., 512 F.2d 564 (2nd Cir. 1975); SEC v. Infinity Group Co., 212 F.3d
180, 197 (3rd Cir. 2000).
The award of fees in a receivership is entrusted to the discretion of the district
court. Commodities Futures Trading Commn. v. Am. Metals Exch. Corp., 991 F.2d 71,
79 (3rd Cir. 1993) (citing Capital Counsellors, 512 F.2d at 658). In determining whether
restrained receivership funds should be used to pay attorney fees, the court must balance
the governments justification for restraining property with the defendants legal interest
in a full and fair hearing on the merits. United States v. Payment Processing Ctr., LLC,
439 F. Supp. 2d 435, 441 (E.D. Pa. 2006). While the Sixth Amendment does not entitle a
defendant to use frozen funds to pay the costs of legal defense, a district court has the
authority to release receivership funds in the interest of fundamental fairness if
wrongdoing is not yet proven and the restrained property is a defendants only means of
securing counsel. See Payment Processing, 439 F. Supp. 2d at 440-441 (stating that the
rationale in Caplin & Drysdale, Chartered v. United States, 491 U.S. 617 (1989) and
United States v. Monsanto, 491 U.S. 600 (1989) does not merit denying a defendant in a
1345 action a reasonable claim for fees from restrained property upon the appropriate
showing before the 1345 complaint has been resolved on the merits); Fed. Sav. & Loan
Ins. Corp. v. Dixon, 835 F.2d 554, 565 ( 5th Cir. 1987), ([T]he court cannot assume the
wrongdoing before judgment in order to remove the defendants' ability to defend
themselves.); Commodity Futures Trading Commn v. Noble Medals Intl, Inc., 67 F.3d.
766, 775 (9th Cir. 1995) (district court must exercise discretion in awarding fee
applications when wrongdoing is not yet proven).
Here, the balance between the Governments goal of preserving Receivership
assets for future restitution or forfeiture and the Individual Defendants need to fund a
defense weighs in favor of the release of a portion of the Receivership assets to pay
reasonable attorney fees and costs. The reasonableness of requested fees is dependent on
a number of factors, including whether the legal services were rendered before or after the
entry of a guilty plea.
A. Defendants Reynolds, Wehmhoff, and Catain
Defendants Reynolds, Wehmhoff and Catain have entered pleas of guilty, and are
no longer entitled to the presumption of innocence. The fees incurred for legal services
after entry of their pleas has been and will continue to be carefully scrutinized. The Court
recognizes that attorneys for the Defendants who have pleaded guilty must continue to
advise their clients in their cooperation with both the criminal prosecutors and with
Receiver Kelley in preserving the assets in the Receivership. It serves the public interest
that counsel for these Defendants complete their representation and be reasonably
compensated for their effort. Because all of Defendants assets are frozen in the
Receivership, Receivership funds are the only source with which to pay the attorney fees
being requested.
Accordingly, the Court will release Receivership funds to pay the Individual
Defendants attorney fees requested, with some exceptions. The Courts in camera
review of the invoices for legal services performed on behalf of Defendant Reynolds
2Billed entries deemed excessive include reviewing indictment and press coverage regarding
another Individual Defendant after Defendant Reynolds has entered a plea of guilty, and billing
full quarter hours for brief tasks such as leaving phone messages and providing file instructions
to legal assistants. See Republican Party of Minn. v. White, 456 F.3d 912, 920 (8th Cir. 2006)
(finding overbilling of fees where short phone calls were billed in quarter hour increments).
reveals that a reduction of the fees requested by the Receiver is appropriate because some
of those fees were excessive in light of the time required to counsel a defendant after the
entry of a guilty plea.2 Defendant Reynolds also retained counsel in California
(Reynolds California counsel) who have sought payment by a previous Motion to
Modify Payments for Defendant Reynolds Living Expenses [Docket No. 177]. As the
Court ordered in ruling on that Motion, [r]equests for attorneys fees are to be presented
in the first instance to Receiver Kelley to be included in his Motion to Approve Payments
of Receiver and Attorney Fees. Order Modifying Payments for Living Expenses,
February 23, 2009, 4 3, [Docket No. 203]. In addition to the procedural defect of
Reynolds California counsels fee request, the request appears to duplicate services
rendered by Defendant Reynolds local counsel, who has been paid substantial fees for
Defendant Reynolds defense.
Defendant Wehmhoffs requested attorney fees have been adjusted slightly to
reflect the Courts disallowing any payment for food expenses during the course of
B. Defendant Petters
Defendant Petters has plead not guilty, and has the benefit of the presumption of
innocence. He faces potential penalties that are effectively life imprisonment if
convicted. He is entitled to quality legal representation as he challenges the
Governments case against him. The allegations of massive fraud necessitate a large
scale document review, and the complexity of the case will require extensive time and
expertise by defense counsel.
The threshold of proof required to enter the TRO and stipulated to in the Order for
Preliminary Injunction does not rise to the level of proof necessary to adjudicate the
criminal claims on their merits. See Payment Processing, 439 F. Supp. 2d at 440-
441(stating that rationale in Monsanto does not merit denying a defendant in a 1345
action a reasonable claim for fees from restrained property upon the appropriate showing
before the claim has been resolved on the merits); Noble Metals, 67 F.3d at 775
(Discretion must be excercised by the district court in light of the fact that wrongdoing is
not yet proved (sic) when the application for attorney fees is made.); SEC v. Duclaud
Gonzalez de Castilla, 170 F. Supp. 2d 427, 430 (releasing attorney fees for defendants
defense because inference on which asset freeze was granted may not be supported by
the necessary quantum of proof).
Moreover, because Defendant Petters is incarcerated and all of his property is
subject to the receivership, the Court finds he has no other means of funding a defense.
Payment Processing, 439 F. Supp. 2d at 440 (defendants ability to fund a defense is an
important factor in determining whether equity favors releasing the assets). Therefore, in
the interest of providing Defendant Petters with the opportunity for a full and fair hearing
on the merits in this complex case, and in the absence of other sources available to
3The pertinent language of the Receivership Order states that [t]he Receiver shall apply to the
Court for prior approval of any payment of any debt or obligation incurred by defendants,
including reasonable living expenses and/or attorneys fees. Second Am. Order 16, 4.
4The invoiced amounts for these expenses are ,345.00 incurred October 31, 2008, and 0.00
incurred November 13, 2008, for a total of ,545.00. No further explanation of the services has
been provided to the Court despite the in camera protection.
Defendant Petters to secure counsel, the Court will authorize payment for attorney fees
reasonably and necessarily incurred in Defendant Petters defense.
The attorney fees that will be compensated are not without limits, however, as
Petters counsel seem to urge. Any assurances the Government may or may not have
made to Petters counsel with regard to fee allowances are not dispositive, as the Court
has always maintained the discretion to limit attorney fees and costs if they are
unreasonable. The funding of Defendant Petters defense is protected by two procedural
safeguards that stand between Petters and the prosecution the Receiver and the Court.3
Both have and will continue to operate independently in reviewing the payments to
defense counsel.
Defendant Petters counsel must continue to submit their itemized fee statements
to the Receiver, who will submit them to the Court for in camera review and approval.
The Court will review each itemized invoice and determine whether the requested fees
and expenses are reasonable and necessary. Here, the Court finds the fees and expenses
requested by Petters counsel to be reasonable and necessary with the exception of two
expense items for payment to a private law firm for professional legal services.4 The
fees approved to date have not been unreasonable in light of the complexity and
5The Court approved a Stipulation Regarding Sale of Property [Docket No. 214] for the sale of
the residence in Keystone, CO for ,510,000. Receivers Second Status Report 6 IV.A
[Docket No. 201]. The Receiver has also received four offers for Defendant Petters luxury
automobiles, as well as an offer for Defendant Petters 2004 Tiara 2900 Coronet boat. Id.
magnitude of this case.
Regarding the Governments concern that Defendant Petters individual
receivership account lacks the funds necessary to pay the attorney fees, Receiver Kelleys
most recent status report [Docket No. 201] indicates that several large assets are in the
process of being liquidated,5 and that the forthcoming funds will substantially replenish
Defendant Petters receivership account. Based on Receiver Kelleys Second Status
Report, the Court finds that sufficient liquid assets will be available to satisfy the fees
currently requested by Defendant Petters counsel.
The Court cannot guarantee going forward that Receivership assets will always be
sufficient to satisfy Defendant Petters attorney fees. While Receiver Kelley may not be
constrained to maintain strict individual accounts within the Receivership, clearly funds
derived from the Individual Defendants who have already pled guilty may not be applied
to the defense costs of Defendant Petters.
Similarly, funds belonging to the corporate entities which are also subject to this
Receivership, namely Petters Company, Inc. and Petters Group Worldwide, LLC, and
their affiliates (the Petters entities) may not necessarily be available to pay Defendant
Petters attorney fees. With regard to the Petters entities currently in Chapter 11
bankruptcy, the Receiver cannot, short of the notice and approval required under the
Bankruptcy Code and Rules, use the bankruptcy estates as slush funds to advance funds
to Petters counsel until Defendant Petters other assets are liquidated.
Finally, the issue of whether the Government can exercise certain claw-back
provisions under forfeiture statutes to require disgorgement of fees already paid to
Petters counsel is not ripe for determination, and the present Motion to approve attorney
fees is not the proper vehicle for litigating that issue. Until such time as the Government
attempts to exercise its forfeiture power, this Court will decline Petters counsels
invitation to order the government to list all assets it seeks to forfeit, right now. Petters
Counsels Reply at 12.
Petters counsel are frustrated and highly concerned about the lack of certainty of
future payment for their legal services. Their effort to seek guarantees and clarity is
understandable, but unattainable. Uncertainty of future payment for legal services is
endemic to practicing law, particularly in the context of criminal defense. This case is not
unique in requiring counsel to balance their time and expense with consideration to the
fact it may not be reimbursed. This Court has now authorized payment of fees to Petters
counsel in excess of a half million dollars. Though a large fee, it is commensurate with
the task at hand under the circumstances of this case. There will be no blank checks
issued, but future fees will be authorized where reasonable and justified.
Based on the foregoing, and all the files, records and proceedings herein,
1. Receiver Kelley is authorized to make the following payments:
Felhaber, Larson, Fenlon & Vogt, P.A. 9,365.20
Colich & Associates ,800.00
Greene Espel P.L.L.P. $ 46,228.00
Frederic Bruno & Associates $ 13,000.00
2. Receiver Kelley is directed to seek reimbursement of the foregoing sums to
the extent possible under applicable insurance policies, including directors and officers
liability policies maintained by Petters Company Inc., Petters Group Worldwide, LLC or
any other related entity.
s/Ann D. Montgomery
Dated: March 25, 2009.


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