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defendantattorneyappealdue process
plaintiffattorneyappealdue processappellee

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F.T.C. v. Assail, Inc., 410 F.3d 256, 74 USLW 3132, 2005-1 Trade Cases P 74,798

Facts

The Federal Trade Commission (FTC) filed a complaint against several defendants, including Kyle Kimoto and his company Assail Inc., for engaging in telemarketing fraud. Following the filing, the district court issued a temporary restraining order freezing the defendants' assets. Despite this, Kimoto paid substantial retainers to his attorneys, Draskovich and Kajioka, from funds that were later determined to be part of the frozen assets. The district court ordered the attorneys to return these retainers, leading to their appeal.

The events leading to these two appeals can be traced to January 9, 2003, when Plaintiff–Appellee Federal Trade Commission (“FTC”) filed a complaint in the United States District Court for the Western District of Texas.

Issue

Did the district court err in ordering the attorneys to disgorge retainers that were paid from assets subject to a freeze order, and did this order violate the attorneys' due process rights?

Did the district court err in ordering the attorneys to disgorge retainers that were paid from assets subject to a freeze order, and did this order violate the attorneys' due process rights?

Rule

An attorney has a duty to inquire about the source of their fees when they are put on notice that the fees may derive from a pool of frozen assets, and failure to do so can result in the disgorgement of those fees.

An attorney has a duty to inquire about the source of their fees when they are put on notice that the fees may derive from a pool of frozen assets, and failure to do so can result in the disgorgement of those fees.

Analysis

The court found that both attorneys were aware of the circumstances surrounding their clients' cases, including the asset freeze and the allegations of fraud. Draskovich's acceptance of funds from third parties without further inquiry was deemed unreasonable, especially given the context of the fraud allegations. Kajioka, while less culpable, also failed to adequately investigate the source of his fees after being informed of the asset freeze. The court concluded that both attorneys had a duty to inquire and did not fulfill it.

The court found that both attorneys were aware of the circumstances surrounding their clients' cases, including the asset freeze and the allegations of fraud.

Conclusion

The court affirmed the district court's orders requiring the attorneys to disgorge their retainers, finding that the funds were derived from assets subject to the freeze order and that the attorneys had not met their duty to inquire about the source of those funds.

The court affirmed the district court's orders requiring the attorneys to disgorge their retainers, finding that the funds were derived from assets subject to the freeze order and that the attorneys had not met their duty to inquire about the source of those funds.

Who won?

The Federal Trade Commission (FTC) prevailed in the case as the court upheld the district court's orders requiring the attorneys to return the retainers, reinforcing the principle that attorneys must ensure their fees do not come from frozen assets.

The Federal Trade Commission (FTC) prevailed in the case as the court upheld the district court's orders requiring the attorneys to return the retainers.

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