The opinion of the court was delivered by: Pollak, J.
In this litigation, whose underpinnings I will not discuss at great length, the Federal Trade Commission ("FTC") has alleged that a vast telemarketing scheme was perpetrated by the named defendants. I have already ordered preliminary injunctive relief in favor of the FTC and appointed a receiver over the corporate defendants (the "Receivership Entities") in order to recoup funds on behalf of consumers who were, it appears, defrauded.
As part of his duties, the Receiver, Wayne D. Geiser, has sought funds from Teledraft -- a payment processing company that processed funds on behalf of some of the Receivership Entities, but that has not itself been named as a defendant in this matter -- that the Receiver alleges are property of the Receivership. When Teledraft refused to turn over the funds sought by the Receiver, the FTC moved this court to compel Teledraft to turn over those funds. After extensive briefing by both Teledraft and the FTC, this court held a hearing on July 23, 2009, at which both parties were permitted to present evidence.
Subsequent to the hearing, both parties submitted additional declarations.
Having considered the parties' filings, together with the evidence and arguments adduced at the hearing, I will, for the following reasons, grant the FTC's motion.
I. FACTUAL FINDINGS AND PROCEDURAL HISTORY
The defendants in the underlying litigation (of which the instant FTC motion is a sub-part) sold health benefit plans by employing telemarketers; those telemarketers' mission was to obtain bank account information from consumers.*fn1 Teledraft processed payments for the providers of these health plans. Specifically, when a telemarketer obtained the bank account information of a consumer, the telemarketer provided that information, along with the amount to be charged, to Teledraft. Teledraft would then use that bank account information to process a payment from the consumer's bank account into the provider's bank account. In simple terms, Teledraft was a middleman between the customer and the health care providers.
Teledraft used two different methods of payment processing: remote checks (a.k.a. "Check 21" transactions or "demand drafts") and Automated Clearing House ("ACH") transfers. Teledraft processed remotely created checks for defendant NHS Systems, Inc. ("NHS"), beginning in February 2008, and for Physicians Health Systems, Inc. ("PHS-3") and defendant Physicians Health Service, LLC ("PHS-4") shortly thereafter. Teledraft ceased processing remote checks on May 2, 2008, and paid out in full the balances it owed to NHS, PHS-3, and PHS-4 (collectively, the "NHS/PHS Entities"), respectively.
On May 12, 2008, Teledraft began processing ACH transfers for the NHS/PHS Entities, ceasing to do so on May 15, 2008.*fn2
Remote checks and ACH transfers are financial instruments both of which facilitate essentially the same transaction: the transfer of funds from one bank account into another. Teledraft's bank, upon receiving from Teledraft either a remotely created check or ACH transfer, would simultaneously request payment from the consumer's bank and provisionally credit the amount of that remote check/ACH transfer to Teledraft's bank account.*fn3 If the request was granted, the consumer's bank would debit the consumer's account and transfer the money to Teledraft's bank; Teledraft's bank would then simply leave Teledraft's account credited (i.e. unchanged). If the payment was "returned" -- i.e., if the bank refused to pay (because, e.g., the charge was not authorized by the consumer) -- Teledraft's bank would deduct the amount it had previously provisionally credited to Teledraft's account.
The determination whether one of these provisional credits has become final (and therefore no longer subject to an automatic deduction in the event of a return) is referred to as "settlement." When a consumer charge is returned after the settlement period (e.g. if it takes eight days for a consumer's bank to realize a charge was unauthorized, and then the consumer's bank requests a refund on behalf of the consumer), the institution of first deposit (in this case, Teledraft's bank) is responsible, as the warrantor of the transaction, for any potential refund. The NHS/PHS Entities and Teledraft agreed on a settlement period of five days. Therefore, the final settlement date for the last remote checks processed for the NHS/PHS Entities by Teledraft was May 9, 2008, and the final settlement date for the last ACH payments processed for the NHS/PHS Entities by Teledraft was May 21, 2008.
The only salient difference (for the purposes of this litigation) between remotely created checks and ACH transfers is that national accounting standards strictly regulate ACH transfers. NACHA, the electronic payments association that oversees the ACH network, has established a return-rate threshold of 1% for unauthorized debit entries.*fn4
NACHA also requires that the ACH network not be used to process payments arising from outbound cold-calling telemarketing campaigns, or for recurring payments under any circumstances.*fn5
The contracts governing the business relationships between the various NHS/PHS Entities and Teledraft are all materially identical. In those contracts, the clients warrant, among other things, that they will not break any laws and that each of their telephone sales will be a legitimate transaction. Contractual provisions also provide that Teledraft can deduct its fees prior to the settlement of any funds; deduct any debts owed by the NHS/PHS Entities from funds that Teledraft would otherwise pay out; and charge/deduct funds from the NHS/PHS Entities if those providers engage in fraud, have a charge/sale returned, charge a consumer without authorization, or fail to comply with the contract and/or with NACHA and FTC rules and regulations. The contracts make Teledraft an independent contractor of the NHS/PHS Entities, and they do not explicitly designate Teledraft as a legal fiduciary or trustee over any funds.
In the original complaint filed in this litigation, the FTC accused the following five defendants of defrauding consumers: NHS, PHS-4, NHS President Harry F. Bell, Jr., PHS-4 President Donna Newman, and John Bartholomew. On May 14, 2008, I granted the FTC's motion for an ex parte Temporary Restraining Order (the "XTRO"). As part of the XTRO, I appointed Wayne D. Geiser as the Receiver over the "Receivership Defendant," defined in the XTRO as "NHS Systems, Inc.... and any of its affiliates, subsidiaries, or divisions." On June 10, 2008, upon entry of a Stipulated Preliminary Injunction ("SPI"), the Receiver was appointed as to PHS-4 and PHS-3 (a non-party to the complaint) as well.
Although Teledraft is not a party to this litigation, the XTRO and SPI apply to Teledraft. Section II of the XTRO, which freezes the Receivership Defendant's assets, expressly applies to "independent contractors" of the Receivership Defendant, and its terms (Section II.A) apply the asset freeze to, inter alia, money held for the Receivership Defendant by an "ACH Network or other payment processor." In addition to containing terms substantially similar to the XTRO, the SPI (in Section IV.C) requires Teledraft by name to promptly disclose the NHS/PHS Entities' account information to the Receiver.
Teledraft's President Al Slaten wrote to the FTC on May 16, 2008, that, as of May 15, 2008, Teledraft was in possession of, and had frozen, $53,021.05 of funds for NHS,*fn6 $346,803.69 for PHS-3, and $68,345.09 for PHS-4, totaling $468,169.83.*fn7 It is undisputed that, by May 21, 2008, those accounts had been reduced to $222,989.53. See Slaten Declaration at ¶ 23 (Docket No. 102, filed July 31, 2009). It is ...