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Federal Trade Commission v. Nhs Systems

May 13, 2011

FEDERAL TRADE COMMISSION, PLAINTIFF
v.
NHS SYSTEMS, INC., A PENNSYLVANIA CORPORATION, ALSO D/B/A NATIONAL HEALTHCARE SOLUTIONS AND NATIONAL HEALTH NET ONLINE, AND HARRY F. BELL, JR., INDIVIDUALLY AND AS AN OFFICER OR PRINCIPAL OF NHS SYSTEMS, INC., AND PHYSICIAN HEALTH SERVICE, LLC, A MISSOURI LIMITED LIABILITY COMPANY, ALSO D/B/A/ AMERICAN HEALTH BENEFITS ON LINE, AND DONNA NEWMAN, INDIVIDUALLY AND AS AN OFFICER OR PRINCIPAL OF PHYSICIAN HEALTH SERVICE, LLC, AND JOHN E. BARTHOLOMEW, INDIVIDUALLY, AND PLUS HEALTH SAVINGS, INC., A PENNSYLVANIA CORPORATION PHYSICIANS HEALTH SYSTEMS, INC., A DELAWARE CORPORATION, ALSO D/B/A AMERICAN HEALTH BENEFITS ON LINE HEALTH MANAGEMENT, LLC, A MISSOURI LIMITED LIABILITY COMPANY 6676529 CANADA, INC., A CANADIAN CORPORATION NICOLE BERTRAND, INDIVIDUALLY AND AS AN OFFICER OR PRINCIPAL OF 6676529 CANADA, INC. BARRY KIRSTEIN, INDIVIDUALLY "DANNIE BOIE" A PERSON WHOSE TRUE IDENTITY IS UNKNOWN, INDIVIDUALLY PHS ENTERPRISES, INC., A NEVADA CORPORATION FIRST STEP MANAGEMENT, INC., A ST. LUCIA COMPANY GOLD DOT, INC., A ST. LUCIA COMPANY LINKE JN PAUL, INDIVIDUALLY AND AS AN OFFICER OR PRINCIPAL OF FIRST STEP MANAGEMENT, INC. AND GOLD DOT, INC. TASHA JN PAUL, INDIVIDUALLY AND AS AN OFFICER OR PRINCIPAL OF GOLD DOT, INC. NEVADA BUSINESS SOLUTIONS, INC., A NEVADA CORPORATION INTERFACE MANAGEMENT, INC., A FLORIDA CORPORATION, ALSO D/B/A GALAXY MEMBER BENEFITS BEGINNING AGAIN, INC., A FLORIDA CORPORATION DEFENDANTS



OPINION

I.

Background This litigation was initiated by the Federal Trade Commission ("Commission" or "FTC") in 2008 against numerous corporations and several individuals associated with one or another of the corporate defendants. The gravamen of the Commission's suit is an allegation that the defendants were participants in a widespread telemarketing scheme designed to peddle fraudulent health benefit plans to unsuspecting would-be consumers. On May 14, 2008, at the instance of the Commission, this court entered an ex parte Temporary Restraining Order ("XTRO"), dkt. 6, designed to prevent dissipation of the defendants' assets. Key to the court's order were two provisions: (1) a "freeze" on "any assets held by, for or under the name of any Defendant at any . . . ACH network of other payment processor"; and (2) appointment as gatherer and custodian of the defendants' assets, of a Receiver, Wayne Geisser. Three weeks later-on June 10, 2008-this court entered a Stipulated Preliminary Injunction ("SPI"), dkt. 15, which added several more defendants but which, in other respects, largely tracked the earlier order. Thereafter, Receiver Geisser asked Teledraft-a payment-processing firm that handled funds for several of the named defendants, but which is not itself a named defendant-to pay over to Geisser certain funds identified by Geisser to be receivership assets. Teledraft did not comply. The FTC then moved this court for an order compelling Teledraft to pay over to Geisser the disputed funds. On September 24, 2009, this court entered a "turnover order" requiring Teledraft to pay over to Geisser $264,224.03 ("Turnover Order"). This court reasoned that it had authority to issue such a directive to nonparty Teledraft because, while the court was without in personam jurisdiction over Teledraft, the XTRO and the SPI provided the court with in rem jurisdiction over all receivership funds. In rem jurisdiction flowed from 28 U.S.C. §754, which provides that [a] receiver appointed in any civil action or proceeding involving property, real, personal or mixed . . . shall . . . be vested with complete jurisdiction and control of all such property with the right to take possession thereof.

Deciding to appeal the Turnover Order, Teledraft moved this court for a stay of the Turnover Order pending appeal. The motion was addressed in an opinion filed on December 10, 2009. Dkt. 119. The opinion explained that this court did not think the Turnover Order was an appealable order within the contemplation of either of the two Federal Rules of Civil Procedure-Rule 62(d) and Rule 62(c)-invoked by Teledraft as authority for a stay. The Turnover Order was an interlocutory order, not a final judgment, and hence outside the purview of Rule 62(d). Rule 62(c), prescribing the procedures governing appeals from orders granting or denying an "injunction" embraces interlocutory as well as final orders, but a turnover order directing the transfer of funds to a receiver is not, ordinarily, conceived of as an "injunction" within the meaning of the Rule. However, this court, in its December 10, 2009 opinion, did have the humility to acknowledge that it was up to the Court of Appeals, not this court, to determine what constitutes an appealable order and, accordingly, whether the Court of Appeals would find that it had jurisdiction to entertain Teledraft's appeal. Accordingly, this court granted a stay of the September 24, 2009 Turnover Order pending the Court of Appeals' determination whether it had jurisdiction over Teledraft's appeal.

On January 8, 2010, the Court of Appeals dismissed Teledraft's appeal for lack of jurisdiction. In a memorandum explaining the order of dismissal, the Court of Appeals said, inter alia:

Although the [Turnover Order] arguably finally disposes of Teledraft's rights to assets, the appeal is premature. Non-parties usually must be held in contempt of district court discovery orders before they have a right to appeal. . . . Because Teledraft has not been held in contempt for refusing to honor FTC's motion to compel requiring it to turn over funds to the receiver, the appeal of the September 25, 2009 order is premature.

Federal Trade Commission v. NHS Systems, Inc. et al., No. 09-3899 (3d Cir. January 6, 2010) (citations omitted).

II.

The FTC's Contempt Motion On March 17, 2010, the FTC filed the instant Motion for an Order to Show Cause Why Teledraft, Inc., Should not be Held in Contempt. Dkt. 125. In its motion, the FTC asks that Teledraft be held in contempt for its failure to comply with the XTRO, the SPI, and the Turnover Order. The FTC further asks that the contempt order require Teledraft to 1) turn over $264,224.03 to the Receiver, as required by the Turnover Order; 2) pay compensatory sanctions in the amount of $105,972.33, which represents the amount the Receiver claims he has expended in attempting to recover funds from Teledraft; and 3) pay a coercive sanction-should Teledraft fail to comply-of $250 on the first day of non-compliance, with the amount doubling on each successive day of non-compliance.

In opposition, Teledraft concedes that it should be held in contempt for its failure to comply with the Turnover Order.*fn1 Indeed, as discussed above, contempt is the only route Teledraft can take to obtain appellate review of the Turnover Order. Still, Teledraft argues that the scope of the contempt order should be narrower than the FTC requests. First, Teledraft contends that it should only be held in contempt of the Turnover Order, and not, as the FTC requests, of the XTRO and SPI as well. Second, Teledraft asserts that this court does not have power to impose any contempt sanctions, either coercive or compensatory. Third, Teledraft argues that, even if the court has the power to impose sanctions, the amounts requested by the FTC are excessive. Finally, Teledraft urges this court to reconsider the Turnover Order on various grounds.*fn2

A. The scope of the contempt order

Teledraft argues that it should not be held in contempt for violating the XTRO and the SPI because, it asserts, those earlier orders did not apply to Teledraft and that, even if they did, Teledraft did not violate them. This argument is essentially a request that the court reconsider the Turnover Order, in which the court found 1) that both the XTRO and the SPI apply to Teledraft, and 2) that Teledraft had failed to comply with either order.*fn3 As noted above, see supra note 2, the court declines to reconsider the Turnover Order.

Teledraft does present two novel grounds to support its contention that it should only be found in contempt of the Turnover Order. First, Teledraft seems to contend that, because this court did not rule that it had power over Teledraft until the Turnover Order, any contempt finding must be based on the Turnover Order only and can only concern Teledraft's conduct after July 2009. But this argument ignores the fact that the XTRO and SPI unambiguously directed Teledraft to freeze and deliver Receivership assets, in May and June of 2008. Second, Teledraft seeks to reframe the Turnover Order as "extending the scope of the earlier [injunctive orders]," see dkt. 127 at 13, and thus again contends that its obligations only began at the time the Turnover Order was issued. This argument also lacks merit. The Turnover Order did not "extend" the XTRO and SPI to Teledraft, it confirmed that those orders applied to Teledraft-by their plain language and pursuant to this court's in rem jurisdiction.

Although the XTRO and SPI apply to Teledraft, the court finds it unnecessary to issue a contempt order grounded in Teledraft's non-compliance with those orders in addition to Teledraft's non-compliance with the Turnover Order. The Turnover Order confirms that the XTRO and SPI apply to Teledraft, and thus this court need-at least at this time-only rule that Teledraft is in contempt of the Turnover Order. Accordingly, the accompanying order will note that Teledraft ...


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