Vemma was in “poor financial state” prior to Receiver
When the court-appointed Receiver submitted a fee application for $294,452, Vemma weren’t happy about it.
Back in control of their company following the Receiver’s temporary stint, Vemma argued that Robb Evans & Associates’ (REA) fees were “excessive”.
Rather than the near $300,000 REA had requested, Vemma insisted the cost of the work performed by REA ‘would be no greater than $100,000‘.
Judge Tuchi has been deliberating on a decision regarding the requested fees for some weeks now, with a decision finally handed down yesterday.
The decision itself weighs in favor of REA receiving $236,966, a reduction of $57,486.
Perhaps the most interesting excerpt from Tuchi’s decision however, is the detailing of Vemma’s financial woes prior to REA’s Receivership appointment.
Before we get into that, let’s take a look at Vemma’s arguments in favor of reducing REA’s fees.
Two broad arguments in favor of a fee reduction were made by Vemma, with Judge Tuchi shooting them both down.
The Court concluded that the Vemma’s first basis for reducing the award – its attack on the way REA carried out its duties under the TRO – was unavailing.
Vemma contend that REA failed in its duties as Temporary Receiver by ceasing operations of Vemma’s multilevel marketing program and resisting entreaties by its executives to continue operating.
According to Vemma, this action was in error because it did not maintain the “status quo” of the business.
This argument fails.
As the Court noted at the October 21 hearing, the TRO required the Temporary Receiver to preserve, to the extent possible, the status quo of the assets, not to maintain the status quo of the business.
Moreover, as quoted above, the TRO required the Temporary Receiver to make a good faith determination whether it could operate the business “profitably and lawfully, if at all.”
The Court concludes the Temporary Receiver did just that.
It considered the findings the Court had made in the TRO about the operation of the Receivership Defendants prior to August 21, 2015, and the prohibitions against certain business and communication practices that the Order imposed.
From that Order, the Temporary Receiver quite reasonably concluded that it could not “lawfully” operate the business as it had been operated before.
Vemma also urge that the Temporary Receiver’s performance was deficient, and therefore requires a fee reduction, because it did not pay certain or all of the bills outstanding during the pendency of the temporary receivership.
Vemma point out specifically REA’s failure to make payments on the lease for Receivership Defendants’ Tempe headquarters, on the lease for a Kenworth tractor, and on their line of credit with Wells Fargo Bank.
But as REA notes, this picture is deceiving in that some of these shortfalls or defaults had commenced before the temporary receivership was instituted.
The Kenworth tractor was already one payment in arrears at commencement of the receivership, and the Wells Fargo debt had been in default more than once prior thereto.
Moreover, REA demonstrated to the Court’s satisfaction that it could not pay many of the bills Receivership Defendants criticize it for not paying because insufficient funds were available, and it had great difficulty freeing up funds from certain accounts and receivables; REA therefore had to prioritize payments, and it focused on paying employees.
The Court does not conclude from the evidence or argument presented that a decrease in fee award is justified on the basis that REA failed to perform its duties as Temporary Receiver.
The thrust of the Receivership Defendants’ second broad argument for a reduction in the award is that the fees and costs REA requests are unreasonable because they are simply excessive.
Here, Vemma have outlined 11 separate areas in which they urge REA and its employees either took too much time to perform the required tasks or unreasonably duplicated work and did not “write down” or otherwise reduce their bill accordingly.
In one such area, Vemma note that REA billed for over 70 hours of work to assess Vemma’s business operations after REA had concluded the business should be closed down.
Additionally, per Vemma, REA relied on reports prepared by Vemma yet appeared to bill for creating original material.
And the Receiver’s Report, according to Vemma, simply restates reports received from Vemma on day one, such as the sales and income statement and balance sheet.
Here, the Court finds that Vemma oversimplify the tasks assigned to the Temporary Receiver and the efforts required to perform those tasks.
The Temporary Receiver’s time charge associated with gathering and reviewing documents necessary to assess Vemma’s finances and operations was largely proper and will only be reduced slightly.
The Temporary Receiver was tasked with determining whether the business could be operated profitably and lawfully going forward.
That exercise required a comprehensive review of materials, procedures and practices, and the affiliate and customer base.
While the efforts undertaken in the completion of this task were substantially justified, the Court is not entirely persuaded that all of the hours claimed for this task were necessary, and it will reduce the fee for this task set.
Similarly, the Court finds that the preparation of the Receiver’s Report was substantially more involved than Vemma argue—and necessarily so— and a cut of the magnitude Vemma seek is unwarranted.
But that does not mean the Court will not apply its own judgment to the determination of what are and are not reasonable fees.
The Court concludes upon consideration of all facts and argument presented that the time charged to produce the product involved, even under the difficult the circumstances the Temporary Receiver faced, was somewhat excessive.
Accordingly, the Court will also reduce the Temporary Receiver’s fee for this component of work performed.
Fees associated with analyzing and reviewing Vemma’s reports, along with producing the Receiver’s own report is where REA primarily saw a reduction in the requested amount.
Travel expenses were also a point of contention, with the requested $22,500 making up ‘nearly 10% of the total request‘.
Vemma also note that REA flew at least ten people from Los Angeles to Phoenix—some multiple times—and argue that it was improper to charge the full hourly rate for the travel time.
Here again, the Court sees things differently than either party.
The Court selected REA to serve as Temporary Receiver in part based on REA’s experience in similar matters, and with knowledge that REA personnel were located in other cities, necessitating travel to Phoenix to complete their assignments.
For that reason, travel expenses, and even repeated travel expenses, that are reasonable and necessary to complete the performance of duties will be allowable.
That said, the notion that REA employees should be paid “on the clock rates” whilst travelling was denied;
The Court does not endorse the Temporary Receiver’s position that it should be paid its employees’ full “on the clock” consulting rate in receivership fees while traveling and not working.
While other courts, as REA asserts, may “commonly” order compensation for all employees of the receiver at their “on the clock” billable rate during all travel time, this Court will not do so absent a demonstration that the employees were actively performing services and working on receivership issues during travel.
Without such proof, it is this Court’s practice to partially reduce billable rates for travel time, and the Court will do so here.
Yet another point of contention was REA employees purportedly billing for the completion of “the same or similar tasks”.
Vemma also take issue with REA’s billing for different employees to perform what it says are the same or similar tasks.
The Court is unpersuaded by this argument.
It is understandable that different staff may be assigned to complete different facets of the same task, and the Court finds that REA has substantiated this work and the need for it.
Vemma also urge is (sic) was inappropriate for REA to charge for “purely secretarial tasks” comprising nearly 50 hours, as well as charging over $21,000.00 for “independent contractor services” without explanation for what those services are.
The Court concludes that REA identified and substantiated these charges.
It will not reduce the fees or costs for same.
Nor does the Court agree with Vemma or their counsel that REA’s expenses accrued in litigating with Vemma over discovery in preparation for the Preliminary Injunction Hearing are improper.
Once appointed by this Court to perform the duties of Temporary Receiver, REA was required to do all that assignment reasonably entailed, including defending its position as Temporary Receiver and engage in related litigation.
The Court will not reduce REA’s fees or costs for this reason.
Finally, the Court will not reduce REA’s fees for tasks performed after its filing of the Receiver’s Report, as it concludes those tasks were necessary and reasonable.
Vemma saved some money, but it was mostly a win for REA. Fee adjustments aside, task wise the court didn’t object to any of the Temporary Receiver’s conduct – which is where Vemma were hoping to see large reductions made.
As to Vemma’s financial status prior to the appointment of a Receiver, grizzly details are laid out in a footnote on page 4 of Tuchi’s order.
Vemma substantially understate the poor financial condition that they were in at the time REA was appointed, with which the Temporary Receiver was required to deal immediately.
It is beyond dispute that Receivership Defendants had incurred a net loss of over $4 million during the first half of 2015 and were suffering from cash flow issues.
This was the reason Mr. Boreyko and two other shareholders had planned, before the Court created the temporary receivership, to effect a $1.3 million cash infusion into Receivership Defendants, which infusion ultimately never took place.
This was the financial state of Vemma when they were running their old compensation plan. Before Morton bailed and the FTC got involved.
BK Boreyko only recently proposed the sale of his share in a property group, with the hopes of injecting $500,000 into Vemma’s post-FTC lawsuit business operations.
Whether or not that proposal is granted remains to be seen, with the current financial status of Vemma otherwise unknown.
If Vemma were in financial dire straits prior to the FTC putting a stop to their recruitment-heavy business operations, one can only wonder what the current state of Vemma’s books are.
Footnote: Our thanks to Don@ASDUpdates for providing a copy of Judge Tuchi’s November 25th order.