Protecting Your Assets

Gregory Piccionelli

As the adult entertainment industry has matured and obtained greater general acceptance as a legitimate business, so to have the number of abusive lawsuits against adult entertainment companies and their principals. Where once lawsuits against adult entertainment companies were almost always brought by parties outside the industry, such as by patent trolls, and governmental entities, like the Federal Trade Commission, now actions initiated by one adult entertainment entity against another are commonplace.

And the number of both legitimate and abusive lawsuits is increasing. So much so, that I sincerely believe that a typical adult entertainment company faces a much greater threat of abusive litigation today than only a few years ago. Whether by actions brought by the FTC, the Department of Justice, patent trolls, copyright owners, disgruntled employees, or class action plaintiffs, assets owned by adult entertainment companies and their principals are now more at risk due to abusive litigation than ever before.

The number of both legitimate and abusive lawsuits is increasing. So much so, that I sincerely believe that a typical adult entertainment company faces a much greater threat of abusive litigation today than only a few years ago.

As a result, adult industry entrepreneurs are well counseled to learn about how to better protect their assets from loss due to abusive litigation.

To help our readers gain a better understanding of how to protect their assets from asset freeze orders or loss through adverse litigation, I asked attorney Steven L. Gleitman, one of the country’s preeminent asset protection planning attorneys to do the following interview in which we discussed how adult entertainment companies and their principals can better protect themselves from asset freezes and post judgment loss.

GREGORY PICCIONELLI:  What are the situations in which an adult entertainment company and/or its principals need to protect their assets from abusive lawsuits?

STEVEN L. GLEITMAN:  There are two basic types of abusive lawsuits that are likely to give rise to a judgment against an adult entertainment entrepreneur or his or her company. The first is a lawsuit started by the federal government, and the second is a lawsuit started by a private adult entertainment plaintiff or his or her company.

PICCIONELLI:  Just to be clear here, we are speaking generally about civil lawsuits and not asset forfeitures resulting from conviction for violation of criminal statutes such as the federal obscenity laws, right?

GLEITMAN:  That’s right. While there are measures that an adult entertainment company can take to protect its assets from a wrongful federal seizure in a criminal case, what I will be discussing today is primarily directed to asset protection in the context of civil litigation initiated by a governmental entity or a private party.

PICCIONELLI:  Which federal agencies are most likely to initiate a lawsuit against an adult entertainment defendant?

GLEITMAN:  The Federal Trade Commission and the Department of Justice (“DOJ”) are the main government agencies that sue adult entertainment clients and their companies.

PICCIONELLI:  Are the economics of a lawsuit brought by the federal government different from lawsuits brought by private plaintiffs?

GLEITMAN:  Yes. Unlike private parties, the federal government is not as motivated by a cost-benefit analysis — it will often spend as much money as it takes to win (our tax dollars at work); a private plaintiff will usually only sue if the client believes there is a favorable cost-benefit ratio or there is a grudge.

PICCIONELLI:  When dealing with the federal government, there is also, unfortunately the issue of government attorneys not always following the rules of ethics. Would you like to comment about your experience regarding that issue and how it impacts the conduct of litigation with the government?

GLEITMAN:  There is quite a bit of government attorney misconduct. For example, former U.S. Sen. Ted Stevens had a conviction overturned due to prosecutorial misconduct — the government withheld evidence favorable to Stevens, and seven-time Cy Young award winner Roger Clemens had his first trial declared a mistrial due to the government attorneys defying a judge’s oral order. If powerful people cannot get fair treatment from the government, what chance does an ordinary client have? Right now, Attorney General Eric Holder is conveniently withholding evidence from Congress in the Fast-and-Furious case.

PICCIONELLI:  Would you please briefly explain a bit about the case for our readers

GLEITMAN:  The DOJ provided assault weapons to licensed gun dealers, and then had the dealers sell arms to the Mexican drug cartels — all in the hope of tracing the guns to learn more about the cartels. But things went wrong, U.S. Border Patrol agent Brian Terry was killed with one of those guns. Congress is investigating, and Congress is ready to find Holder in contempt of Congress for not producing evidence. So you see, the Attorney General’s withholding of evidence is, in my opinion, a clear demonstration of the DOJ’s belief that it can pretty much do whatever it wants with impunity. One set of rules for the client and another set of rules for the government. It is simply unbridled government power, and I’ve seen it happen regardless of whether Republicans or Democrats are in office

PICCIONELLI:  The court rules have also been stacked in favor of a federal plaintiff versus a private plaintiff as well.

GLEITMAN:  Absolutely! The federal government plays by a different set of rules in court than does a private plaintiff. For example, if the FTC brings a lawsuit against any marketer for unfair practices, whether it’s an Internet content provider, an online marketer, a direct mail marketer or a TV marketer, the FTC can go to court without giving the defendant notice of the hearing. In other words, the federal government appears in court and the client does not! The client does not get due process — the government has too much power, in my opinion. By comparison, a private plaintiff has to give notice to a client of a lawsuit and allow the client to appear in court to put on a defense — that is the first major difference between being sued by the federal government and a private plaintiff. But not only are the rules different, the remedies are also different in government initiated cases. At the “government-is-there-youare-not-hearing,” the judge can issue a “freeze order.”

PICCIONELLI:  Please briefly explain what a “freeze order” is.

GLEITMAN:  A freeze order is a temporary restraining order, and it is called a freeze order because the court freezes a client’s bank accounts. That prevents the owners of a business from writing checks from personal bank accounts or business bank accounts. All the freeze orders I have seen apply to the spouse of a business owner, even if the spouse does not work in the business. If the spouse has signatory power over the spouse’s bank accounts for the spouse’s business or over an inheritance from parents, the freeze orders would apply to all of the spouse’s bank accounts.

PICCIONELLI:  I have represented clients who have been subject to freeze orders. In one particular FTC case, the order effectively shut down the client’s affiliate marketing program by stopping payments to the affiliates until we got the order lifted.

GLEITMAN:  And a private plaintiff cannot get a freeze order as a remedy — that is the second major difference between defending a lawsuit brought by the government and a lawsuit brought by a private plaintiff. Between government attorney misconduct, a “government-is-there-you-are-not-hearing,” and the governments freeze orders, there is not a level playing field for a client.

PICCIONELLI:  Is there a way to level the playing field?

GLEITMAN:  Yes. I call the type of asset protection plan used to protect a client against a government freeze order an “Anti-Freeze Trust.”

PICCIONELLI:  I like the name. But as a trademark attorney, I’d have to tell you its descriptive. Now let’s see, you can’t call it Prestone, that’s taken. But I would rather like something like “Gleitman’s Anti-Freeze Trust” or a trademark slogan like “Gleitman’s, the most trusted name in asset anti-freeze trusts.”

GLEITMAN:  Well thanks, but I think it is important that the Anti-Freeze Trust be descriptive to let our clients know how it can effectively prevent a potentially catastrophic company and personal asset freeze.

PICCIONELLI:  Could you please explain for our readers what happens to a client after a freeze order is issued if a client does not have an Anti-Freeze Trust and then compare that scenario to the benefits a client gets if the client has an Anti-Freeze Trust?

GLEITMAN:  Without an Anti-Freeze Trust, a client cannot pay their employees, cannot pay affiliates, cannot pay other business expenses, and they cannot even pay personal expenses without court permission. The client will even need to obtain permission to hire and pay attorneys to try to vacate the freeze order. It is like being in a jail without bars — your freedom is taken away. I have had clients tell me they could not pay their children’s private school tuition because of a freeze order. After a client has had a freeze order issued against them, they are glad to find-out an Anti-Freeze Trust can prevent this disaster from reoccurring.

PICCIONELLI:  Please explain for our readers what happens after the freeze order is issued by the court, for example in an FTC action.

GLEITMAN:  The FTC puts a consent order in front of the client. A consent order is a judgment filed in court in which the client admits the client did something wrong and pays a fine. When the FTC puts a consent order in front of you — an agreement to admit wrongdoing and pay a hefty fine, you are forced to sign and pay to the FTC whatever you are told to pay or your employees are not paid, your business stops running, and you cannot buy groceries. If you sign the consent order, your business can run again and you can buy groceries. To me this is federal government coercion — it is hard to distinguish between coercion and extortion.

PICCIONELLI:  Most people are surprised to learn that not even the U.S. Constitution’s requirement of due process entitles a client to get an immediate hearing in court to address what are almost always immediately catastrophic consequences flowing from an asset freeze order.

GLEITMAN:  That’s right. The client only gets the right to go to court 30 days after the freeze order, and after 30 days a client finally gets a chance to be heard in court to challenge the freeze order. But during the 30 days between the freeze order and the client’s first hearing in court, one of two things happen without an Anti-Freeze Trust: the client either signs the consent order or they are usually out of business.

PICCIONELLI:  How, then does an Anti-Freeze Trust help the client?

GLEITMAN:  If a client sets-up an Anti-Freeze Trust, doing so allows a client’s business expenses and personal expenses to be paid, and the client can avoid the impact of the freeze order until they are in court 30 days after the freeze order. I have often observed federal attorneys who are stunned when they realize that the government cannot force a client to sign a consent order — a great day for liberty. The Anti-Freeze Trust can be set up to hold sufficient cash in a bank account that is not subject to the jurisdiction of the U.S. courts, so that the subject business and others affected by the freeze order can survive to effectively challenge the order. This is because the freeze order does not apply to the accounts held in the Anti-Freeze Trust. The money in that account is used, for example, to pay all personal expenses, attorney’s fees, employee’s salaries, and other business expenses for the client who has the freeze order issued against them. Because a client has money to pay personal expenses and business expenses, the client is not forced into this choice: either sign a consent order or go out of business. With an Anti-Freeze Trust, the client can say “no” to signing the consent order. Thirty days after the freeze order, the client gets the first chance to litigate in court both the government contention of alleged wrongdoing and the amount of the fine the government wants to assess. With an Anti-Freeze Trust, the client gets a day in court — the client gets an opportunity for justice and due process. Clients get a fighting chance to win in a game stacked against them.

PICCIONELLI:  Can you give me some examples of the types businesses you have helped deal with freeze orders and orders to install receivers?

GLEITMAN:  Online adult entertainment businesses, of course, and television marketing businesses, a health supplements marketing business, a bricks-and-mortar casino, a business selling toner cartridges for laser printers by telephone, and businesses providing financial processing services for online gaming or online adult businesses.

PICCIONELLI:  It seems to me that an Anti-Freeze Trust could conceivably be set up for a client in any state.

GLEITMAN:  Absolutely, I have done so for clients from Connecticut to California, and many in between.

PICCIONELLI:  Switching gears to private plaintiff litigation, what are examples of private plaintiff litigation that can be helped by your asset protection strategies?

GLEITMAN:  A client involved in online marketing could be a defendant in an abusive lawsuit with regard to a claim of unlicensed use of music, an adult business could be subject to allegations of patent infringement by a patent troll, a disgruntled employee could bring a sexual harassment law suit, or a website member could bring a class action lawsuit — all of these are types of actions that are started by private plaintiffs that can put a substantial amount of a company’s assets at risk. I use the term “Regular APP Trust” to refer to a trust that we set up that protects against judgments from private plaintiffs. Many clients set-up both a Regular APP Trust and an Anti-Freeze Trust, however.

PICCIONELLI:  Private plaintiff lawsuits of the type you just mentioned have all been topics of XBIZ articles I’ve written to forewarn our readers about the serious problems they can pose to virtually any adult entertainment business. How does a Regular APP Trust help an adult entertainment defendant facing such an action, and how does it differ from your Anti-Freeze Trust?

GLEITMAN:  A Regular APP Trust is set-up to defend against a private plaintiff who gets a judgment and tries to enforce that judgment after a trial is over; an Anti-Freeze Trust is designed to protect a client from court remedies — a freeze order — that occur before a trial. The structure of a Regular APP Trust and an Anti-Freeze Trust are designed differently to handle different circumstances. A Regular APP Trust prevents a private plaintiff who gets a judgment against a client from enforcing the judgment, so the client keeps all of their assets.

PICCIONELLI:  I think that it is important that we mention the fact that neither an Anti-Freeze Trust or a Regular APP Trust for private litigation can, in and of itself, prevent a lawsuit.

GLEITMAN:  That’s correct. Anyone can sue anyone at any time for any amount of money provided that they comply with the rules of the court. A party cannot prevent someone from bringing a lawsuit against them, but if someone gets a judgment against the party, a Regular APP Trust can prevent a plaintiff from enforcing a judgment against the party.

PICCIONELLI:  What about the use of foreign assets held in an Anti-Freeze Trust?

GLEITMAN:  If a client has set-up an Anti-Freeze Trust with assets outside the U.S., those assets are generally available outside the U.S. court system to pay all of a client’s legal obligations, both their business and personal expenses.

If you would like to contact Steve Gleitman for further information or consultation regarding the topics discussed in this article, you can reach him at (310) 553-5080 or at stevegleitman@gmail.com.

Gregory A. Piccionelli, an intellectual property attorney specializing in adult entertainment matters, can be reached at Piccionelli & Sarno at (818) 201-3955 or greg@piccionellisarno.com.

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