CONSUMER FINANCIAL PROTECTION BUREAU, et al., Plaintiffs, v. STRATFS, LLC (f/k/a STRATEGIC FINANCIAL SOLUTIONS, LLC), et al., Defendants, and STRATEGIC ESOP, et al., Relief Defendants.
24-CV-40-EAW-MJR
UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK
MAR 25 2025
REPORT, RECOMMENDATION AND ORDER
Lit Def Strategies, LLC
Defendant Lit Def Strategies, LLC (“Lit Def“) is owned and controlled by defendant Jason Blust. (Dkt. No. 115-1, pg. 15) Lit Def provided litigation support services to law firms. (Id. at 14, 39) The law firms supported by Lit Def engaged in consumer debt settlement and debt litigation, in exchange for fees. (Dkt. No. 183, pgs. 10-11) The law firms provided these services together with defendant StratFS, LLC (“StratFS“) and its related entities and affiliates (hereinafter referred to as “Strategic‘s debt-relief services” or “Strategic‘s debt-relief operation“).3 (Id.) Plaintiffs allege, inter alia, that Lit Def, together with Blust, provided substantial assistance to the law firms in collecting unlawful advance fees from consumers in exchange for debt-relief services, in violation of the Telemarketing Sales Rules (“TSR“). (Dkt. No. 366) Blust controlled the law firms supported by Lit Def, and Blust served as a liaison between the law firms and StratFS with regard to the Strategic‘s advance fee debt-relief services.4 (Dkt. No. 183, pg. 47)
The TRO
On January 11, 2024, the Honorable Lawrence J. Vilardo issued a temporary restraining order (“TRO“) with asset-freeze, appointment of Receiver Thomas McNamara (the “Receiver“), and other equitable relief. (Dkt. No. 12) The TRO defined “defendants” as all corporate and individual defendants named in the lawsuit, including Jason Blust. (Dkt. No. 12, pg. 6) The TRO identified Lit Def as a “receivership defendant.”5 (Id. at 8-9) The TRO extended the definition of “receivership defendant” to include Lit Def‘s subsidiaries, affiliates, divisions, successors, and assigns. (Id.) The TRO also identified, as receivership defendants, “any other business related to the [d]efendants’ debt-relief services and which the....Receiver has reason to believe is owned or controlled in whole or in part by any of the [d]efendants or relief defendants included in this definition, and includes the fictitious names under which they do business.” (Id.)
The TRO imposed a number of cooperation requirements on Lit Def and Blust. Specifically, the TRO required Lit Def and Blust to provide the Receiver with physical and electronic access to their business operations, and to identify to the Receiver the
Continued Operation of Lit Def
On January 25, 2024, counsel for Lit Def informed the Receiver that, upon entry of the TRO, Lit Def had ceased all operations and laid off all employees. (Dkt. No. 150, pgs. 6-7) The Receiver relayed this information in a preliminary report to the Court. (Dkt. No. 115-1, pgs. 14-15) Likewise, Blust and Lit Def jointly represented to the Court that Lit Def had ceased operations when the TRO was entered. (Dkt. No. 149, pgs. 2-3)
On February 23, 2024, the Receiver became aware of a series of emails suggesting that, contrary to the representations made by defendants to the Receiver
The Receiver then found additional client-related emails in StratFS‘s records suggesting that Lit Def had continued to operate after the imposition of the TRO. On January 30, 2024, Gallagher was copied on an email asking that an attached complaint be sent “to litigation.” (Dkt. No. 179-13) On January 31, 2024, Gallagher responded “Thank you...[w]e will assign this to a litigation attorney.” (Id.) Also on January 31, 2024, Gallagher received an email from one of the law firms asking about a client with an “upcoming hearing.” (Dkt. No. 179-14) Later that same day, Gallagher requested litigation documents from a StratFS employee “so that [Gallagher] could get an attorney on it immediately.” (Id.) On February 23, 2024, the StratFS VP of Client Relations emailed Blust asking about the “status of Lit Attorneys and Non-Lit Attorneys.” (Dkt. No. 179-1, pgs. 13-14) Later that same day, Gallagher, who had been copied on the email by Blust, responded by stating “[w]e haven‘t had much turnover on the lit side, and the
The receiver brought these emails to the attention of the Court and the parties on February 26, 2024. (Dkt. No. 179) Blust then admitted that Lit Def had continued to operate “for a short period of time on a limited basis” after the issuance of the TRO.9 (Dkt. No. 211, ¶ 5; Dkt. No. 572, pg. 2)
The Receiver‘s Discovery of Fidelis Legal Services, LLC
Also on February 23, 2024, the Receiver received information suggesting that Fidelis Legal Support Services LLC (“Fidelis“), another litigation support services company potentially owned and/or controlled by Blust, was operating in tandem with Lit Def in assisting Strategic‘s debt-relief operation, past the imposition of the TRO.10 (Dkt. No. 179-1, pg. 6) Specifically, in at least one of the email communications discussed previously, Gallagher received the initial communication or inquiry through her Lit Def email account, but responded using an email account associated with the domain “fidelissupport.com.” (Dkt. No. 179-1, pgs. 12) These email exchanges suggested to the Receiver that Gallagher, manager of Lit Def, was continuing to conduct Lit Def‘s operations utilizing both a Lit Def email account and a Fidelis email account.
The Receiver further reviewed StratFS‘s client records and found various emails from individuals using the “fidelissupport.com” domain as far back as February 2022.
Prior to the discovery of these emails, the Receiver was unaware of Fidelis. (Dkt. No. 179-1, pg. 8) Upon further investigation, the Receiver learned that Fidelis was formed on January 25, 2021 as a Nevada limited liability company. (Dkt. No. 179-3) The sole manager listed for Fidelis is Cameron Christo, an individual with a residential address in Chicago, Illinois.12 (Id.) Fidelis’ website lists a Las Vegas virtual office and indicates that it provides “top quality support to assist lawyers for complicated cases.” (Dkt. No. 179-4) Lit Def and Fidelis’ websites are similar, and indicate that the two businesses provide the same types of services. (Dkt. Nos. 179-4; 179-5)
The Receiver later uncovered additional emails suggesting that Blust was involved with Fidelis. Specially, the Receiver located an October 2021 email thread between the StratFS Controller and Blust‘s accountant, ostensibly concerning a transfer
Based on this investigation, the Receiver notified Fidelis that it qualified as a receivership defendant under the TRO.13 (Dkt. No. 190-1, pg. 9) The Receiver also filed the instant order to show cause as to why Blust and Lit Def should not be held in civil contempt, on the basis that Lit Def continued to operate both on its own, and under the guise of Fidelis, in violation of the TRO. (Dkt. No. 179)
Blust Declares No Involvement in Fidelis
In response to the motion for contempt, Blust filed a signed declaration, pursuant to
Blust further declared that when Lit Def took on less business from 2021 to 2023, he “became aware that a few employees of [Lit Def] began simultaneously working for Fidelis, and that he approved of their doing so.” (Id. at ¶ 10) Blust averred that “this arrangement in no fashion involved an interest of any kind on [his] part, including financial or supervisory, in the operation of Fidelis.” (Id. at ¶ 11, emphasis added) Blust further declared that any statement by the Receiver that he “beneficially owned or controlled Fidelis” was false, as was the Receiver‘s claims that Fidelis was “operating in parallel with, as a proxy of, or as a successor to” Lit Def. (Id. at ¶ 15)
Christo and Fidelis Deny Involvement by Blust
On March 4, 2024, Fidelis filed a motion challenging the Receiver‘s determination that it is a receivership defendant. (Dkt. No. 190) In support, Cameron Christo filed a signed declaration, pursuant to
Christo further stated that Shirley Saavedra, Jean Komis, Jennifer Moy, Peggy Slivka, and Katherine Rosenberg all worked for him at Fidelis while also working at Lit Def. (Id. at ¶ 26) Christo stated that Michelle Gallagher worked at Fidelis as a manager of these employees while also continuing to work as a manager at Lit Def. (Id. at ¶ 24, ¶ 27) Christo declared that while Fidelis’ employees partially overlapped with Lit Def, their work did not. (Id. at ¶ 22) Christo declared that in the fall of 2021, Strategic Client Support, LLC hired him to “vet a new software program.” (Id. at ¶ 36) Christo stated that this fee had nothing to do with litigation support, that Blust did not receive any portion of the fee, and that Blust “does not own or control Fidelis.” (Id. at ¶ 38)
Katherine Rosenberg Declaration
In his response to Fidelis’ motion challenging the receivership designation, the Receiver submitted, inter alia, a declaration by Katherine Rosenberg. (Dkt. No. 212-1) Rosenberg‘s declaration directly contradicted Blust and Christo‘s averments that Lit Def and Fidelis were wholly separate companies. (Id.) Rosenberg‘s declaration instead suggested that Fidelis was Lit Def‘s successor, with the companies sharing employees, management, customers, procedures, equipment, and software accounts. (Id.)
Rosenberg explained that, in August of 2021, she applied for a paralegal role and was contacted by an individual who represented themselves as being from Fidelis. (Id.
Rosenberg further stated that, in the fall of 2021, Gallagher informed her and her co-workers that Lit Def would “soon formerly become Fidelis” and that Lit Def employees “would transition over to become Fidelis employee.” (Id. at ¶ 6) Rosenberg recalled Gallagher describing this as a “merger” of Lit Def and Fidelis, and also stating that Fidelis was “buying” Lit Def. (Id.) According to Rosenberg, employes were not given a choice regarding the transition of their work to Fidelis. (Id.)
Rosenberg stated that management set February 1, 2022 as the official transition date. (Id. at ¶ 7) Employees were told that ligation files originating before that date would be treated as “Lit Def” files and serviced from “litdefstrategies.com” email accounts, but that new litigation files after that date would be “Fidelis” files and serviced from “fidelissupport.com” email accounts. (Id.) Rosenberg explained that before February 1, 2022, she serviced only Lit Def litigation files. (Id. at ¶ 8) Between February 2022 and April 2023, she serviced both Lit Def and Fidelis files. (Id.) Beginning on April 10, 2023, Rosenberg was assigned Fidelis files only. (Id.) She used the same tablet computer initially provided by Lit Def to perform work for both companies. (Id. at ¶ 4)
During the transition, Rosenberg received two paychecks, with the first $1,000 of her pay coming from Lit Def and the remainder from Fidelis. (Id. at ¶ 11) She was not asked to clock out, keep separate time sheets, or otherwise formally differentiate her time spent working on Lit Def as opposed to Fidelis files. (Id.)
Rosenberg explained that the transition from Lit Def to Fidelis had virtually no impact on her day-to-day work. (Id. at ¶ 10) To that end, she worked with the same attorneys, co-workers, and management; followed the same procedures; and used the same computer and software programs. (Id.) Beginning in April 2023, Rosenberg was paid by Fidelis only and she worked solely on Fidelis files. (Id. at ¶ 12) A co-worker was assigned to service only Lit Def files (Id.) Rosenberg stated that she met Christo only once, and that she did not recall Christo having any involvement in Fidelis’ day-to-day operations. (Id. at ¶ 13) Based on Rosenberg‘s experience, she believed Fidelis was a successor to Lit Def. (Id.)
Rosenberg further recounted that, in January of 2024, employees were told that they could not access any email accounts, payroll information, or tax information related
Christo and Gallagher Further Deny Involvement by Blust
In a reply to the Receiver‘s response, Christo submitted another declaration, also under penalty of perjury. (Dkt. No. 233-1) Christo stated that Rosenberg‘s assertion that Fidelis was Lit Def‘s successor was inaccurate; that Fidelis did not receive anything from Lit Def; and that Fidelis did not take over any litigations supported by Lit Def. (Id. at ¶ 14) Christo stated that Lit Def never transferred any asset to Fidelis. (Id. at ¶ 10) Christo further stated that employees working for Lit Def and Fidelis “scrupulously segregated their work for the two companies.” (Id.)
Christo‘s declaration again emphasized that Blust does not own or control Fidelis. (Id. at ¶ 4, ¶ 6) Christo specifically declared that “Blust is not a consultant for Fidelis and he does not control it in any respect...[h]e does not set policy, he does not prescribe strategy, he does not make decisions, he does not direct operations...he has no role in the running of Fidelis‘s business“. (Id. at ¶ 7) Christo also averred that “[f]rom the moment I first heard the Receiver‘s allegation, it has mystified me. Jason Blust simply does not own or control Fidelis is any way, and Fidelis is not, and never was, Lit Def‘s successor or alter ego.” (Id. at ¶ 19)
In further support of its opposition to the receivership designation, Fidelis submitted the declaration of Michelle Gallagher. (Dkt. No. 233-5) Gallagher‘s declaration was also submitted under penalty of perjury, pursuant to
Gallagher also declared that, while working at Fidelis, she reported to Christo. (Id. ¶ 28) Gallagher averred that she would contact Christo, and not Blust, with any Fidelis issues she could not resolve. (Id.) Gallagher stated that if she ever asked Blust for help with a Fidelis matter “he would have asked me, in colorful terms, why I was bothering him with Fidelis.” (Id.) Gallagher stated that, based on her observations, Christo made “all executive decisions with regard to personnel, payroll, purchasing, and contracting.” (Id. at ¶ 29)
Discovery of Lit Def and Fidelis Emails
On March 20, 2024, Lit Def provided the Receiver with passwords for its email accounts. (Dkt. No. 237-1 at 1) The Receiver then found numerous internal Lit Def communications showing that Blust was directly involved in directing Fidelis’ business operations and vendor contracts, and that Blust personally dictated Fidelis employees’
On January 11, 2022, Blust sent Gallagher an email with “going forward” instructions wherein he indicated that any new file coming in after 2/1/22 would be worked on by “this new team.” Blust then told Gallagher how employees’ weekly compensation should be divided between Fidelis and Lit Def.17 Blust suggested telling attorneys that Fidelis is a “new company working files but same personnel.” Christo was not included in the discussion. (Dkt. No. 237-3)
On January 11, 2022, Blust sent Gallagher a list of law firms that would be “moving” to Fidelis. Blust told Gallagher to “get everyone moving over [to Fidelis] new login/passwords for lit def software so they can continue to work just under Fidelis, etc. Should be that simple.” Blust further stated “I don‘t want Charles [the managing director of a vendor] asking for a contact for Fidelis – so, same people different name if he asks[.]” Gallagher responded with suggestions to Blust as to which employees to “move.” Christo was not included in the discussion (Dkt. No. 237-4)
Gallagher sent Blust weekly employee productivity reports for both Lit Def and Fidelis employees for years. (Dkt. No. 237-5) There is no indication a similar report was provided to Christo. (Dkt. No. 576, pg. 13)
Blust periodically instructed Gallagher to “move” employees between Lit Def and Fidelis payrolls. (Dkt. No. 237-6; Dkt. No. 237-12)
Blust determined the 2022 and 2023 bonus amounts for all Lit Def and Fidelis employees, apparently without Christo‘s involvement. (Dkt. No. 237-10; Dkt. No. 237-14)
After the Court issued the TRO and the Receiver entered StratFS‘s offices, Blust instructed Gallagher to make sure there would be no communication with Strategic, and Gallagher passed this message along to Fidelis‘s employees, including Rosenberg. (Dkt. No. 576, pgs. 13-14)
Blust complained that Fidelis employees Hayfa Zayad and Kisten Power had decreased work productivity.18 (Dkt. No. 27-5)
Blust and Gallagher discussed hiring a new Fidelis employee to work only on Fidelis files, and not on Lit Def files, without including Christo in the conversation. (Dkt. No. 270-6)
Gallagher told an HR manager to pay Zayed a bonus “from Fidelis” and included Blust on the email, but did not include Christo. (Dkt. No. 270-7)
Blust set Fidelis‘s holiday schedule. (Dkt. No. 270-9)
On May 23, 2024, the Court heard oral argument addressing the Receiver‘s contempt motion and Fidelis’ motion challenging the receivership designation, at which time the Court determined that an evidentiary hearing was necessary to address the contempt motion. The Court ordered that Fidelis provide discovery to the Receiver, including emails. The Receiver‘s review of that discovery produced more evidence that Blust exercised control over Fidelis:
A text message from Gallagher to Christo regarding an apparent falsehood they agreed to tell a vendor: “[The vendor] doesn‘t know about fidelis because [Blust] doesn‘t want him to... Essentially the messaging is that we want to create 2 separate paralegal teams.” (Dkt. No. 606-3 at 3)
An email from Gallagher to Christo, in which Gallagher stated she needed to check with Blust regarding Fidelis work assignments. (Dkt. No. 606-4)
An email exchange showing Blust determined Fidelis‘s December 2022 employee bonuses and communicating them to Gallagher; Gallagher then asked Christo to enter the bonuses Blust set “on website,” referring to Fidelis‘s payroll account. (Dkt. No. 606-5)
In response to the Receiver‘s production of these emails, Christo and Gallagher submitted supplemental declarations, again under penalty of perjury. (Dkt. Nos. 320-1; 320-3) Both attempted to downplay the apparent contradictions between their prior
The Receiver also discovered additional information about the $750,000 “technology” payment from StratFS to Fidelis, which Christo claimed, in his first two declarations, was compensation he received from StratFS for vetting a software program. The Receiver‘s search of StratFS emails revealed no evidence of engagement with Fidelis for work during this time period. (Dkt. No. 622, pg. 16) The Receiver found no evidence of a contract, deliverables, or correspondence as to any consulting services or software “vetting” by Christo. (Id.) In addition, Brian Reiss, StratFS‘s former Senior Vice President of Technology and Data Security, stated, in a sworn declaration, that he had no knowledge of Christo, Fidelis, or any IT contractor performing the work described by Christo. (Dkt. No. 576-11) Moreover, the Receiver uncovered evidence indicating that the $750,000 was actually intended as reimbursement to Blust, from Strategic, for half of a $1.5 million dollar settlement reached with Daniel Rufty, an attorney formerly associated with one of the law firms controlled by Blust, that was paid via Lit Def.19 (Dkt. No. 576, pgs. 28-32; Dkt. No. 576-7; Dkt. No. 576-9 at 2)
An evidentiary hearing addressing the Receiver‘s contempt motion against Blust and Lit Def was held, before this Court, on January 23 and 24, 2025. Katherine Rosenberg, Jason Blust, Cameron Christo, and Michelle Gallagher were all called as witnesses. When questioned on direct examination, Blust, Christo, and Gallagher all invoked their Fifth Amendment privilege against self-incrimination in response to every question asked of them.
Jason Blust Testimony
Blust was asked if it was correct that he arranged with Christo to establish Fidelis in 2021 to replace Lit Def, as an entity to support Blust‘s law firms, in part because Blust and his companies had been sued numerous times in 2019 and 2020. (Dkt. No. 622, Exh. 1, 40:14-21; 40:22-41:22) Blust was asked if, after Fidelis was formed, he began shifting litigation defense work from Lit Def to Fidelis. (Id. at 21:4-18) Blust was asked to confirm whether he determined which law firms associated with Strategic‘s debt-relief operation would stop being serviced by Lit Def and begin being serviced by Fidelis, and whether he controlled which law firms were assigned to which entity going forward. (Id. at 42:17-43:1; 16:16-25) Blust was asked to acknowledge that he instructed Gallagher to begin assigning Lit Def employes to Fidelis to assist with the law firms he had transferred to Fidelis, and that he later controlled whether and when employees worked for each entity. (Id. at 12:15-3:2; 43:2-9) Blust asserted his Fifth Amendment privilege in response to each of these questions.
Blust was questioned whether he or his law firm, Client First Bankruptcy, provided tablet computers to Lit Def employees, which those employees retained and
The Receiver further questioned Blust regarding his control over the compensation for Lit Def and Fidelis employees, including setting annual bonuses and pay raises, without the involvement of Christo. (Id. at 15:23-16:6; 44:12-45:13; 45:14-22; 45:23-46:3) Blust was asked if it was correct that he made the final decision as to whether to hire a Fidelis employee. (Id. at 17:11-15) Blust was asked to confirm that (1) Gallagher sent him, and not Christo, weekly employee productivity reports for Fidelis employees until January 2024; and (2) based on these production reports, he would instruct Gallagher to transfer employees from Lit Def to Fidelis, without consulting Christo. (Id. at 43:10-44:4; 44:5-11) Blust was asked to acknowledge that Christo was the owner of Fidelis in name only. (Id. at 18:21-19:1; 47:1-6) Blust was also questioned as to whether he received things of value from Christo and Fidelis. (Id. at 19:8-13) Blust asserted his Fifth Amendment privilege as to each of these questions.
The Receiver asked Blust to confirm that (1) Lit Def funded a $1.5 million settlement with attorney Daniel Rufty; and (2) Blust had an agreement with defendant Ryan Sasson, the owner of StratFS, that StratFS would reimburse Lit Def for one half of the settlement amount. (Id. at 49:11-18; 49:19-24) Blust was asked to acknowledge that
Blust was asked to acknowledge that he concealed his control of Fidelis from the Receiver and the parties to the lawsuit. (Id. at 47:7-12) Blust was asked if it was true that he knowingly violated the TRO by continuing to operate Lit Def after having knowledge of the TRO. (Id. at 57:10-15) Blust was asked if it was true that he knowingly violated the TRO by also continuing to operate Fidelis. (Id. at 57:24-58:5) Blust was asked if it was true that he knowingly violated the TRO by submitting false testimony in order to conceal his control of Fidelis and prevent the Receiver from taking control of assets of the receivership. (Id. at 58:6-15) Blust asserted his Fifth Amendment privilege in response to each of these questions.
Cameron Christo Testimony
Christo was asked to confirm that (1) Blust controlled whether former Lit Def employees worked at Fidelis; (2) Blust made all compensation decisions for Fidelis; and (3) Blust made all hiring and staffing decision for Fidelis. (Dkt. No. 622, Exh. 2 at 26:17-19; 37:22-38:16) Christo was asked if it was correct that he was not involved in overseeing Fidelis’ day-to-day operations, and that Blust and Gallagher actually oversaw daily operations. (Id. at 30:10-12; 30:13-32:24; 32:25-34:10) Christo was asked
Christo was asked to admit that the following statements in his declaration were false: (1) Blust exercised no control over Fidelis, (2) Blust made no decisions for Fidelis; and (3) Blust had no role in the running of Fidelis’ business. (Id. at 71:13-72:1) Christo was asked to acknowledge that Blust provided Fidelis with all of its clients, most of its employees, and the “infrastructure for Fidelis to operate.” (Id. at 60:19-73:2) Christo was asked to confirm that (1) he did not bring in any new law firms to Fidelis; and that (2) all of the law firms serviced by Fidelis were controlled by Blust. (Id. at 20:23-21:2; 21:3-7) Christo was asked if it was true that, directly contrary to the statements in his declaration, Fidelis was Lit Def‘s successor. (Id. at 17:22-18:1; 20:18-22; 72:13-73:2) Christo asserted his Fifth Amendment privilege in response to each of these questions.
Christo was asked to confirm that he was never actually hired by StratFS to perform any vetting of a software platform. (Id. at 63:19-23) Christo was further asked to acknowledge that, contrary to the assertions in his declarations, he did not perform any work for Strategic in exchange for the $750,000 payment that was transferred to Fidelis. (Id. at 42:6-43:9; 63:4-18; 64:16-22) Christo was also asked to acknowledge that his statement, in his declaration, that “Lit Def never transferred any asset, right, duty, obligation or liability to Fidelis,” was false. (Id. at 72:2-12) Christo was asked to confirm
Michelle Gallagher Testimony
Gallagher was asked if she and Blust jointly made hiring and firing decisions at Fidelis. (Dkt. No. 622, Exh. 1 at 87:11-15) Gallagher was asked if it was true that she sent Blust file submission reports from both Lit Def and Fidelis until at least January 8, 2024, and that Blust used those reports to decide whether to move certain Lit Def staff to Fidelis. (Id. at 88:9-13; 89:5-10; 99:14-18) Gallagher was asked whether it was true that Blust controlled the bonuses and salaries of Fidelis employees, including her own. (Id. at 89:21-25; 90: 1-5; 90: 16-21; 90:22-91:2; 102:15-21) Gallagher was asked to confirm that Blust did not consult Christo in making these decisions. (Id. at 103:4-1; 103:12-16; 90:11-15) Gallagher asserted the Fifth Amendment privilege in response to every question.
Gallagher was asked whether it was true that in January of 2022, Blust told her which employes to switch over to Fidelis’ files and payrolls, without consulting Christo, and that Blust directed her as to how to split the employees’ compensation between Fidelis and Lit Def. (Id. at 10:22-102:3; 102: 4-9) Gallagher was asked if it was true that Blust periodically transferred employees from Lit Def to Fidelis without consulting with Christo. (Id. at 103:24-104:4) Gallagher was asked to confirm that she regularly brought Fidelis matters to Blust‘s attention and that statements to the contrary, made in her declaration, were false. (Id. at 105:3-7; 105:8-18) Gallagher asserted the Fifth Amendment privilege in response to each of these questions.
Gallagher was asked if she was aware that Blust continued to be involved in the operation of Fidelis after entry of the TRO. (Id. at 91:3-8; 91:14-19; 91:20-25) She was asked to confirm that Blust emailed her account login information of employees after entry of the TRO, and that he instructed her as to how Fidelis employees could continue to work with StratFS after entry of the TRO. (Id.) Gallagher was asked to confirm that the statement she provided in her declaration, namely that Blust had no role in Fidelis’ operation and exercised no control over the running of Fidelis’ business, was untruthful. (Id. at 100:22-101:8) Gallagher invoked her Fifth Amendment privilege in response to each of these questions.
Rosenberg testified, in a consistent mater, about many of the same facts set forth in her prior declaration. Rosenberg testified that she is a paralegal and that she applied to a job posting in August of 2021. (Dkt. No. 595, pgs. 112-113) She received a call for an interview with Fidelis. (Id. at 113) She interviewed with Michelle Gallagher and was hired to work for Lit Def as a support specialist/legal assistant. (Id. at 113-114) Rosenberg worked remotely and was provided a Microsoft Surface tablet. (Id. at 114-15) Her login name was associated with Client First Bankruptcy. (Id.) Around February of 2022, Rosenberg was told by Gallagher that Lit Def employees would be “moving over” to a new company, and Gallagher explained the change was “like a merger.” (Id. at 121-22) Employees were told that all of their day-to-day work would remain the same. (Id.) Rosenberg was not given a choice as to whether to stay with Lit Def or begin working on files with the new company. (Id. at 124)
After Rosenberg began working on Fidelis files, her managers remained the same and there were no changes to her day-to-day work activities. (Id. at 127, 157) Rosenberg received no new or additional training from Fidelis (Id. at 129) She never interviewed with Christo and met him only one. (Id. at 130) Fidelis did not send her any new technology or a new computer; she used the same software programs as she used at Lit Def; and she continued using her Client First Bankruptcy login as she had done with Lit Def. (Id. at 128-29, 139-40, 159) Rosenberg testified that employees were told that if an email associated with a Fidelis file was sent to their Lit Def email address, they were to copy and paste the message to a Fidelis email, in order to make it a “clean” email. (Id. at 127)
Credibility
After having the opportunity to listen to the in-person testimony of Katherine Rosenberg and observe her demeanor during the evidentiary hearing, the Court finds her to be wholly credible. In addition, Rosenberg‘s testimony was consistent with her prior declaration and was corroborated by the Lit Def and Fidelis internal communications discovered by the Receiver. Thus, the Court credits Rosenberg‘s hearing testimony as well as the statements in her declaration.
CONCLUSIONS OF LAW
Adverse Inferences
Unlike in a criminal proceeding, “the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them.” Louis Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83, 98 (2d Cir. 2012) (citing Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S. Ct. 1551, 47 L. Ed. 2d 810 (1976)). Thus, where parties or material witnesses invoke their Fifth Amendment right against self-incrimination in response to questions, the Court has broad discretion to draw adverse inferences that the testimony those witnesses would
The Court may also draw adverse inferences against parties based on the invocations of the Fifth Amendment by other parties in the case or non-parties, where there is some relationship or loyalty established between the witness and the other party. Libutti, 178 F.3d at 122. See also Brinks’ Inc. v. City of New York, 717 F.2d 700, 710 (2d Cir. 1983) (adverse inference based on former employee‘s Fifth Amendment assertion); Willingham v. County of Albany, 593 F. Supp. 2d 446 (N.D.N.Y. 2006) (party‘s invocation of Fifth Amendment merited adverse inference as to another party where both parties’ interests “have remained intertwined leading up to and continuing through this litigation“). “[T]he overarching concern is fundamentally whether the adverse inference is trustworthy under all of the circumstances and will advance the search for the truth.” Id. at 452-53 (internal citations omitted).
Here, Blust, Christo, and Gallagher all asserted their Fifth Amendment privilege with respect to every question asked during the evidentiary hearing. The majority of that questioning concerned apparent false statements, in these witnesses’ prior declarations,
Indeed, the record indicates a relationship or loyalty between these witnesses. They are all presently defendants or relief defendants in this action. Blust is Gallagher‘s former employer. Christo has an interest in preventing Fidelis from being named as a receivership defendant. Gallagher and Blust have an interest in showing that Fidelis was not created as a successor to, or continuation of, Lit Def. Gallagher and Blust also have an interest in showing that they did not operate Lit Def and/or Fidelis in violation of the TRO. Moreover, these adverse inferences are corroborated by independent evidence, including the contemporaneous, internal Lit Def and Fidelis communications discovered by the Receiver, as well as the credible declaration and testimony offered by Rosenberg.
Fidelis is a Successor to Lit Def and is Controlled by Jason Blust
Based on the adverse inferences drawn from the testimony of Blust, Christo, and Gallagher, and the other evidence in the record, the Court finds that, in or around
Beginning in February of 2022, Blust directed which Lit Def employees would begin transitioning to Fidelis and which employees would remain at Lit Def. Blust directed how those shared employees would be paid by each company. Blust also directed how certain Lit Def files would be transitioned to Fidelis and which Lit Def law firms would become clients of Fidelis. Lit Def computers were transferred, at no cost, to Fidelis.
During the transition, Lit Def and Fidelis were interchangeable. Stated another way, they operated in parallel or as essentially one entity. They serviced the same law firms. The majority of these law firms were related to Strategic‘s debt-relief operation and most, if not all, were controlled by or connected to Blust.22 Lit Def and Fidelis had
The record also shows that Blust exercised control, in whole or in part, over Fidelis. He directed employee assignments and monitored employee productivity at Fidelis. Blust was directly involved in the hiring of Fidelis employees. He set the holiday schedule. He determined employee compensation and bonuses. When Gallagher, the manager of Fidelis, had questions regarding Fidelis’ employees or operations, she regularly contacted Blust. The record further shows that Christo had minimal involvement in Fidelis’ day-to-day operations, including personnel management, and
Fidelis is a Receivership Defendant
The TRO named Lit Def, as well as its “subsidiaries, affiliates, successors, and assigns” as receivership defendants. (Dkt. No. 12, pg. 9) The TRO also defined receivership defendants to include “any other business related to the Defendants’ debt-relief services and which the...Receiver has reason to believe is owned or controlled in whole or in part by any of the Defendants, and includes fictitious names under which they do business.” (Id. at 8) These definitions of receivership defendants remain the same in the PI issued by this Court on March 4, 2024. (Dkt. No. 184, pg. 8)
Fidelis meets the definition of a receivership defendant under both the TRO and the PI. For all of the reasons just stated, the Court finds that Fidelis is a successor and assign of Lit Def. Also for the reasons just stated, the Court finds that Fidelis is controlled, in whole or in part, by defendant Jason Blust, and that it is related to defendants’ debt-relief services.24 Thus, the Court orders that, consistent with the Receiver‘s designation, the receivership is expanded to include Fidelis Legal Support Services, LLC.
Fidelis previously argued that the Receiver does not have jurisdiction over it because the Receiver did not file copies of the complaint and an appointment order in Nevada, where Fidelis is registered, or in Illinois, where Fidelis’ assets are located. The Court rejects this argument. Fidelis is a defendant in this lawsuit and meets the
Jason Blust and Lit Def Should be Found in Civil Contempt for Violating the TRO
A court may hold a party in contempt for violation of an order “if (1) the order the party failed to comply with is clear and unambiguous, (2) the proof of noncompliance is clear and convincing, and (3) the party has not diligently attempted to comply in a reasonable manner.” CBS Broad. Inc. v. FilmOn.com, Inc., 814 F.3d 91, 98 (2d Cir. 2016). Where a court order requires or prohibits an action by a corporation, the order is also “in effect a command to those who are officially responsible for the conduct of its affairs.” Id. at 100. Failure to comply with a TRO in a receivership justifies a contempt order. See S.E.C. v. Princeton Econ. Int‘l Ltd., 152 F. Supp. 2d 456, 459 (S.D.N.Y. 2001) (finding contempt for failure to turn over corporate assets to receiver in compliance with the TRO).
The TRO also clearly and unambiguously required Blust and Lit Def to provide the Receiver with any information necessary for the Receiver to identify and recover assets of the receivership estate. The TRO required Blust and Lit Def to notify the Receiver of any receivership assets, including those held in any other name. The TRO further required Blust and Lit Def to cooperate with the Receiver, and prohibited Blust and Lit Def from taking any action that would interfere with the Receiver‘s ability to take control of any assets subject to receivership. Here, the Receiver has put forth clear and convincing evidence that Blust and Lit Def violated these requirements by failing to
Moreover, Blust and Lit Def‘s conduct, in violation of the TRO, went beyond a mere failure to disclose the existence of Fidelis. The record shows that once the Receiver himself discovered Fidelis and its likely connection to Blust and Lit Def, Blust refused to cooperate with the Receiver by providing truthful information regarding his own involvement with Fidelis and Fidelis’ apparent connection to the receivership estate. Instead, Blust steadfastly denied that he had any interest in, or control over, Fidelis. Blust also steadfastly denied that Fidelis was, in any manner, a proxy, assign, or successor to Lit Def. To that end, Blust, together with Christo and Gallagher, went to significant lengths to hide Blust‘s involvement with, and control over, Fidelis, as well as Fidelis’ significant connections to Lit Def. These lengths included filing multiple declarations with the Court, under penalty of perjury, that have now been determined to contain material falsities.26 Thus, the Court finds that not only did Lit Def and Blust violate the TRO, but that they did so in a knowing and willful manner.27
“Civil contempt fines seek one of two objectives. One is coercion—to force the contemnor to conform his conduct to the court‘s order. The second is compensation. Where the contumacious conduct has caused injury to the beneficiary of the court‘s order, a civil fine may be imposed on the contemnor to compensate the victim for the loss or harm caused by the unlawful conduct.” New York State Nat‘l Org. for Women v. Terry, 159 F.3d 86, 93 (2d Cir. 1998). See also Manhattan Indus., Inc. v. Sweater Bee by Banff, Ltd., 885 F.2d 1, 5 (2d Cir. 1989) (“monetary sanctions for civil contempt traditionally have been awarded to compensate the plaintiff for injury caused by past noncompliance or to prevent continued disobedience“). Courts are authorized to assess attorney‘s fees where the contempt was willful. Chambers v. NASCO, Inc., 501 U.S. 32, 45 (1991).
The Receiver has requested that Blust and Lit Def be assessed a fine of $1,000 per day during the period of non-compliance, which dates back to shortly after January 11, 2024. However, the parties appear to agree, and the record appears to indicate, that Lit Def ceased operating, at the latest, in January or February of 2024. While Fidelis continues to operate, the parties appear to agree that Fidelis does not currently service any law firms that collect advance fees from consumers in exchange for debt-relief.28 There is no evidence in the record that Blust is currently transacting any business on behalf of Fidelis. The Receiver argues that Blust and Lit Def remain in contempt
However, the Court finds that Lit Def and Blust‘s violation of the TRO caused injury to receivership estate, including forcing the Receiver to expend substantial money and time in (1) bringing the instant contempt motion; and (2) defending the related motion by Fidelis challenging his conclusion that Fidelis is a receivership defendant. Thus, the Court recommends that the District Court require Blust and Lit Def to pay all attorney‘s fees and costs of the Receiver associated with both motions.29
The Receiver also requests that, with respect to a contempt remedy, the Court issue an order “requiring Lit Def and Blust to cooperate immediately and completely with the Receiver, including turning over to the Receiver all Assets and corporate records of Fidelis and turning over control of all business operations of Fidelis to the Receiver, and providing a complete financial accounting of Fidelis, including all transfers to third parties.” As noted previously, the Court has determined that Fidelis qualifies as a receivership defendant under the PI. Thus, Fidelis will now be required to comply with
Referral to the United States Attorney‘s Office
“Perjury goes to the very heart of the fair administration of justice [and] no legal system can long remain viable if lying under oath is treated as no more than a social solecism.” United States v. Cornielle, 171 F.3d 748, 753 (2d Cir. 1999). “Perjured testimony is an obvious and flagrant affront to the basic concepts of judicial proceedings. . . . Congress has made the giving of false answers a criminal act punishable by severe penalties.” United States v. Mandujano, 425 U.S. 564, 576 (1976).
As discussed at length previously, the Court finds that the declarations filed with the Court by Jason Blust, Cameron Christo, and Michelle Gallagher contained material false statements. (Dkt. Nos. 211; 190-4; 233-1; 233-5; 320-1; 320-3) The Court bases these finding on the documentary evidence submitted by the Receiver over the course of these proceedings. The Court also bases these findings on all of the testimony and evidence entered at the evidentiary hearing, including the credible testimony of Katherine Rosenberg and the adverse inferences drawn as to Blust, Christo, and Gallagher‘s testimony. The declarations submitted by Blust, Christo, and Gallagher were made under penalty of perjury, pursuant to
CONCLUSION
For the foregoing reasons, it is recommended that the Receiver‘s motion for an order to show cause as to why defendants Lit Def Strategies, LLC and Jason Blust should not be held in civil contempt be granted (Dkt. No. 179), and it is recommended that the District Court issue a finding of civil contempt against Lit Def Strategies, LLC and Jason Blust. It is further recommended that the District Court require Lit Def Strategies, LLC and Jason Blust to pay all attorney‘s fees and costs associated with the Receiver‘s motion for contempt and the Receiver‘s defense of Fidelis’ motion challenging its designation as a receivership defendant. It is also recommended that the District Court refer the conduct of Jason Blust, Cameron Christo, and Michelle Gallagher to the United States Attorney‘s Office for the Western District of New York for investigation and, if deemed appropriate, the filing of criminal charges for perjury. It is ordered that the receivership be expanded to encompass Fidelis Legal Support Services, LLC, and Fidelis’ motion challenging such designation (Dkt. No. 190) is denied.
Pursuant to
Unless otherwise ordered by Judge Wolford, any objections to the recommendation portion of this Report, Recommendation, and Order must be filed with the Clerk of Court within fourteen days of service of this Report, Recommendation, and Order in accordance with the above statute, Rules 72(b), 6(a), and 6(d) of the Federal
Failure to file objections, or to request an extension of time to file objections, within fourteen days of service of this Report and Recommendation WAIVES THE RIGHT TO APPEAL THE DISTRICT COURT‘S ORDER. See Small v. Sec‘y of Health & Human Servs., 892 F.2d 15 (2d Cir. 1989).
The District Court will ordinarily refuse to consider de novo arguments, case law and/or evidentiary material which could have been, but were not, presented to the Magistrate Judge in the first instance. See Paterson–Leitch Co. v. Mass. Mun. Wholesale Elec. Co., 840 F.2d 985, 990-91 (1st Cir. 1988).
Finally, the parties are reminded that, pursuant to W.D.N.Y. L.R.Civ.P. 72(b), written objections “shall specifically identify the portions of the proposed findings and recommendations to which objection is made and the basis for each objection, and shall be supported by legal authority.” Failure to comply with these provisions may result in the District Court‘s refusal to consider the objection.
SO ORDERED.
Dated: March 24, 2025
Buffalo, New York
MICHAEL J. ROEMER
United States Magistrate Judge