No. 13‐10696
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
NETSPHERE, INCORPORATED; ET AL,
Plaintiffs,
vs.
JEFFREY BARON,
Defendant–Appellant,
QUANTEC L.L.C.; NOVO POINT, L.L.C.,
Movants–Appellants
vs.
PETER S. VOGEL,
Appellee,
Appeal from the United States District Court
for the Northern District of Texas, Dallas Division
Docket No. 3:09-CV-988
APPELLANTS, NOVO POINT LLC’S AND QUANTEC
LLC’S, OPENNING BRIEF
PAUL RAYNOR KEATING
173 Balmes 2o 2a, 08006 Barcelona,
Spain, Tel. (415) 937.0836, Fax. (415)
358.4450
Attorneys for Appellants, Novo Point LLC
and Quantec LLC
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i
No. 13‐10696
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
NETSPHERE, INCORPORATED; ET AL,
Plaintiffs,
vs.
JEFFREY BARON,
Defendant–Appellant,
QUANTEC L.L.C.; NOVO POINT, L.L.C.,
Movants–Appellants
vs.
PETER S. VOGEL,
Appellee,
CERTIFICATE OF INTERESTED PERSONS
Pursuant to Fifth Circuit Rule 28.2.1, the undersigned counsel of record for
Appellant, Jeffrey Baron, certify that the following listed persons have an
interest in the outcome of the case. These representations are made in order
that the Judges of this Court may evaluate possible disqualification or
recusal.
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ii
Appellants:
• Jeffrey Baron
Represented by:
Leonard H. Simon
William P. Haddock
Pendergraft & Simon, LLP
2777 Allen Parkway, Suite 800
Houston, TX 77019
Tel. 713-528-8555
Fax. 713-868-1267
• Novo Point, LLC
Paul Raynor Keating
173 Balmes 2/2
08006 Barcelona Spain
Tel. (415) 937.0836
Fax. (415) 358.4450
• Quantec, LLC
Paul Raynor Keating
173 Balmes 2/2
08006 Barcelona Spain
Tel. (415) 937.0836
Fax. (415) 358.4450
Appellee:
• Peter S. Vogel, Receiver for
Netsphere, Inc.
Represented by:
David J. Schenck
Dykema Gossett PLLC
1717 Main Street, Ste. 4000
Dallas, Texas 75201
Tel. 214-462-6455
Fax. 214-462-6401
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iii
Other Interested Parties:
• Daniel J. Sherman, Trustee
Represented by:
Raymond J. Urbanik
Munsch, Hardt, Kopf & Harr PC
500 N. Akard St., Ste. 3800
Dallas, TX 75201-6659
Tel. 214-855-7590
Fax. 214-978-4374
• Gardere Wynne Sewell LLP
Barry M Golden
Gardere Wynne Sewell LLP
Thanksgiving Tower
1601 Elm St
Suite 3000
Dallas, TX 75201-4761
Tel. 214-999-3000
Fax. 214-999-3422 (fax)
• Dykema Gossett PLLC
David J. Schenck
Dykema Gossett PLLC
1717 Main Street, Ste. 4000
Dallas, Texas 75201
Tel. 214-462-6455
Fax. 214-462-6401
• Munsch, Hardt, Kopf & Harr PC
Raymond J. Urbanik
Munsch, Hardt, Kopf & Harr PC
500 N. Akard St., Ste. 3800
Dallas, TX 75201-6659
Tel. 214-855-7590
Fax. 214-978-4374
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iv
• Gerrit M. Pronske, et al. (the “Pe-
titioning Creditors”)
Gerrit M. Pronske
Melanie P. Goolsby
Pronske, Goolsby & Kathman, PC
2200 Ross Avenue, Suite 5350
Dallas, Texas 75201
Tel. 214- 658-6500
Fax. 214- 658-6509
• Netsphere, Inc., et al.
John W MacPete
P.O. Box 224726
Dallas, TX 75222
Tel. 214/564-5205
/s/ Paul Raynor Keating
Paul Raynor Keating
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v
STATEMENT REGARDING ORAL ARGUMENT
The Appellant respectfully requests an oral argument under Fed. R. App.
P. 34(a). The Appellant believes this case meets the standards in Rule
34(a)(2) for oral argument in that:
a. This appeal is not frivolous;
b. Some of the dispositive issues raised in this appeal, in particu-
lar the unique issues of: (1) whether Receivership fees and ex-
penses can be charged against parties and assets that were not
within the jurisdiction of the trial court – namely Novo Point
and Quantec and who were not found to be culpable of any
complained of conduct or the alter ego of Baron; and (2) the re-
lated due process issues, have not been authoritatively decided
within this Circuit; and
c. As described in this brief, the decisional process may be signifi-
cantly aided by oral argument.
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TABLE OF CONTENTS
Certificate of Interested Persons ......................................................................... i
Statement Regarding Oral Argument ............................................................... v
Index of Authorities............................................................................................... x
Statement of Jurisdiction ...................................................................................... 1
Issues Presented ..................................................................................................... 2
Statement of the Case ............................................................................................ 3
A. The district court appoints a Receiver due to
unresolved claims .................................................................................... 4
B. The court authorizes the Receiver to take control of
Novo Point, LLC and Quantec, LLC without a finding
of alter ego. ............................................................................................... 5
C. The appeal of the Receivership Order and the Netsphere
I opinion directing the district court to review all prior
receivership fees and expenses and apply a
“meaningfully discount” ........................................................................ 6
D. The involuntary bankruptcy filing ....................................................... 7
E. The Advisory on past and pending Receiver
disbursements ........................................................................................ 10
F. This Court denies all pending motions and issues 8
mandates ................................................................................................. 11
G. The district court imposes an exceedingly fast track to
re-determine fees ................................................................................... 11
H. The Fee Applications ............................................................................. 12
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vii
I. Requests/Motions to seek funding for attorney and
expert witness fees, for permission to conduct limited
discovery, and to continue the matter, to enable
presentation of a viable defense to the fee applications
are repeatedly denied. .......................................................................... 16
a. Appellants Novo Point and Quantec Were Denied
Representation or Discovery. ............................................................... 16
b. Baron’s requests for fees and discovery are denied. ........................ 17
J. The Objections to the Fee Applications .............................................. 19
K. The hearing & post-hearing briefing on the Fee
Applications ........................................................................................... 20
L. The district court enters the Receivership Fee Order ....................... 21
Summary of the Argument ................................................................................. 22
Argument ............................................................................................................... 23
I. The district court abused its discretion by ignoring this
Court’s mandate in Netsphere I when it entered the Fee
Order ................................................................................................................ 23
A. Authorizing the Receiver to liquidate and/or use any
of the assets of Novo Point or Quantec to pay the
Receiver’s professional fees and expenses was an
abuse of discretion ................................................................................. 26
1. The district court lacked subject matter jurisdiction
over Novo Point, LLC and Quantec, LLC ................................... 27
2. The LLCs were neither alter egos of Baron nor
independently culpable and there has been no
determination to the contrary. ...................................................... 32
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viii
3. The Receiver and his professionals have been
improperly paid from the liquidation of assets
owned by, and cash generated by, Novo Point,
LLC and Quantec, LLC ................................................................... 34
4. Conclusion ........................................................................................ 36
B. As a matter of law, a non-receivership professional,
such as the Ondova bankruptcy trustee, cannot be
awarded fees and expenses, even where their services
might have benefitted the receivership estate ................................... 36
1. In Netsphere I, this Court reversed the order
awarding the Ondova Bankruptcy Trustee’s fees
and expenses .................................................................................... 37
2. The district court correctly ruled, on January 2,
2013, that no more fees and expenses would be
awarded to the Ondova Bankruptcy Trustee and
that disgorgement was in order .................................................... 38
3. The district court erred by doing a 180-degree turn
and disavowing the January 2, 2013 ruling. ................................ 38
C. As a Matter of Law, the Receiver and His Professionals
Should Not Be compensated For Defending the
Imposition of the Receivership ............................................................ 41
II. Even if authorized under the rules of equity, the district
court abused its discretion by entering the Fee Order ............................. 45
A. The district court erroneously awarded fees under
patently defective Fee Applications .................................................... 45
1. The Court Improperly Awarded the Receiver Fees. .................. 47
2. Block billing practices rendered the Fee
Applications defective as a matter of law ................................... 52
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ix
B. The district court made numerous unsupported
findings in the Fee Order ...................................................................... 56
1. There has never been an adjudication that any
appellant, or their counsel, are vexatious litigants,
and there are no facts in existence that would
support such a finding. .................................................................. 56
2. Appellants did not engage in discovery abuse .......................... 58
3. Conclusion ........................................................................................ 59
III. The district court abused its discretion and violated
Appellants’ due process rights by precluding their
participation in the Fee Applications proceedings and
proceeding on an unreasonably accelerated basis, refusing
to allocate funding to pay counsel and an expert witness,
and refusing to grant a continuance requested by Baron
who was the sole party then capable of objecting to the fee
requests on the LLC’s behalf. ....................................................................... 60
Conclusion & Prayer ............................................................................................ 65
Certificate of Service ........................................................................................... 69
Certificate of Compliance with Rule 32(a) ...................................................... 70
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x
INDEX OF AUTHORITIES
Cases
ASARCO, LLC v. Jordan Hyden Womble Culbreth & Holzer, P.C.
(Matter Of ASARCO, LLC),
No. 12-40997 (5th Cir. April 30, 2014) .......................................................... 41
Atlantic Trust Co. v. Chapman,
208 U.S. 360 (1908) ............................................................................. 25, 26, 42
Bank of Commerce & Trust Co. v. Hood,
65 F.2d 281 (5th Cir. 1933) ....................................................................... 27, 32
Baron v. Schurig,
No. 3:13-CV-3461, 2014 WL 25519 (N.D. Tex. Jan. 2, 2014) ........................ 9
Beach v. Macon Grocery Co.,
125 F. 513 (5th Cir. 1903) ........................................................................ 23, 29
Bolloré S.A v. Import Warehouse, Inc.,
448 F.3d 317 (5th Cir. 2006) ...................................................................... 24, 30
Cochrane v. WF Potts Son & Co.,
47 F.2d 1026 (5th Cir.1931) ............................................................................. 27
Commodity Futures Trading Comm’n v. Morse,
762 F.2d 60 (8th Cir. 1985) .............................................................................. 24
Connecticut v. Doehr, 501 U.S. 1 (1991) ................................................................ 59
Deputy v. Lehman Bros., Inc.,
345 F.3d 494 (7th Cir. 2003) ............................................................................ 21
Gaskill v. Gordon,
27 F.3d 248 (7th Cir. 1994) .............................................................................. 42
Goldberg v. Kelly,
397 U.S. 254 (1970) ................................................................................... 57, 60
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xi
In re Marcuse & Co.,
11 F.2d 513 (7th Cir. 1926) .............................................................................. 39
In re Middle West Utilities Co.,
17 F.Supp. 359 (D.C. Ill. 1936) ....................................................................... 34
Johnson v. Georgia Highway Exp., Inc.,
488 F.2d 714 (5th Cir. 1974) ..................................................................... 43, 44
Kearney v. Auto-Owners Ins. Co.,
713 F.Supp.2d 1369 (M.D. Fla. 2010) ............................................................ 50
Lion Bonding & Surety Co. v. Karatz,
262 U.S. 640 (1923) .......................................................................................... 33
Maiz v. Virani,
311 F.3d 334 (5th Cir. 2002) ............................................................................ 30
Matthews v. Eldridge,
424 U.S. 319 (1976) ................................................................................... 59, 60
Netsphere, Inc. v. Baron,
703 F.3d 296 (5th Cir. 2012) ................................................................... passim
O'Sullivan v. Countrywide Home Loans, Inc.,
319 F.3d 732 (5th Cir. 2003) ............................................................................. 24
R.B. Potashnick v. Port City Construction Co.,
609 F.2d 1101 (5th Cir. 1980) .......................................................................... 57
S.E.C. v. Striker Petroleum, LLC,
3:09-CV-2304, 2012 WL 685333 (N.D. Tex. Mar. 2, 2012) .......................... 43
S.E.C. v. W.L. Moody & Co., Bankers (Unincorporated),
374 F.Supp. 465 (S.D. Tex. 1974), aff’d, 519 F.2d 1087
(5th Cir. 1975) .................................................................................................. 43
Seastrunk v. Darwell Integrated Technology, Inc.,
No. 3:05-CV-0531, 2009 WL 2705511 (N.D.Tex. Aug. 27,
2009) .................................................................................................................. 50
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xii
Speakman v. Bryan,
61 F.2d 430 (5th Cir. 1932) .............................................................................. 39
Texas Catastrophe Prop. Ins. Assoc. v. Morales,
975 F.2d 1178 (5th Cir. 1992) .......................................................................... 57
Texas State Teachers Ass’n v. Garland Indep. Sch. Dist.,
489 U.S. 782 (1989) .......................................................................................... 49
The Southern Company v. Dauben, Inc., No. 08-10248 (5th Cir.
2009) .................................................................................................................. 46
United States Catholic Conference v. Abortion Rights Mobilization,
Inc., 487 U.S. 72 (1988) .................................................................................... 25
United States v. Kellington,
217 F.3d 1084 (9th Cir. 2000) .......................................................................... 21
United States v. Larchwood Gardens, Inc.,
420 F.2d 531 (3rd Cir. 1970) ........................................................................... 39
Veeder v. Public Service Holding Corp.,
51 A.2d 321 (Del. 1947) ................................................................................... 34
Walker v. U.S. Dep’t of Housing & Urban Dev.,
99 F.3d 761 (5th Cir. 1996) .............................................................................. 50
Statutes
11 U.S.C. § 303 .......................................................................................................... 9
28 U.S.C. § 1291 ........................................................................................................ 1
Rules
Fed. R. App. P. 4 ...................................................................................................... 1
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1
TO THE HONORABLE JUDGES OF SAID COURT:
Appellants Novo Point LLC (“Novo Point”) and Quantec LLC (“Quan-
tec”) respectfully represent:
STATEMENT OF JURISDICTION
This is an appeal of a final Order on Receivership Professional Fees dated
May 29, 2013, awarding fees to Receiver, Peter S. Vogel, Receiver’s counsel,
Dykema Gosset, PLLC and others and setting forth the priority of payment.
This Court has jurisdiction under 28 U.S.C. § 1291.
This order was entered May 29, 2013, Notice of Appeal was timely filed
on June 28, 2013.
1
See Fed. R. App. P. 4.
1
The Notice of Appeal also seeks review of an associated Order Granting Receiver’s Fee
Application Regarding Certain Miscellaneous Receivership Professionals, signed May 23,
2013. (ROA.28113–114). As to this order, the Notice of Appeal was not timely. See Fed.
R. App. P. 4. Therefore, Appellants herein abandon the appeal as to such Order.
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2
ISSUES PRESENTED
1. Whether it was legal error to charge the estates of Novo Point
and Quantec
2
with any amount of Receivers’ fees and expenses,
particularly those related to other estates within the Receiver-
ship without findings of alter ego or direct culpability.
2. Whether the District Court abused its discretion in entering the
Fee Order in the amounts set forth therein and not allocating
same to specific estates within the Receivership.
3. Whether the District Court abused its discretion and violated
appellants’ rights by excluding it from the Fee Application pro-
cess and proceeding on an accelerated basis and denying funds
with which to pay counsel and experts and by denying discov-
ery.
2
Novo Point and Quantec are hereinafter sometimes jointly referred to as the “LLCs”.
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3
STATEMENT OF THE CASE
On May 28, 2009, Netsphere, Inc. and others, filed a lawsuit against Jef-
frey Baron and Ondova Limited Company (“Ondova”) in the United States
United States District Court for the Northern District of Texas, Dallas Divi-
sion, Cause No. 3:09-CV-988 (“Netsphere DC Case”). (ROA.135–148). On July
24, 2009, Ondova filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code (“Ondova Bankruptcy”); Daniel J. Sherman was
appointed as Trustee for Ondova. (ROA.642). At all times, Ondova’s bank-
ruptcy case was pending in the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division.
Neither Novo Point nor Quantec was named as a party in the Netsphere
DC Case. The complaint contains no allegations as against them. Neither
Novo Point nor Quantec were named parties to the Ondova Bankruptcy.
The Netsphere DC case settled, assets were transferred and stipulated
dismissal documents were fully executed by all parties including the bank-
ruptcy trustee, Sherman at the end of July 2010, after the protracted settle-
ment negotiations spanning six months. (ROA.1803-1812; 1691-1840 –
entire Global Settlement Agreement; and 34789 – “The current status is that
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4
parties are all complying with settlement agreement provisions in terms of
payments and other activities, so there has been no problem”).
A. The district court appoints a Receiver due to unresolved claims
Despite the settlement, on November 24, 2010, Ondova’s Trustee filed
an Emergency Motion for Appointment of a Receiver Over Baron.
(ROA.1032–60). On the same date, the district court, in the Netsphere DC
Case, entered an order (“Receivership Order”) establishing an equity receiv-
ership over Baron’s assets, and appointed Peter S. Vogel as the receiver
(“Receiver”). (ROA.1135–48).
Pursuant to the Receivership Order, and the court’s subsequent clarifi-
cation orders, the Receiver, took possession and control over all of Baron’s
assets, including creditor-exempt assets (“Baron Personal Assets”).
The asserted purpose of the Receivership was to stop Baron from hiring
and firing attorneys and delaying the resolution of the Netsphere DC Case
and secure funds to pay non-judgment claims of unspecified attorneys.
(ROA.4762). It quickly broadened to become a means of resolving liquidity
issues in the Ondova Bankruptcy
3
and the payment of the non-judgment
3
Via payment of Trustee fees using funds from Novo Point and Quantec.
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5
claims of the Petitioning Creditors they asserted against Baron.
B. The court authorizes the Receiver to take control of Novo Point,
LLC and Quantec, LLC without a finding of alter ego.
Pursuant to an Order Granting the Receiver’s Motion to Clarify the Receiver
Order With Respect to Novo Point, LLC and Quantec, LLC, (ROA.3391–98) the
Receiver took possession and control of Novo Point and Quantec, whose
assets consisted almost entirely of cash and Internet Domain Names (“Do-
mains”) which generated substantial revenues (“LLC Assets”). (see e.g.
ROA.4749).
During the hearing on December 17, 2010, which led to the inclusion of
the LLCs, moving counsel admitted there was no motion asserting that the
LLCs were alter egos of Baron but that the reason for inclusion was liquidi-
ty. (ROA.4758). The Court disclosed its goal to use the assets of Novo Point
and Quantec to pay the debts of Baron. (ROA.4762).
Novo Point and Quantec are LLCs formed, and in good standing, un-
der the laws of the Cook Islands
4
and owned entirely by, and form the
4
There is no evidence to the contrary in the ROA.
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6
principal assets of, The Village Trust
5
, a trust created and existing under
the Cook Islands. As the principal beneficiary of the Village Trust, the val-
ue of Novo Point, LLC and Quantec, LLC are of substantial import to Bar-
on, forming the corpus from which he may benefit as a beneficiary.
6
C. The appeal of the Receivership Order and the
Netsphere
I
opinion
directing the district court to review all prior receivership fees
and expenses and apply a “meaningfully discount”
Twelve appeals to this Court were taken regarding the Receivership
Order and related orders that were entered in the Netsphere DC Case.
7
These and other matters were resolved December 18, 2012, when this Court
released its opinion in Netsphere, Inc. v. Baron. 703 F.3d 296 (5th Cir. 2012)
(“Netsphere I”).
5
See e.g. ROA.4758.
6
The Trust, not Baron, owns and directs the LLCs. The statement in Netsphere I that
they were “owned or controlled by Baron” is not a finding of alter ego.
7
Eleven appeals were taken, and were consolidated into Appellate Case No. 10-11202.
The Appellate Cases consolidated into Case No. 10-11202 were Appellate Case Nos. 11-
10113, 11-10289, 11-10290, 11-10390, 11-10501, 12-10003, 12-10444, 12-10489, 12-10657, 12-
10804, and 12-11082.
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7
Concerning the Receivership Order, this Court held that the Reciver’s
appointment was improper and an abuse of discretion. Id. at 302, 310-11,
315. As to the LLCs this Court specifically found subject matter jurisdiction
lacking. As this Court explained: “A court lacks jurisdiction to impose a
receivership over property that is not the subject of an underlying claim or
controversy.” Id. at 310. This Court then held:
“The receivership also included business entities owned or con-
trolled by Baron, including Novo Point, LLC and Quantec,
LLC. Although Novo Point and Quantec were listed as parties
on the global settlement agreement, they were never named
parties in the Netsphere lawsuit or the Ondova bankruptcy. We
conclude the district court could not impose a receivership over
Baron's personal property and the assets held by Novo Point
and Quantec.”
Id.
Following its conclusion that the imposition of the receivership was an
abuse of discretion, this Court instructed the district court in unmistakably
clear and unambiguous language to reconsider and meaningfully discount all
fees and expenses previously paid by the Receiver. Id. at 313.
D. The involuntary bankruptcy filing
From the day the Receivership’s initiation on November 20, 2010, until
this Court reversed and vacated the Receivership Order on December 18,
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8
2012, the LLCs, along with Baron, were in a financial lockdown of epic
proportions, prohibited from conducting any business, and deprived of
civil liberties. Novo Point and Quantec were prohibited from engaging le-
gal counsel to defend themselves from the wrongful actions being under-
taken by the Receiver and the Ondova Trustee.
Stay requests were denied, meaning, unfortunately, that the steamroll-
ing impact of the Receivership and the wholly improper erosion of the
LLCs’ assets continued unabated. By the time this Court issued its opinion
in Netsphere I, approximately $4 million in fees and expenses had been dis-
tributed to the Receiver, the Ondova trustee, and their attorneys, most of
which came out of the assets of Novo Point and Quantec, two entities that
were never litigants in the Netsphere DC Case or Ondova bankruptcy and
were not owned by Appellant Baron.
8
Approximately two hours after this Court issued its opinion in
Netsphere—long before the issuance of the mandates on April 18, 2013—
8
The Village Trust was and is the owner of Novo Point, LLC and Quantec, LLC. Baron
was and is the primary beneficiary of said trust. However, Baron did not own these en-
tities, there was never a finding of alter ego by the District Court, and inclusion of these
entities in the Receivership and the dissipation of such entities’ cash and non-cash assets
to pay the Receivership fees and expenses was beyond the jurisdiction of the District
Court.
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9
and in violation of the Receivership Order, (ROA.1146–47),
9
eight of the
former attorneys (the “Petitioning Creditors”), led by Gerrit Pronske, filed
a Chapter 7 involuntary petition against Baron in the United States Bank-
ruptcy Court, Northern District of Texas, Dallas Division, case no. 12-37291
(“Baron Involuntary Bankruptcy”).
10
On June 26, 2013, the bankruptcy court entered an order for relief
11
in
the Baron Involuntary Bankruptcy. Baron perfected an appeal to the Dis-
trict Court on July 8, 2013 resulting in a final judgment with Amended
Memorandum Opinion and Order by the District Court on January 2, 2014,
reversing the Order for Relief. Baron v. Schurig, No. 3:13-CV-3461, 2014 WL
25519 (N.D. Tex. Jan. 2, 2014).
12
This judgment and opinion has been ap-
pealed to this Court and the briefing completed. See Schurig Jetel Beckett
9
Not immediately dissolved following Netsphere I (ROA.26366)
10
United States Bankruptcy Court for the Northern District of Texas, Dallas Division
under case no. 12-37291. On December 19, 2012, the Petitioning Attorneys filed in an
emergency motion in the Bankruptcy Court to appoint an interim trustee over Baron's
entire estate, attempting to block this Court’s Opinion. The orders and appeal followed.
11
See 11 U.S.C. § 303 (describing the steps to obtain an order for relief in an involuntary
bankruptcy case).
12
The underlying claims were asserted based entirely upon a District Court order is-
sued in the course of the Receivership that the District Court, on appeal from the Baron
Involuntary Bankruptcy, held to be improper in light of Netsphere I. Baron v. Schurig,
No. 3:13-CV-3461, 2014 WL 25519 (N.D. Tex. Jan. 2, 2014).
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10
Tackett v. Baron, No. 14-10092.
As a result of the Baron Involuntary Bankruptcy, the LLCs and Baron
remained in financial lockdown through January 2014, when the district
court declined to issue a stay pending appeal. It was during this period that
the district court commenced an expedited process of re-determining the
Receivership fees and expenses, which led to the Fee Order and this ap-
peal.
E. The Advisory on past and pending Receiver disbursements
On January 2, 2013, two weeks after the Netsphere I opinion, the district
court, issued, sua sponte, an Advisory on Past and Pending Receivership Dis-
bursements (“Advisory”) in the Netsphere DC Case. (ROA.26477–79).
13
The
Advisory specifically stated:
- The fees incurred by the Receiver and his counsel, the
Gardere law firm would be re-evaluated and paid at fifty
percent (50%).
- The fees incurred by the Dykema law firm in representing the
receiver would be reevaluated and paid at ninety-five percent
(95%).
13
Issued without briefing, evidence or hearing. (ROA.128–30).
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11
- All prior payments to the Trustee or Trustee's counsel would
be disgorged and returned to the Receivership.
- All other miscellaneous requests for payments, including for
experts, would be reviewed on an individual basis at a later
date.
(ROA.206478).
F. This Court denies all pending motions and issues 8 mandates
On April 4, 2013, this Court denied all petitions for rehearing, and on
April 19, 2013 issued eight Mandates, each filed with the district court on
April 24, 2013.
14
(ROA.27967–81). This Court’s opinion in Netsphere I was
left unmodified; therefore, the district court held a mandate to wind-down
the receivership, re-determine all fees and expenses (including those previ-
ously approved), apply a meaningfully discount to the receivership fees
and expenses in a manner consistent with the Opinion, and thereafter, re-
turn the receivership assets to the rightful owners.
G. The district court imposes an exceedingly fast track to re-
determine fees
14
Each of the Mandates dealt with one or more of the twelve Consolidated Appeals.
Case: 13-10696 Document: 00512704339 Page: 24 Date Filed: 07/18/2014
12
The retirement of Judge Royal Ferguson, the presiding judge in the
Netsphere DC Case, was imminent (ROA.31094) and his last day on the
case was quickly approaching.
15
Judge Ferguson put the re-determination
of fees matter on an exceedingly fast track. On April 5, 2013, Judge Fergu-
son entered a Scheduling Order (ROA.27155), which set the following
deadlines:
1. All fee applications had to be filed on or before Wednesday,
April 17, 2013.
2. Baron was given eight days to file objections.
3. The pre-trial hearing on the fee applications was set for April
29, 2013.
4. The trial on the fee applications was set for May 8, 2013.
(ROA.27155).
H. The Fee Applications
16
On April 17, 2013, Ondova Trustee Daniel J. Sherman, filed his fee ap-
plication requesting $1,219,775.68, consisting of $1,203,329.50 in profession-
15
Judge Ferguson’s announced retirement was to be effective on May 31, 2013, and that
was his last day as the presiding judge on the case. (ROA.28171).
16
The fee applications described in this Section G are collectively referred to herein as
the “Fee Applications.”
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13
al fees and $16,446.18 in expenses, of which $379,761.18 had already been
paid by the Receiver. (ROA.27173–27474).
On April 17, 2013, Receiver’s former general counsel, Gardere Wynne
Sewell, LLP, filed a fee application requesting $2,010,862.22, consisting of
$1,956,737.00 in professional fees and $54,125.42 in expenses, of which
$1,479,571.95 had already been paid by the Receiver. (ROA 27479–27510).
This Fee Application incorporated 19 prior Fee Applications, thus totaling
15,775 pages of Fee Applications.
On April 17, 2013, Receiver’s current general counsel, Dykema Gossett
PLLC (“Dykema”), filed a fee application requesting $1,550,776.00 through
March 2013 (net of voluntary and court-directed 5 percent reduction), con-
sisting of $1,526,694.00 in professional fees and $24,082.00 in expenses, of
which $737,276.73 was on hand in Dykema’s trust account, and $398,893.91
had been paid by the Receiver. (ROA.27757–27860). This Fee Application
totaled 103 pages.
On April 17, 2013, the Receiver filed an application requesting approval
of the fees and expenses of the Receiver, the fees and expenses of former
counsel for the Receiver, Gardere Wynne Sewell, LLP, the fees and expens-
es of the Receiver’s current counsel, Dykema Gossett PLLC, and the fees
Case: 13-10696 Document: 00512704339 Page: 26 Date Filed: 07/18/2014
14
and expenses of numerous other professionals. (ROA.27511–27756). This
Fee Application totaled 245 pages.
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15
In all, fees and expenses were requested as follows:
Claimant
Total Amount
Requested
Amount
Previously
Paid Amount Owed
Peter S. Vogel, Receiver $1,250,680.00 $708,926.00 $527,576.00
Gardere Wynne Sewell, LLP
17
2,010,832.22 1,479,571.05 531,290.27
Dykema Gossett, PLLC
18
1,550,776.00 1,136,170.64
19
354,777.69
13 law firms outside of Texas 19,559.41 19,559.41 0.00
Thomas Jackson 69,007.50 69,007.50 0.00
Joshua Cox 61,968.75 53,235.60 8,733.15
James Eckels 64,787.50 61,637.50 3,150.00
Jeffrey Harbin 13,913.62 13,913.62 0.00
Gary Lyon 16,462.50 16,462.50 0.00
Grant Thornton, LLP 121,390.53 109,301.53 12,089.00
Martin Thomas 95,285.52 95,285.52 0.00
Damon Nelson 306,262.92 287,962.92 18,300.00
Matt Morris 54,572.50
0.00 54,572.50
Total $5,635,498.97 $4,051,033.15 $1,510,488.61
17
Gardere Wynne Sewell, LLP filed a separate fee application that was duplicative.
(ROA.27479–27510).
18
Dykema Gossett, PLLC filed a separate fee application that was duplicative.
(ROA.27757–27860).
19
Dykema Gossett, PLLC filed a separate fee application that was duplicative.
(ROA.27757–27860)
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16
Claimant
Total Amount
Requested
Amount
Previously
Paid Amount Owed
(ROA.27513-14).
The district court’s schedule provided only 8 days to review over 16,000
pages of Fee Applications incorporating thousands of time entries over a
time period that spanned 29 months.
I. Requests/Motions to seek funding for attorney and expert wit-
ness fees, for permission to conduct limited discovery, and to
continue the matter, to enable presentation of a viable defense
to the fee applications are repeatedly denied.
a. Appellants Novo Point and Quantec Were Denied Representa-
tion or Discovery.
The District Court did not include Appellants as an interested party in
the context of the May 28 2014 Order on Receivership Professional Fees.
20
This continued a trend established as early as February 10, 2011, when the
court limited the LLC’s “authorized counsel” to Mr. Jackson and Mr. Cox,
20
ROA.28124. The Order references the parties as “All parties in interest have respond-
ed … including: the Receiver and Dykema Gossett LLP ("Dykema") … the Petitioning
Creditors ... Jeffrey Baron ... and Netsphere. With the permission of this Court, the Trus-
tee filed a post-trial brief”). Nowhere was there a mention of an appearance on behalf
of the LLCs.
Case: 13-10696 Document: 00512704339 Page: 29 Date Filed: 07/18/2014
17
stating that he “wouldn’t expect to receive any motions on behalf of the
LLC’s except for those people” and would not “recognize the authority” of
any other counsel for the LLCs.
Both Mr. Jackson and Mr. Cox were there-
after retained by Receiver’s counsel; they represented the interests of the
Receiver and not the LLCs.
21
The absence of counsel actually representing
the LLCs is reflected in the District Court’s Docket, which is devoid of fil-
ings by the LLC’s other than those pertaining to appeals.
b. Baron’s requests for fees and discovery are denied.
The preclusion of the LLCs left Baron as the only voice against the
storm. At the hearing on April 4, 2013, which resulted in the District
Court’s Scheduling Order of April 5, 2013, Baron requested fees for attorneys
and experts to contest the coming fee applications. (ROA.27872). Cut off
from his assets and without funding to mount a defense to the voluminous
fee applications, Baron filed a motion on April 17, 2013, attempting to seek
funding from the Receivership estate to pay the professional fees necessary
to proceed forward with his defense of the fee applications. (ROA.27475-
21
As reflected in the Fee Application For Receiver And Receivership Professionals
ROA.27511–27756.
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18
77). The District Court summarily denied his request. (ROA.27863-64).
On April 19, 2013, Baron filed a Motion for Discovery, for Continuance and
to Reconsider Funding for Jeffrey Baron’s Counsel. (ROA.27872-99). On April
22, 2014, the court denied the motion. (ROA.27911-17). In denying the re-
quest for fees, the District Court attempted to differentiate between the
right to “retain” counsel and the right to “pay” counsel, finding that the
right to “retain” counsel alone was sufficient even though there was no
means to pay.
22
The District Court found that it could not “fairly” allow a
payment for Baron’s attorney (a solo practitioner) and experts and not the
others. This of course ignored the fact that all those making fee applica-
tions had previously received millions in fees and cost reimbursements.
Discovery was denied. Although the other parties had a long history of ob-
jecting to Baron’s discovery, the court found the motion improper for want
of a statement that a formal pre-motion conference had actually been held.
(ROA.27872-99).
Such a sudden desire for equity fails to resonate given the overall histo-
ry of this case and the abuse of the innocent non-party LLCs by stripping
22
This is puzzling; Baron’s not paying his attorneys was the basis for the Receivership.
Case: 13-10696 Document: 00512704339 Page: 31 Date Filed: 07/18/2014
19
their assets in an effort to satisfy debts and cash needs of third parties to
whom they owed no obligation.
23
On May 8, 2013, the first day of the hearing, Steve Cochell, Baron’s
counsel, orally moved for a continuance citing compelling reasons, includ-
ing that the parties had spent the prior two weeks in court ordered media-
tion attempting to settle the entire case. (ROA.27156, 27158, 31088–89). The
motion was denied. (ROA.31089).
J. The Objections to the Fee Applications
The parties filed the following objections to the Fee Applications:
1. Receiver’s Objection to Trustee’s Fee Application. (ROA.27925–
27).
2. Receiver’s Supplemental Response and Objection, objecting to
the Ondova Trustee’s Fee Application. (ROA.27928–33).
3. Petitioning Creditors’ Omnibus Comment to Receivership Pro-
fessionals’ Fee Applications. (ROA.27984–90).
4. Baron’s Preliminary Objections to Trustee, Trustee’s Counsel,
Receiver and Receiver’s Counsel Fee Claims. (ROA.27991–
28005).
23
Nothing in the Netsphere I Opinion suggested Baron should be precluded from con-
ducting discovery or deprived of funding to pay counsel and expert witness fees in or-
der to adequately prepare for and present his defenses in connection with the Court’s
mandate. Netsphere I, 703 F.3d at 296.
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20
5. Netsphere Parties’ Objections to the Attorney Fee Requests in
Connection With the Wind-Up of the Receivership.
(ROA.28014–18).
K. The hearing & post-hearing briefing on the Fee Applications
The court held hearings on the Fee Applications from May 8–10, 2013
24
.
The Receiver, Dykema and the Ondova Trustee filed the following post-
hearing briefs:
1. Receiver and Dykema filed a Consolidated Post-Hearing Brief
addressing some of the legal issues raised at the fee application
hearing. (ROA.28019–28).
2. The Ondova Trustee filed a Letter Brief. (ROA.28079-82).
Baron filed the following post-hearing briefs:
1. Response to the Receiver’s Post-Hearing Briefing. (ROA.28083–
95).
2. Reply to Trustee’s Letter Brief. (ROA.28096–97).
3. Supplemental Argument on Fees (ROA 28109–12).
The Petitioning Creditors filed a Supplemental Objection to the Final
Application for Allowance and Subsequent Payment of Compensation for
24
The Transcript is at ROA.31081–21256. It bears the date May 9, 2013 on page one, but
the date of the hearing is reflected on the Docket Sheet as May 8. (ROA.120).
For May 9, 2013, the Transcript is at ROA.31284–31367.
For May 10, 2013, the Transcript is at ROA.31583–31668.
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21
Services and Reimbursement of Expenses to Dykema Gossett PLLC, as At-
torneys for Peter S. Vogel, Receiver. (ROA 28115–120).
L. The district court enters the Receivership Fee Order
On May 29, 2013, the District Court entered its Order on Receivership Pro-
fessional Fees (“Receivership Fee Order”). (ROA.28124–69). The Receivership
Fee Order differs from the Advisory (ROA.26477–79) in the following re-
spects:
25
Applicant Advisory Receivership Fee Order
Ondova Bankruptcy Trustee Disgorgement of all prior
payments, and no award of
unpaid fees and expenses
No disgorgement of prior
payments, and no award of
unpaid fees and expenses
Receiver, Peter S. Vogel Meaningful Discount: 50% of
all prior payments and
discount of 50% unpaid fees
and expenses
Meaningful Discount: 30% of
all prior payments and
discount of 50% unpaid fees
and expenses
Gardere Wynne Sewell, LLP Meaningful Discount: 50% of
all prior payments and
discount of 50% unpaid fees
and expenses
Meaningful Discount: 27% of
all prior payments and
discount of 27% unpaid fees
and expenses
25
Comparing ROA.28124–69 with ROA.26477–79.
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22
Applicant Advisory Receivership Fee Order
Dykema Gossett, LLP Meaningful Discount: 5% of
all prior payments and
unpaid fees and expenses
Meaningful Discount: 2% of
all fees and expenses from
7/6/2012–12/18/2012; 10%
of all fees and expenses from
12/18/2012–4/4/2013; and
5% of all fees and expenses
during month of April 2013
SUMMARY OF THE ARGUMENT
This appeal stems from a Fee Order approving fees and expenses to be
charged against the Receivership. In approving fees, the court did not (1)
hold evidentiary inquiry into Baron’s conduct post entry of Receivership or
post Netsphere I, (2) hold evidentiary inquiry or make findings attributing
conduct of Baron to the LLCs or inquire into the issue of alter ego or culpa-
bility of the LLCs, (3) require the fee applicants to allocate amounts to the
various estates within the Receivership as required by Bank of Commerce &
Trust Co. v. Hood; Bank of Commerce & Trust Co. v. Hood, 65 F.2d 281, 283-4
(5th Cir. 1933), (4) require the fee applicants to satisfy the requirements of
Moody and Johnson as applicable, (d) allocate awarded amounts to specific
estates as required by Bank of Commerce & Trust Co, but rather allowed all
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23
amounts to be paid by the LLCs; or (5) inquire into any of the prior fees or
expenses paid by the Receivership to any other person except as to those
presented by the Ondova Trustee, Receiver, and Receiver’s counsel, alt-
hough instructed to do so in Netsphere I.
The Court further compounded its errors by (1) precluding Novo Point
and Quantec from participating in the Fee Application process or being
represented by counsel and (2) conducting the Fee Application process on
an unfairly rapid time-schedule while denying Baron, the only opposing
party allowed to be present, fees with which to pay counsel and experts
and a right of even limited discovery, all in violation of the due process
rights of Novo Point, Quantec and Baron.
ARGUMENT
I.
The district court abused its discretion by ignoring this Court’s
mandate in
Netsphere I
when it entered the Fee Order
The manner in which the lower court enforces an appellate court’s
mandate is reviewed de novo. United States v. Kellington, 217 F.3d 1084, 1092
Case: 13-10696 Document: 00512704339 Page: 36 Date Filed: 07/18/2014
24
(9th Cir. 2000). Lower courts are obligated to execute the terms of the man-
date, but they are free to do issue other orders not prohibited by the man-
date. Id. Where on remand, the trial court is ordered to conduct a hearing
and enter findings of fact, such findings are reviewed on a like standard of
review as required for findings of fact made in the original hearing. Deputy
v. Lehman Bros., Inc., 345 F.3d 494, 509 (7th Cir. 2003) (reversing a trial
court’s decision excluding expert testimony, stating that any subsequent
review would be under an abuse of discretion standard, assuming the trial
court properly applies the Daubert standards).
The Netsphere I Opinion instructed the District Court to review and re-
consider all prior expenditures, subjecting them to scrutiny and a “mean-
ingful discount”. The District Court failed to fulfill its mandate in several
ways.
First, the Fee Order did not address all prior expenditures. The Receiver
employed approximately 24 professionals, who were paid fees from the re-
ceivership estate.
26
(ROA.27925). However, the lower court only reconsid-
ered fees and expenses of four professionals and in doing so failed to
26
As shown below, most of these were paid using the assets of Novo Point and Quan-
tec.
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25
implement the court’s mandate. The failure of the Receiver to properly
subject all prior disbursements to the District Court was the fault of the Re-
ceiver, who alone should now bear the burden.
Second, in reviewing those fee applications actually addressed in the
Fee Order, the court misapplied both the instructions and guidance of
Netsphere I and the otherwise applicable law, none of which was rendered
inapplicable by this Court’s opinion in Netsphere I.
The District Court should have assessed all prior fee/expense awards
by first making sure they were proper and sufficiently detailed and allocat-
ed by estate. Thereafter, the District Court should have assessed the re-
quests to determine which fees were legally permissible as against each
estate; and in the case of the LLCs held an appropriate trial on the issue of
alter ego and/or direct culpability. Thereafter, the court should have ap-
plied the Moody test as to Receiver claims and the Johnson test as to counsel
claims. Finally, the District Court should have exercised its discretion and,
taking into account actually established evidence, subjected each separate
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26
fee to a “meaningful discount”, applicable as to each estate.
27
In the context of the LLCs, the fees should have been disallowed com-
pletely (and all prior payments recovered) either as a function of their not
being legally permissible, or as a result of the LLC’s lack of culpable con-
duct, applying the “meaningful discount” to reduce the claims to zero and
ordering disgorgement. While this may well mean that the Receiver and
other professionals are left unpaid, such is mandated by the U.S. Supreme
Court decision in Lion Bonding Co., 262 U. S. at 641–42; Beach v. Macon Gro-
cery Co., 125 F. 513, 515 (5th Cir. 1903).
The Fee Order reveals the District Court did not engage in the proper
assessment. For the most part, the court’s failure was the direct result of
the fee applicants’ failure to meet the most basic of requirements in submit-
ting their requests.
A. Authorizing the Receiver to liquidate and/or use
any
of the assets
of Novo Point or Quantec to pay the Receiver’s professional fees
27
This Court’s warning in ASARCO, LLC V. Jordan Hyden Womble Culbreth & Holzer, P.C.
(Matter Of ASARCO, LLC), No. 12-40997 (5th Cir. April 30, 2014) against the "conspiracy
of silence" and its reference to no “black hats in fee litigation” strongly suggests that
professional fees should be exposed to the same adversary process as other facts re-
quired to be determined by the courts.
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27
and expenses was an abuse of discretion
The charging of the LLC’s assets with any fees or expenses of the Re-
ceivership raises the issues of abuse of discretion with questions should be
reviewed Bolloré S.A v. Import Warehouse, Inc., 448 F.3d 317, (5th Cir. 2006);
O'Sullivan v. Countrywide Home Loans, Inc., 319 F.3d 732, 737 (5th Cir. 2003).
Assuming an assessment of any fees or costs against the LLCs was le-
gally permissible, the issue of the amount of fees and expenses and alloca-
tion thereof over the various estates held in Receivership should be
reviewed de novo under the abuse of discretion standard. See Commodity Fu-
tures Trading Comm’n v. Morse, 762 F.2d 60, 63 (8th Cir. 1985).
1. The district court lacked subject matter jurisdiction over Novo Point,
LLC and Quantec, LLC
Courts have finite bounds of authority and cannot simply seize private
property that is not subject to a claim pending before the court. See United
States Catholic Conference v. Abortion Rights Mobilization, Inc., 487 U.S. 72, 77
(1988).
In Atlantic Trust Co. v. Chapman, the Supreme Court enunciated the
fundamental principle of receivership law that a court is prohibited from
using property of a non-party to pay a receiver’s expenses. (208 U.S. 360,
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28
376–76 (1908). These principles are well established and have long been re-
iterated by this court. For example, in Beach v. Macon Grocery Co., 125 F. 513
(5th Cir. 1903), the court stated:
“[T]he receiver has, by no law, been imposed upon
the de-
fendant. Neither is there any equitable principle which should
require him to pay, before he can secure a return of his prop-
erty, the expenses of the unlawful proceeding by which it has
been taken
and withheld from his possession. To require
that payment from him or his property would be a wrong
which the court has neither the power nor the disposition to in-
flict upon him. It may be a hardship upon the receiver himself,
but it is one of the risks which he has voluntarily assumed”
28
Accordingly, in Netsphere, Inc., this Court held that the court lacked
subject matter jurisdiction over the LLCs explaining: “[a] court lacks juris-
diction to impose a receivership over property that is not the subject of an
underlying claim or controversy.” 703 F.3d at 302, 310–11, 315. The Court
further held:
The receivership ordered in this case encompassed all of
Baron's personal property, none of which was sought in the
Netsphere lawsuit or the Ondova bankruptcy other than as a
possible fund for paying the unsecured claims of Baron's cur-
28
C.f., Atlantic Trust Co. v. Chapman, 208 U.S. 360, 373 (1908) (approving holding that “If
he [the receiver] has taken property into his custody under an irregular, unauthorized
appointment, he must look for his compensation to the parties at whose instance he was
appointed, and the same rule applies if the property of which he takes possession is de-
termined to belong to persons who are not parties to the action”).
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29
rent and former attorneys that had not been reduced to judg-
ment. The receivership also included business entities owned or
controlled by Baron, including Novo Point, LLC and Quantec,
LLC. Although Novo Point and Quantec were listed as parties
on the global settlement agreement, they were never named
parties in the Netsphere lawsuit or the Ondova bankruptcy. We
conclude the district court could not impose a receivership over
Baron's personal property and the assets held by Novo Point
and Quantec.
Id.
Because the District Court lacked subject matter jurisdiction over Novo
Point and Quantec in the first place, it could acquire no jurisdiction simply
by imposing a receivership.
29
It is submitted that on remand the court
should have removed the LLCs from the impact of further proceedings.
See Cochrane v. WF Potts Son & Co., 47 F.2d 1026, 1028 (5th Cir.1931) (“courts
may not seize property without jurisdiction and then claim jurisdiction
over the property because it is in the possession of the court.”).
Where as here a receiver holds multiple estates in a single receivership,
the separate estates must be separately managed and fees must be charged
29
The April 19, 2013 mandates included one disposing of Appellate Case No. 11-10113.
(ROA.27968–69), an appeal from several orders entered by the District Court reflected in
a Notice of Appeal filed on January 18, 2011. (ROA.3763–65). Among the orders ap-
pealed was the order entered on December 17, 2010, where the District Court ordered
that Novo Point, LLC and Quantec, LLC be included in the Receivership. (ROA.3391–
98). The Mandate reversed said order and remanded the matter to the District Court for
further proceedings in accordance with the Netsphere, Inc. opinion. (ROA.27968–69).
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30
against each estate as if separate receivers had been appointed for each.
Bank of Commerce & Trust Co. v. Hood, 65 F.2d 281, 283-4 (5th Cir. 1933). The
need for separate estates was no surprise to the Receiver or his counsel.
The point was made during the initial December 17, 2010 hearing that lead
to the LLCs being included within the Receivership:
MR. JACKSON: Your Honor, again, part of the agreement is
Quantec and Novo Point's money is Quantec and Novo Point's
money to be used for their purposes and their purposes only,
and our point in that agreement is they are separate and distinct
from any of these other problems involving Baron. So our funds
are to be used for the business purposes of Quantec and Novo
Point only.
THE COURT: I appreciate that clarification. I didn't realize that.
Well, we're running out of money. Let's do this.
MR. LOH: To some extent, I would take issue with that from a
technical standpoint. But Quantec and Novo Point are the only
two entities now that have any money.
30
(ROA.4826).
Novo Point and Quantec each constituted a separate estate within the Re-
ceivership. However, no attempt was made to segregate estates such that
30
The “technical point” reference does not challenge the underlying agreement; only its
implementation. Apparently, shortly after this hearing, Mr. Jackson, along with Mr.
Cox, were retained by the Receiver and ceased being “independent” counsel for the
LLCs; there is no evidence of the “agreement” in the record or any request by the Re-
ceiver to be relieved of its obligation to separately account for each estate.
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31
fees, costs and expenses were properly charged.
Nowhere in Netsphere I did this Court rule upon the question as to
which receivership estate should be charged with expense. While this
Court found equity dictated that the fees would not be abated, it issued this
ruling based upon the actions of Baron – not the LLCs. The Netsphere Opin-
ion stated there was an equitable basis for assessing reasonable receiver-
ship expenses as against Baron. No such findings were made as to Novo
Point or Quantec. Similarly, there were no findings that either LLC was
Baron’s alter ego such that the equitable findings as against Baron could be
imputed.
In the absence of findings as against the LLCs, the District Court was
faced with an instance where subject matter jurisdiction being absent along
with culpability, controlling Supreme Court precedent required the party
whose property was seized be made whole fully and all of his property re-
stored, even to the extent that a receiver and his professionals are not paid.
See Lion Bonding Co., 262 U. S. at 641–42; Beach v. Macon Grocery Co., 125 F.
513, 515 (5th Cir. 1903).
In ordering that all fees and expenses (including those previously
approved and paid) be “meaningfully discounted”, this Court left the court
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32
with two guiding principles. First, the court had lacked subject matter ju-
risdiction over Novo Point and Quantec, a fact to be considered in re-
assessing all fees and expenses. Second, the Receivership as to Baron was
an abuse of discretion but that due to Baron’s own conduct, Baron was to
bare otherwise proper Receivership fees and expenses at a “meaningfully
discounted” rate. The District Court was thus ordered to reconsider the
matter in light of the applicable law and the instructions set out in the
Netsphere I. The District Court failed in its task by ignoring both the man-
date and the law.
2. The LLCs were neither alter egos of Baron nor independently culpable
and there has been no determination to the contrary.
In the absence of findings in Netsphere I that Novo Point and Quantec
were culpable, the District Court was required to determine if Baron’s con-
duct could be legally imputed. No such determination was made (the pre-
clusion of the LLCs from the courtroom would make it impossible).
The absence of any determination that Novo and Quantec are alter egos
of Baron renders any attempt to charge them with any Receivership ex-
penses legally impermissible. See Bolloré S.A., 448 F.3d at 324.
Even if a trial as to alter ego were held, Novo Point and Quantec would
Case: 13-10696 Document: 00512704339 Page: 45 Date Filed: 07/18/2014
33
both prevail as a matter of law. Cook Islands law does not recognize the
concept of alter ego.
31
Texas law would render the same result. “Texas
courts will not apply the alter ego doctrine to directly or reversely pierce
the corporate veil unless one of the ‘alter egos’ owns stock in the other”.
Baron does not own Novo Point or Quantec. His being a beneficiary of the
Trust does not alter this legal reality. (See e.g. ROA. 4758).
While Netsphere I referenced Novo Point and Quantec as being “owned
or controlled” by Baron, such is not itself a finding of alter ego, particularly
given this Courts subsequent conclusion that the District Court lacked sub-
ject matter jurisdiction over the LLCs.
32
This Court treated them as distinct
both as to jurisdictional rational and culpability (referring only to Baron as
culpable).
Nor has there been any determination that the LLCs are otherwise di-
31
Cook Islands Ltd. Liab. Cos. Act 2009 §45. The Cook Islands is recognized by the
United States; the Treaty on Friendship and Delimitation of the Maritime Boundary Be-
tween the United States of America and the Cook Islands, signed at Rarotonga on 11
June 1980 and ratified by the US Senate June 21, 1983, obligates the United States to rec-
ognize Cook Islands’ sovereignty. The Court is requested to take judicial notice of the
Treaty.
32
Obviously, had this Court concluded that the LLCs were the alter ego of Baron the
fact that they had not been individually named as parties in the Netsphere DC Case
would have been of little import.
Case: 13-10696 Document: 00512704339 Page: 46 Date Filed: 07/18/2014
34
rectly culpable. Neither could be held vexatious under the governing law of
Texas and there has been no evidence that they were responsible for any
delay in proceedings.
33
While they did file numerous appeals, they pre-
vailed on virtually all of them; their right of appeal was their only recourse
given that the District Court denied them any right to participate.
3. The Receiver and his professionals have been improperly paid from the
liquidation of assets owned by, and cash generated by, Novo Point,
LLC and Quantec, LLC
As noted earlier, multiple estates require separation. When a receiver
holds more than one estate, Bank of Commerce & Trust Co. v. Hood requires
that the source of payment for receiver’s expenses be the estate to which
the expense relates.
“[An] accurate inquiry ought to be made as to what time
and services counsel and receiver gave to each fund, and
what part of their expenses were in fact necessary for each”
65 F.2d at 284.
Netsphere I did not render this rule superfluous.
Neither the Receiver or its professionals, nor the Trustee and its
counsel (or anyone else), attempted to segregate fees or expenses as to ap-
plicable estates within the Receivership. Virtually every Receiver Report
33
See Tex. Civ. Prac. & Rem. Code § 11.054.
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35
accompanied a request for payment. The Receiver simply charged Novo
Point and Quantec because they had the money.
For example, The Receiver’s Report Of Work Performed In May 2012
(ROA.24106) shows over $ in payments. The LLCs paid for all or virtually
all of this amount.
34
In issuing its Fee Order, the District Court made no attempt to allo-
cate the Receivership fees and expenses to any particular estate.
(ROA.28124). Thus, both the fee applications and the resulting orders vio-
lated the legal principles laid out long ago Bank of Commerce & Trust Co. v.
Hood.
Because Novo Point and Quantec were unable to participate, it is im-
possible to determine exactly which fees and expenses were paid from
which estate.
35
However, from the summary reports filed by the Receiver,
34
Appellant has found a total of 20 such reports, (ROA.17146, 17080, 17333, 18432,
18239, 18504, 18167, 19456, 19222, 20872, 24106, 15917, 15854, 15598, 15661, 14177, 14126,
13943, 13892, 13246). Appellants note that some of the amounts appear to be for the
preservation of assets. As to domain registration fees and management fee payments to
Damon Nelson, for example, the LLCs do not request disgorgement. As to other ex-
penses, disgorgement is not sought to the extent the Receiver can show them to be rea-
sonable and necessary for the preservation of assets. Such is equitable given the
appellant’s inability to conduct discovery or mount a meaningful defense in the context
of the Fee Order.
35
See Footnote 34, supra.
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36
it would appear that the vast majority of all Receivership fees and expenses
were charged to the Novo Point and Quantec estates.
36
4. Conclusion
Under controlling precedent, Novo Point and Quantec, as non-parties,
may not be charged with the Receiver’s professional fees and expenses in-
curred in an unauthorized receivership because the District Court lacked
subject matter jurisdiction over them and because there have been no find-
ings of culpability that would expose their assets to any form of “equitable”
contribution. Where there is no subject matter jurisdiction, invoking an
equitable resolution for the payment of some but not all of such fees and
expenses out of the property owned by entities over which the District
Court never had subject matter jurisdiction would be unlawful. Lion Bond-
ing & Surety Co. v. Karatz, 262 U.S. 640, 641–42 (1923). Thus, “meaningful
discount” as applied to Novo Point and Quantec means nothing short of a
full reimbursement of all amounts paid (to the extent paid from their as-
sets) and a rejection of any further charges as against their assets.
B. As a matter of law, a non-receivership professional, such as the
36
See Footnote 34, supra.
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37
Ondova bankruptcy trustee, cannot be awarded fees and expens-
es, even where their services might have benefitted the receiver-
ship estate
Where, as here, the interests of a receivership estate are adequately rep-
resented by receivership counsel, unnecessary action by others on the re-
ceivership's behalf will not be compensated. Veeder v. Public Service Holding
Corp., 51 A.2d 321, 325–26 (Del. 1947). Even where such non-receivership
professionals make suggestions and recommendations and render services
of value to the receivership estate, they cannot be paid out of the receiver-
ship estate unless they are receivership professionals. In re Middle West Util-
ities Co., 17 F.Supp. 359, 371 (D.C. Ill. 1936).
1. In Netsphere I, this Court reversed the order awarding the Ondova
Bankruptcy Trustee’s fees and expenses
By this Court’s Mandates, most if not all of the orders awarding fees
and expenses to the Receiver’s professionals and the Ondova Trustee were
expressly reversed, including, specifically, the Order Granting Motion of
Daniel J. Sherman, Chapter 11 Trustee for Ondova Limited Company, for Reim-
bursement of Fees and Expenses From the Receivership Estate (ROA.21409-10),
by which the Ondova Trustee was paid $379,761.18. See Court’s Mandate
issued in Appellate Cases 12-10489, 12-10657 and 12-10-804. (ROA.27979–
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38
10). The reversal was mandated by This Court with full knowledge of the
equitable issues related to Baron. Notwithstanding such reversal, the Dis-
trict Court impermissibly permitted the Trustee to retain this same amount
as a part of its Fee Order. (ROA.28124, p. 28148).
2. The district court correctly ruled, on January 2, 2013, that no more fees
and expenses would be awarded to the Ondova Bankruptcy Trustee and
that disgorgement was in order
On January 2, 2013, the district court issued an Advisory on Past and
Pending Receivership Disbursements (the “Advisory”), noting:
Finally, the Court reads the Fifth Circuit opinion to preclude
payment of the Trustee's fees. Although the Fifth Circuit placed
no blame on the Trustee in moving for the Receivership, recog-
nizing that he did so on the recommendation of the bankruptcy
court, the Fifth Circuit did acknowledge that “[w]hen a receiv-
ership is improper or the court lacks equitable authority to ap-
point a receiver, the party that sought the receivership at times
has been held accountable for the receivership fees and expens-
es.” . . . In light of the Trustee's role in pursing the Receivership
and the Fifth Circuit's opinion which only authorizes payment
of fees to the Receiver and his counsel, this Court believes that
it was not and is not authorized to pay any of the Trustee's ex-
penses from Receivership funds. Accordingly, the Trustee will
be instructed to return all previously paid amounts back to the
Receiver. The Court will not require the Trustee to pay the Re-
ceivership fees and expenses.
(ROA.26478) (emphasis added).
3. The district court erred by doing a 180-degree turn and disavowing the
January 2, 2013 ruling.
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39
Inexplicably, the District Court made a 180-degree turn in the Receiver-
ship Fee Order by not ordering disgorgement of the $379,761.18 previously
awarded. The reasoning of the District Court in the Receivership Fee Order
is convoluted and internally inconsistent. The District Court denied the
newly requested fees, finding no legal entitlement. The court denied re-
covery quantum meruit finding that the services were not rendered to the
Receivership but were undertaken “in the course of the Trustee’s inde-
pendent duties to the Ondova estate as well as its duty to defend the Re-
ceivership as the moving party.” (ROA.28146-7). The court went on to
conclude:
Having found that the Trustee is not a Receivership profession-
al, the Court may not reimburse the Trustee for fees incurred. It
is therefore irrelevant to consider the Johnson factors or§
330(a)(l) of the Bankruptcy Code. See Johnson v. Georgia Highway
Express, Inc., 488 F.2d 714 (5th Cir. 1974).
(ROA.28147).
However, when it came to the disgorgement issue, the court aban-
doned its earlier reasoning stating that because the Trustee’s counsel had
“sought to do duty to their clients and to both the District Court and the
Bankruptcy Court”, it would be “inequitable” to require disgorgement.
(ROA.28148). The Court described the payment as being “in recognition of
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40
the valuable appellate work that was incurred as a result of Baron’s exces-
sive appeals.” (Id). This is odd given that the Receiver himself not only
opposed the Trustee’s fee request but strenuously argued that any prior
payments should be returned. (ROA.27925-33).
In the final measure, the Trustee’s counsel defended the Receiv-
ership on appeal not because the Receiver engaged or hired
them, but because they were quite properly defending their own
client, the Trustee, against the very real risk that he would be
held responsible for the costs of an improper Receivership.
(ROA.27931).
The Receiver argued that the “Court’s Advisory of January 2, 2013 was
precisely correct and that the Netsphere I opinion required discouragement.
(ROA.26477–79).
The real reason for the court’s position was solely to punish Baron.
… It [the retention] in no way is designed to compensate the
Trustee or his counsel for any work which they were obligated to
do as the Trustee in the Ondova case, but to account for Baron’s
complicity in the additional fees that were incurred [as a result of
Baron’s excessive appeals].”
(Id).
In the present case, it was Ondova’s Bankruptcy Trustee who sought the
imposition of the unlawful receivership. No assessment of the Johnson fac-
tors was undertaken. No reference was made to Novo Point or Quantec.
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41
The fees were recognized as not properly due but awarded anyway as a
punitive sanction against Baron for raising appeals – most, if not all, of
which were successful.
37
And, they were paid not by Baron but by the
LLCs!
As to Barron of course this amounted to an abuse of discretion.
However, as to the LLC’s the absence of any finding that they were directly
culpable or the alter ego of Baron, it also amounts to an error of law be-
cause these amounts were paid using the assets of the LLCs.
38
The Trustee and its counsel should receive nothing and all amounts
previously paid should be disgorged.
C. As a Matter of Law, the Receiver and His Professionals Should
Not Be compensated For Defending the Imposition of the Receiv-
ership
The prevailing view among the circuits is that the defense of the impo-
sition of receivership is not an awardable expense because it provides no
benefit to estate. The Third Circuit applies the “American Rule” requiring
37
Nor does the Receivership Order attempt to link any of the prior fees to specific work
in relation to any appeal. It is plainly and simply a punitive damage award as against
Baron.
38
Or if this Court concludes the LLCs to be the alter ego of Baron, also an abuse of dis-
cretion.
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42
that each party pay his own expenses including receivers in defense of re-
ceivership fees. United States v. Larchwood Gardens, Inc., 420 F.2d 531, 535
(3rd Cir. 1970). Likewise, the Seventh Circuit refuses to authorize receiver-
ship fees when the receiver is engaging in controversy as a litigant advocat-
ing a position where he is not acting as a neutral. In re Marcuse & Co., 11
F.2d 513, 516 (7th Cir. 1926).
39
Similarly, this Court, in Speakman v. Bryan, 61 F.2d 430 (5th Cir. 1932)
affirmed that the costs, expenses, and disbursements incurred by a receiver
whose appointment was improvidently made, or who has taken wrongful
possession of property, can charge such fees and expenses against the re-
ceivership property only to the extent that the services rendered have bene-
fited or the receivership estate. Id at p. 431.
The manner of billings submitted by the Receiver made it impossible to
discern what services were in fact rendered, how they benefited each es-
tate, which were rendered as receiver and which improperly rendered as
cumulative “lead counsel”, and which, if any services were for the benefit
39
Such would be further rationale for denying the Trustee’s fee application and requir-
ing discouragement.
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43
of the Receivership as a whole, and therein which benefited each estate –
for example the LLC estates – as to which such fees should not be awarded.
The manner of billing prevented the District Court from fulfilling its obli-
gations.
As applied to this case, the district court should have required the Re-
ceiver and his professionals to present invoices that were broken down by
task and by estate so that proper analysis could be undertaken. As pre-
sented, there was no basis upon which the District Court could reasonably
conclude its work in accordance with the law and the mandate of Netsphere
I. In reaching any decision in the Fee Order, the court thus acted improp-
erly requiring reversal.
The Fee Order is replete with justifying references to Baron’s numerous
appeals. The court ignored the fact that while the Receiver most often in-
duced the rulings that resulted in “all those appeals” Mr. Vogel did not
prevailed on the merits in defending a single one. Following the issuance of
Netsphere I it was the Receiver who sought en banc review by the Fifth Cir-
cuit – a request that evidently no member of this Court supported. How is
such activity justified as “benefiting the estate(s)”?
Indeed, by seeking orders for the payment of fees and expenses, the Re-
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44
ceiver is not only asking to be principally rewarded for unsuccessfully de-
fending appeals and an en banc petition, he is asking that they be paid by
Novo Point and Quantec, both innocent parties who successfully and intel-
ligently exercised their rights of appeal.
40
Although a bankruptcy matter, the LLCs proffer guidance in ASARCO,
LLC v. Jordan Hyden Womble Culbreth & Holzer, P.C. (Matter Of ASARCO,
LLC), No. 12-40997 (5th Cir. April 30, 2014). Therein, the court stated:
No side wears the black hat for administrative fee purposes. In the ab-
sence of explicit statutory guidance, requiring professionals to
defend their fee applications as a cost of doing business is con-
sistent with the reality of the bankruptcy process. The perverse
incentives that could arise from paying the bankruptcy profes-
sionals to engage in satellite fee litigation are easy to conceive.
Although the Asarco Court allowed that fees for defense could be permitted
where "an adverse party has acted in bad faith, vexatiously, wantonly, or
for oppressive reasons," this would not apply herein. In Netsphere I this
Court found that Baron’s conduct (not the LLCs’) contributed to the imposi-
40
Baron filed eleven appeals, ten of which were reversed and remanded Appeal Nos.
10-11202 (1 order), 11-10113 (2 orders), 11-10289 (18 orders), 11-10290 (13 orders), 11-
10390 (16 orders), 12-10003 (2 orders), 12-10489 (7 orders), 12-10657 (4 orders), 12-10804
(6 orders), 12-11082 (5 orders). One was dismissed (Appeal No. 11-10501 was dismissed
as Carington, Coleman, Sloman & Blumenthal, LLP had filed a motion for rehearing
that was still pending when the appeal was taken.). Seventy-four District Court orders
were reversed by this Court and remanded. Baron did not create chaos: he simply ethi-
cally and successfully appealed the District Court’s orders.
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45
tion of the Receivership. There has been no finding that Baron or the LLCs
acted improperly since that time and the success of the appeals bears this
out.
II.
Even if authorized under the rules of equity, the district court
abused its discretion by entering the Fee Order
A. The district court erroneously awarded fees under patently defec-
tive Fee Applications
Ordinarily, the expenses and fees of a receivership are charged against
the property being administered. Atlantic Trust Co., 208 U.S. at 375–76;
Netsphere, Inc., 703 F.3d at 311. In considering compensation to the Receiv-
er, the court administering the receivership may consider all factors in-
volved in the particular receivership to determine an appropriate fee.
Gaskill v. Gordon, 27 F.3d 248, 253 (7th Cir. 1994); As stated in S.E.C. v. Strik-
er Petroleum, LLC:
The Fifth Circuit has not required district courts to evaluate the
Johnson factors when making fee awards in receiverships (as
opposed to awards under civil rights fee-shifting statutes). And
because the Johnson factors address fee applications by lawyers,
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46
and receivers need not be lawyers, it is at least questionable
whether the factors should be adopted for all receivership fee
applications (a number of the factors do not literally apply to
non-lawyers, even if they provide guiding principles for evalu-
ating the fee applications of non-lawyer receivers).
No. 3:09-CV-2304, 2012 WL 685333, at *3 n. 10 (N.D. Tex. Mar. 2,
2012).
In the Southern District of Texas, it has been determined that the fol-
lowing factors are particularly significant when it comes to fee applications
by receivers:
1. The complexity of the problem faced by the receivership;
2. The ability, reputation and professional qualities of the receiver
and assisting professionals necessary for the job;
3. The time and value of the labor necessarily expended;
4. The results achieved; and
5. The ability of the receivership estate to afford the requested fees
and expenses.
S.E.C. v. W.L. Moody & Co., Bankers (Unincorporated), 374 F.Supp. 465,
480 (S.D. Tex. 1974), aff’d, 519 F.2d 1087 (5th Cir. 1975)
This is similar to, but is not as extensive as, what must be proved for the
recovery of attorneys’ fees under Johnson v. Georgia Highway Exp., Inc. 488
F.2d 714, 717–19 (5th Cir. 1974) (listing 12 factors that must be proved for
an award of attorneys’ fees). A Moody analysis was not undertaken by the
Receiver and not present in the Fee Order.
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47
Counsel for receivers must justify their fees using the 12 factors articu-
lated in Johnson v. Georgia Highway Exp., Inc. 488 F.2d 714, 717–19 (5th Cir.
1974).
1. The Court Improperly Awarded the Receiver Fees.
The first task of the District Court was to determine what subsets of
fees were attributed to Mr. Vogel’s role as a receiver (as opposed to what
the court properly found – duplicative efforts as “lead counsel”) and there-
after to apply the Moody test to determine the amount of the subset should
be paid.
Vogel’s time entries precluded the District Court from determining
value to the estates or applying the Moody (or any other) test.
41
For exam-
ple, in his December 31, 2012 Fee Application (ROA.27571–92), three in-
voices are attached for September, October and December 2012, covering
45 time entries. Nearly every single entry is identical, reading as follows:
Review pleading, files, emails, send emails, and related conver-
41
In the Receivership Professionals’ Fee Application (ROA27511–27756), in Section II
entitled “Receivership Fees and Expenses,” Vogel recites that he submitted applications
for fees and expenses from September 1, 2012–October 31, 2012, and from December 1–
28, 2012, as detailed in the invoices attached to a prior application. (ROA.27513–14).
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48
sations with Receiver’s counsel.
This type of billing continued in 2013. (ROA.27594–611). The Receiver also
attached invoices for work performed by the Receiver from the com-
mencement of the Receivership on November 24, 2010, through August
2012. (ROA.27614–734). The non-specific time entries in all of these invoic-
es failed to inform the District Court and Appellants as to who Mr. Vogel
talked to, for how long and why, the nature of the tasks performed and
their relationship to this case. And, it prevented the District Court, or Ap-
pellants, from understanding which estate should be charged with what
amount. The submission of a “summary” as a part of the supporting briefs
did not cure the defect. Nor did any testimony provided, which was non-
specific as to time entries.
The District Court first found that no reimbursement would be made
for time spent as “lead counsel” reasoning that as a receiver, Mr. Vogel had
retained counsel to act in that capacity and awarding recovery for “lead
counsel” activities would be duplicative. (ROA.28160). The analysis, how-
ever, begs the question. With such summary, block form billing, how did
the District Court properly exercise any discretion (as opposed to guess-
ing)? The nature of the Fee Applications themselves precluded the court
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49
from following the law and properly discerning what amount was attribut-
ed to “lead counsel” activities as opposed to activities as a receiver.
Even if the Moody factors could have been considered, they would not
result in a finding favorable to the Receiver.
The business of the LLCs was not complex; they held cash and revenue-
generating domain names. Revenue was received monthly by wire trans-
fer from a single source.
42
The only business decision was to determine
whether certain domain names had generated sufficient revenues to be re-
newed. Registration fees were paid to two registrars and renewals oc-
42
A description of the domain name business is set out in The Southern Company v.
Dauben, Inc., No. 08-10248 (5th Cir. 2009). The LLC’s business is frankly one often run
by two “domainers in a garage”. The domains generated revenues via PPC – those irri-
tating undeveloped websites that contain 7-10 links we have all seen PPC sites earn rev-
enues from people who type the domain into their browser – known as direct
navigation. Revenues are earned as a result of users clicking on the links that are essen-
tially advertisements. Payments are made by a handful of third party PPC Providers
(such as in this case Domain Holding Group) who actually produce the PPC webpages
on an automated basis. Contracts with the PPC providers are largely automated and
based on a percentage of revenue generated. In most instances, large domain name
portfolio holders (such as the LLCs) receive 80-90% of the revenue earned by the PPC
providers. The only activity required of the domain name owner is to alter “name serv-
er” associated with the domain name (which can be accomplished by bulk instruction)
so that the domain name is “forwarded” to the PPC provider. Once the name server is
set, there is no further work for the domain name owner other than to perhaps liaison
with the PPC Provider to improve the revenue stream. Payments are by monthly or bi-
weekly by wire transfer to specified bank accounts. There is no evidence that the Re-
ceiver undertook any of this work – leaving it instead to contractors such as Domain
Holdings Group.
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50
curred automatically unless prevented. The non-judgment claims of the
Petitioning Creditors had not been paid. The “thousands” of UDRPs
43
re-
mained either unresolved or defaulted without any defense having been
mounted by the Receiver. (ROA.28549–70, 28577–28667). The amounts
due to the Village Trust by Netsphere under the Global Settlement Agree-
ment remained unpaid and the Receiver failed to initiate any action to en-
force payment.
44
In distributing the LLCs’ assets, the Receiver made little
effort to determine the authorized person to whom they should be ten-
dered.
As to value, the Receiver’s Reports show that most of the work was per-
formed in relation to other estates but merely paid for by the LLCs.
The Receiver cannot claim the result was successful and the Receiver is
not an innocent party in its failures. As noted elsewhere, much time was
spent on unsuccessful appeals brought about by the Receivers own unlaw-
43
A proceeding brought pursuant to the Uniform Domain-name Dispute-Resolution
Policy incorporated within each domain name registration agreement. A UDRP is a
paper-only ADR procedure. The sole remedy for a prevailing complainant is either
transfer of the domain name to complainant or cancellation of the domain name regis-
tration. No monetary award is possible. See:
https://www.icann.org/resources/pages/udrp-2012-02-25-en.
44
The Receiver sought only an order that directed the wrong person to pay the amounts
and apparently made no further efforts.
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51
ful positions. Although having participated in hearings and having filed at
least one motion for an Order to Show Cause re Authority in the Ondova
bankruptcy directing that Mr. Payne and Ms. Katz show authority, no or-
der was pursued.
45
When Baron raised the issue in the context of the
Court’s orders authorizing the distribution of remaining assets, the Receiv-
er objected. All the while the Receiver was aware that the only recognized
counsel of the LLCs – Mr. Cox and Mr. Jackson – were both on the Receiv-
er’s payroll and that the court had previously precluded any other counsel
from appearing on the LLCs’ behalf. That the Receiver instead chose to
dump the assets by delivering to a person over Baron’s objection was a
derogation of his obligations as a receiver.
46
In short, the LLCs, who pre-
receivership, were in no danger and had no claims against them, were used
as a bank account to satisfy the needs of others. They exited with domain
names but no cash and the Receiver tendered control to an unauthorized
45
The issue of Mr. Payne and Ms. Katz’ authority to act for the LLCs was the subject of
great concern to Judge Jernigan in the Ondova Bankruptcy, so much so that she au-
thored a letter to this Court in connection with Netsphere I expressing her concerns. A
copy of the letter is found at ROA.21487–85).
46
As a result, the issue of Mr. Payne and Ms. Katz and their wrongful control over the
assets of Novo Point and Quantec is the subject of new litigation before the District
Court in the form of Novo Point LLC and Quantec LLC v. Elissa Katz and Christopher Payne,
U.S. District Court, N.D. Texas, Dallas Div., 3:14-CV-1552-L.
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52
person. While the other estates within the Receivership may have been
more complicated, such does not justify charging the LLCs with Receiver’s
fees or expenses.
47
This is hardly the success meeting the requirements of
Moody.
The last Moody factor must be judged in light of the Receivership es-
tates’ ability to pay – without regard to the LLCs. The Receivership was
entirely improper as to the LLCs and use of their funds was impermissible.
2. Block billing practices rendered the Fee Applications defective as a
matter of law
As a matter of law, the Receiver and his legal counsel did not met their
evidentiary burden to support their fees. There is a clear problem with the
“block billing” presented by Vogel and his counsel in their Fee Applica-
tions. The term “block billing” refers to the method by which each lawyer
enters the total daily time spent working on a case, rather than itemizing
the time expended on specific tasks. Such practices are unacceptable when
47
A later 2013 Application for Receiver Fees contains a report showing earlier refer-
ences to 17 entities to be managed was either a sham or that all entitles other than Novo
Point and Quantec were quickly dispersed with as entities having no assets following
the establishment of the Receivership. (See: Doc 1324 and 1326).
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53
a fiduciary applies for payment of fees from the estate for their services be-
cause, unlike applicants in ordinary attorney fee applications, a receiver
and his attorneys have an extremely high duty to account to the estate for
disbursements from the estate.
A party does not have the right to bill for time that is not properly doc-
umented. Texas State Teachers Ass’n v. Garland Indep. Sch. Dist., 489 U.S. 782,
784 (1989). As a matter of established law, block billing is inadequate to
support a fee award. E.g., Kearney v. Auto-Owners Ins. Co., 713 F.Supp.2d
1369, 1378 (M.D. Fla. 2010); Seastrunk v. Darwell Integrated Technology, Inc.,
No. 3:05-CV-0531, 2009 WL 2705511, at *8 (N.D.Tex. Aug. 27, 2009) (reduc-
ing award in block billing case). Yet, in the instant case, the Receiver and
his counsel all submitted Fee Applications supported entirely by block bill-
ing, which makes it impossible to exercise billing judgment.
48
For example, in the invoices attached to its Fee Application, Dykema
submitted multiple tasks in single entries making it impossible to under-
48
The failure to exercise billing judgment should result in denial of fees. See Walker v.
U.S. Dep’t of Housing & Urban Dev., 99 F.3d 761, 770 (5th Cir. 1996) (block billing reject-
ed).
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54
stand what amount of time was spent on any one task.
49
More importantly,
such billing makes it impossible to assess the application of any task, fee or
expense in the context of any specific estate.
Nowhere, either in the body of the Fee Applications or in the invoices
attached, is there any attempt to segregate the time billing entries by task
or by estate. In a section of its Fee Application entitled “Dykema Gossett
PLLC’s Role in the Receivership Case,” Dykema attempts to summarize the
different tasks performed by the firm, but no attempt is made to advise the
reader of the amount of time spent on each task by each lawyer, the hourly
rates of such lawyers and the total amount charged for performing such
task or how they relate to any particular estate. (ROA.27761–65).
Block billing is not allowed in bankruptcy proceedings because of the
need to protect the bankruptcy estate. The standard for receiverships
should be no different. As a bankruptcy lawyer, Mr. Jeffrey Fine, a senior
partner with Dykema, was well aware that block billing was a serious
problem in terms of safeguarding and accounting for the funds in the re-
ceivership estate and no doubt aware of the Complex Guidelines. Thus, in
49
See Dykema Fee Application (ROA.27757–27860) and, in particular the invoices of
Dykema attached to its Fee Application (ROA.27814–47).
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55
addition to failing to meet their burden to support the fees, as fees, the Re-
ceiver and Dykema have failed to satisfy their burden to articulate and es-
tablish the necessity and basis for their fees.
50
Receiver’s counsel further hindered the court by heavily redacting
items from the billing sheets submitted, an example of which is shown be-
low:
(ROA. 27814). From the above example it is impossible to tell what motion
was prepared let alone why it was beneficial to any particular estate. The
one thing it does convey are charges by an attorney for “filing and service
of [motions], a clerical task for which legal fees should not be awarded.
A court facing allocation in a multi-estate receivership cannot remedy
the issue of block billing and redactions. The failure cannot be “cured” by
50
With automated billing systems it would have been a small task for the fee applicants
to have created billing codes which would have accurately separated time by estate (e.g.
client) and function (legal vs clerical, project-based, etc). The Receiver and its counsel
volunteered for the job. They knew what was expected. That they failed in such a sim-
ple task should be heavily weighted by this Court in its considerations.
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56
simply “guestimating” or reducing fees as a penalty for improper billing.
The actions of Receiver and his counsel not only hindered the Court from
determining value to the estates, it prevented the court from assessing, as
to any estate, the any of the Moody factors as applicable to the Receiver and
the Johnson factors as they relate to counsel fees. As such, the applicants
themselves rendered application of the law impossible.
Because the defect applied as to both current and prior fees, the Fee Or-
der should be overruled (at least as to the LLCs) and this Court should is-
sue a judgment that the applicants receive nothing and be required to
disgorge all amounts previously received from Novo Point and Quantec.
B. The district court made numerous unsupported findings in the
Fee Order
There are numerous myths that have been perpetuated by the adver-
saries throughout this case. Acting with caution that this Court may de-
termine that Novo Point and Quantec should be assessed fees and
expenses, they are alternatively addressed herein.
1. There has never been an adjudication that any appellant, or their coun-
sel, are vexatious litigants, and there are no facts in existence that
would support such a finding.
While the Opinion in Netsphere I made reference to the Receivership be-
Case: 13-10696 Document: 00512704339 Page: 69 Date Filed: 07/18/2014
57
ing “primarily of Baron’s own making”, such a finding was limited to the
events at the outset of the Receivership and did not reference the LLCs.
Netsphere I contained no findings as to subsequent conduct. The Fee Order
referenced only Baron’s many appeals, which purportedly reeked havoc on
the proceedings. (ROA.28124). The propriety of these appeals has been
addressed above. Successful appeals cannot possibly constitute vexatious
conduct and any havoc cannot be attributed to the successful appellant.
There are no facts that Appellee or any of the Interested Parties can
point to supporting a finding that any of the LLCs is a “vexatious litigant.”
None fall within the definition of a vexatious litigant under Texas law.
None were ever held in contempt or sanctioned by the district court.
51
Nor,
as addressed, can they be found the alter ego of Baron.
While Baron (not the LLCs) was penalized for failing to appear at a
51
In Netsphere, Inc., this Court pointed out:
If the district court entered a sufficiently specific order, it could have held
Baron in contempt, imposed a fine or imprisoned him for “disobedience . . .
to its lawful . . . command.” 18 U.S.C. § 401. At oral argument in the appeal,
it seemed conceded that no clear order existed. Instead, the receiver and trus-
tee cited only to hearings at which the district court admonished Baron not
to hire or fire any more attorneys. Whether there was a clear order ultimately
does not matter in our resolution.
Netsphere, Inc., 703 F.3d at 311.
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58
deposition in the Ondova Bankruptcy matter, such was addressed by pre-
cluding his ability to contest a motion for fees therein and was unrelated to
the Netsphere DC Case resulting in a substantial contribution award. If any
appellant herein were a “vexatious litigant,” one would expect to find in
this vast record on appeal at least one order granting a motion requesting
that their attorneys be sanctioned (or at least cautioned) for engaging in
vexatious conduct.
52
This Court can search the record on appeal and it will
find no such document.
The district court never conducted a hearing to determine whether Bar-
on, Novo Point, Quantec, or any attorney working on their behalf, engaged
in any alleged vexatious or bad faith conduct and no order finding as much
has ever been entered by the court. This failure prevented the court from
assessing a “meaningful discount” to any otherwise proper Receivership
fees and expenses.
2. Appellants did not engage in discovery abuse
There is no order (let alone evidence) that any appellant ever engaged
in discovery abuse or refused to comply with the district court’s orders on
52
28 U.S.C. § 1927.
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59
discovery. The district court’s comments in the Fee Order regarding Bar-
on’s conduct in discovery are completely unsupported by the record.
3. Conclusion
Judge Ferguson was clearly frustrated over this proceeding since its in-
ception. While that frustration is understandable, the findings in the Re-
ceivership Fee Order reflect the court’s refracted perceptions. Indeed, such
comments could be seen to suggest bias and lack of impartiality on the part
of the District Court. This was not something that grew over time. From
day one, Judge Furgeson was unduly aggressive and extreme in his deal-
ings with Baron and his counsel. Judge Ferguson’s comments at the first
status conference in this case set the tone for the entire case. Addressing
Baron’s attorneys, Judge Furgurson stated on the record:
MR. BELL: Yes, your Honor, absolutely. I don’t think your
Honor needs to modify that order, and I’m okay with it, and I
believe Mr. MacPete is as well.
THE COURT: You realize that order is an order of the Court.
So any failure to comply with that order is contempt, punisha-
ble by lots of dollars, punishable by possible jail, death.
(ROA.29510).
THE COURT: So I’ll tell you what.... You want to challenge the
court order, I have the marshals behind me. I can come to your
house, pick you up, put you in jail. I can seize your property,
do anything I need to do to enforce my orders. I’m telling you
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60
don’t screw with me. You are a fool, a fool, a fool, a fool to
screw with a federal judge, and if you don’t understand that, I
can make you understand it. I have the force of the Navy, Ar-
my, Marines and Navy behind me.
(ROA.29515–16).
The day following, Baron’s lawyers promptly filed an emergency mo-
tion to withdraw (ROA.191–4), which was granted the following day
(ROA.190–200), leaving Baron without counsel during a temporary injunc-
tion proceeding and requiring Baron to comply with discovery and pro-
duce thousands of documents and attend depositions pro se.
53
The tone
was such that the issue resurfaced during the December 17, 2010 hearing
on the Receivership wherein counsel if he would be in danger of sanction
for representing Baron. (ROA.4771-2).
III.
The district court abused its discretion and violated Appellants’
due process rights by precluding their participation in the Fee
Applications proceedings and proceeding on an unreasonably
accelerated basis, refusing to allocate funding to pay counsel
53
Baron did not fire these lawyers as Judge Ferguson suggested in the Receivership Fee
Order. They quit, having been understandably disturbed over the overly aggressive
comments made by Judge Ferguson at the June 19, 2009, status conference.
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61
and an expert witness, and refusing to grant a continuance re-
quested by Baron who was the sole party then capable of ob-
jecting to the fee requests on the LLC’s behalf.
This Court has long maintained that "the right to retained counsel in
civil litigation is implicit in the concept of the Fifth Amendment due pro-
cess." R.B. Potashnick v. Port City Construction Co., 609 F.2d 1101, 1117 (5th
Cir. 1980). Counsel can help delineate the issues, present the factual conten-
tions in an orderly manner, conduct cross-examination, and generally safe-
guard the interests of the recipient. Goldberg v. Kelly, 397 U.S. 254, 270–71
(1970). The right to counsel in civil matters “‘includes the right to choose
the lawyer who will provide the representation.’” Texas Catastrophe Prop.
Ins. Assoc. v. Morales, 975 F.2d 1178, 1181 (5th Cir. 1992) (quoting McCuin v.
Texas Power & Light Co., 714 F.2d 1255, 1257 (5th Cir. 1983)). The meaning
of these decisions cannot be limited to the right to selection of whatever
lawyer will work for free.
As of the Fee Orders, the Court had improperly imposed a Receivership
for over 2½ years, freezing the assets of all appellants. Novo Point and
Quantec were not permitted to be present; they were unwanted and unin-
vited. They were not given notice and had been expressly instructed that
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62
the court would not recognize attorneys on their behalf other than those re-
tained by the Receiver.
They had at most only an indirect voice via Baron.
Baron was not only forced to defend against the Fee Applications on an
incredibly accelerated basis imposed by the District Court, but also was
simultaneously ordered to participate in mediation and forced to defend
himself at trial in the complex Baron Involuntary Bankruptcy set to be
heard in the middle of May 2013, against another team of highly skilled
lawyers—all this while Baron was deprived of the use of any of his funds
to hire counsel.
54
The issues were extraordinarily complex, and the docu-
ments and evidence were voluminous. Penniless, Baron faced a team of
professionals who had already been paid millions of dollars (largely if not
entirely from LLC funds) and who were seeking more. The Receiver, the
Ondova Trustee and their counsel presented over $6 million in billings, in-
corporating thousands hours of time and numerous time entries covering a
290 month period. To defend against the Fee Applications on the acceler-
ated time schedule set by the District Court required experienced lawyers
54
Except for $25,000 release by the District Court to pay for a retainer for bankruptcy
counsel after Baron’s bankruptcy counsel of choice was denied his requested retainer of
$100,000 by the bankruptcy court.
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63
and experts familiar with the issues.
There can be no doubt that the continuous asset seizure from Novem-
ber 2010 forward imposed by the District Court together with the involun-
tary bankruptcy implicated the procedural protections mandated by the
Due Process Clause of the Fifth Amendment for both Baron and for the
LLCs. See, e.g., Connecticut v. Doehr, 501 U.S. 1, 11–12 (1991) (holding that
due process protection is merited when there is deprivation of property
and deprivation need not be “complete, physical, or permanent” to merit
protection but that “even the temporary or partial impairments to property
rights that attachments, liens, and similar encumbrances entail are suffi-
cient to merit due process protections.”).
Appellants were entitled to a meaningful opportunity to be heard in de-
fense of the Fee Applications, and to have the funding necessary to engage
the proper professionals necessary for such defense. See, e.g., Matthews v.
Eldridge, 424 U.S. 319, 333 (1976) (The right to be heard “before being con-
demned to grievous loss of any kind . . . is a principle basic to our society”
and the “fundamental requirement of due process is the right to heard at a
meaningful time and in a meaningful manner”).
What constitutes a “meaningful” opportunity to be heard varies with
Case: 13-10696 Document: 00512704339 Page: 76 Date Filed: 07/18/2014
64
the circumstances and the interest at stake. Due Process, “unlike some le-
gal rules, is not a technical conception with a fixed content unrelated to
time, place and circumstances.” Mathews, 424 U.S. at 334; see also Goldberg,
397 U.S. at 268–69 (“the opportunity to be heard must be tailored to the ca-
pacities and circumstances of those who are to be heard”). In the present
litigation, however, the effect of the Court’s rigid freeze on funds for Bar-
on’s defense including funds to his counsel, for experts and other costs and
expenses precluded appellants from mounting all but a minimal defense
and prevented them from having any meaningful opportunity to be heard.
To defend himself at a hearing on substantial Fee Applications covering
three of the largest law firms in Dallas, Texas, a time period from Novem-
ber 24, 2010, to April 30, 2013, involving a small army of lawyers, and an
enormous volume of time entries, Baron required a skilled legal team in-
cluding staff and experts. He and the LLCs had the resources to do so but
they were all firewalled behind the cloak of Receivership.
55
Baron made
several pleas to the district court for access to funds required to defend
55
Baron held funds in exempt IRA and similar accounts, all of which were controlled by
the Receiver. The LLCs of course had cash and a continuing revenue stream from their
domain names.
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65
himself—all were refused in their entirety. Baron was left with unpaid
counsel and no experts, in both this trial and the involuntary bankruptcy
trial. Baron’s unpaid counsel probably did they best they could be ex-
pected to do without resources, but that effort was woefully inadequate,
considering the enormous scope and scale of the task. The process adopted
by the District Court on an expedited basis to accommodate the judge’s
scheduled retirement did not constitute a “meaningful opportunity to be
heard.”
CONCLUSION & PRAYER
The difficulties recognized by this Court in Netsphere I seem only to
have grown over time, resulting in a grave and substantial harm to Novo
Point and Quantec. The LLCs have been struggling to keep pace; chal-
lenged by the need to expeditiously respond to a growing number of issues
while being deprived of the financial means to do so.
What began as a means to prevent Baron from hiring and firing counsel
grew to include a need to pay for the, as yet unsubstantiated, claims of the
Petitioning Creditors for legal fees owed them by Baron. It ended up as a
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66
free-for-all in which the LLCs, legally independent entities, were illegally
sucked into the Receivership for the sole apparent reason to act as the bank
account for the Receiver, his attorneys, and, it seems, anyone else who
could dream up a claim against Baron. At the end of the day, the LLCs
have been forced to expend millions upon millions to finance a fight in
which they had no dog. They were not in any manner culpable of any of
the activities which formed the basis for the Receivership and have done
nothing since which could be seen as culpable. They certainly received no
benefit. A court should not be able to act under in equity to accomplish a
task which is legally prohibited.
The opposition and the District Court have run roughshod over the
rights of the LLCs, depriving them of their assets, civil liberties and the
most basic due process – the right to be heard. The LLCs feel like any one
of your Honors who, being mistaken for your neighbor, has had their iden-
tity stolen, forcibly evicted from your home by a gang of outlaws asserting
authority, and are forced to sit outside in the cold, left to stare in the win-
dow as the gang feasts on your food and uses your property as they please.
This is pillage and it must stop.
The LLCs request that this Court issue a judgment overturning the Fee
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67
Order, denying the Fee Applications in their entirety and order full restitu-
tion of all of the LLCs assets improperly expended too the LLCs. As con-
cerns the LLCs, the Receivership and the improper Fee Applications are the
fault of the fee applicants. Remand would be inappropriate. See Lee v. In-
terstate Fire & Cas. Co., 86 F.3d 101, 105 (7th Cir. 1996) (Remand for devel-
opment of a factual record is inappropriate where a plaintiff fails to meet
his burden of persuasion and never suggested to the trial court that addi-
tional evidence was necessary). A remand is unnecessary when the trial
court’s error is directly traceable to the failure of the party with the burden
of proof to articulate and identify the evidence. United States v. Microsoft
Corp., 253 F.3d 34, 81-82 (9th Cir. 2001).
WHEREFORE, for the foregoing reasons, appellants Novo Point and
Quantec requests that this Court:
1. Reverse the district court’s Fee Order finding that no fees should be
charged as against their assets, that any prior fees and expenses
charged to the LLCs should be disgorged and tendered to the man-
ager of the LLCs, Mr. David McNair;
2. Issue judgment as to prior recipients whose prior awards were not
reviewed in the Fee Order:
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68
(a) that such fees and expenses, to the extent received, be ordered
disgorged under the premise that payment by the LLCs was im-
permissible and that because Netsphere I mandated their reconsid-
eration, by failing to submit their prior awards for reconsideration
they waived their rights to retain them, or, alternatively,
(b) that the issue be remanded with instruction.
3. Grant such other and further relief as is just and proper.
Respectfully Submitted,
/s/ Paul Raynor Keating
Attorney for Appellants Novo
Point LLC and Quantec LLC
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69
CERTIFICATE OF SERVICE
The undersigned certifies that the original of the Appellants’ Brief was elec-
tronically filed with the Clerk of the United States Court of Appeals for the
Fifth Circuit using the Appellate CM/ECF system. Accordingly, counsel
who have entered an appearance in this case and are registered Appellate
CM/ECF users will be served electronically by the Appellate CM/ECF sys-
tem through their registered e-mail addresses.
The undersigned further certifies that a true and correct copy of this Appel-
lants’ Brief was served on counsel who do not participate in the Appellate
CM/ECF system by courier in accordance with Fed. R. App. P. 25 and
5
TH CIR. R. 25 on 21
st
day of July 2014.
Service List:
Leonard H. Simon
Texas Bar No. 18387400
William P. Haddock
Texas Bar No. 00793875
2777 Allen Parkway, Suite 800
Houston, TX 77019
Tel. 713-528-8555
Fax. 713-868-1267
Counsel for Appellant Jeffrey Baron
David J. Schenck
Dykema Gossett, PLLC
1717 Main Street, Suite 4000
Dallas, TX 75201
Counsel for Peter S. Vogel, Receiver
/s/ Paul Raynor Keating
Paul Raynor Keating
Dated: July 18, 2014
Attorneys for Appellants
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70
CERTIFICATE OF COMPLIANCE WITH RULE 32(A )
Certificate of Compliance with Type-Volume Limitation, Typeface
Requirements, and Type Style Requirements
1. This brief complies with the type-volume limitation of Fed. R. App. P.
32(a)(7)(B) because this brief contains 13,878 words, excluding the parts
of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).
2. This brief complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) be-
cause this brief has been prepared in a proportionally spaced typeface
using Microsoft Word 2011 (Mac OS X) in 14 point Palatino for text, and
Helvetica Neue for headings.
/s/ Paul Raynor Keating
Paul Raynor Keating
Dated: July 18, 2014
Case: 13-10696 Document: 00512704339 Page: 83 Date Filed: 07/18/2014
