No. 10-11202
In the
United States Court of Appeals
for the Fifth Circuit
NETSPHERE, INC. Et Al,
Plaintiffs
v.
JEFFREY BARON,
Defendant-Appellant
v.
ONDOVA LIMITED COMPANY,
Defendant-Appellee
Appeal of Order Appointing Receiver in Settled Lawsuit
––––––––––––––––––––––––––––––––––––––––––––
Cons. w/ No. 11-10113
NETSPHERE INC., Et Al, Plaintiffs
v.
JEFFREY BARON, Et Al, Defendants
v.
QUANTEC L.L.C.; NOVO POINT L.L.C.,
Appellants
v.
PETER S. VOGEL,
Appellee
From the United States District Court
Northern District of Texas, Dallas Division
Civil Action No. 3-09CV0988-F
BRIEF FOR APPELLANTS NOVO POINT, LLC AND QUANTEC, LLC
IN REPLY TO SHERMAN BRIEFING ON APPEALS
NOS. 11-10390, 11-10501
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––––––––––––––––––––––––––––––––––––––––––––
Cons. w/ No. 11-10289
NETSPHERE, INC., ET AL, Plaintiffs
v.
JEFFREY BARON, Defendant- Appellant
v.
DANIEL J SHERMAN, Appellee
––––––––––––––––––––––––––––––––––––––––––––
Cons. w/ No. 11-10290
NETSPHERE, INC. ET AL, Plaintiffs
v.
JEFFREY BARON, ET AL, Defendants
v.
QUANTEC L.L.C.; NOVO POINT L.L.C., Non-Party Appellants
v.
PETER S. VOGEL, Appellee
––––––––––––––––––––––––––––––––––––––––––––
Cons. w/ No. 11-10390
NETSPHERE, INC. ET AL, Plaintiffs
v.
JEFFREY BARON, Defendant – Appellant
v.
QUANTEC L.L.C.; NOVO POINT L.L.C., Appellants
v.
ONDOVA LIMITED COMPANY, Defendant – Appellee
v.
PETER S. VOGEL, Appellee
––––––––––––––––––––––––––––––––––––––––––––
Cons. w/ No. 11-10501
NETSPHERE, INC. ET AL, Plaintiffs
v.
JEFFREY BARON, Defendant – Appellant
QUANTEC L.L.C.; NOVO POINT L.L.C., Appellants
CARRINGTON, COLEMAN, SLOMAN & BLUMENTHAL, L.L.P.,
Appellant
v.
PETER S. VOGEL; DANIEL J. SHERMAN, Appellees
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Interlocutory Appeals of
Orders in Receivership on Appeal
From the United States District Court
Northern District of Texas, Dallas Division
Civil Action No. 3-09CV0988-F
Hon. Judge William R. Furgeson Presiding
Respectfully submitted,
/s/ Gary N. Schepps
Gary N. Schepps
Texas State Bar No. 00791608
5400 LBJ Freeway, Suite 1200
Dallas, Texas 75240
(214) 210-5940 - Telephone
(214) 347-4031 - Facsimile
Email: legal@schepps.net
FOR NOVO POINT, LLC and
QUANTEC, LLC
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TABLE OF CONTENTS
TABLE OF CONTENTS.................................................................................4
ABBREVIATIONS ..........................................................................................6
ADOPTION BY REFERENCE......................................................................6
TABLE OF AUTHORITIES...........................................................................7
REPLY ISSUES PRESENTED FOR CONSIDERATION ......................10
REPLY STATEMENT OF FACTS..............................................................11
SUMMARY OF THE ARGUMENT.............................................................12
ARGUMENT & AUTHORITY .....................................................................13
REPLY ISSUE 1: THERE WAS NO EMERGENCY OR
EXIGENT NEED FOR SHERMAN AND VOGEL TO SEEK
SECRET OFF-THE-RECORD EX PARTE PROCEEDINGS TO
SEIZE ALL OF BARON’S RIGHTS AND ASSETS...................................... 13
The Ondova Bankruptcy Estate was Flush with a CASH
Surplus Exceeding a Million Dollars, and Held $330,000.00 in
Cash Escrow for Baron...........................................................................13
Sherman’s Groundless Legal Theory Sold to the District Judge .........19
REPLY ISSUE 2: SHERMAN’S ARGUMENT ERRS IN
IGNORING THE LEGALLY SEPARATE IDENTITIES OF
NOVO POINT, LLC AND QUANTEC, LLC. ................................................ 22
REPLY ISSUE 3: STANDING....................................................................... 23
Standing with Respect to Docs 272 and 287 .........................................23
REPLY ISSUE 4: SHERMAN’S ARGUMENT ERRS ON
MOOTNESS...................................................................................................... 26
The Good Faith Purchaser Exception ...................................................26
Interim Fee Awards are Not Mooted by their Payment.......................28
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Docket No. 285........................................................................................31
Other Orders...........................................................................................32
Stay Pending Appeal does Not Moot the Appealed from Order...........34
REPLY ISSUE 5: SHERMAN’S ARGUMENT ERRS ON
APPEALABILITY............................................................................................ 36
Placing a company into receivership is reviewable on
interlocutory appeal ...............................................................................36
Pendent Appellate Jurisdiction .............................................................38
REPLY ISSUE 6: SHERMAN’S ARGUMENT ERRS ON
HARMLESS ERROR....................................................................................... 41
REPLY ISSUE 7: SHERMAN’S ARGUMENT ERRS ON
WAIVER. .......................................................................................................... 42
The District Court’s Failure to Allow Response to Vogel’s
Motions ...................................................................................................42
Baron’s Sec. 144 Affidavit ......................................................................43
Novo Point LLC and Quantec LLC Objected to being Included
as Receivership Parties..........................................................................43
The Receivership Fee Orders.................................................................44
Defects in Subject Matter and Territorial Jurisdiction Cannot
be Waived................................................................................................44
CERTIFICATE OF COMPLIANCE ...........................................................46
CERTIFICATE OF SERVICE.....................................................................47
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ABBREVIATIONS
“SBRE.” refers to Sherman’s combined Appellee’s Brief filed in appeals
11-10289, 11-10390 and 11-10501.
“VBRE.” refers to Vogel’s combined Appellee’s Brief filed in appeals
11-10290, 11-10390 and 11-10501.
ADOPTION BY REFERENCE
This brief adopts and incorporates by reference the reply brief
filed in this appeal for Jeff Baron, and the reply brief filed in response
to Vogel’s Appellee’s brief. To the greatest extent possible, duplicative
briefing has been avoided in light of the instant appeals’ consolidation
into appeal no. 10-11202.
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TABLE OF AUTHORITIES
FEDERAL CASES
Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 241 (1937).....................................27
Allen v. Wright, 468 U.S. 737, 754-757 (1984) ......................................................24
Alyeska Pipeline Service Co. v. Wilderness Society,
421 U.S. 240, 255-257 (1975)..............................................................................29
Bollore SA v. Import Warehouse, Inc., 448 F.3d 317 (5th Cir. 2006) ....................22
Boone v. Chiles, 35 U.S. 177, 210 (1836) ...............................................................26
Burlington, CR & NR Co. v. Simmons, 123 U.S. 52, 54 (1887) ............................35
Comstock v. Alabama and Coushatta Indian Tribes, 261 F.3d 567, 571
(5th Cir. 2001) ......................................................................................................40
Dakota County v. Glidden, 113 U.S. 222, 224 (1885) ............................................27
Dayton Indep. School Dist. v. US Mineral Prods. Co., 906 F.2d 1059, 1063.........35
Gideon v. Wainwright, 372 U.S. 335 (1963)...........................................................41
Honorable Court. E.g., Massachusetts Mutual Life Insurance Company v. Brock,
405 F.2d 429, 431 (5th Cir. 1968)........................................................................28
Honorable Court. Resolution Trust Corp. v. Smith, 53 F.3d 72, 77 fn2
(5th Cir. 1995) ......................................................................................................34
In re Bleaufontaine, Inc., 634 F.2d 1383, 1388 n.7 (5th Cir. 1981) ........................26
In re Consolidated Bancshares, Inc., 785 F.2d 1249,1253 (5th Cir. 1986) .............20
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In re DP Partners Ltd. Partnership, 106 F. 3d 667, 671-673 (5th Cir. 1997) ... 20, 21
Lion Bonding & Surety Co. v. Karatz, 262 U.S. 640, 642 (1923) ..........................24
Mitchell v. Maurer, 293 U.S. 237, 244 (1934) .......................................................44
Morin v. Caire, 77 F.3d 116, 119-120 (5th Cir. 1996) ............................................38
Palmer v. City of Chicago, 806 F.2d 1316, 1319 (7th Cir. 1986) ...........................29
Powell v. McCormack, 395 U.S. 486, 496 (1969) ..................................................27
Powell v. US, 849 F.2d 1576,1582 (5th Cir. 1988) .................................................41
Richardson v. Penfold, 900 F.2d 116, 118 (7th Cir. 1990)......................................30
S.E.C. v. Janvey, 404 Fed.Appx. 912, 916, (5th Cir. 2010) ....................................26
Securities & Exch. Com'n. v. Lincoln Thrift Ass'n., 577 F.2d 600, 602
(9th Cir. 1978) ......................................................................................................32
Shipes v. Trinity Industries, Inc., 883 F.2d 339, 345 (5th Cir. 1989) .............. 29, 30
Taylor v. Sterrett, 640 F.2d 663, 666-667 (5th Cir. 1981) ......................................37
Vaccaro v. United States, 461 F.2d 626, 635 (5th Cir. 1972) .................................41
FEDERAL STATUTES
11 U.S.C. 105(b) ......................................................................................................21
11 U.S.C. 503(b)(3)(D)............................................................................................20
11 U.S.C. 503(b)(4)..................................................................................................20
28 U.S.C. 1292.........................................................................................................37
28 U.S.C. 1292(a) ....................................................................................................37
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28 U.S.C. 1292(a)(2)................................................................................................30
28 U.S.C. 144...........................................................................................................43
28 U.S.C. 1654.........................................................................................................18
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REPLY ISSUES PRESENTED FOR CONSIDERATION
Reply Issue 1: There was no emergency or exigent need for
Sherman and Vogel to seek secret off-the-record ex parte
proceedings to seize all of Baron’s rights and Assets.
Reply Issue 2: Sherman’s argument errs in ignoring the legally
separate identities of Novo Point, LLC and Quantec, LLC.
Reply Issue 3: Standing.
Reply Issue 4: Sherman’s argument errs on Mootness.
Reply Issue 5: Sherman’s argument errs on Appealability.
Reply Issue 6: Sherman’s argument errs on Harmless Error.
Reply Issue 7: Sherman’s argument errs on Waiver.
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REPLY STATEMENT OF FACTS
The Reply Statement of Facts in the Brief for Appellant Jeffrey
Baron in Reply to Sherman Briefing On Appeals Nos. 11-10289, 11-
10390, 11-10501, is adopted and incorporated herein by reference.
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SUMMARY OF THE ARGUMENT
The following reply briefing addresses the fact that the Ondova
Bankruptcy Estate was flush with a cash surplus
exceeding a million
dollars, and held $330,000.00 in an additional cash escrow for Baron
and that the bankruptcy was not ‘threatened’ as Sherman’s argument
erroneously avers. (SBRE. 3). While the District Judge may have
concluded “members of the bar” needed “protecting” (Id.), the
receivership was imposed in off-the-record ex parte proceedings and
based in large part on a fabricated story Sherman presented that Baron
had not paid his bankruptcy counsel Martin Thomas.
Sherman’s arguments as to standing, mootness, appealablity,
harmless error and waiver are also addressed.
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ARGUMENT & AUTHORITY
REPLY ISSUE 1: THERE WAS NO EMERGENCY OR EXIGENT
NEED FOR SHERMAN AND VOGEL TO SEEK SECRET OFF-THE-
RECORD EX PARTE PROCEEDINGS TO SEIZE ALL OF BARON’S
RIGHTS AND ASSETS.
The Ondova Bankruptcy Estate was Flush with a CASH
Surplus Exceeding a Million Dollars, and Held
$330,000.00 in Cash Escrow for Baron
Baron is the beneficial owner of Ondova, and in September 2010
Ondova had $330,000.00 of Baron’s cash money in ‘escrow’ and held
more than a million dollar cash surplus
above all claims and
liabilities of the bankruptcy estate. In September 2010 the Ondova
bankruptcy estate held:
(1) $330,000.00 of Baron’s money in ‘escrow’ to ensure Baron’s
compliance with the global settlement agreement;
(2) Nearly $300,000.00 of cash belonging to Baron that was
refunded from a creditor of Ondova on a debt that Baron
personally guaranteed, was forced to pay, and overpaid,
and for which the overpayment was seized by Ondova;
(3) Some $2,000,000.00 in cash and only around
$900,000.00 in claims.
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In other words, in addition to hundreds of thousands of dollars of
Baron’s money held in ‘escrow’, Ondova had more than a million dollar
cash surplus
.
1
1
The July 2010 Monthly Operating Report filed by the Trustee, reflects cash on
hand as of July 31, 2010, of $247,476.76 (SR. v10 p4105), $732,811.64 in accounts
receivables, $5,000.00 in office equipment, $5,000.00 in machinery, fixtures &
equipment, and what appears to be the balance of a retainer fee paid to the firm of
Wright-Ginsberg-Brusilow, PC in the amount of $53,281.00 (SR. v10 p4109) giving
the Estate a total of $1,043,569.40 in assets (SR. v10 p4109) with no pre-petition or
post-petition liabilities (SR. v10 p4110).
The Claims Registry (SR. v10 p4120) lists pending claims of almost $3,000,000.00
even after compromise of the University of Texas Regents claims to an agreed
allowed general unsecured claim of $268,000.00 such that the estate is essentially
insolvent. Additionally, approximately four dozen creditors were left off the mailing
matrix, and did not receive appropriate notice of certain filings. The Trustee filed a
Motion to Extend Bar Date as to Certain Creditors (SR. v10 p4131) on or about July
21, 2010 seeking to provide each such creditor with an additional thirty (30) days
within which to file a Proof of Claim. The Court granted the Trustees Motion to
Extend Bar Date as to Certain Creditors by Order dated July 28, 2010 (SR. v10
p4184) and required that the Trustee provide notices to the affected creditors on or
before August 2, 2010. Assuming that the Trustee provided notices to the affected
creditors in accordance with the Courts Order, the Bar Date for the affected
creditors would be September 1, 2010.
The Monthly Operating Report does not reflect that fact that on July 2, 2010, the
Trustee filed The Trustees Motion for Approval of Settlement Agreement Pursuant
to Rule 9019, Federal Rules of Bankruptcy Procedure (SR. v10 p4187). Under the
terms of the intended settlement, the Estate will receive $1,250,000.00 within
ninety (90) days and will receive an additional $450,000.00 in installments over the
course of approximately seven months (SR. v10 p4192). Further, under the
settlement the Estate received an interest in specific domain names and retained its
interest in the internet domain name servers.com and potentially to the continuing
payments from a settlement previously approved by the Bankruptcy Court against
River Cruise Enterprises of New Zealand. (SR. v10 p4193).
In exchange for the payments to the Estate, the Estate released certain claims
including a debt owed to the Estate pursuant to a Note dated December 31, 2005 in
the original principal amount of $460,000 from Macadamia Management, LLC, the
current balance of which is approximately $600,000. The Estate also released a
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claim for approximately $800,000 owed to Ondova under a Domain Name Renewal
Agreement between Manassas LLC and Ondova entered into in March 2009. The
Estate also waived and released certain avoidance action claims related, inter alia,
to: (a) the transfer of a valuable portfolio of domain names from Ondova to Blue
Horizon Limited Liability Company, formerly known as Macadamia Management,
LLC in December 2005; and (b) a transfer of domain names from Ondova to
Manassas, LLC (nominee for Shiloh LLC, a wholly owned subsidiary of Quantec,
LLC - Cook Islands) and to Diamond Key, LLC (nominee of Javelina, LLC, a wholly
owned subsidiary of Novo Point, LLC - Cook Islands) which occurred in March,
2009. The Estate also waived and released claims that it may have owned an
interest in many Blue Horizon domain names which had been jointly monetized
between Ondova and Diamond Key, LLC. (SR. v10 p4193). The Court entered an
Order Granting Trustees Motion for Approval of Settlement Agreement pursuant to
rule 9019, Federal Rules of Bankruptcy Procedure on July 28, 2010 and ordered all
parties to execute the settlement agreement within certain time deadlines (SR. v10
p4200). Then, according to the August 2010 Monthly Operating Report filed by the
Trustee, the Estates assets remained essentially the same except that it increased
its cash on hand from $247,476.76 to $524,691.73 as of August 31, 2010, (SR. v10
p4215) creating total assets of $1,320,764.37. Nowhere are the settlement
agreement and the $1,700,000.00 infusion of cash mentioned or accounted for even
though the settlement was approved by the Bankruptcy Court on July 28, 2010.
In response to the Notice of Extended Bar Date one new Proof of Claim seeking
$1,100.41 on behalf of Bennett, Weston, LaJone & Turner, P.C. was received (SR.
v10 p4126). Finally, a final Proof of Claim was filed on September 1, 2010, by Nace
& Motley, LLP in the amount of $20,073.00 (SR. v10 p4127). The Bankruptcy Court
held a status conference on September 15, 2010. During the status conference the
Court was apprised that Mr. Baron had instituted suit against his former counsel
Gerrit Pronske of Pronske & Patel, PC to prevent him from divulging attorney
client information, and that a dispute concerning payment of an outstanding invoice
allegedly owed to Mr. Pronske had arisen. The Court then ordered that the Village
Trust make, on Baron’s behalf, a security deposit of $330,000.00 (being
approximately 50% of the cash on hand in Novo Point, LLC and Ondova, LLC) with
the Trustee by September 17, 2010 to incentivize Baron to fulfill his obligations
under the settlement agreement. As Ordered, The Village Trust deposited
$330,000.00 with the Trustee on September 17, 2010 (SR. v10 p4227).
On September 21, 2010, the law firms of Hohmann, Taube & Summers, LLP;
Hitchcock Everett, LLP; West & Associates, LLP; and, Schurig-Jetel-Beckett-
Tackett filed a Motion for Allowance of Additional Attorneys Fees Pursuant to
Supplemental Settlement Agreement seeking an unspecified amount of attorneys
fees but claiming that counsel for AsiaTrust incurred over $150,000.00 in fees and
expenses.(SR. v10 p4235). On September 22, 2010 the Estate received a $32,000.00
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As detailed in the footnote above, this huge cash surplus over all
claims and liabilities was achieved when Baron agreed for Ondova to
take all
of the settlement proceeds in the global settlement. SR. v10
p4275, et.seq. Baron agreed to that because he was promised by the
Ondova chapter 11 trustee (Sherman) that:
payment from the River Cruise settlement. (SR. v10 p4227). Then, on September
27, 2010, the Estate received the $1,250,000.00 from Netsphere in accordance with
the settlement approved by the Court on July 28, 2010. (SR. v10 p4227).
The settlement and Village Trust security deposit created a cash position of
$2,095,589.36 and total assets of $2,892,559.80, at the end of September 2010. (SR.
v10 p4229). Total claims set forth under Schedule D were $71,977.30. Total claims
set forth under Schedule E were less than $100,000.00, and the total claims not
foreclosed by failure to file a proof of claim before the bar date as set forth on
Schedule F were $12,866.39. Of the eighteen proofs of claims filed, the claims filed
by Baron, Novo Point, Quantec, Manilla Industries, Netsphere, Inc., Munish
Krishan, Simple Solutions, Iguana Consulting, and Four Points Management, were
compromised, settled and eliminated as part of the settlement agreement approved
by the Bankruptcy Court on July 28, 2010, (SR. v10 p4235), leaving nine remaining
claims. The claims of Equivalent Data were previously extinguished in January
2010, by payments made by Baron and others pursuant to an Order of the United
States District Court. (SR. v10 p4242). Shortly thereafter, the Estate compromised
the claims of Liberty Media and the University of Texas Board of Regents by
granting allowed unsecured general claims of $10,000.00 (SR. v10 p4277) and
$268,000.00 respectively. (SR. v10 p4408). The settlement agreement also
compromised the claims of the Rasansky Firm and Charla Aldous by granting them
a $200,000.00 allowed general unsecured claim. (SR. v10 p4235). Accordingly, as of
the end of September 2010, the remaining eight claims had a maximum value of
$1,344,742.08.
Total claims from Schedule D, Schedule E, allowed Schedule F, and the pending
claims set forth in the claims registry were approximately $1,530,000.00. Given
total assets of $2,892,559.80, the Estates assets exceeded its liabilities by slightly
more than $1,360,000.00. $330,000.00 of those assets were expressly a security
deposit for Jeff Baron (SR. v10 p4446), resulting at the end of September 2010 in
a net surplus of $1,060,000.00 in the Ondova estate
.
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“[I]f I were going to be entering into this settlement
agreement, that once the creditors were paid, that there
would be a significant amount of money that was left over,
that would come back, that would stay, you know, in a
company that I would have at the end of the day. I was
told that obviously if you look at the settlement
agreement, I individually am not getting any, a penny
from it myself. The settlement agreement was that
Ondova was going to be able to walk away out of the
bankruptcy, after it paid its creditors, with a large amount
of cash, and we were thinking maybe even a million
dollars.”
SR. v10 p4222 (Baron’s testimony before the Bankruptcy
Court on 9/15/2010.)
Sherman should have immediately closed the Ondova bankruptcy
in September 2010 when there was the million dollars cash surplus.
Sherman’s counsel has admitted “The negotiation was to pay the
debts and give the keys back to Mr. Baron. But that didn’t
happen.” R. 4598:11-12. Instead, Sherman kept the bankruptcy open
and ran up over $300,000.00 in additional
attorney fees. Baron
eventually objected. Within three business days of Baron’s objection
2
,
Sherman and Vogel had Baron placed into receivership.
2
R. 1577.
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Notably, by November 2010 when Sherman and Vogel had Vogel
appointed ex parte as receiver over Baron, Baron had already fully
performed all of his settlement agreement obligations. Thus, in his
motion Sherman did not allege Baron was in breach of the settlement.
Rather, Sherman’s motion represented that by recommendation of the
Bankruptcy Court, a receivership was to be imposed if Baron fired his
bankruptcy counsel and proceeded pro se. Such a recommendation does
not exist, but if it did, it would clearly not comply with federal law. 28
U.S.C. § 1654.
For the purported recommendation to apply, Sherman and Vogel
had to show that Martin Thomas (who was Baron’s counsel in the
bankruptcy court) was fired. So, a fraudulent story was concocted
that Baron (1) didn’t pay Thomas and (2) filed an ethics complaint
against him, thereby forcing Thomas to withdraw as his counsel in the
bankruptcy case. The story was false and fabricated. In truth, Thomas
was paid in full, did not withdraw, and there was no ethics complaint.
SR. v10 p4097-4098.
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The concocted story about Thomas was bolstered with reference to
a fabricated claim asserted about Stan Broome. With Broome’s
participation a false claim was fabricated that (1) Broome’s fee contract
contained no provision capping his monthly fees at $10,000.00 per
month, (2) Baron wrongfully refused to pay more than that amount, and
thus, (3) Broome was owed tens of thousands of dollars. Broome filed
his motion to withdraw from the bankruptcy case immediately to prior
to Sherman and Vogel’s seeking to have Vogel appointed receiver over
Baron’s assets. Eventually, Vogel was forced by the District Court to
produce Broome’s contract. At that point the claim was shown to be
completely fabricated. See SR. v8 p1212 (the written terms in Broome’s
contract, imposing a $10,000.00 per month cap on fees incurred and
requiring express written authorization to exceed the cap); and see
SR. v5 pp426-430 (Broome’s fraudulent statements denying the existence
of such a term in his contract).
Sherman’s Groundless Legal Theory Sold to the District
Judge
Baron was alleged by Sherman to risk the Ondova bankruptcy by
firing his attorneys. (SBRE. 3). This claim deserves careful attention.
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The Bankruptcy Code sets up the right of every creditor to have his
reasonable attorneys fees paid by the bankruptcy estate when the
creditor has provided a substantial benefit to the estate. The creditor
can seek reimbursement, or his attorneys can seek payment directly. 11
U.S.C. 503(b)(3)(D); and see e.g., In re DP Partners Ltd. Partnership,
106 F. 3d 667, 671-673 (5th Cir. 1997). The argument that somehow
Baron should be put in receivership to prevent him hiring lawyers who
will then make substantial contributions to the Ondova estate and seek
payment for it, is legally frivolous and has no support in law
. If the
creditor has paid the professional who made the contribution, the
creditor is entitled to reimbursement from the bankruptcy estate. Id. If
the professional has not been paid by the creditor, the professional is
entitled to be paid directly from the bankruptcy estate. 11 U.S.C.
503(b)(4); and see e.g., In re Consolidated Bancshares, Inc., 785 F.2d
1249,1253 (5th Cir. 1986). In either case, by law the party responsible
for paying the cost of any qualifying substantial contribution is the
bankruptcy estate and not
the creditor who makes the contribution.
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It should be noted that to qualify as a substantial contribution,
the benefit provided to the estate must be greater than the expense of
the claim. E.g., In re DP Partners, 106 F. 3d at 673. In summary, the
imposition of a receivership in order to force a creditor to pay the costs
of substantial contributions to the bankruptcy estate– an obligation
imposed by law upon the estate– involves the use of a prohibited means
(see 11 U.S.C. 105(b)), to controvert the clear statutory framework of
the Bankruptcy Code. There is absolutely zero authority in law for
‘indemnification’ against a creditor who has made a substantial
contribution. Rather it is the creditor who is entitled to be reimbursed
(or his professionals paid directly) and not the other way around.
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REPLY ISSUE 2: SHERMAN’S ARGUMENT ERRS IN IGNORING
THE LEGALLY SEPARATE IDENTITIES OF NOVO POINT, LLC
AND QUANTEC, LLC.
Sherman’s argument ignores all of the law involving the legal
identity of incorporated and chartered entities, and simply ignores the
fundamental distinction between Baron, an individual, and Novo Point
LLC, and Quantec LLC, independent corporate entities that Baron does
not own. (SBRE. 8). Baron and Novo Point LLC are not “collectively
(‘Baron’)”. Sherman’s argument offers no response to the clear and
direct precedent of this Honorable Court’s holding in Bollore SA v.
Import Warehouse, Inc., 448 F.3d 317 (5th Cir. 2006). Rather,
Sherman’s argument erroneously pretends that Baron is the alter ego of
Novo Point LLC and Quantec LLC, even though (1) no pleading making
that allegation was filed in the proceedings below, (2) no finding to that
effect has been made, (3) no evidence of that has been offered, and
significantly, (4) this Honorable Court has directly held that
receiverships may not be used to establish alter-ego liability.
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REPLY ISSUE 3: STANDING.
Since Vogel took a million dollars and emptied Baron’s savings
accounts to pay ‘fees’ for being the receiver of 30 different entities
placed into receivership (on Vogel’s own motions and without service of
process, supporting evidence of cause, pleadings of any claims against
the entities, etc.), Baron clearly has an interest in declaring that the
receivership over those entities is void.
3
Standing with Respect to Docs 272 and 287
Sherman takes the contradictory positions that on one hand
(1) the two ex parte orders placing multiple non-parties into
receivership without notice were really turnover orders of property
controlled by Baron; but on the other hand (2) Baron has no interest of
any kind in the entities and has no standing to complain. Clearly, if (as
Sherman argues) the challenged orders divested Baron of control over
the companies, then he has a judicially and cognizable injury arising
3
Notably according to Vogel’s work reports, despite the million dollar fee to himself
and his law partners (challenged on appeal), in the past year Vogel since he has
been receiver, Vogel has filed no tax returns or reports, paid no quarterly federal
taxes nor paid any state franchise fees or property taxes for any of the receivership
parties, including Novo Point LLC and Quantec LLC. SR. v4 p1438, v5 p1282, v8
p623, v9 p267,v10 pp1219,1964,3243.
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out of that divesture. The record, however, does not support Sherman’s
argument that Baron controlled the mass of entities added by Vogel into
the receivership. However, because Baron was charged for costs alleged
by the receiver to be incurred with respect to the multiple receivership
estates created by the two challenged orders, Baron clearly has an
interest in reversal of those orders.
As a matter of established law, if the District Court lacked
personal jurisdiction over the entities placed into receivership, or lacked
territorial jurisdiction over the assets, or lacked subject matter
jurisdiction over the assets, then the District Court is without power to
charge fees for the receivership of those assets (other than from the
party who provoked the receivership). Eg., Lion Bonding & Surety Co.
v. Karatz, 262 U.S. 640, 642 (1923) (Where a case is dismissed for want
of jurisdiction there is not even power to award costs). Accordingly,
Baron has a judicially cognizable injury (the costs charged to Baron for
the receiverships) that is traceable to the challenged orders. See e.g.,
Allen v. Wright, 468 U.S. 737, 754-757 (1984). Similarly, Novo Point
LLC, and Quantec LLC, share this standing as their assets are being
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threatened to be sold, in part as a result of the massive receivership
fees charged with respect to the challenged orders.
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REPLY ISSUE 4: SHERMAN’S ARGUMENT ERRS ON MOOTNESS.
The Good Faith Purchaser Exception
Sherman’s argument relies upon an unpublished case
4
(which
pursuant to the express rules of this Honorable Court is not precedent),
that holds where a party does not seek to stay the sale of property sold
to good faith purchasers, an appeal of that sale is moot.
Notably, good faith purchasers are afforded special protection
under the law. The importance of securing the rights of good faith
purchasers is so fundamental that the Supreme Court explained almost
200 years ago: “Strong as a plaintiff’s equity may be, it can in no case be
stronger than that of a purchaser, who has put himself in peril by
purchasing a title, and paying a valuable consideration, without notice
of any defect in it, or adverse claim to it.” Boone v. Chiles, 35 U.S. 177,
210 (1836). Accordingly, with few exceptions, as a special rule, good
faith purchaser status trumps a challenge to an order confirming the
sale of property. See generally In re Bleaufontaine, Inc., 634 F.2d 1383,
1388 n.7 (5th Cir. 1981). However, no order challenged on appeal
4
S.E.C. v. Janvey, 404 Fed.Appx. 912, 916, (5th Cir. 2010).
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involves property that has been sold to a good faith purchaser, and
the rule has no application in this appeal.
The good faith purchaser exception does not
apply to the payment
of money. Rather, as a well-established principle of fundamental law,
even after money is paid, an appellate court is fully empowered to
reverse the order to pay the money, and if reversed, the aggrieved party
can recover his money back. Eg., Dakota County v. Glidden, 113 U.S.
222, 224 (1885). A case is only moot when the parties lack a legally
cognizable interest in the outcome. E.g., Powell v. McCormack, 395 U.S.
486, 496 (1969). As a matter of well-established law, a case is
justiciable when the court can order specific relief through a decree of a
conclusive character. Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 241
(1937). This Honorable Court can issue a decree of conclusive
character with respect to each of the matters involved in the instant
appeal.
Sherman’s argument that this Court cannot return “the time they
spent or the expenses they incurred”, is erroneous for multiple reasons,
as follows: First, the time was spent before any fees were awarded.
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Accordingly, if the argument had any merit, a district court would have
no discretion, but would automatically have to award whatever fees
were billed because ‘the time was spent’. Contrary to Sherman’s
argument, a receiver has no ‘entitlement’ to fees. Secondly, no one
seeks the return of the time spent. Rather, the issue on appeal is for
return of the million dollars taken by the receiver and his law firm from
Baron’s savings accounts. This Honorable Court can
order that money
returned to Baron’s savings account, and thereby provide specific relief
of a conclusive character. See e.g., Locke at 364.
Interim Fee Awards are Not Mooted by their Payment
Sherman’s argument that bankruptcy law prohibits appeal of
interim fee awards that have been paid has no support in law and
ignores the well-established body of law regarding appeal of interim fee
awards. As a matter of well-established law, interim fee awards can be
reviewed by later appeal (without any motion to stay the interim
awards), and have been frequently reversed on appeal by this
Honorable Court. E.g., Massachusetts Mutual Life Insurance Company
v. Brock, 405 F.2d 429, 431 (5th Cir. 1968) (“There is thus no
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impediment whatever to our reaching the merits of this controversy:
Whether the District Court abused its discretion in awarding the
interim fees in question to the trustee and his counsel.”).
As a matter of established law, an order awarding attorneys fees
can be reversed just like any other judgment awarding money. E.g.,
Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 255-
257 (1975). The inherent power of the court to order attorneys (to
whom fees were paid pursuant to court order) to repay the fees should
the order be reversed, has been expressly recognized as an implicit
power of the court. Palmer v. City of Chicago, 806 F.2d 1316, 1319 (7th
Cir. 1986) (“He could appeal from the sanction at the end of the entire
suit, and if he won the appeal his opponent would repay the money.”).
For this reason, as a matter of well-established law, interim fee
awards may be appealed at the end of a case, and do not require
interlocutory appeals. Shipes v. Trinity Industries, Inc., 883 F.2d
339, 345 (5th Cir. 1989). This Honorable Court has held that only in
the special circumstance where a party would be at risk that he would
be unable to recover the fees back because the attorney would be unable
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to pay back the fees if the interim award is reversed, does a special rule
apply allowing immediate appeal of the interim fee award. Id. In such a
circumstance the party must prove, as a special factual matter, that the
mere payment of the fees would make them unrecoverable because they
would uncollectable if the judgment is reversed. Id. at 344. Accordingly,
absent the existence of a special factual scenario where the attorney
would be unable to return the money, the mere payment of fees does not
make them unrecoverable on appeal and does not
moot the appeal nor
deprive the Court of Appeals of jurisdiction to review the challenged
interim fee award on appeal. Id.; Richardson v. Penfold, 900 F.2d 116,
118 (7th Cir. 1990). Notably, in the instant appeal the interim fee
awards are directly appealable because they are orders directing the
disposal of receivership property. 28 U.S.C. §1292(a)(2).
Sherman erroneously argues that District Court orders on the
disbursement of receivership funds are moot because the interim fee
payments ordered have already been made. As discussed above, a
matter of well-established and fundamental law, even after money is
paid an appellate court is fully empowered to reverse an order for the
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payment of money. E.g. Dakota, 113 U.S. at 224; Brock, 405 F.2d at
431. This Court can clearly give effective relief by reversing the District
Court’s orders to pay money, and Sherman’s argument has offered no
authority to the contrary.
Docket No. 285
Sherman argues that District Court Docket No. 285 is moot
because part of the relief denied by the Order is moot. First, server fees
renew monthly, so that the issue is not currently moot– the server fees
are currently past due and unpaid. Moreover, contrary to Sherman’s
argument the underlying controversy involves more than server fees.
Baron moved for an order for his life’s work (computer code on a
computer hard disk that was threatened with deletion) to be backed up.
The District Court failed to allow Baron to reply to Sherman’s response
to his motion, and denied the motion without allowing Baron the
procedural due process required by the Federal Rules of Procedure and
Local Rules of the Northern District of Texas. The underlying
substance of the denied relief was the preservation of Baron’s assets, an
express purpose of the ex parte receivership imposed upon Baron. The
dispute is live, and the matter is not moot.
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Other Orders
Sherman’s argument appears to argue, without citation to any
authority, that where an emergency hearing is requested upon a
motion, the relief requested is automatically mooted by the failure to
grant the relief on an emergency basis. However, in the context of a
receivership, appellate jurisdiction extends to interlocutory review of all
orders which take, or refuse to take, “steps to accomplish the purposes”
of the receivership. See Securities & Exch. Com’n. v. Lincoln Thrift
Ass’n., 577 F.2d 600, 602 (9th Cir. 1978) (an order which takes “steps to
accomplish the purposes” of the receivership). Where a motion is made
for distribution or disposal of receivership assets for a certain purpose,
so long as the distribution or disposal has been declined by the District
Court the controversy is live and the matter is not moot. For example,
Baron’s need for a heated apartment (refused him by the receiver) was
acute in the freezing weather of February. The matter is not moot,
however, as in the next 30 or 90 days the weather again will be very
cold in Dallas. Clearly, a dispute for which review was requested on
emergency basis does not become moot because emergency relief was
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not granted. Significant harm and irreparable damages may have been
incurred, but that does not relate to the fact that damages are still
being incurred. Sherman has no made showing of mootness with
respect to the motions which sought an ‘emergency’ setting. Vogel still
has Baron is locked in an apartment without heat, and has not allowed
Baron to purchase a vehicle, or to travel outside of the northern district
of Texas, etc.
Sherman argues that the injunction ordered in District Court
Docket No. 318 is moot because it was vacated by the District Court
after the order was appealed. However, as a preliminary matter the
District Court is without jurisdiction to vacate the order after it was
appealed, and thus has no jurisdictional authority to moot the matter
on appeal. Griggs at 58. Similarly, Docket 291 is an injunction
directed personally to Schepps and properly subject to interlocutory
review pursuant to 12 U.S.C. §1292(a)(2).
Docket 293 materially expanded the territorial scope of the
receivership, and both changed the status of the receivership on appeal
and was clearly an order “to take steps to accomplish the purposes” of
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the receivership, and is therefore properly subject to interlocutory
review by this Honorable Court. Resolution Trust Corp. v. Smith, 53
F.3d 72, 77 fn2 (5th Cir. 1995). Similar orders to take steps to
accomplish the purposes of the receivership should include Docket 459
relating to Vogel’s non-filing of tax returns and reports, Docket 473,
purporting to appoint a manager over the Cook Island LLCs; and Docket
551, ordering Baron to disclose his private medical information as a pre-
condition to receiving medical care. Notably, Docket 435 involves a
threatened violation of attorney-client privilege (as a step to accomplish
the purposes of the receivership). There has been no showing the order
has been complied with yet, and the controversy is therefore not moot.
Stay Pending Appeal does Not Moot the Appealed from
Order
The District Court in Docket No. 288 gave the receiver a blank
check to dispose of essentially any and all of the receivership assets of
the receivership estates of Novo Point, LLC, and Quantec, LLC (in
order to pay alleged debts of Jeff Baron), without the requirement of
any further order by the District Court. Sherman argues, with no
supporting legal authority, that because after that order was appealed
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and the District Court entered subsequent orders, the status of the case
has changed and the order is no longer ripe for appeal. However, once
the order was appealed the District Court was divested of jurisdiction
over the matter and was without power to alter the status of the order
then on appeal. Dayton Indep. School Dist. v. US Mineral Prods. Co.,
906 F.2d 1059, 1063 (5th Cir. 1990 (A district court does not have the
power to alter the status of the case as it rests before the Court of
Appeals.).
Sherman argues erroneously that the stay imposed by this
Honorable Court on the District Court, makes the orders on appeal non-
appealable. However, it is axiomatic that stay pending appeal does not
moot the order then on appeal because it has been stayed. Rather,
when the decree can be carried into effect without the need for “further
order or decree” from the trial court, the order is ripe for interlocutory
review. Burlington, CR & NR Co. v. Simmons, 123 U.S. 52, 54 (1887).
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REPLY ISSUE 5: SHERMAN’S ARGUMENT ERRS ON
APPEALABILITY.
Placing a company into receivership is reviewable on
interlocutory appeal
Sherman argues that the District Court orders placing over a
dozen new receivership parties and estates under receivership are non-
appealable turnover orders against Baron’s personal property.
However, contrary to the assertions of Sherman’s argument, the
appealed from orders (District Court Docket Numbers 272, 287) make
no finding that any company is owned or controlled by Baron. SR. v2
pp365, 405. Rather, more than a dozen independent entities were
ordered (without service of process or hearing) placed into receivership,
and one entity was ordered removed. Sherman’s argument ignores that
the entities were placed into receivership and were made subject to a
long series of injunctions. Sherman argues instead that there was
merely a turnover over. However, the challenged orders are clear: The
entities were made receivership parties
. Further, as there was also a
series of injunctions imposed upon the entities by virtue of the appealed
from orders, the orders also fall within the scope of §1292(a).
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Sherman’s argument also lacks a logical footing. Sherman argues
that entities which are not parties to a lawsuit and have not been
served with process, can be placed into receivership ex parte without
being named in the receivership order. Then, after the blank
receivership order can no longer be appealed, those companies can then
be identified and included in the receivership, but the companies have
no right to interlocutory appeal. Thus, to Sherman’s argument, the
statutory right to interlocutory appeal pursuant to 28 U.S.C. §1292(a)
when a receivership is imposed can be abrogated by entering a
receivership order without naming receivership parties, and then later,
after the time for appeal of that order has lapsed, entering an order
reciting the names of the included parties. However, as an established
principle of law, an independent right to appeal extends to orders that
modify or amend previous orders. E.g.,, Taylor v. Sterrett, 640 F.2d 663,
666-667 (5th Cir. 1981). Accordingly, an order that clarifies a previous
order to place new parties into receivership is clearly an appealable
order pursuant to 28 U.S.C. §1292.
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Pendent Appellate Jurisdiction
Even if Sherman’s argument were logically valid and supported by
authority, the appeals challenging the expansion of the receivership
should still be considered pursuant to the doctrine of pendent appellate
jurisdiction. A refusal to allow the appeal would defeat the principal
purpose of allowing an immediate appeal of a receivership order. See
e.g., Morin v. Caire, 77 F.3d 116, 119-120 (5th Cir. 1996).
The issues raised in appeals nos. 11-10113, 11-10289, 11-10290,
11-10390, and 11-10501 are closely related to the issues raised in
appeal no. 10-11202. More information has become available since the
time of filing of the original appeal, such as:
(1) facts regarding the original ex parte proceedings, such as the
direct involvement of Vogel, while Special Master, in secret off-
the-record proceedings to have himself appointed receiver over
Baron; and the fraudulent nature of the misrepresentations
made to the District Judge regarding Baron having caused the
mediation (conducted by Vogel) to fail;
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(2) the completely groundless nature of the ‘claims’ asserted
against Baron and the fact that Vogel prepared the forms for
‘claimants’ to submit, and actively sought submission of the
‘claims’;
(3) the flush financial state of Ondova at the time the receivership
was sought by Sherman and Vogel;
(4) the long history of prior involvement between Vogel and
Baron, and the decade of litigation involving Gardere against
Ondova and Baron, etc.; and
(5) that the functional purpose of the receivership as implemented
by Vogel was to literally empty Baron’s bank accounts into the
pockets of Vogel and his partners.
Yet, a core issue raised in the appeals is the same issue raised in appeal
no. 10-11202, whether the District Court is divested of jurisdiction over
the matter appealed by an interlocutory appeal. The Appellants argue
in this appeal that the District Court was divested of jurisdiction over
the matters on appeal and therefore lacked authority other than to
maintain the status quo as of the filing of the notice of appeal. See e.g.,
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Griggs, 459 U.S. at 58; Coastal Corp., 869 F.2d at 820. The same facts
and legal issue apply to all of the orders challenged in the subsequent
appeals. It materially serves the interest of judicial economy to review
orders expanding the jurisdictional authority of a receiver (while the
receivership was on appeal) at the same time the Court takes up the
issue of the effect of filing an appeal on the District Court’s jurisdiction.
See Comstock v. Alabama and Coushatta Indian Tribes, 261 F.3d 567,
571 (5th Cir. 2001).
Finally, the District Court’s authority, if challenged on appeal, is
best challenged before the District Court takes action based on that
asserted authority, and not after. For that reason, receivership orders
are allowed interlocutory review. Orders of the District Court to carry
out the purposes of the receivership, which have jurisdictional impact
and will necessarily impact the validity of numerous future orders of
the District Court, should be allowed interlocutory review at the time
the validity of the underlying receivership is reviewed as a matter of
fundamental judicial economy.
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REPLY ISSUE 6: SHERMAN’S ARGUMENT ERRS ON HARMLESS
ERROR.
This Honorable Court has recognized that when a party is denied
the opportunity to be heard and present evidence to support their
contentions, the resulting error is not
harmless. E.g. Powell v. US, 849
F.2d 1576,1582 (5th Cir. 1988). Rather, an error in providing notice
and an opportunity to be heard is harmless “if the nonmoving party
admits that he has no additional evidence anyway or if, as in Norman v.
McCotter, the appellate court evaluates all of the nonmoving party’s
additional evidence and finds no genuine issue of material fact.” Id.
Similarly, this Honorable Court has held that basic constitutional
rights to a fair trial can “never be treated as harmless error”. Vaccaro v.
United States, 461 F.2d 626, 635 (5th Cir. 1972). These rights include,
for example, the right to counsel, and an impartial judge. Id. at fn. 47.
Further, the Supreme Court has held that the fundamental safeguards
of the Bill of Rights are immune from federal abridgement. Gideon v.
Wainwright, 372 U.S. 335 (1963).
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REPLY ISSUE 7: SHERMAN’S ARGUMENT ERRS ON WAIVER.
The District Court’s Failure to Allow Response to Vogel’s
Motions
Contrary to Sherman’s argument
5
, complaint about the District
Court’s failure to allow response to Vogel’s motions was raised in the
District Court, and was even included in Baron’s 28 U.S.C. 144
affidavit, with particulars.
6
The District Court clearly was apprised of
the issue and responded by stating that “I am going to give Mr. Schepps
a full twenty-one days to respond to every motion that’s filed.” R. 1625.
The District Court, however, proceeded with a pattern of denying an
opportunity to respond. In the context where the District Court had
threatened appellate counsel for objecting to Baron’s lack of paid
counsel to represent him in the proceedings
7
– by instructing counsel
that “You look to me like you haven’t gone to law school. You are
skating so close to having big problems in federal court, having
the ability to practice in federal court. Do you understand that?”–
5
SBRE. 32.
6
Doc 497, (placed under seal by the District Court.SR. v5 p1470).
7
Baron’s appellate counsel had filed a motion listing issues for which legal
representation was needed for Baron, and requesting that Baron be allowed access
to his own money to hire an attorney to represent him with respect to those
matters. SR. v2 p384.
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Baron’s appellate counsel was careful that once issues were raised to
the District Court’s attention, further objection was avoided with
respect to the District Court’s handling of the matter from that point, as
such objections clearly seemed to antagonize the District Judge. SR. v4
p1006.
Baron’s Sec. 144 Affidavit
As a matter of established law, the Trial Court is required to
accept the allegations contained in a 28 U.S.C. §144 affidavit as true,
and on that basis rule on their legal sufficiency. Instead, the District
Court ruled that the allegations were insufficient because they were not
supported by record citations. SR. v7 p379.
Novo Point LLC and Quantec LLC Objected to being
Included as Receivership Parties
Sherman erroneously argues that Novo Point LLC and Quantec
LLC never objected to being included as receivership parties, and
agreed to that designation.
8
(SBRE. 29).
8
See the LLCs’ reply briefing in appeal no. 11-10113, at pages 18-20.
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The Receivership Fee Orders
All of the fee requests suffered the same deficiencies which have
been pointed out and argued with specificity. For example, Sherman
and Vogel (adopting Sherman) concede that the fees were not allocated
to any individual receivership entity or estate. Sherman and Vogel,
moreover, offer no responsive authority to the arguments on appeal.
Defects in Subject Matter and Territorial Jurisdiction
Cannot be Waived
With respect to Docket 473, defects in subject matter and
territorial jurisdiction cannot be waived and are appropriately raised on
appeal, even for the first time. E.g. Mitchell v. Maurer, 293 U.S. 237,
244 (1934).
Case: 10-11202 Document: 00511672923 Page: 44 Date Filed: 11/21/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 44 of 143 PageID 1479
-45-
Respectfully submitted,
/s/ Gary N. Schepps
Gary N. Schepps
Texas State Bar No. 00791608
5400 LBJ Freeway, Suite 1200
Dallas, Texas 75240
(214) 210-5940 - Telephone
(214) 347-4031 - Facsimile
Email: legal@schepps.net
FOR NOVO POINT, LLC and
QUANTEC, LLC
Case: 10-11202 Document: 00511672923 Page: 45 Date Filed: 11/21/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 45 of 143 PageID 1480
-46-
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 6,491 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) because: this brief has been prepared in a proportionally spaced
typeface using MS Word 2000 in 14 and 15 point century font.
DATED: November 21, 2011.
CERTIFIED BY: /s/ Gary N. Schepps
Gary N. Schepps
COUNSEL FOR APPELLANTS
Case: 10-11202 Document: 00511672923 Page: 46 Date Filed: 11/21/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 46 of 143 PageID 1481
-47-
CERTIFICATE OF SERVICE
This is to certify that this brief was served this day on all parties who
receive notification through the Court’s electronic filing system.
CERTIFIED BY: /s/ Gary N. Schepps
Gary N. Schepps
COUNSEL FOR APPELLANTS
Case: 10-11202 Document: 00511672923 Page: 47 Date Filed: 11/21/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 47 of 143 PageID 1482
No. 10-11202
In the
United States Court of Appeals
for the Fifth Circuit
NETSPHERE, INC. Et Al,
Plaintiffs
v.
JEFFREY BARON,
Defendant-Appellant
v.
ONDOVA LIMITED COMPANY,
Defendant-Appellee
Appeal of Order Appointing Receiver in Settled Lawsuit
----------------------------------------------------------------------------------------
Cons. w/ No. 11-10113
NETSPHERE INC., Et Al, Plaintiffs
v.
JEFFREY BARON, Et Al, Defendants
v.
QUANTEC L.L.C.; NOVO POINT L.L.C.,
Appellants
v.
PETER S. VOGEL,
Appellee
From the United States District Court
Northern District of Texas, Dallas Division
Civil Action No. 3-09CV0988-F
DECLARATION OF GARY SCHEPPS
Case 3:09-cv-00988-F Document 721-1 Filed 11/18/11 Page 1 of 7 PageID 36058Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 48 of 143 PageID 1483
----------------------------------------------------------------------------------------
Cons. w/ No. 11-10289
NETSPHERE, INC., ET AL, Plaintiffs
v.
JEFFREY BARON, Defendant- Appellant
v.
DANIEL J SHERMAN, Appellee
----------------------------------------------------------------------------------------
Cons. w/ No. 11-10290
NETSPHERE, INC. ET AL, Plaintiffs
v.
JEFFREY BARON, ET AL, Defendants
v.
QUANTEC L.L.C.; NOVO POINT L.L.C., Non-Party Appellants
v.
PETER S. VOGEL, Appellee
----------------------------------------------------------------------------------------
Cons. w/ No. 11-10390
NETSPHERE, INC. ET AL, Plaintiffs
v.
JEFFREY BARON, Defendant – Appellant
v.
QUANTEC L.L.C.; NOVO POINT L.L.C., Appellants
v.
ONDOVA LIMITED COMPANY, Defendant – Appellee
v.
PETER S. VOGEL, Appellee
----------------------------------------------------------------------------------------
Cons. w/ No. 11-10501
NETSPHERE, INC. ET AL, Plaintiffs
v.
JEFFREY BARON, Defendant – Appellant
QUANTEC L.L.C.; NOVO POINT L.L.C., Appellants
CARRINGTON, COLEMAN, SLOMAN & BLUMENTHAL, L.L.P.,
Appellant
v.
PETER S. VOGEL; DANIEL J. SHERMAN, Appellees
Case 3:09-cv-00988-F Document 721-1 Filed 11/18/11 Page 2 of 7 PageID 36059Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 49 of 143 PageID 1484
DECLARATION OF GARY SCHEPPS - Page 3
Interlocutory Appeals of
Orders in Receivership on Appeal
From the United States District Court
Northern District of Texas, Dallas Division
Civil Action No. 3-09CV0988-F
Hon. Judge William R. Furgeson Presiding
“1. My name is Gary Schepps. I am the appellate counsel for Jeff
Baron, Novo Point, LLC., and Quantec, LLC. I am competent to make this
declaration. The facts stated in this declaration are within my personal
knowledge and are true and correct. I have knowledge of the stated facts,
which I learned in my role as appellate counsel in the above entitled appeals.
“2. The following is a true and accurate screen clip from Adobe
Acrobat 9 showing the creation date of Document 123 filed in Case 3:09-cv-
00988-F on 11/24/10, the “EMERGENCY MOTION OF TRUSTEE FOR
APPOINTMENT OF A RECEIVER OVER JEFFREY BARON”. The file
shows that it was created at 2:07 PM on 11/24/2010:
Case 3:09-cv-00988-F Document 721-1 Filed 11/18/11 Page 3 of 7 PageID 36060Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 50 of 143 PageID 1485
DECLARATION OF GARY SCHEPPS - Page 4
“3. The following is an e-mail record of ICANN, the international
internet registry, showing that Raymond Urbanik, counsel for Sherman,
informed ICANN that the District Court appointed Vogel as receiver at 1:15
pm on 11/24/2010.
From: Urbanik, Raymond
Sent: Wednesday, November 24, 2010 3:54 PM
To: 'Samantha Eisner' <Samantha.Eisner@icann.org>
Cc: Erin Brady; Amy Stathos; 'schnabel.eric@dorsey.com';
mallard.robert@dorsey.com
Subject: RE: Approval of Termination of Accreditation and Bulk Transfer
Sam, Erin, Amy, Eric, Robert
A receiver was appointed over Mr Baron today at 1:15 pm Central time by
Senior United States Federal District Court Judge Royal Ferguson.
Case 3:09-cv-00988-F Document 721-1 Filed 11/18/11 Page 4 of 7 PageID 36061Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 51 of 143 PageID 1486
DECLARATION OF GARY SCHEPPS - Page 5
The order also immediately suspends, enjoins and stays the transfer of
the names by ICANN through the de - accredited registrar process.
The newly appointed Receiver, Peter Vogel, will be sending you a copy of
the order shortly.
Please call if you would like to discuss this matter. Thank you.
-ray
Raymond J. Urbanik
MUNSCH HARDT KOPF & HARR, P.C.
500 North Akard Street, Suite 3800
Dallas, Texas 75201-6659
Direct: (214) 855-7590
Fax: (214) 978-4374
rurbanik@munsch.com <mailto:rurbanik@munsch.com>
munsch.com <http://www.munsch.com/>
NOTICE: This e-mail message is for the sole use of the intended
recipient(s) and may contain confidential and privileged information.
Any unauthorized review, use, disclosure or distribution is prohibited.
If you are not the intended recipient, please contact the sender by
reply e-mail. Please virus check all attachments to prevent widespread
contamination and corruption of files and operating systems. Nothing
contained in this message or in any attachment shall constitute a
contract or electronic signature under the Electronic Signatures in
Global and National Commerce Act, any version of the Uniform Electronic
Transactions Act or any other statute governing electronic transactions.
IRS Circular 230 Notice: To ensure compliance with requirements imposed
by the IRS, we inform you that any U.S. tax advice contained in this
communication (including any attachments) is not intended or written to
be used, and cannot be used, for the purpose of (a) avoiding penalties
under the Internal Revenue Code or (b) promoting, marketing or
recommending to another party any transaction or matter addressed
herein.
________________________________
Case 3:09-cv-00988-F Document 721-1 Filed 11/18/11 Page 5 of 7 PageID 36062Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 52 of 143 PageID 1487
DECLARATION OF GARY SCHEPPS - Page 6
From: Samantha Eisner [mailto:Samantha.Eisner@icann.org]
Sent: Tuesday, November 23, 2010 8:10 PM
To: Urbanik, Raymond
Cc: Erin Brady; Amy Stathos
Subject: FW: Approval of Termination of Accreditation and Bulk Transfer
Hi Ray -
I'm forwarding a message sent from our Registrar Liaison Group to the
Primary Contact for Compana.
I believe that the notice to the Registries will be forwarded by
tomorrow.
Best regards,
Sam
------ Forwarded Message
From: Brian Peck <brian.peck@icann.org>
Date: Tue, 23 Nov 2010 17:43:06 -0800
To: "ondovalimited@gmail.com" <ondovalimited@gmail.com>
Cc: Samantha Eisner <Samantha.Eisner@icann.org>, Tim Cole
<Tim.Cole@icann.org>, Mike Zupke <Mike.Zupke@icann.org>
Subject: Approval of Termination of Accreditation and Bulk Transfer
Dear Mr. Nelson,
We confirm receipt of your written notice of termination of your
registrar's RAA. We have completed our internal review and in
accordance with ICANN's Inter-Registrar Transfer Policy, we approve your
request to designate Fabulous.com Pty Ltd. as the gaining registrar to
receive the bulk transfer of all names currently under management of
your registrar. We will contact the relevant registries shortly and you
can coordinate the timing of the bulk transfers with the registries
directly after they contact you.
The termination will be effective on 30 November 2010. As requested,
ICANN waives the remainder of the 30-day notice period set forth in the
RAA.
Please note that your registrar remains responsible for all outstanding
fees due to ICANN which are incurred up until the effective date of
termination, which is 30 November, 2010. Please let us know if you have
any questions.
Sincerely,
Case 3:09-cv-00988-F Document 721-1 Filed 11/18/11 Page 6 of 7 PageID 36063Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 53 of 143 PageID 1488
DECLARATION OF GARY SCHEPPS - Page 7
Brian Peck
Registrar Liaison Manager
ICANN
------ End of Forwarded Message
I declare under penalty of perjury that the foregoing declaration is true and
correct.
Signed this 19th day of November, 2011, in Dallas, Texas.
/s/ Gary N. Schepps
Gary N. Schepps
Case 3:09-cv-00988-F Document 721-1 Filed 11/18/11 Page 7 of 7 PageID 36064Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 54 of 143 PageID 1489
No. 11-10501
In the
United States Court of Appeals
for the Fifth Circuit
▬▬▬▬▬▬▬▬▬▬▬▬▬▬
NETSPHERE, INC. ET AL,
Plaintiffs
v.
JEFFREY BARON,
Defendant – Appellant
QUANTEC L.L.C.; NOVO POINT L.L.C.,
Appellants
CARRINGTON, COLEMAN, SLOMAN & BLUMENTHAL, L.L.P.,
Appellant
v.
PETER S. VOGEL; DANIEL J. SHERMAN,
Appellees
▬▬▬▬▬▬▬▬▬▬▬▬▬▬
Interlocutory Appeal of Orders
in Receivership on Appeal
▬▬▬▬▬▬▬▬▬▬▬▬▬▬
From the United States District Court
Northern District of Texas, Dallas Division
Civil Action No. 3-09CV0988-F
Hon. Judge William R. Furgeson Presiding
▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬
BRIEF FOR APPELLANTS NOVO POINT, L.L.C.,
QUANTEC, L.L.C., AND JEFFREY BARON
▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬
Case: 11-10501 Document: 00511625994 Page: 1 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 55 of 143 PageID 1490
----------------------------------------------------------------------------------------
No. 10-11202
In the
United States Court of Appeals
for the Fifth Circuit
▬▬▬▬▬▬▬▬▬▬▬▬▬
NETSPHERE, INC. Et Al, Plaintiffs
v.
JEFFREY BARON, Defendant-Appellant
v.
ONDOVA LIMITED COMPANY, Defendant-Appellee
▬▬▬▬▬▬▬▬▬▬▬▬▬
Appeal of Order Appointing Receiver in Settled Lawsuit
▬▬▬▬▬▬▬▬▬▬▬▬▬
----------------------------------------------------------------------------------------
Cons. w/ No. 11-10113
NETSPHERE INC., Et Al, Plaintiffs
v.
JEFFREY BARON, Et Al, Defendants
v.
QUANTEC L.L.C.; NOVO POINT L.L.C., Appellants
v.
PETER S. VOGEL, Appellee
▬▬▬▬▬▬▬▬▬▬▬▬▬
Appeal of Order Adding Non-Parties Novo Point, LLC
and Quantec, LLC as Receivership Parties
▬▬▬▬▬▬▬▬▬▬▬▬▬
----------------------------------------------------------------------------------------
Cons. w/ No. 11-10289
NETSPHERE, INC., ET AL, Plaintiffs
v.
JEFFREY BARON, Defendant- Appellant
v.
DANIEL J SHERMAN, Appellee
▬▬▬▬▬▬▬▬▬▬▬
Interlocutory Appeal of Orders in Receivership on Appeal
▬▬▬▬▬▬▬▬▬▬▬
----------------------------------------------------------------------------------------
Case: 11-10501 Document: 00511625994 Page: 2 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 56 of 143 PageID 1491
Cons. w/ No. 11-10290
NETSPHERE, INC. ET AL, Plaintiffs
v.
JEFFREY BARON, ET AL, Defendants
v.
QUANTEC L.L.C.; NOVO POINT L.L.C., Non-Party Appellants
v.
PETER S. VOGEL, Appellee
----------------------------------------------------------------------------------------
Cons. w/ No. 11-10390
NETSPHERE, INC. ET AL, Plaintiffs
v.
JEFFREY BARON, Defendant – Appellant
v.
QUANTEC L.L.C.; NOVO POINT L.L.C., Appellants
v.
ONDOVA LIMITED COMPANY, Defendant – Appellee
v.
PETER S. VOGEL, Appellee
----------------------------------------------------------------------------------------
Cons. w/ No. 11-10501
NETSPHERE, INC. ET AL, Plaintiffs
v.
JEFFREY BARON, Defendant – Appellant
QUANTEC L.L.C.; NOVO POINT L.L.C., Appellants
CARRINGTON, COLEMAN, SLOMAN & BLUMENTHAL, L.L.P.,
Appellant
v.
PETER S. VOGEL; DANIEL J. SHERMAN, Appellees
▬▬▬▬▬▬▬▬▬▬▬▬▬▬
From the United States District Court
Northern District of Texas, Dallas Division
Civil Action No. 3-09CV0988-F
Hon. Judge William R. Furgeson Presiding
Case: 11-10501 Document: 00511625994 Page: 3 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 57 of 143 PageID 1492
Respectfully submitted,
/s/ Gary N. Schepps
Gary N. Schepps
Texas State Bar No. 00791608
5400 LBJ Freeway, Suite 1200
Dallas, Texas 75240
(214) 210-5940 - Telephone
(214) 347-4031 - Facsimile
Email: legal@schepps.net
FOR APPELLANTS
NOVO POINT, L.L.C.,
QUANTEC, L.L.C., and
JEFFREY BARON
Case: 11-10501 Document: 00511625994 Page: 4 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 58 of 143 PageID 1493
-5-
CERTIFICATE OF INTERESTED PERSONS
The undersigned counsel of record certifies that the following
listed persons and entities have an interest in the outcome of this case.
These representations are made in order that the judges of this Court
may evaluate possible disqualification or recusal.
1. PARTIES
a. Defendant: JEFFREY BARON
b. Defendant: DANIEL J. SHERMAN, Trustee
for ONDOVA LIMITED COMPANY
C. Intervenors: RASANSKY, JEFFREY H.
AND CHARLA G. ALDOUS
d. Intervenor: VeriSign, Inc.
e. Plaintiffs: (1) Netsphere Inc
(2) Manila Industries Inc
(3) MUNISH KRISHAN
F. APPELLANTS: (1) NOVO POINT, L.L.C.
(2) QUANTEC, L.L.C.
(3) JEFFREY BARON
(4) CARRINGTON, COLEMAN, SLOMAN &
BLUMENTHAL, L.L.P.
G. APPELLEES: (1) PETER S. VOGEL
(2) DANIEL J. SHERMAN
Case: 11-10501 Document: 00511625994 Page: 5 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 59 of 143 PageID 1494
-6-
2. ATTORNEYS
a. For Appellants Novo Point, LLC., Quantec, LLC., and Jeffrey
Baron:
Gary N. Schepps
Suite 1200
5400 LBJ Freeway
Dallas, Texas 75240
Telephone: (214) 210-5940
Facsimile: (214) 347-4031
b. For Appellee Vogel:
Gardere Wynne Sewell LLP
(1) Barry Golden
(2) Peter L. Loh
1601 Elm Street, Suite 3000
Dallas, Texas 75201
Telephone (214) 999-3000
Facsimile (214) 999-4667
bgolden@gardere.com
c. For Appellee Sherman:
Munsch Hardt Kopf & Harr, P.C.
(1) Raymond J. Urbanik, Esq.
(2) Lee J. Pannier, Esq.
3800 Lincoln Plaza / 500 N. Akard Street
Dallas, Texas 75201-6659
Telephone: (214) 855-7500
Facsimile: (214) 855-7584
d. For Intervenor VeriSign: Dorsey & Whitney (Delaware)
(1) Eric Lopez Schnabel, Esq.
(2) Robert W. Mallard, Esq.
d. For Intervenor Rasansky and Aldous:
Case: 11-10501 Document: 00511625994 Page: 6 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 60 of 143 PageID 1495
-7-
Aldous Law Firm
Charla G Aldous
f. For Plaintiffs:
(1) John W MacPete, Locke Lord Bissell & Liddell
(2) Douglas D Skierski, Franklin Skierski Lovall Hayward
(3) Franklin Skierski, Franklin Skierski Lovall Hayward
(4) Lovall Hayward , Franklin Skierski Lovall Hayward
(5) Melissa S Hayward, Franklin Skierski Lovall Hayward
(6) George M Tompkins, Tompkins PC
3. OTHER
a. Companies and entities purportedly seized by the
receivership:
(1) VillageTrust
(2) Equity Trust Company
(3) IRA 19471
(4) Daystar Trust
(5) Belton Trust
(6) Novo Point, Inc.
(7) Iguana Consulting, Inc.
(8) Quantec, Inc.,
(9) Shiloh LLC
(10) Novquant, LLC
(11) Manassas, LLC
(12) Domain Jamboree, LLC
(13) Genesis, LLC
(14) Nova Point, LLC
(15) Quantec, LLC
(16) Iguana Consulting, LLC
(17) Diamond Key, LLC
(18) Quasar Services, LLC
(19) Javelina, LLC
Case: 11-10501 Document: 00511625994 Page: 7 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 61 of 143 PageID 1496
-8-
(20) HCB, LLC, a Delaware limited liability company
(21) HCB, LLC, a U.S. Virgin Islands limited liability company
(22) Realty Investment Management, LLC, a Delaware limited
liability company
(23) Realty Investment Management, LLC, a U.S. Virgin
(24) Islands limited liability company
(25) Blue Horizon Limited Liability Company
(26) Simple Solutions, LLC
(27) Asiatrust Limited
(28) Southpac Trust Limited
(29) Stowe Protectors, Ltd.
(30) Royal Gable 3129 Trust
b. Receiver / Mediator / Special Master: Peter Vogel
c. Non-parties seeking money from the receivership res:
1. Garrey, Robert (Robert J. Garrey, P.C.)
2. Pronske and Patel
3. Carrington, Coleman, Sloman & Blumenthal, LLP
4. Aldous Law Firm (Charla G. Aldous)
5. Rasansky Law Firm (Rasansky, Jeffrey H.)
6. Schurig Jetel Beckett Tackett
7. Powers and Taylor (Taylor, Mark)
8. Gary G. Lyon
9. Dean Ferguson
10. Bickel & Brewer
11. Robert J. Garrey
12. Hohmann, Taube & Summers, LLP
13. Michael B. Nelson, Inc.
14. Mateer & Shaffer, LLP (Randy Schaffer)
15. Broome Law Firm, PLLC
16. Fee, Smith, Sharp & Vitullo, LLP (Vitullo, Anthony “Louie”)
17. Jones, Otjen & Davis (Jones, Steven)
18. Hitchcock Evert, LLP
19. David L. Pacione
20. Shaver Law Firm
21. James M. Eckels
Case: 11-10501 Document: 00511625994 Page: 8 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 62 of 143 PageID 1497
-9-
22. Joshua E. Cox
23. Friedman, Larry (Friedman & Feiger)
24. Pacione, David L.
25. Motley, Christy (Nace & Motley)
26. Shaver, Steven R. (Shaver & Ash)
27. Jeffrey Hall
28. Martin Thomas
29. Sidney B. Chesnin
30. Tom Jackson
CERTIFIED BY: /s/ Gary N. Schepps
Gary N. Schepps
COUNSEL FOR APPELLANTS
Case: 11-10501 Document: 00511625994 Page: 9 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 63 of 143 PageID 1498
-10-
STATEMENT REGARDING ORAL ARGUMENT
Appellants do not believe oral argument would be helpful in
determining the issues involved in this appeal. Dispositive issues in
this appeal raise questions of law involving established legal principles
that have been authoritatively decided, e.g., Griggs v. Provident
Consumer Discount Co., 459 U.S. 56, 58 (1982) (Filing of a notice of
appeal confers jurisdiction on the court of appeals and divests the
district court of its control over all aspects of the case involved in the
appeal); Lion Bonding & Surety Co. v. Karatz, 262 U.S. 640, 642
(1923) (Even where the court which appoints a receiver had jurisdiction
at the time, but loses it ... the first court cannot thereafter make an
allowance for the receiver’s expenses and compensation); Scott v. Neely,
140 U.S. 106, 109-110 (1891) (Seventh Amendment right to jury trial
cannot be dispensed with nor can it be impaired by blending with a
demand for equitable relief); and Bollore SA v. Import Warehouse, Inc.,
448 F.3d 317 (5th Cir. 2006) (Receivership cannot be used to adjudicate
alter ego claims).
Case: 11-10501 Document: 00511625994 Page: 10 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 64 of 143 PageID 1499
-11-
TABLE OF CONTENTS
CERTIFICATE OF INTERESTED PERSONS ..........................................5
STATEMENT REGARDING ORAL ARGUMENT...................................10
TABLE OF CONTENTS...............................................................................11
TABLE OF AUTHORITIES.........................................................................15
STATEMENT OF THE JURISDICTION ..................................................21
ISSUES PRESENTED FOR REVIEW .......................................................22
STATEMENT OF THE CASE .....................................................................24
STATEMENT OF FACTS ............................................................................24
The “Claims” Solicited by the Receiver .................................................28
The 28 U.S.C. §144 Affidavit .................................................................38
The District Judge Refused to Review the Legal Sufficiency of
the Facts Stated in the Affidavit ...........................................................38
ARGUMENT SUMMARY.............................................................................40
ARGUMENT & AUTHORITY .....................................................................42
ISSUE 1: Does interlocutory appeal divest the trial court of
jurisdiction over the matter appealed ?.......................................................... 42
Standard of Review ................................................................................42
Appeal Divests the District Court of Jurisdiction Over the
Matter Appealed.....................................................................................42
The District Court was Divested of Jurisdiction over
Receivership Res.....................................................................................43
Policy Issue: The Right to Appellate Review of a Receivership
Order .......................................................................................................46
Case: 11-10501 Document: 00511625994 Page: 11 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 65 of 143 PageID 1500
-12-
ISSUE 2: Does Due Process require that a party be afforded the
opportunity to be heard on motions before substantive relief is
granted against that party ? ........................................................................... 47
Standard of Review ................................................................................47
Argument ................................................................................................47
ISSUE 3: In the absence of a statute, is a court authorized to use
receivership to provide a remedy for unsecured creditors’ in
personam claims against an individual before they have been
reduced to judgment ? ..................................................................................... 50
Standard of Review ................................................................................50
Argument Overview ...............................................................................50
The District Court’s Erroneous View of Equity Receivership..............51
Overview of Equity Receivership Power ...............................................52
Equity Receivership is Only Authorized as an Interlocutory,
Ancillary Remedy ...................................................................................52
Carrington-Coleman’s Erroneous Argument ........................................54
In Personam vs. In Rem Claims ............................................................56
Baron’s Unsecured Alleged Creditors Have No Right in the
Receivership Property ............................................................................58
Exercise of Receivership Power Must be Closely Scrutinized..............60
ISSUE 4: Did the District Court abuse its discretion, act outside of its
jurisdiction, or exceed its authority in ordering that Baron, an adult
citizen, must involuntarily compromise disputed claims against him ?............... 62
Standard of Review ................................................................................62
Subject Matter Jurisdiction ...................................................................62
Abuse of Discretion.................................................................................63
The Seventh Amendment ......................................................................65
Case: 11-10501 Document: 00511625994 Page: 12 Date Filed: 10/06/2011
Case 3:12-cv-00387-B Document 5-1 Filed 02/19/12 Page 66 of 143 PageID 1501
-13-
ISSUE 5: Did the District Court err in granting relief against
Baron and his property held in receivership while prohibiting
Baron (1) from being represented by paid counsel, (2) from hiring
experienced federal trial counsel, and (3) from hiring expert
witnesses to testify as to the necessity and reasonableness of the
fees claimed ?.................................................................................................... 68
Standard of Review ................................................................................68
Argument ................................................................................................68
ISSUE 6: Once an affidavit is filed pursuant to 28 U.S.C. §144, is
further activity of the Judge circumscribed to making a
determination as to the legal sufficiency of the facts stated in the
affidavit ? .......................................................................................................... 71
Standard of Review ................................................................................71
Argument ................................................................................................71
ISSUE 7: Where the same receiver was appointed over multiple
receivership parties and estates, did the District Court abuse its
discretion in awarding receivership fees and expenses (1) without a
showing or finding that the fees and expenses were reasonable or
necessary; (2) without regard to which of multiple receivership
estates the fees were allegedly incurred; and (3) where the receiver
was prohibited by law from being appointed as a receiver ?.......................... 73
Standard of Review ................................................................................73
Established Limitations on Receivership Fees.....................................73
No Evidence of Necessity or Reasonableness, and No
Segregation of Fees across Multiple Receivership Estates ..................75
Vogel Was Prohibited by Law from Being Appointed Receiver ...........76
ISSUE 8: Can a receivership be used as a vehicle to make third
parties liable as ‘reverse alter-egos’ of a party ?............................................ 78
Standard of Review ................................................................................78
Receivership May Not be Used to Determine an Alter Ego
Claim.......................................................................................................79
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Bollore SA v. Import Warehouse, Inc.....................................................79
If there had been a trial on Alter Ego, Novo Point and Quantec
would have prevailed as a matter of law...............................................80
Novo Point and Quantec Are Not Parties to the Lawsuit ....................82
Materially Missing Steps with Respect to the LLCs ............................82
ISSUE 9: Did the US District Court in the Northern District of
Texas have jurisdictional authority to appoint the manager of a
LLC in the Cook Islands ?............................................................................... 84
Standard of Review ................................................................................84
Argument ................................................................................................84
PRAYER .........................................................................................................87
CERTIFICATE OF COMPLIANCE ...........................................................88
CERTIFICATE OF SERVICE.....................................................................89
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TABLE OF AUTHORITIES
F
EDERAL CASES
Alberto v. Diversified Group, Inc., 55 F.3d 201, 203 (5th Cir. 1995) .....81
Alemite Mfg. Corporation v. Staff, 42 F.2d 832 (2nd Cir.1930) .............82
Armstrong v. Manzo, 380 U.S. 545, 552 (1965).......................................47
Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316
(8th Cir. 1993)........................................................................................78
Bank of Commerce & Trust Co. v. Hood, 65 F.2d 281, 283-284
(5th Cir. 1933)........................................................................................74
Bollore SA v. Import Warehouse, Inc., 448 F.3d 317
(5th Cir. 2006)................................................................10, 41, 79, 80, 83
Booth v. Clark, 58 U.S. 322, 331 (1855) ............................................57, 85
Castillo v. Cameron County, Texas, 238 F.3d 339, 347
(5th Cir. 2001)........................................................................................62
Chandler v. Fretag, 348 U.S. 3, 10 (1954) ...............................................70
Coastal Corp. v. Texas Eastern Corp., 869 F.2d 817, 820
(5th Cir. 1989)........................................................................................43
Cochrane v. WF Potts Son & Co., 47 F.2d 1026, 1028
(5th Cir. 1931)........................................................................................63
Consolidated Rail Corp. v. Fore River Ry. Co., 861 F.2d 322, 326-27
(1st Cir. 1988) ........................................................................................78
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Davis v. Board of School Com'rs of Mobile County, 517 F.2d 1044, 1051
(5th Cir. 1975)........................................................................................71
Dayton Indep. School Dist. v. US Mineral Prods. Co., 906 F.2d 1059,
1065 (5th Cir. 1990).........................................................................42, 46
Desarrollo, SA v. Alliance Bond Fund, Inc.,
527 U.S. 308, 310 (1999) .......................................................................56
Devlin v. Scardelletti, 536 U.S. 1 (2002) .................................................76
District Court, Santibanez v. Wier McMahon & Co., 105 F.3d 234, 241
(5th Cir. 1997)........................................................................................51
Finn v. Childs Co., 181 F.2d 431, 436 (2nd Cir. 1950)............................74
Forex Asset (and US v. Durham, 86 F.3d 70 (5th Cir. 1996) .................55
Forgay v. Conrad, 47 U.S. 201, 204-205 (1848).......................................53
Freedman's Sav. & Trust Co. v. Earle, 110 U.S. 710, 718 (1884) ..........51
Gordon v. Washington, 295 U.S. 30, 37 (1935) .......................................53
Goss v. Lopez, 419 U.S. 565, 579 (1975)..................................................47
Great-West Life & Annuity Ins. Co. v. Knudson,
534 U.S. 204 , 213-214 (2002) ...............................................................55
Griffin v. Lee, 621 F.3d 380, 388 (5th Cir. 2010) ....................................63
Griggs v. Provident Consumer Discount Co.,
459 U.S. 56, 58 (1982) ...............................................................10, 40, 42
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Guaranty Trust Co. of New York v. Fentress, 61 F. 2d 329, 332
(7th Cir.1932).........................................................................................85
Guaranty Trust Co. v. York, 326 U.S. 99, 105 (1945).............................67
Hartford Life Ins. Co. v. IBS, 237 U.S. 662, 671 (1915) .........................85
Hawthorne Savings v. Reliance Ins. Co., 421 F.3d 835, 855
(9th Cir. 2005)........................................................................................57
In re Imperial ‘‘400’’ ""National, Inc., 432 F.2d 232, 237
(3rd Cir. 1970)........................................................................................74
In re Volkswagen of America, Inc., 545 F.3d 304, 310
(5th Cir. 2008)........................................................................................64
International Transactions v. Embotelladora Agral, 347 F.3d 589, 596
(5th Cir. 2003)........................................................................................48
Johnson v. City of Cincinnati, 310 F.3d 484, 501 (6th Cir. 2002) ..........69
Joint Anti-Fascist Refugee Comm. v. McGrath,
341 U.S. 123, 161 (1951) .......................................................................48
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941).............81
Lion Bonding & Surety Co. v. Karatz, 262 U.S. 640, 642 (1923) .....10, 44
Liverpool & C. Ins. Co. v. Orleans Assessors,
221 U.S. 346, 354 (1911) .......................................................................57
Logan v. Zimmerman Brush Co., 455 U.S. 422, 429-430 (1982) ............47
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Marbury v. Madison, 1 Cranch 137, 173-180 (1803)...............................63
McClure v. Ashcroft, 335 F.3d 404, 408 (5th Cir. 2003) .........................64
Meyerson v. Council Bluffs Sav. Bank, 824 F. Supp. 173, 177
(S.D. Iowa 1991) ....................................................................................58
Mitchell v. Maurer, 293 U.S. 237, 244 (1934) ........................................62
Morris v. Jones, 329 U.S. 545, 549 (1947) ...............................................60
Mosley v. St. Louis Southwestern Ry., 634 F.2d 942, 946 (5th Cir. 1981)
..........................................................................................................69, 70
Omni Capital Int'l, Ltd. v. Rudolf Wolff & Co.,
484 U.S. 97, 104 (1987) .........................................................................85
Ortiz v. Fibreboard Corp., 527 U.S. 815, 846 (1999)...............................66
Palmer v. Texas, 212 U.S. 118, 126 (1909)..............................................43
Parrish v. Board of Com'rs of Alabama State Bar, 524 F.2d 98, 100
(5th Cir. 1975)..................................................................................40, 72
Pennoyer v. Neff, 95 US 714, 737 (1878).................................................47
Potashnick v. Port City Const. Co., 609 F.2d 1101, 1104
(5th Cir. 1980)..................................................................................69, 70
Powell v. Alabama, 287 U.S. 45, 53-69 (1932) ..................................69, 70
Prima Tek II LLC v. Polypap, SaRL, 318 F. 3d 1143 (Fed. Cir. 2003) ..84
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Pusey & Jones Co. v. Hanssen, 261 U.S. 491 (1923)
..................................................................................53, 54, 58, 59, 61, 79
Rosen v. Siegel, 106 F.3d 28, 34 (2d Cir. 1997).......................................78
Ross v. Bernhard, 396 U.S. 531, 531 (1970)............................................58
Scott v. Neely, 140 U.S. 106, 109-110 (1891) ..............................10, 40, 66
Sec. & Exch. Comm'n v. Forex Asset Mgmt. LLC, 242 F.3d 325, 331
(5th Cir. 2001)........................................................................................54
Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356, 362 (2006)
................................................................................................................55
Solis v. Matheson, 563 F.3d 425, 437 (9th Cir. 2009) .............................78
Sommers Drug Stores Co. Emp. P. Sharing Trust v. Corrigan, 883 F.2d
345, 353 (5th Cir. 1989).........................................................................81
St. Clair v. Cox, 106 U.S. 350, 353 (1882) ...............................................85
Stuart v. Boulware, 133 U.S. 78, 82 (1890).............................................74
Sumrall v. Moody, 620 F.2d 548, 550 (5th Cir. 1980) .............................57
Taylor v. Sterrett, 640 F.2d 663, 668 (5th Cir. 1981) .............................44
Tucker v. Baker, 214 F.2d 627, 631 (5th Cir. 1954)..........................60, 78
United States v. Arizona Fuels Corp., 739 F.2d 455, 459 (9th Cir. 1984)
................................................................................................................53
United States v. Cauble, 706 F.2d 1322, 1347 (5th Cir. 1983)...............60
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US v. Wallach, 935 F.2d 445, 462 (2nd Cir. 1991) ..................................59
Wabash R. Co. v. Adelbert College of Western Reserve Univ., 208 U.S.
38, 46 (1908)...........................................................................................44
Williams Holding Co. v. Pennell, 86 F.2d 230 (5th Cir. 1936) ...............59
Williams v. McKeithen, 939 F.2d 1100, 1105 (5th Cir. 1991) ................69
Williamson v. Berry, 49 U.S. 495, 536 (1850) .........................................62
S
TATE CASES
Horton v. Ferrell, 335 Ark. 366, 981 S.W.2d 88 (1998) ..........................76
F
EDERAL STATUTES
28 U.S.C. §§1292(a)(1)..............................................................................21
28 U.S.C. §455 ..........................................................................................78
28 U.S.C. §958 ..........................................................................................77
U.S. Const. amend. VII ............................................................................65
FEDERAL RULES
FED. R. APP. P. 32(a)(5) ..........................................................................88
FED. R. APP. P. 32(a)(6) ..........................................................................88
FED. R. APP. P. 32(a)(7)(B) .....................................................................88
Fed.R.Civ.P. 53(b)(3) ................................................................................78
Fed.R.Civ.P. 82 .........................................................................................63
N.D. Tex. L.R. 7.1(e) .................................................................................48
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STATEMENT OF THE JURISDICTION
The Fifth Circuit Court of Appeals has jurisdiction to hear this
interlocutory appeal from the orders of the District Court of the
Northern District of Texas: (1) appointing a receiver, (2) taking steps to
accomplish the purposes of a receivership, including denying Jeff Baron
the ability to hire counsel, (3) directing the sale of receivership assets,
and (4) ordering the disposal and disbursement of receivership property;
pursuant to 28 U.S.C. §§1292(a)(1) and (2).
The District Court lacked jurisdiction to enter the orders
challenged on appeal because: (1) the District Court was divested of
jurisdiction over the matter when it was appealed to the Fifth Circuit
Court of Appeals; (2) the District Court lacks subject matter jurisdiction
both over Baron’s assets and over the unpleaded, non-diverse state law
claims against Baron, and (3) the District Court lacks personal
jurisdiction over the multitude of new parties ordered into receivership
without service of process or hearing.
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ISSUES PRESENTED FOR REVIEW
ISSUE 1: Does interlocutory appeal divest the trial court of
jurisdiction over the matter appealed ?
ISSUE 2: Does Due Process require that a party be afforded the
opportunity to be heard on motions before substantive relief is
granted against that party ?
ISSUE 3: In the absence of a statute, is a court authorized to use
receivership to provide a remedy for unsecured creditors’ in
personam claims against an individual before they have been
reduced to judgment ?
ISSUE 4: Did the District Court abuse its discretion, act outside of its
jurisdiction, or exceed its authority in ordering that Baron, an adult
citizen, must involuntarily compromise disputed claims against him ?
ISSUE 5: Did the District Court err in granting relief against
Baron and his property held in receivership while prohibiting
Baron (1) from being represented by paid counsel, (2) from hiring
experienced federal trial counsel, and (3) from hiring expert
witnesses to testify as to the necessity and reasonableness of the
fees claimed ?
ISSUE 6: Once an affidavit is filed pursuant to 28 U.S.C. §144, is
further activity of the Judge circumscribed to making a
determination as to the legal sufficiency of the facts stated in the
affidavit ?
ISSUE 7: Where the same receiver was appointed over multiple
receivership parties and estates, did the District Court abuse its
discretion in awarding receivership fees and expenses (1) without a
showing or finding that the fees and expenses were reasonable or
necessary; (2) without regard to which of multiple receivership
estates the fees were allegedly incurred; and (3) where the receiver
was prohibited by law from being appointed as a receiver ?
ISSUE 8: Can a receivership be used as a vehicle to make third
parties liable as ‘reverse alter-egos’ of a party ?
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ISSUE 9: Did the US District Court in the Northern District of
Texas have jurisdictional authority to appoint the manager of a
LLC in the Cook Islands ?
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STATEMENT OF THE CASE
This is an interlocutory appeal from orders entered by the District
Court exercising control of a receivership while the matter is on appeal
to the Fifth Circuit.
STATEMENT OF FACTS
One defendant below, Ondova (through Sherman, the chapter 11
trustee who now controls it) filed a motion for the District Court to seize
all of the assets of another defendant, Jeffrey Baron, in order to prevent
Baron from hiring an attorney.
1
Sherman falsely made it look like the
bankruptcy judge desired a receiver over Baron if he hired any
lawyers.
2
The District Judge granted Sherman’s motion ex parte and
later explained: “[T]he receivership is an effort to stop the parade of
lawyers trying to wiggle out of lawful injunctions from judicial officers.
Yes, sir.”
3
1
R. 1578 (paragraph 13, “the appointment of a receiver is necessary under the
circumstances in order to remove Baron from control of his assets and end his
ability to further hire and fire a growing army of attorneys.” ), 1619-1632. One
reason cited by Sherman in his motion was that three business days before, Baron
had hired an attorney to assist in objecting to Sherman’s Attorney’s fee application
in the bankruptcy court where Baron is a creditor. 1576-1577.
2
R. 1576.
3
R. 4593-4594.
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The original purpose of the ex parte receivership was clear: Jeff
Baron was warned that he was “prohibited from retaining any
legal counsel” and that if he did “the Receiver may move the
Court to find you in contempt”.
4
To enforce compliance and to stop
Jeff from having any money to hire a lawyer, all
of his assets (including
his exempt property) were seized
5
, as were all of his future earnings
6
.
Jeff was ordered not to cash any checks
7
or enter into any business
transactions
8
. Jeff Baron has been this “civil lockdown” since the day
the challenged order was issued ex parte in November 2010. Baron has
been forced to live off a monthly sustenance stipend disbursed to him by
the receiver. Under the express threat of contempt, Jeff Baron has been
permitted to purchase only
“local transportation, meals, home utilities,
medical care and medicine.”
9
4
SR. v8 p1213.
5
R. 1620.
6
R. 1622 paragraph F.
7
R. 1620, 1621 paragraph C.
8
R. 1620, 1622, 1627 paragraph A.
9
SR. v8 p1213.
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When the receivership was imposed, Baron immediately turned
over his personal documents and files requested by the receiver.
10
Baron’s estate consists essentially of some savings accounts and some
Roth IRAs.
11
Accordingly, the receiver was not left with very much to
do. Baron appealed the receivership order on Dec. 2, 2010.
12
The receiver
then moved to add a multitude of companies into his
receivership (without lawsuits, service, evidence, or the normally
expected process of law).
13
Those companies include:
1. NovoPoint, LLC.
2. Quantec, LLC.
3. Iguana Consulting, LLC.
4. Diamond Key, LLC.
5. Quasar Services, LLC
6. Javelina, LLC.
7. HCB, LLC, a Delaware limited liability company.
8. HCB, LLC, a USVI company.
9. Realty Investment Management, LLC.- Deleware.
10. Realty Investment Management, LLC – USVI.
11. Blue Horizon, LLC.
12. Simple Solutions, LLC.
13. Asiatrust Limited.
14. Southpac Trust Limited.
15. Stowe Protectors, Ltd.
16. Royal Gable 3129 Trust.
10
R. 3891.
11
SR. v8 p1007.
12
R. 1699-1700.
13
R. 1717, 3952; SR. v1 p40, and sealed record Doc 609; SR. v2 pp365,405.
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17. CDM Services, LLC
18. URDMC, LLC.
The District Judge made no findings in entering the original
November 2010, ex parte receivership order against Baron and an
initial set of companies. R. 1619-1632. Months later, in February 2011
the District Court entered findings in denying Baron’s
Fed.R.App.P. 8(a) motion for relief pending appeal. The post-appeal
explanation in the Fed.R.App.P. 8(a) findings is essentially as follows:
The District Court believes Baron was a vexatious litigant (although
never appearing pro se and never sanctioned) who owed money in
undetermined amounts to his former attorneys, and therefore should be
denied the ability to hire an experienced trial lawyer to defend himself,
and should be stripped of his possessions without trial “so that justice is
done”. SR v2 p358.
While this matter has been on appeal, the District Court has
distributed essentially all of Baron’s savings account balances to the
receiver and his law firm.
14
The amount is staggering— almost a
14
Around $400,000 in a stock portfolio, and IRAs remain, but the stocks are
currently subject to a motion by the receiver to liquidate to pay additional fees, and
the receiver did not pay 2010 taxes.
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million dollars. SR. v8 p990-992.
The “Claims” Solicited by the Receiver
In addition to the receiver (and his firm’s) personal fees, the
receiver solicited claims (SR. v8 p1242-43) against Baron by former
attorneys of the receivership entities and presented the “claims” to the
District court in a one-sided ‘report’ that intentionally excluded
all of the exculpatory evidence. SR. v7 p202. Baron moved the
District Court for the opportunity to:
(1) retain experienced Federal trial counsel to defend the ‘claims’;
(2) the opportunity to conduct discovery with respect to the
claims; and
(3) the opportunity to retain an expert witness with respect to the
reasonableness of the alleged fees.
SR. v5 p139 [Doc 445].
However, the District Court did not grant Baron any of the
requested relief, and instead sealed
from the public view Baron’s
motion, objections, and response to the one-sided receiver’s ‘report’. SR.
v7 p379; and see Doc 458 (itself also sealed). Baron then filed a detailed
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briefing rebutting the alleged claims (SR. v5 p1313 [Doc 577]). The
District Court sealed that too. SR. v7 p379. Baron had also filed
additional evidence. SR. v5 p1369 [Doc 507]; SR. v6 p70 [Doc 523]. The
evidence was rejected by the District Court. SR. v6 pp116, 124. The
receiver’s initial motion for ‘approval’ of the claims against Baron was
denied by the District Court. SR. v6 p94 [Doc 527]. The receiver then
filed a new
motion seeking approval of the ‘former attorney’ alleged
claims against Baron. SR. v7 p194. Five business days later, the
District Court granted the new motion (ignoring the defensive evidence
previously filed by Baron), and before Baron was able to file a response
to the new motion. SR. v7 p349. Notably, although Baron had
previously directed the District Court’s attention to evidence refuting
the fee allegations made by claimants, the District Court did “not
question the evidence presented by the Receiver”. SR. v6 p94. The
issues involving the unpleaded ‘claims’ awarded
15
(in the total sum of
$870,237.19) by the District Court against Baron include, for example,
15
The District Court did not evaluate the claims per se but decided that the claims
would “likely” be successful if tried, ordered Baron to settle with the claimants in
the amount set by the District Judge, and authorized the receiver to pay the claims
out of any of the receivership estates. SR. v7 p349.
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the following:
16
1. Mr. Broome ‘claimed’ more than the $10,000.00 per-month
capped fee he was paid by Baron. ‘Exhibits 4-5b’ referenced
at SR. v7 p363.
17
Broome’s argument is that Mr. Baron paid
him based on a $10,000.00 monthly fee cap but his contract
did not
contain any term limiting the amount of fees that
may be incurred in any month. SR. v5 pp426, 427. However,
Broome’s contract (submitted by Broome) clearly contains (in
writing) an explicit and unambiguous provision limiting the
amount of fees that may be incurred to $10,000.00 per
month. There is no ambiguity. Broome’s contract expressly
states a capped monthly fee limit setting the maximum
amount of fees that could be “incurred”, and expressly
16
The nine “claims” discussed below constitute approximately 80% of the total
dollar amount in “claims” presented. The factual underpinnings of the remaining 16
“claims” are similar to the nine discussed below. However, a full factual discussion
of each of the remaining claims would exceed briefing length limitations. See
‘Exhibits’ referenced at SR. v7 p362-369. Notably, the District Court made no
specific factual findings with respect to any individual “claim”. SR. v7 p349.
17
The attorney’s allegations were filed as sealed documents, and the Appellants’
motion for access to the sealed portions of the record on appeal was denied by the
appellate motion panel. Accordingly, Appellants are unable to provide more
detailed citation to the record with respect to the ‘claim’ allegation documentation,
(hereinafter referenced as ‘Exhibit __’).
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requires formal written authorization to exceed the capped
amount. SR. v8 p1212 (and see SR. v7 p379). No written
authorization to exceed the monthly fee cap was alleged in
Broome’s “claim”, and no written authorization to exceed the
agreed upon monthly cap has been produced by Broome.
Rather, Broome falsely swore that his contract did not
contain any provision to limit the amount of fees that could
be incurred monthly. SR. v5 pp426-427.
2. Ms. Crandall ‘claimed’ fees based on her allegation that she
had a written contract (which she could not produce) at an
hourly fee of $300/hour. ‘Exhibit 16’ referenced at SR. v7
p364. However, per Crandall’s own invoice, Crandall billed
(and was paid), at a flat
monthly fee. SR. v6 p77; SR. v6 p70-
76. There is no ambiguity. Crandall’s invoice (which was
paid) clearly states that “60.1” hours of work were performed
and the “Flat Rate” due was $5,000.00. SR. v6 p77.
3. Mr. Pronske was paid $75,000.00 up front for his work in the
bankruptcy court, and later alleged that the $75,000.00 was
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just an initial retainer. ‘Exhibit 24’ referenced at SR. v7
p365. Pronske demanded an additional fee of $241,912.70.
Id. However, Pronske admitted that “There are no
engagement agreements relating to the representation” and
for almost a year after receiving the $75,000.00 fee and
working on the case, Pronske sent no contract, no
engagement letter, no bill, no invoice, no demand for
payment, and no hourly work report alleging that the flat fee
payment was actually a ‘retainer’. SR. v8 p1218 and ‘Exhibit
24’. Also, the only
“invoices relating to the Representation”
(which Pronske alleges ended in July 2010), were printed up
in February 2011, after the claims were solicited by the
receiver, and some seven months after Pronske’s
representation ended. Id.
4. Mr. Ferguson’s ‘claim’ sought more than the $22,000.00
capped fee he agreed to in writing and that was paid. SR. v8
p1220. Ferguson offered several conflicting factual scenarios,
the latest being that he is allowed to violate his engagement
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agreement and charge more than the agreed upon (and paid
in full) capped fee because he was ‘defrauded’. Id. Ferguson
alleged that Baron ‘fraudulently’ represented that the money
would be paid from his million dollar trust and not from his
pocket personally because he was personally “destitute”
(according to Ferguson). Id. It is, however, undisputed that
the trust’s money is just as green and in US Dollars, just the
same as if it had come from Baron’s pocket, and Ferguson
was paid the agreed upon fee. Notably, in his original sworn
testimony before the District Court at a Fed.R.App.P. 8(a)
hearing, Ferguson offered a different story. R. 4443, 4445.
At the FRAP 8(a) hearing, to explain the additional fee
‘claimed’ in light of the agreed fee at which Ferguson was
paid, Ferguson claimed the agreed fee was only to August 21
and based on a 33% time demand. Id. In his new ‘claim’
Ferguson tells a new story to avoid the written
agreed upon
fee cap. Ferguson’s new story contradicts his original
version and now admits that the cap did apply through
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August 31, and with full time work contemplated (as is
stated in Ferguson’s written agreement), but should not
apply since Ferguson claims Baron ‘fraudulently’
represented the money (which was paid in full) was coming
from Baron’s million dollar trust. SR. v8 p1220.
5. Mr. Lyon submitted a ‘claim’ for more than the $40/hour fee
he charged and was paid. His argument is that his fee was
really $300/hour (and around $260/hour is due him),
although he could not produce his written contract. ‘Exhibit
19’ referenced at SR. v7 p361. However, Lyon’s own email
(distributed to other attorneys) states his rate was the
$40/hour rate he was paid. SR. v5 p1376. In this undisputed
evidence, Lyon bragged– in writing– that his rate of
$40/hour gave Baron ‘more bang for the buck’ so that Lyon
should be given more work to do. Id.
6. Mr. Taylor submitted a ‘claim’ for additional fees beyond the
money he was paid (in full) pursuant to the $10,000.00 per
month fee cap expressly called for in his written contract.
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‘Exhibit 18’ referenced at SR. v7 p365. Unlike Broome,
Taylor did not deny his fees were capped at $10,000/month
(as stated in his written contract). Instead, Mr. Taylor
claims entitlement to a contingency fee even though the
contingency provided for in his contract was not met. Id.
When the case settled at a substantial loss, Taylor made no
claim that the contingency in his contract was met, and
made no disclosure of any contingency amount which would
be due; rather, Taylor confirmed in writing
that only a very
small (hourly) fee would be billed. SR. v5 pp1370, 1380.
Subsequently, Taylor decided he wanted a contingency fee
payment after all, and asked for $42,000.00. SR. v5 p 1378.
The District Court, although no suit was filed in the District
Court, and with no explanation of how the ‘contingency’
amount had been calculated, awarded Taylor $78,058.50.
SR. v7 p365.
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7. Ms. Schurig submitted a ‘claim’ for more than the million
dollar fee she has been paid. Her ‘claim’ was for work
performed– without any contract– for a company neither
owned nor managed by Baron—AsiaTrust. SR. v8 p1223.
Schurig does not allege that Baron ever agreed or undertook
to pay the debts of AsiaTrust, yet the District Court awarded
her $93,731.79 “claim” for unpaid fees. Id.; SR. v7 p364.
8. Bickel-Brewer submitted a ‘claim’ for more than the
$200,000.00+ fee it was paid nearly half a decade ago. The
current amount claimed due is around $40,000.00– the
amount of the work billed by Bickel-Brewer, without
explanation, for fees preceding
its representation of Baron
plus additional fees for seeking payment of the claimed fees.
Bickel-Brewer’s contract does not call for payment of any
pre-engagement work, and there is no explanation of what
the work was for, or why Baron is in any way liable to pay it.
SR. v8 pp1224-1235; ‘Exhibit 20’ referenced at SR. v7 p365.
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9. Mr. Garrey submitted a ‘claim’ for two weeks work. Garrey
originally demanded a million dollar fee for that alleged
work. SR. v4 p104. Recently, Mr. Garrey has lowed his
million dollar ‘claim’ to a $52,275.00 “claim” for the alleged
two weeks work. ‘Exhibit BLANK’ referenced at SR. v7 p361.
Garrey, however, has admitted that he agreed in writing to a
fixed rate employment at $8,500.00 per month, for the period
covering the two weeks he claims to have worked. Id. In his
“claim” Garrey notably alleges that he expended a
significant amount of time in representing Baron in part
because he was “asked to object to the fee requests of the
Receiver’s counsel, and I was asked to devise a strategy to
remove the Receiver and the Receiver’s counsel.” SR. v8
p1217. Garrey, however, admitted that his alleged two week
representation ended on November 16, 2010, well before
the
application for the appointment of a receiver had been made.
Id.
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The 28 U.S.C. §144 Affidavit
On or about April 27, 2011, the District Judge issued sealed
findings that statements made about an attorney in filings were
‘unfounded’. Doc 458 (under seal). No hearing was held and no briefing
was submitted on the issue. Accordingly, it appeared that the District
Judge had no basis other than bias to make such findings. In light of
the foregoing, after a careful review of a series of actions and
statements by the District Judge, counsel for Baron came to believe that
there was a good faith basis to conclude that due to the District Judge’s
personal bent of mind (developed well before the filing of the District
Court lawsuit), Baron could not receive fair and impartial treatment.
Doc 497 filed 4/27/11 (ordered under seal). Baron then submitted an
affidavit pursuant to 28 U.S.C. §144, certified to by counsel. Id.
The District Judge Refused to Review the Legal
Sufficiency of the Facts Stated in the Affidavit
The District Judge refused to review the legal sufficiency of the
facts stated in Baron’s §144 affidavit, and ruled that Baron could not
submit an affidavit that made factual allegations, but must instead
submit an affidavit that cited specific portions of the court record. SR.
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v5 p1470. The District Court also sealed Baron’s affidavit so that it was
hidden from the public. Id. Baron filed a supplemental affidavit that
added quotations from the record, including the quoted text and the
hearing date, and removed the ‘sealed’ facts from the affidavit. Doc.
521 (also ordered under seal). The District Judge then struck and
placed that affidavit under seal on the grounds that the affidavit “failed
to give citation to the record as to every statement by the Court”. SR.
v6 p122. The District Judge ordered that any supplemental affidavit
could not contain any off-the-record statements made by the District
Judge, and must be confined to statements the Judge made on the
record. Id.
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ARGUMENT SUMMARY
This appeal presents core issues that have been authoritatively
decided, as follows:
(1) The District Court below lacked jurisdiction to issue the orders
challenged in this appeal. Griggs v. Provident Consumer
Discount Co., 459 U.S. 56, 58 (1982) (filing of a notice of appeal
confers jurisdiction on the court of appeals and divests the
district court of its control over the aspects of the case involved
in the appeal).
(2) The District Court should have ceased all action in the case until
the legal sufficiency of the factual allegations made in Baron’s
§144 affidavit had been ruled on. Parrish v. Board of Com'rs of
Alabama State Bar, 524 F.2d 98, 100 (5th Cir. 1975).
(3) The District Court erred in holding that it could appoint a
receiver over an individual and thereby waive the individual’s
Constitutional right to trial by jury. Scott v. Neely, 140 U.S. 106,
109-110 (1891) (Seventh Amendment right to jury trial cannot be
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dispensed with nor can it be impaired by blending with a
demand for equitable relief).
(4) The District Court erred in attempting to use receivership to
adjudicate alter ego claims. Bollore SA v. Import Warehouse,
Inc., 448 F.3d 317 (5th Cir. 2006) (receivership cannot be used to
adjudicate alter ego claims).
Additionally, there was a breakdown of the basic protections of
Due Process in the proceedings below, with the District Court:
(1) issuing orders against non-parties upon whom no service
was made and over whom the District Court lacked
personal jurisdiction;
(2) issuing orders without allowing the opportunity
mandated by the rules to respond to the motions seeking
substantive relief; and
(3) refusing to allow Baron to be represented by (1) paid
counsel and (2) an experienced Federal trial lawyer.
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ARGUMENT & AUTHORITY
ISSUE 1: DOES INTERLOCUTORY APPEAL DIVEST THE
TRIAL COURT OF JURISDICTION OVER THE MATTER
APPEALED ?
Standard of Review
Issues based on questions law are subject to independent review,
de novo. In Re Fredeman, 843 F.2d at 824.
Appeal Divests the District Court of Jurisdiction Over
the Matter Appealed
Jeffrey Baron filed a notice of appeal from the receivership order
on December 2, 2010. R. 1699. The filing of a notice of appeal is an
event of jurisdictional significance– it confers jurisdiction on the court of
appeals and divests the district court of its control over those aspects of
the case involved in the appeal. Griggs v. Provident Consumer Discount
Co., 459 U.S. 56, 58 (1982). The divesture of jurisdiction of the trial
court involves all those aspects of the case appealed. Id. As a matter of
established law, the district court loses jurisdiction over all matters
which are validly on appeal. Dayton Indep. School Dist. v. US Mineral
Prods. Co., 906 F.2d 1059, 1065 (5th Cir. 1990) (“rule which we follow
rigorously”). The sole authority of a district court with respect to a
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matter on interlocutory appeal is to maintain the status quo of the case
as it rests before the court of appeals. E.g., Coastal Corp. v. Texas
Eastern Corp., 869 F.2d 817, 820 (5th Cir. 1989); Dayton at 1063.
The District Court was Divested of Jurisdiction over
Receivership Res
As a long-established principle of law, the effect of an appeal of a
receivership is that the appellate
court is vested with jurisdiction over
the receivership res. E.g., Palmer v. Texas, 212 U.S. 118, 126 (1909).
The Supreme Court held in Palmer “[T]he effect of the appeal was
simply ... that the appellate court still had jurisdiction over the
res the same as the trial court had”. Id. The Supreme Court
explained this rule in Palmer, holding:
“If a court of competent jurisdiction, Federal or state, has
... obtained jurisdiction over the same, such property is
withdrawn from the jurisdiction of the courts of the other
authority as effectually as if the property had been
entirely removed to the territory of another sovereignty.”
Id. at 125.
Similarly, as a long-established rule of law, “Even where the court
which appoints a receiver had jurisdiction at the time, but loses it ... the
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first court cannot thereafter make an allowance for his expenses and
compensation”. Lion Bonding & Surety Co. v. Karatz, 262 U.S. 640, 642
(1923). Once the matter was placed before the Court of Appeals, the
property was in the possession of the Court of Appeals, and “[T]hat
possession carried with it the exclusive jurisdiction to determine all
judicial questions concerning the property.” Wabash R. Co. v. Adelbert
College of Western Reserve Univ., 208 U.S. 38, 46 (1908). As an
established principle of law and comity, two courts should not attempt
to assert jurisdiction over the same matter simultaneously. Griggs at
58; Dayton at 1063.
While the matter is on appeal, the district court is divested of
authority over the matter on appeal, and has no jurisdiction award fees
for the matter while it is on appeal. E.g., Taylor v. Sterrett, 640 F.2d
663, 668 (5th Cir. 1981) (“[T]he District Court was divested of
jurisdiction only as to matters relating to the April 27 and May 12
orders and subsequent orders and, for that reason, fees cannot be
recovered for work relating to these orders.”).
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Accordingly, the District Court was without authority to disburse
hundreds of thousands of dollars from the receivership res awarded as
‘fees’, and the following orders should therefore be reversed: Doc 533
(SR. v6 p103), Doc 532 (SR. v6 p101), Doc 535 (SR. v6 p107), Doc 574
(SR. v7 p348), Doc 529 (SR. v6 p98), Doc 462 (SR. v5 p230), Doc 573
(SR. v7 p347), Doc 530 (SR. v6 p99), Doc 461 (SR. v5 p229), Doc 464
(SR. v5 p232), Doc 539 (SR. v6 p113), Doc 543 (SR. v6 p118), Doc 536
(SR. v6 p109), Doc 473 (SR. v5 p412), Doc 463 (SR. v5 p231), Doc 542
(SR. v6 p117), Doc 537 (SR. v6 p110), Doc 538 (SR. v6 p111), Doc 531
(SR. v6 p100), and Doc 540 (SR. v6 p114). Similarly the District Court
was without authority to authorize the liquidation of receivership assets
or to approve assessments against those assets and Doc 575 (SR. v7
p349) should therefore be reversed. Finally, the District Court was also
without authority to approve the propriety of the receiver’s actions with
respect to the receivership res, and accordingly, Doc 459 (SR. v5 p227)
should also be reversed.
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Policy Issue: The Right to Appellate Review of a
Receivership Order
The validity of the receivership order should be resolved on appeal
before
the District Court should be allowed to distribute and disburse
the property of a party that was seized by the District Court’s
receivership order. Otherwise, the District Court can effectively bypass
review by the Court of Appeals by distribution of the receivership res
before the validity of the receivership has been resolved on appeal. A
district court should not be allowed to moot a matter pending before the
Court of Appeals. Dayton, 906 F.2d at 1063. Accordingly, the challenged
orders listed above should be reversed.
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ISSUE 2: DOES DUE PROCESS REQUIRE THAT A PARTY BE
AFFORDED THE OPPORTUNITY TO BE HEARD ON MOTIONS
BEFORE SUBSTANTIVE RELIEF IS GRANTED AGAINST THAT
PARTY ?
Standard of Review
Issues based on questions law are subject to independent review,
de novo. In Re Fredeman, 843 F.2d at 824.
Argument
As a matter of established law, failure to afford a party the
opportunity to be heard on a motion seeking substantive relief against
them is fundamentally inconsistent with the notion of due process and
orders issued without such an opportunity are void. E.g. Armstrong v.
Manzo, 380 U.S. 545, 552 (1965) (restored the petitioner to the position
he would have occupied had due process of law [the opportunity to be
heard] been accorded to him in the first place); Pennoyer v. Neff, 95 US
714, 737 (1878) (“void as not being by due process of law”); Goss v.
Lopez, 419 U.S. 565, 579 (1975) (“The fundamental requisite of due
process of law is the opportunity to be heard”); Logan v. Zimmerman
Brush Co., 455 U.S. 422, 429-430 (1982) (due process violated in
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denying potential litigants established adjudicatory procedures); Joint
Anti-Fascist Refugee Comm. v. McGrath, 341 U.S. 123, 161 (1951)
(“Fairness of procedure is ‘due process in the primary sense.’ It is
ingrained in our national traditions and is designed to maintain
them.”)(citation omitted); International Transactions v. Embotelladora
Agral, 347 F.3d 589, 596 (5th Cir. 2003).
Local Rule 7.1(e) of the Northern District of Texas provides that a
respondent shall be allowed 21 days to respond to motions. N.D. Tex.
L.R. 7.1(e) (“Time for Response and Brief. A response and brief to an
opposed motion must be filed within 21 days from the date the motion is
filed.”). The District Judge did not
order or provide any notice that the
time would be shortened, but rather notified the parties that the time
allowed was “a full twenty-one days to respond to every motion that’s
filed”. SR. v4 p863. Accordingly, with respect to Orders: Doc 575 (SR.
v7 p349), Doc 533 (SR. v6 p103), Doc 532 (SR. v6 p101), Doc 535 (SR. v6
p107), Doc 574 (SR. v7 p348), Doc 529 (SR. v6 p98), Doc 462 (SR. v5
p230), Doc 573 (SR. v7 p347), Doc 530 (SR. v6 p99), Doc 461 (SR. v5
p229), Doc 464 (SR. v5 p232), Doc 539 (SR. v6 p113), Doc 543 (SR. v6
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p118), Doc 536 (SR. v6 p109), Doc 463 (SR. v5 p231), Doc 542 (SR. v6
p117), Doc 537 (SR. v6 p110), Doc 538 (SR. v6 p111), Doc 531 (SR. v6
p100), Doc 540 (SR. v6 p114), and Doc 459 (SR. v5 p227), the District
Court abused its discretion in granting relief without allowing the
Appellants the opportunity to respond and be heard on the requested
relief as provided for by the applicable rules of procedure. A party is
clearly prejudiced when it is not allowed to respond to the
reasonableness and propriety of fee claims, and clearly a party is
prejudiced by the failure to allow the party to respond and be heard
with respect to multiple ‘claims’ for alleged liability for breach of
contract. As discussed above, the District Court’s failure to allow the
Appellants the established procedures and opportunity to respond and
be heard on the relief requested against them constitutes a violation of
Due Process and should render the orders so entered void.
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ISSUE 3: IN THE ABSENCE OF A STATUTE, IS A COURT
AUTHORIZED TO USE RECEIVERSHIP TO PROVIDE A
REMEDY FOR UNSECURED CREDITORS’ IN PERSONAM
CLAIMS AGAINST AN INDIVIDUAL BEFORE THEY HAVE
BEEN REDUCED TO JUDGMENT ?
Standard of Review
Questions of law are review de novo. E.g. In re Fredeman, 843 F.2d
at 824; Gandy Nursery, Inc. v. US, 318 F.3d 631, 636 (5th Cir. 2003).
Argument Overview
This issue addresses the question:
18
“Does the law authorize a court to skip the trouble of
lawsuits and trials by simply placing an individual’s
property into receivership and redistributing the
property to pay alleged unsecured debts of the
individual as the court finds ‘equitable’ ?”
An overview of the answer, “No”, is as follows:
1. Receivership is not authorized as an alternative
system of justice. Rather, receivership is a very limited
ancillary remedy to conserve property subject to some
other claim in equity.
18
Issue 4, at page 62, addresses the related issues of: (1) The District Court’s lack of
subject matter jurisdiction over non-diverse state law claims, and (2) The
constitutionality of adjudication of disputed claims at law without trial.
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2. An individual’s unsecured debts are not property of
the individual and are not subject to receivership with
respect to that individual.
The District Court’s Erroneous View of Equity
Receivership
In the erroneous view of the District Court:
(1) Receivership is an independent substantive remedy that
divests individuals of their property without trial and
transmutes the property into “equitable assets” held by
the Judge. SR. v7 p353-356.
19
(2) Those “equitable assets” can then be redistributed to
alleged general creditors based on the Judge’s sense of
“equity”. Id.
(3) By appointing a receiver over a citizen the Court can
freely waive a citizen’s Constitutional rights. SR. v7
19
The authority erroneously relied upon by the District Court, Santibanez v. Wier
McMahon & Co., 105 F.3d 234, 241 (5th Cir. 1997), notably does not hold that
receivership is a remedy available to general creditors to create equitable assets.
Rather, Santibanez holds that “[R]eceivers may be appointed ‘to preserve property
pending final determination of its distribution in supplementary proceedings in aid
of execution.’ In addition, ‘receivership may be an appropriate remedy for a
judgment creditor
…’ ”. Id. at 241 (inner citation omitted). The holding in
Santibanez is fully consistent with the well-established principle of law that a
receivership conserves property for specific claims of ownership or equitable interest
in that specific property. E.g., Gordon v. Washington, 295 U.S. 30, 37 (1935). By
stark contrast, “To constitute equitable assets, the trust imposed by the party, or by
the court, must be for the benefit of creditors generally”. Freedman's Sav. & Trust
Co. v. Earle, 110 U.S. 710, 718 (1884). Thus, there is a fundamental
difference
between (1) the interlocutory seizure of property by receivership for the benefit of
parties holding an existing right to an equitable remedy in the receivership
property so that the court can provide that remedy (Gordon at 38); and (2) seizure of
property for the creation of a trust for the benefit of unsecured general creditors
(“equitable assets”).
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p356-357. In other words, in the District Court’s
erroneous view, since a court, through its receiver, can
waive a citizen’s Constitutional rights for them, a
District Court can take away all of a citizens “legal
rights” with respect to their property, and redistribute
the property without regard to all the Constitutional
protections recognized by law. Id.
As discussed below, the District Court has fundamentally erred
with respect to the Constitution and the law of equity receivership.
Overview of Equity Receivership Power
As a matter of well-established law, equity receivership is neither
an independent nor substantive remedy. Rather, as discussed below,
receivership is a special remedy that can be used only
as an ancillary
remedy to preserve property so that property can be disposed of
pursuant to some other recognized equitable remedy that was properly
pleaded and that the court has jurisdiction to impose.
Equity Receivership is Only
Authorized as an
Interlocutory, Ancillary Remedy
The Supreme Court held over a century ago that receivership is
“interlocutory only
, and intended to preserve the subject-matter in
dispute from waste or dilapidation, and to keep it within the control of
the court until the rights of the parties concerned can be adjudicated by
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a final decree”. Forgay v. Conrad, 47 U.S. 201, 204-205 (1848). The
Supreme Court has held this limitation is a fundamental principle of
law imposed by the limitations on the equity authority granted to a
court. Gordon v. Washington, 295 U.S. 30, 37 (1935) (receivership must
be “ancillary to some form of final relief which is appropriate for equity
to give”). While summary proceedings have been recognized as proper
to determine what property should be held in the receivership res, such
proceedings have not been recognized as proper to determine who
should ultimately be entitled to possession of that res. United States v.
Arizona Fuels Corp., 739 F.2d 455, 459 (9th Cir. 1984) (summary
proceedings are appropriate to determine right to possession, although
not ultimate rights to title or ownership).
As a matter of established law, receivership is not a substitute for
trial nor a substantive remedy. See Pusey & Jones Co. v. Hanssen, 261
U.S. 491, 497 (1923). The rule of law is clear. As the Supreme Court
held in Pusey:
“[T]he appointment of a receiver is merely an ancillary
and incidental remedy. A receivership is not final relief.
The appointment determines no substantive right; nor is
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it a step in the determination of such a right. It is a means
of preserving property”
Id.
Carrington-Coleman’s Erroneous Argument
In their Principal Appeal brief, Carrington-Coleman glosses over
the well-established principle that receivership is merely an ancillary
remedy that determines no substantive rights. On page 8 of its brief,
Carrington-Coleman erroneously mis-cites Sec. & Exch. Comm’n v.
Forex Asset Mgmt. LLC, 242 F.3d 325, 331 (5th Cir. 2001) as holding
that the distribution of receivership assets is an equitable remedy.
There is no such substantive remedy in equity, and a careful reading of
Forex Asset reveals this fundamental error in Carrington-Coleman’s
argument. The holding in Forex Asset expressly states that the
equitable remedy the holding refers to is the remedy of restitution
. Id.
Specifically, Forex Asset holds:
“[I]n entering a restitution order, adherence to specific
equitable principles, including rules concerning tracing
are ‘subject to the equitable discretion of the court.’
”
Id.
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Notably, equitable restitution is an independent equitable remedy
and can be imposed regardless
of the existence of a receivership.
20
In
both Forex Asset (and US v. Durham, 86 F.3d 70 (5th Cir. 1996), the
case relied upon by Forex Asset) the receivership was purely ancillary to
the ultimate relief afforded (i.e., equitable restitution). In both cases,
the receivership provided a mechanism to secure property so that the
ultimate relief of equitable restitution could be effectively carried out by
the court. Accordingly, when this Honorable Court in Forex Asset (and
Durham) referenced a court’s “acting pursuant to its inherent equitable
powers” those powers were not some new, independent power in equity
20
Equitable Restitution is different than restitution generally. E.g., Sereboff v. Mid
Atlantic Medical Services, Inc., 547 U.S. 356, 362 (2006) (‘[N]ot all relief falling
under the rubric of restitution [was] available in equity.’). Equitable Restitution is
an equitable remedy that involves in rem recovery of specific property. Id. As the
Supreme Court held in Sereboff:
“To decide whether the restitutionary relief sought by Great-West was
equitable or legal, we examined cases and secondary legal materials to
determine if the relief would have been equitable ‘[i]n the days of the
divided bench.’ Ibid. We explained that one feature of equitable
restitution was that it sought to impose a constructive trust or
equitable lien on "particular funds or property in the defendant's
possession." Id., at 213. That requirement was not met in Knudson,
because ‘the funds to which petitioners claim[ed] an entitlement" were
not in Knudson's possession,’. Thus, for restitution to lie in equity, the
action must seek not to impose in personam liability on the defendant,
but must seek in rem recovery to restore to the plaintiff particular
funds or property in the defendant's possession. See Great-West Life &
Annuity Ins. Co. v. Knudson, 534 U.S. 204 , 213-214 (2002).”
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arising out of the existence of a receivership, to distribute a party’s
assets as a court feels is ‘just and equitable’. Rather, the powers
referenced in Forex Asset and Durham were specific powers in equity to
provide an established form of substantive relief that equity is
empowered to give— Equitable Restitution.
By contrast, the creation of a new equitable remedy to allow a
court to simply seize property in receivership and then distribute the
property based on the court’s sense of ‘equity’ would directly violate the
holding of Grupo Mexicano de Desarrollo, SA v. Alliance Bond Fund,
Inc., 527 U.S. 308, 310 (1999). The Supreme Court held in Grupo
Mexicano that “[T]he equitable powers conferred by the Judiciary Act of
1789 [do] not include the power to create remedies previously unknown
to equity jurisprudence”. Id.
In Personam vs. In Rem Claims
Moreover, if receivership were authorized as a means of providing
final relief, providing a remedy with respect to the alleged unsecured
debts of Baron would still fall well outside the District Court’s
receivership authority. The short explanation for this is that, as a well-
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established rule of law, a receiver may only be placed over property.
E.g., Booth v. Clark, 58 U.S. 322, 331 (1855). Debt, however, “is not
property in the hands of the debtor”. Liverpool & C. Ins. Co. v. Orleans
Assessors, 221 U.S. 346, 354 (1911). Accordingly, the in personam
claims against Baron for his alleged debts are not part of the
receivership res and adjudication of those claims falls well outside of the
receivership itself.
A longer explanation is as follows: Receivership actions are in rem
actions over specific property. E.g. Sumrall v. Moody, 620 F.2d 548, 550
(5th Cir. 1980). As a matter of established law, in personam actions to
establish liability on claims against individuals do not involve the
receivership res. Hawthorne Savings v. Reliance Ins. Co., 421 F.3d 835,
855 (9th Cir. 2005) (noting the fundamental distinction between “the
liquidation of a claim and the enforcement of the claim after it has been
reduced to judgment”). Accordingly, only an attempt to levy against the
res made after a judgment has been obtained in personam
involves an
in rem action that relates to a court's dominion over the receivership
res. Id.
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The District Court fundamentally erred in, out of a “sense of
justice”, attempting to create an interest in property that does not exist.
See Meyerson v. Council Bluffs Sav. Bank, 824 F. Supp. 173, 177 (S.D.
Iowa 1991). The ‘claimants’ do not have, and have not asserted, any
legally cognizable in rem claims against the res property. Rather, the
claimants allege that Mr. Baron personally is obligated in personam to
pay them money for breach of contract. Accordingly, the District Court
erred in attempting to bypass the crucial step of adjudication of in
personam liability. Notably, the fundamental step of adjudicating in
personam liability is a constitutionally protected step, and with claims
at law like those asserted against Baron, a citizen's right to trial by jury
is invoked. E.g., Ross v. Bernhard, 396 U.S. 531, 531 (1970).
Baron’s Unsecured Alleged Creditors Have No
Right in
the Receivership Property
Unsecured Creditors Have No Rights in the Property of their Debtor
Baron’s unsecured creditors have no rights in a receivership
because, in the absence of statute, they have no substantive right, legal
or equitable, in or to his property. See Pusey, 261 U.S. 491 at 497. This
is true, whatever
the nature of the property. Id. The only substantive
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right of a simple contract creditor is to have his debt paid in due course
and his recourse for non-payment is a suit at law
. Id. Moreover, such a
creditor has no right whatsoever in equity until he has exhausted his
legal remedy. Id. Accordingly, as matter of well-established law, a court
does not have equitable jurisdiction to use receivership to enforce the
unsecured creditors’ in personam claims (against the owner of the
receivership property) before those claims have been reduced to
judgment. Id.; e.g., Williams Holding Co. v. Pennell, 86 F.2d 230 (5th
Cir. 1936). The District Court’s Order [Doc 575] to pay alleged
unsecured creditors of Baron should therefore be reversed. SR. v7 p349.
Distinction between Receivership of a Corporation and Receivership
of an Individual’s Property
It is notable that unlike an individual, control of a corporation is a
property interest. E.g., US v. Wallach, 935 F.2d 445, 462 (2nd Cir.
1991). Similarly, ownership rights in a corporation constitute property.
See 11 Fletcher Cyclopedia of the Law of Private Corporations § 5097,
at 92 (Perm. ed. 1990). Thus, claims against a corporation which has
been taken into the hands of a receiver are claims against the
receivership res. By contrast, claims against the corporation's
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shareholders (the owners of property) are in personam. E.g., Morris v.
Jones, 329 U.S. 545, 549 (1947) (the liquidation of a claim against a
person “[I]s strictly a proceeding in personam”); and see e.g., United
States v. Cauble, 706 F.2d 1322, 1347 (5th Cir. 1983) (taking property
interest held by a person is in personam and not in rem). Accordingly,
the in personam claims against Baron, are not in rem claims against the
receivership res and fall well outside the District Court’s subject matter
jurisdiction and authority with respect to the receivership res.
Exercise of Receivership Power Must be Closely
Scrutinized
This Honorable Court has held that “[R]eceiverships for
conservation have a legitimate function but they are to be watched with
jealous eyes lest their function be perverted.” Tucker v. Baker, 214 F.2d
627, 631 (5th Cir. 1954). This Court held in Tucker that:
“A receivership is only a means to reach some legitimate
end sought through the exercise of the power of the court
of equity; it is not an end in itself. Where a final decree
involving the disposition of property is appropriately
asked, the court, in its discretion, may appoint a receiver
to preserve and protect the property pending its final
disposition. For that purpose the court may appoint a
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receiver of mortgaged property to protect and conserve it
pending foreclosure, or of property which a judgment
creditor seeks to have applied to the satisfaction of his
judgment.”
This Honorable Court’s holding in Santibanez, 105 F.3d at 241 is
consistent with the holding in Tucker and the Supreme Court’s holdings
in Gordon, Pusey, Forgay, etc. Receivership is authorized when a
judgment
creditor seeks to have a defendant’s property applied to the
satisfaction of his judgment. The District Court erred in confusing the
rights of a judgment creditor with those of unsecured general creditors.
Attempting to use receivership to seize a citizen’s property in order to
redistribute the property to unsecured general creditors is not
authorized by law. E.g., Pusey 261 U.S. at 497. It is also prohibited by
the Constitution. U.S. Const. amend. VII. Accordingly, the District
Court’s “FINDINGS OF FACT, CONCLUSIONS OF LAW, AND
ORDER ON ASSESSMENT AND DISBURSEMENT OF FORMER
ATTORNEY CLAIMS” entered 5/18/2011 (Doc 575) should be reversed.
SR. v7 p349.
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ISSUE 4: DID THE DISTRICT COURT ABUSE ITS DISCRETION,
ACT OUTSIDE OF ITS JURISDICTION, OR EXCEED ITS
AUTHORITY IN ORDERING THAT BARON, AN ADULT CITIZEN,
MUST INVOLUNTARILY COMPROMISE DISPUTED CLAIMS
AGAINST HIM ?
Standard of Review
The discretionary aspects of a District Court’s rulings are
reviewed for abuse of discretion. E.g., Commodity Credit, 107 F.2d at
1001. Issues of authority, jurisdiction, and constitutionality are based
on questions law and are subject to independent review, de novo. See
e.g., Castillo v. Cameron County, Texas, 238 F.3d 339, 347 (5th Cir.
2001).
Subject Matter Jurisdiction
Lack of subject matter jurisdiction cannot be waived. E.g.,
Mitchell v. Maurer, 293 U.S. 237, 244 (1934). Subject matter
jurisdiction arises out of the matter in controversy between the parties
before the court. Williamson v. Berry, 49 U.S. 495, 536 (1850). Federal
courts are not courts of general jurisdiction; they have only the power
that is authorized by Article III of the Constitution and the statutes
enacted by Congress pursuant thereto. See, e. g., Marbury v. Madison, 1
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Cranch 137, 173-180 (1803). The claims of Baron’s former attorneys are
state law claims between non-diverse parties and invoke no federal
question. Griffin v. Lee, 621 F.3d 380, 388 (5th Cir. 2010). Accordingly,
the District Court was without subject matter jurisdiction over the
claims, and was without power to order Baron to settle the claims.
Notably, a receivership cannot endow the District Court with any
subject matter jurisdiction it did not already posses. Cochrane v. WF
Potts Son & Co., 47 F.2d 1026, 1028 (5th Cir. 1931) (seizure in
receivership does not endow a court with subject matter jurisdiction
over the property seized “[U]nless the subject-matter was by proper
pleadings already before the court”). While Rule 66 permits the
appointment of receivers under the Federal Rules, the rules do not
extend the jurisdiction of the district court. Fed.R.Civ.P. 82.
Abuse of Discretion
As discussed in the Statement of Facts, above, the groundless
nature of the ‘claims’ is clear from the evidence and documents in the
record. A district court abuses its discretion if it relies on clearly
erroneous factual findings. E.g., In re Volkswagen of America, Inc., 545
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F.3d 304, 310 (5th Cir. 2008). The District Court relied on no evidence
nor basis in law to find Baron “could quite possibly be found liable to
some of the claimants .. for punitive damages”. SR. v7 p358.
Accordingly, the District Court abused its discretion in making such a
finding. Similarly, the District Court found that “if the Former
Attorney Claims were to be litigated, Baron would likely lose at trial”.
However, no evidence was offered as to the likely outcome of any trial
.
Notably, the receiver’s “report” as to the claims was one-sided and
intentionally omitted all of the exculpatory evidence in Baron’s favor.
SR. v7 p202. Accordingly, the District Court abused its discretion in
making its findings.
If District Court’s adjudication of the “claims” were otherwise
authorized by law and the Constitution, a Court’s adjudication must be
based on the legal rights of the parties, not upon what the outcome
would “likely” be if the claims were tried. The District Court made no
findings with respect to the underlying facts of any specific “claim”. A
court abuses its discretion where it misapplies the law. E.g. McClure v.
Ashcroft, 335 F.3d 404, 408 (5th Cir. 2003). Accordingly, the District
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Court abused its discretion in awarding claims based on what would
‘likely’ happen if the claims were tried.
The District Court similarly abused its discretion in failing to
allow the period of time required by the local rules (21 days) for a
response to the receiver’s motion for relief granted by the District Court,
and abused its discretion granting the receiver’s motion only 7 days
after it was filed, without notice of any shortened response period. SR.
v7 p194 (filed 5/11/11); SR. v7 p349 (entered 5/18/11).
The District Court also abused its discretion in denying Baron the
right to be represented by paid counsel, and refusing to consider Baron’s
affidavit evidence because Baron was unwilling to submit to cross-
examination (at a prior hearing) without the representation of paid
counsel. SR. v7 p366.
The Seventh Amendment
As a matter of fundamental law in the United States, “In Suits at
common law, where the value in controversy shall exceed twenty
dollars, the right of trial by jury shall be preserved”. U.S. Const. amend.
VII. The matter is one of well-established law. As the Supreme Court
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held Court in Scott v. Neely, 140 U.S. 106, 109-110 (1891):
“The Constitution, in its Seventh Amendment, declares
that "in suits at common law, where the value in
controversy shall exceed twenty dollars, the right of trial
by jury shall be preserved." In the Federal courts this
right cannot be dispensed with, except by the assent of the
parties entitled to it, nor can it be impaired by any
blending with a claim, properly cognizable at law, of a
demand for equitable relief in aid of the legal action or
during its pendency. Such aid in the Federal courts must
be sought in separate proceedings, to the end that the
right to a trial by a jury in the legal action may be
preserved intact. In the case before us the debt due the
complainants was in no respect different from any other
debt upon contract; it was the subject of a legal action
only, in which the defendants were entitled to a jury trial
… a proceeding to set aside alleged fraudulent
conveyances of the defendants, did not take that right
from them, or in any respect impair it.”
The “former attorney” alleged claims are clearly claims in
contract. Accordingly, the District Court’s order mandating Baron to
compromise the disputed attorneys’ claims is a direct violation of the
Seventh Amendment. See e.g., Ortiz v. Fibreboard Corp., 527 U.S. 815,
846 (1999)(court mandated settlement of claims violates the Seventh
Amendment). As a fundamental restriction on a court’s exercise of
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power, “[T]he constitutional right to trial by jury cannot be evaded.”
Guaranty Trust Co. v. York, 326 U.S. 99, 105 (1945). The District
Court’s order entered 5/18/2011 (Doc 575) should accordingly be
reversed. SR. v7 p349.
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ISSUE 5: DID THE DISTRICT COURT ERR IN GRANTING
RELIEF AGAINST BARON AND HIS PROPERTY HELD IN
RECEIVERSHIP WHILE PROHIBITING BARON (1) FROM
BEING REPRESENTED BY PAID COUNSEL, (2) FROM HIRING
EXPERIENCED FEDERAL TRIAL COUNSEL, AND (3) FROM
HIRING EXPERT WITNESSES TO TESTIFY AS TO THE
NECESSITY AND REASONABLENESS OF THE FEES CLAIMED ?
Standard of Review
Issues based on questions law are subject to independent review,
de novo. In Re Fredeman, 843 F.2d at 824. The discretionary aspects of
receivership fee allowances are reviewed for abuse of discretion.
Commodity Credit, 107 F.2d at 1001.
Argument
Baron repeatedly moved to be allowed access to his own money in
order to hire attorneys to represent him. E.g., R. 2720; SR. v2 p384-390
(Doc 264); SR. v5 p139 (Doc 445). However, the District Court did not
allow Baron to hire counsel. E.g., Doc 316 (SR. v4 p119). The District
Court went so far as to order that Baron’s appellate counsel could not be
paid during the pendency of the receivership and sealed Baron’s motion
to hire counsel so that it would not be viewed by the public. R. 4580-
4581; SR. v7 p379.
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This Honorable Court has held that a civil litigant has a
constitutional right to retain hired counsel. Potashnick v. Port City
Const. Co., 609 F.2d 1101, 1104 (5th Cir. 1980). Moreover, this
Honorable Court has held that “the right to counsel is one of
constitutional dimensions and should thus be freely exercised without
impingement.” Id. at 1118; Mosley v. St. Louis Southwestern Ry., 634
F.2d 942, 946 (5th Cir. 1981). An individual's relationship with his or
her attorney “acts as a critical buffer between the individual and the
power of the State.” Johnson v. City of Cincinnati, 310 F.3d 484, 501
(6th Cir. 2002). Further, the Supreme Court has held that a party
must be afforded a fair opportunity to secure counsel “of his own choice”
and that applies “in any case, civil or criminal” as a due process right
“in the constitutional sense”. Powell v. Alabama, 287 U.S. 45, 53-69
(1932). That basic right was denied Baron by the District Court below.
As a fundamental cornerstone of Due Process, the Constitution
guarantees every citizen the right to a meaningful opportunity to be
heard in a meaningful manner. Williams v. McKeithen, 939 F.2d 1100,
1105 (5th Cir. 1991). As a matter of established law, this means the
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right to be represented by paid legal counsel. E.g., Mosley, 634 F.
2d at 946; Powell, 287 U.S. at 53; Chandler v. Fretag, 348 U.S. 3, 10
(1954); Potashnick v. Port City Const. Co., 609 F.2d 1101, 1104 (5th Cir.
1980). In the proceedings below, Jeffrey Baron was denied this
fundamental right. Accordingly the substantive orders
21
issued against
Baron and his property while he was deprived of that basic
constitutional right should be reversed.
21
Doc 527 (SR. v6 p94), Doc 575 (SR. v7 p349), Doc 533 (SR. v6 p103), Doc 532 (SR.
v6 p101), Doc 534 (SR. v6 p105), Doc 535 (SR. v6 p107), Doc 574 (SR. v7 p348), Doc
529 (SR. v6 p98), Doc 462 (SR. v5 p230), Doc 573 (SR. v7 p347), Doc 530 (SR. v6
p99), Doc 461 (SR. v5 p229), Doc 464 (SR. v5 p232), Doc 539 (SR. v6 p113), Doc 543
(SR. v6 p118), Doc 536 (SR. v6 p109), Doc 463 (SR. v5 p231), Doc 542 (SR. v6 p117),
Doc 537 (SR. v6 p110), Doc 538 (SR. v6 p111), Doc 531 (SR. v6 p100), and Doc 540
(SR. v6 p114),
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ISSUE 6: ONCE AN AFFIDAVIT IS FILED PURSUANT TO 28
U.S.C. §144, IS FURTHER ACTIVITY OF THE JUDGE
CIRCUMSCRIBED TO MAKING A DETERMINATION AS TO
THE LEGAL SUFFICIENCY OF THE FACTS STATED IN THE
AFFIDAVIT ?
Standard of Review
Issues based on questions law are subject to independent review,
de novo. In Re Fredeman, 843 F.2d at 824.
Argument
This Honorable Court has held that “Once the motion is filed
under § 144, the judge must pass on the legal sufficiency of the
affidavit, but may not pass on the truth of the matters alleged”. Davis
v. Board of School Com'rs of Mobile County, 517 F.2d 1044, 1051 (5th
Cir. 1975). Baron filed his motion and affidavit under §144,
22
and
pursuant to 28 U.S.C. §144 and the clear precedent of this Honorable
Court, the District Court must
pass on the legal sufficiency of the
affidavit. Id. This Honorable Court has expressly held in Parrish v.
Board of Com'rs of Alabama State Bar, 524 F.2d 98, 100 (5th Cir.
22
Doc 497. The affidavit was sealed by the District Judge and Appellant’s motion
for access to the sealed portion of the record was denied by the motion panel on
appeal. Accordingly, more specific citation to the record cannot be provided.
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1975)(emphasis) that:
“The threshold requirement under the §144
disqualification procedure is that a party file an affidavit
demonstrating personal bias or prejudice on the part of
the district judge against that party or in favor of an
adverse party. Once the affidavit is filed, further
activity of the judge against whom it is filed is
circumscribed except as allowed by the statute. In
terms of the statute, there are three issues to be
determined: (1) was the affidavit timely filed; (2) was it
accompanied by the necessary certificate of counsel of
record; and (3) is the affidavit sufficient in statutory
terms?”
However, the District Judge below: (1) refused to accept the
factual allegations in Baron’s §144 affidavit as true; (2) refused to pass
on the legal sufficiency of facts stated in the Baron’s §144 affidavit, and
(3) continued his normal activity in the case. Because the District
Judge’s authority to act was circumscribed by law as discussed above,
the District Judge lacked authority to issue subsequent orders, and
those orders
23
should therefore be reversed.
23
Doc 527 (SR. v6 p94), Doc 575 (SR. v7 p349), Doc 533 (SR. v6 p103), Doc 532 (SR.
v6 p101), Doc 534 (SR. v6 p105), Doc 535 (SR. v6 p107), Doc 574 (SR. v7 p348), Doc
529 (SR. v6 p98), Doc 573 (SR. v7 p347), Doc 530 (SR. v6 p99), Doc 539 (SR. v6
p113), Doc 543 (SR. v6 p118), Doc 536 (SR. v6 p109), Doc 542 (SR. v6 p117), Doc 537
(SR. v6 p110), Doc 538 (SR. v6 p111), Doc 531 (SR. v6 p100), Doc 540 (SR. v6 p114),
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ISSUE 7: WHERE THE SAME RECEIVER WAS APPOINTED
OVER MULTIPLE RECEIVERSHIP PARTIES AND ESTATES,
DID THE DISTRICT COURT ABUSE ITS DISCRETION IN
AWARDING RECEIVERSHIP FEES AND EXPENSES (1)
WITHOUT A SHOWING OR FINDING THAT THE FEES AND
EXPENSES WERE REASONABLE OR NECESSARY; (2) WITHOUT
REGARD TO WHICH OF MULTIPLE RECEIVERSHIP ESTATES
THE FEES WERE ALLEGEDLY INCURRED; AND (3) WHERE
THE RECEIVER WAS PROHIBITED BY LAW FROM BEING
APPOINTED AS A RECEIVER ?
Standard of Review
Issues based on questions law are subject to independent review,
de novo. In Re Fredeman, 843 F.2d at 824. The discretionary aspects of
receivership fee allowances are reviewed for abuse of discretion.
Commodity Credit Corporation v. Bell, 107 F.2d 1001 (5th Cir. 1939).
Established Limitations on Receivership Fees
While a District Court enjoys great discretion in determining the
compensation of a receiver, that discretion has clear bounds. As a
preliminary matter, the receiver’s compensation should correspond with
the degree of responsibility and business ability required in the
management of the affairs entrusted to him and the perplexity and
Doc 551 (SR. v6 p125), Doc 541 (SR. v6 p116), Doc 544 (SR. v6 p119), and Doc 550
(SR. v6 p124)
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difficulty involved in that management. Stuart v. Boulware, 133 U.S.
78, 82 (1890). A receiver looks for compensation to the receivership
estate, which may belong, in equity, largely to others than those who
have requested the receiver’s services, and the receiver should have in
mind the fact that the total aggregate of fees must bear some
reasonable relation to the estate's value. Cf. In re Imperial “400”
National, Inc., 432 F.2d 232, 237 (3rd Cir. 1970); Finn v. Childs Co., 181
F.2d 431, 436 (2nd Cir. 1950). Critically, compensation paid to a
receiver from a receivership estate must be for actual services provided
by the receiver to that estate. E.g., Commodity Credit Corporation v.
Bell, 107 F.2d 1001, 1001 (5th Cir. 1939). Where the same receiver is
appointed over multiple receivership estates, the charge to each estate
should be based on the work performed by the receiver for that
particular estate. Bank of Commerce & Trust Co. v. Hood, 65 F.2d 281,
283-284 (5th Cir. 1933) (fees and expenses must be charged against
each fund held by receiver as if separate receivers had been appointed
for each and an “[A]ccurate inquiry ought to be made as to what time
and services counsel and receiver gave to each fund, and what part of
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their expenses were in fact necessary for each.”); and e.g., Butterwick v.
Fitzpatrick, 2008 Cal. App. LEXIS 1293 (4th Appellate Dist., 1st Div.,
February 15, 2008). The District Court considered none of these
mandated factors, and therefore abused its discretion in granting the
receivership fees.
No Evidence of Necessity or Reasonableness, and No
Segregation of Fees across Multiple Receivership
Estates
A series of orders challenged in this appeal
24
award fees to the
receiver, his law partners, and ‘professionals’ employed by the receiver.
With respect to the motions seeking such fees, there was no argument
or evidence offered that the fees were reasonable or necessary. The fees
moreover were billed for work on multiple receivership estates, for work
involving multiple receivership parties and multiple receivership res;
however, the fees were not segregated in any way and were charged
apparently arbitrarily against any particular receivership party or
24
Doc 533 (SR. v6 p103), Doc 532 (SR. v6 p101), Doc 534 (SR. v6 p105), Doc 535 (SR.
v6 p107), Doc 574 (SR. v7 p348), Doc 529 (SR. v6 p98), Doc 462 (SR. v5 p230), Doc
573 (SR. v7 p347), Doc 530 (SR. v6 p99), Doc 461 (SR. v5 p229), Doc 464 (SR. v5
p232), Doc 539 (SR. v6 p113), Doc 543 (SR. v6 p118), Doc 536 (SR. v6 p109), Doc 463
(SR. v5 p231), Doc 542 (SR. v6 p117), Doc 537 (SR. v6 p110), Doc 538 (SR. v6 p111),
Doc 531 (SR. v6 p100), and Doc 540 (SR. v6 p114).
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estate. The District Court entered no findings of fact or law in support
of its granting the motions for payment of the fees. Accordingly, the
District Court abused its discretion in granting the fee awards.
Vogel Was Prohibited by Law from Being Appointed
Receiver
Background
On July 9, 2009, the District Court employed Peter Vogel as a
special master in this case. R. 394. While still in his role as special
master in this case, Vogel consulted ex parte with Sherman (who then
controlled the defendant Ondova) with respect to the motion to appoint
himself (Vogel) as a private receiver over Mr. Baron’s assets. SR. v5
p238. Vogel was also a special master in this case when he moved to
add Novo Point, LLC., and Quantec, LLC., under his own receivership.
R. 1717. A special master employed by the Court is an officer of the
court. E.g., Devlin v. Scardelletti, 536 U.S. 1 (2002). Further, courts
which have considered the issue have held that a special master is a
judge sitting in the case in which he is employed. E.g., Horton v.
Ferrell, 335 Ark. 366, 981 S.W.2d 88 (1998); Vereen v. Everett, Dist.
Court, (ND Georgia 2009, No. 1:08-CV-1969-RWS).
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28 U.S.C. §958 Prohibited Vogel’s Appointment as Receiver
Congress mandated in 28 U.S.C. §958 that any person (1) holding
any civil office or (2) employed by any judge of the United States, shall
not
be appointed a receiver in any case. Accordingly, pursuant to
Federal law, Peter Vogel could not be appointed a receiver because he
was employed by the District Judge as a special master at the time he
was appointed receiver. A clear public policy purpose of the statute is to
prevent conflict of interest. The possibility that a special master in a
case would privately consult behind closed doors to have himself
appointed as a private receiver over a party in the lawsuit where he
presently sat as a judge, violates the most fundamental notations of an
impartial judiciary. If the motive of personal profit is allowed to enter
the side of the bench behind which judges and special masters sit, the
very foundation of an independent, impartial judiciary is threatened.
For these reasons, regardless of the character and intentions of those
involved, the fees awarded to Peter Vogel and his law firm should be
reversed.
25
25
Vogel’s multiple conflicts of interest are not merely theoretical. For example,
after his appointment as receiver, Vogel as receiver moved, without any explanation
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ISSUE 8: CAN A RECEIVERSHIP BE USED AS A VEHICLE TO
MAKE THIRD PARTIES LIABLE AS ‘REVERSE ALTER-EGOS’
OF A PARTY ?
Standard of Review
This Honorable Court has held that a district court's decision to
grant appoint a receiver is subject to “close scrutiny” on appeal. Tucker,
214 F.2d at 631. Equity receivership has been recognized as an
“extraordinary” remedy to be “employed with the utmost caution”. See
e.g., Solis v. Matheson, 563 F.3d 425, 437 (9th Cir. 2009); Rosen v.
Siegel, 106 F.3d 28, 34 (2d Cir. 1997); Aviation Supply Corp. v. R.S.B.I.
Aerospace, Inc., 999 F.2d 314, 316 (8th Cir. 1993); Consolidated Rail
Corp. v. Fore River Ry. Co., 861 F.2d 322, 326-27 (1st Cir. 1988). Issues
based on questions law underlying a court’s decision are subject to
as to why payment should come from receivership funds, to be paid out of the
receivership funds for his work as special master. SR. v4 p 541. Notably, Vogel was
employed as special master in the case below, even though his law firm represented
another plaintiff against the defendants below, Ondova and Baron, in another
dispute that was still in litigation against the same defendants and involved one of
the very same assets (“servers.com”) involved in the case below. SR. v8 p424. The
District Court took the unusual step, expressly prohibited by the Federal Rules, of
appointing Vogel as special master without requiring Vogel to file a conflicts
affidavit. Vogel’s employment as special master in the case below was thus
undertaken in clear violation of Federal Rule of Civil Procedure 53(b)(3), which
strictly requires that a court may issue an order appointing a special master only
after the master files an affidavit disclosing any ground for disqualification under
28 U.S.C. §455. (Vogel and Gardere’s decade long history of conflicts involving
Baron predating
the lawsuit below is detailed in Document 00511400011 filed
3/2/2011 in Fifth Circuit case 10-11202).
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independent review, de novo. In re Fredeman, 843 F.2d at 824.
Receivership May Not
be Used to Determine an Alter
Ego Claim
As discussed below, as matter of established law receivership may
not be used to determine (or bypass the determination of) an alter ego
claim. Moreover, as a matter of long settled law receivership
“determines no substantive right; nor is it a step in the determination of
such a right.” E.g., Pusey, 261 U.S. at 497 (1923).
Bollore SA v. Import Warehouse, Inc.
The issue was presented to this Honorable Court in Bollore SA v.
Import Warehouse, Inc., 448 F.3d 317 (5th Cir. 2006). In Bollore, the
district court entered an order appointing a receiver over an alleged
‘alter ego’ entity, and ordering turnover of property. Id. at 321. This
Honorable Court vacated the receivership and ruled that turnover
orders do “not
allow for a determination of the substantive rights of
involved parties” and may not
be used “as a vehicle to adjudicate the
substantive rights of non-judgment third parties”. Id. at 323. This
Honorable Court held that this rule ultimately springs from due process
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concerns. Id. (such a remedy “completely bypasses our system of
affording due process.”).
As explained by this Honorable Court in Bollore, alter ego
proceedings are substantive proceedings arising out of state law. Id. at
324. Pursuant to Texas law, a party must pursue their alter ego
proceedings in a separate trial on the merits. Id. No such proceedings
were plead against Novo Point or Quantec, and no such trial was ever
held.
As in Bollore, because no independent trial was held against Novo
Point or Quantec to establish an alter ego claim, the District Court’s
order that cash and assets from the receivership estates of Novo Point,
LLC, and Quantec, LLC, can be used to pay alleged creditors of Jeffrey
Baron should be vacated. Id. at 326.
If there had been a trial on Alter Ego, Novo Point and
Quantec would have prevailed as a matter of law
If Novo Point and Quantec had been served with citation and
appeared as parties in a lawsuit seeking to impute liability upon them
under an alter ego or reverse piercing theory (neither of which has
occurred), they would have prevailed at trial as a matter of law. The
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first step to a claim for piercing the corporate veil (although notably, no
such claim was plead or heard) is to determine which jurisdiction’s law
controls the issue. E.g., Sommers Drug Stores Co. Emp. P. Sharing
Trust v. Corrigan, 883 F.2d 345, 353 (5th Cir. 1989). Novo Point, LLC
and Quantec, LLC are incorporated under the laws of the Cook Islands.
The law of the Cook Islands therefore applies. See e.g., Alberto v.
Diversified Group, Inc., 55 F.3d 201, 203 (5th Cir. 1995); Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Pursuant to Cook
Islands law, there is no basis to impose reverse alter-ego liability. Art.
45, Cook Islands Limited Liability Companies Act (2008).
26
Accordingly, because receivership cannot be used to determine (or
bypass the determination) of an alter ego claim, and the companies
have not been determined in any trial to be alter-egos of Jeffrey Baron,
the District Court’s order allowing application of the companies assets
to the alleged debts of Baron should be reversed.
26
The same result would be reached in applying Texas corporate law. As explained
by the Fifth Circuit in Bollore, “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.” Id. at 325. Since Jeff Baron owns no stock in either Novo Point,
LLC, nor Quantec, LLC, alter-ego liability would not apply.
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Novo Point and Quantec Are Not Parties to the Lawsuit
Novo Point and Quantec are not parties to the lawsuit below. As
Justice Hand explained nearly a century ago, “[N]o court can make a
decree which will bind anyone but a party; a court of equity is as much
so limited as a court of law …. its jurisdiction is limited to those who
therefore can have their day in court”. Alemite Mfg. Corporation v.
Staff, 42 F.2d 832 (2nd Cir.1930).
Materially Missing Steps with Respect to the LLCs
The District Court has erroneously attempted to convert the
unliquidated in personam claims against Baron into in rem claims
against the LLC entities. The District Court erred in skipping two
fundamental steps: First, the claims need to be liquidated and
converted to judgments against Baron. Pursuant to the Constitution of
the United States and the Fifth and Seventh Amendments, converting
the claims to judgment requires jury trials since the claims are claims
at law exceeding twenty dollars. Secondly, if claims are adjudicated
and converted into judgments against Baron, liability against Baron
still has to be converted into liability of the LLC entities. That requires
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a separate determination as to whether the LLC entities are liable
under the law for Baron's debts. Bollore SA v. Import Warehouse, Inc.,
448 F.3d 317, 323 (5th Cir. 2006). As discussed above, as a matter of
established law, the LLC entities are not liable for Baron’s personal
debt. However, instead of taking the path of due process, the
District Court skipped both of two critical steps discussed above,
and used instead an ad hoc ‘shortcut’. The District Court’s order
authorizing application of the LLC entities’ assets for the payment of
the claims against Baron should therefore be reversed. SR. v7 p349
(Doc 575).
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ISSUE 9: DID THE US DISTRICT COURT IN THE NORTHERN
DISTRICT OF TEXAS HAVE JURISDICTIONAL AUTHORITY
TO APPOINT THE MANAGER OF A LLC IN THE COOK
ISLANDS ?
Standard of Review
Issues based on questions law are subject to independent review,
de novo. In Re Fredeman, 843 F.2d at 824.
Argument
Novo Point, LLC and Quantec, LLC, exist as legal entities
pursuant to laws of the sovereign government of the Cook Islands, a
member of the British Commonwealth. R. 850, 2110. The two
companies are owned by a Cook Islands trustee, SouthPac Trust
International, Inc. (“SouthPac”). R 4681. SouthPac is an internationally
recognized and well respected trustee, recognized as a proper and
lawful litigant by the Federal Circuit Court of Appeal and multiple US
Federal Courts. E.g., Prima Tek II LLC v. Polypap, SaRL, 318 F. 3d
1143 (Fed. Cir. 2003). SouthPac, however, is not a party to the lawsuit
below and has not been served with any process in the proceedings
below. Accordingly, the District Court did not acquire personal
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jurisdiction over SouthPac. Omni Capital Int'l, Ltd. v. Rudolf Wolff &
Co., 484 U.S. 97, 104 (1987) (“Before a federal court may exercise
personal jurisdiction over a defendant, the procedural requirement of
service of summons must be satisfied”); St. Clair v. Cox, 106 U.S. 350,
353 (1882) (“The courts … must have acquired jurisdiction over the
party … whether the party be a corporation or a natural person.”).
While a US district court has jurisdiction to place into
receivership the assets of a foreign company that are located within the
district in which the Court sits, the Supreme Court has held that a
district court does not have power to directly affect property located in
foreign jurisdictions. E.g., Booth v. Clark, 58 U.S. 322, 333 (1855);
Guaranty Trust Co. of New York v. Fentress, 61 F. 2d 329, 332 (7th
Cir.1932). Similarly, the Supreme Court has held that the sovereign
where the company is chartered has “jurisdiction of all questions
relating to the internal management of the corporation.” Hartford Life
Ins. Co. v. IBS, 237 U.S. 662, 671 (1915).
Pursuant to the law of the Cook Islands, the sovereign pursuant to
whose laws Novo Point, L.L.C., and Quantec, L.L.C. are chartered, the
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membership rights of the owners of the companies may not be executed
upon by judicial process or otherwise controlled by any court other than
the courts of the Cook Islands. Art. 45, Cook Islands Limited Liability
Companies Act (2008). A treaty between the United States and the
Cook Islands obligates the United States to recognize Cook Islands’
sovereignty.
27
Accordingly, while the District Court below may have
jurisdiction to seize the property of Novo Point, LLC and Quantec, LLC
that is located within the Northern District of Texas, the District Court
has no authority to change or appoint the Cook Islands’ manager of the
companies, an act by virtue of Cook Islands’ law that can be performed
only by the courts of the Cook Islands and the owners of the LLCs. Art.
26, Cook Islands Limited Liability Companies Act (2008). The District
Court thus lacked authority and jurisdiction to change the companies’
international management, and the order of the District Court
attempting to do so should be reversed. SR. v4 p777 (Doc 362).
27
Paragraph Five of the “Treaty on Friendship and Delimitation of the Maritime
Boundary Between 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.
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PRAYER
Appellants, jointly and in the alternative requests the following
relief:
(1) That the challenged orders be reversed.
(2) That the challenged orders be found to be void ab initio.
(3) That costs be taxed against the Appellees.
Respectfully submitted,
/s/ Gary N. Schepps
Gary N. Schepps
Texas State Bar No. 00791608
5400 LBJ Freeway, Suite 1200
Dallas, Texas 75240
(214) 210-5940 - Telephone
(214) 347-4031 - Facsimile
Email: legal@schepps.net
FOR APPELLANTS
NOVO POINT, LLC.,
QUANTEC, LLC., and
JEFFREY BARON
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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 12,836 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) because: this brief has been prepared in a proportionally spaced
typeface using MS Word 2000 in 14 and 15 point century font.
DATED: October 6, 2011.
CERTIFIED BY: /s/ Gary N. Schepps
GARY N. SCHEPPS
COUNSEL FOR APPELLANT
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CERTIFICATE OF SERVICE
This is to certify that this brief was served this day on all parties
who receive notification through the Court’s electronic filing system.
CERTIFIED BY: /s/ Gary N. Schepps
Gary N. Schepps
COUNSEL FOR APPELLANTS
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