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IN THE UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF TEXAS (DALLAS)
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) Case No. 12-37921-sgj7
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In re ) Dallas, Texas
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JEFFREY BARON, )
Debtor. )
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_______________________________)
) Case No. 09-34784-sgj11
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In re )
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ONDOVA LIMITED COMPANY, )
) February 13, 2013
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Debtor. ) 1:37 PM
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_______________________________)
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TRANSCRIPT OF TRIAL HEARING (RE: related documents 52);
STATUS CONFERENCE (RE: related documents 1047)
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BEFORE THE HONORABLE STACEY G. JERNIGAN,
UNITED STATES BANKRUPTCY JUDGE
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PROCEEDINGS RECORDED BY ELECTRONIC SOUND RECORDING.
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TRANSCRIPT PRODUCED BY TRANSCRIPTION SERVICE.
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APPEARANCES:
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For the Debtor: MARK STROMBERG, ESQ.
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ALAN L. BUSCH, ESQ.
STROMBERG STOCK
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5420 LBJ Freeway
Suite 300
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Dallas, TX 75240
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Petitioning Creditors: GERRIT M. PRONSKE, ESQ.
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MELANIE PEARCE GOOLSBY, ESQ.
PRONSKE & PATEL, P.C.
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2200 Ross Avenue
Suite 5350
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Dallas, TX 75201
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Daniel J. Sherman, RAYMOND J. URBANIK, ESQ.
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Chapter 11 Trustee of MUNSCH, HARDT, KOPF & HARR, P.C.
Ondova Ltd. Co.: 500 North Akard Street
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Suite 3800
Dallas, TX 75201
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Receiver Peter S. Vogel: JEFFREY R. FINE, ESQ.
DAVID SCHENCK, ESQ.
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DYKEMA GOSSETT PLLC
1717 Main Street
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Suite 4000
Dallas, TX 75201
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Carrington Coleman J. MICHAEL SUTHERLAND, ESQ.
Sloman & Blumenthal, JENNIFER KNAPP, ESQ.
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LLP: CARRINGTON COLEMAN SLOMAN &
BLUMENTHAL, LLP
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901 Main Street
Suite 5500
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Dallas, Texas 75202
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Petitioning Creditor: DEAN FERGUSON, ESQ.
LAW OFFICES OF DEAN FERGUSON
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4715 Breezy Point Drive
Kingwood, TX 77345
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Jeffrey Baron (Ondova): STEPHEN R. COCHELL, ESQ.
THE COCHELL LAW FIRM, P.C.
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7026 Old Katy Road
Houston, TX 77345
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(TELEPHONICALLY)
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Gardere Wynne Sewell: RICHARD M. ROBERSON, ESQ.
GARDERE WYNNE SEWELL LLP
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1601 Elm Street
Suite 3000
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Dallas, TX 75201
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United States ERIN SCHMIDT, ESQ.
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Department of Justice OFFICE OF THE UNITED STATES TRUSTEE
1100 Commerce Street
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Room 976
Dallas, TX 75242
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THE COURT: Be seated. All right. We're ready to
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begin hearings we have in Jeff Baron's case, case number 12-
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37921 and then we also have a status conference in Ondova,
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case number 09-34784. Let's get appearances from lawyers in
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the courtroom first.
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MR. STROMBERG: Good afternoon, Your Honor, Mark
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Stromberg on behalf of the alleged debtor. I'm here with Alan
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Busch.
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THE COURT: Okay. Welcome.
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MR. PRONSKE: Good afternoon, Your Honor. Gerrit
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Pronske and Melanie Goolsby for the petitioning creditor.
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THE COURT: Okay. Good afternoon.
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MR. URBANIK: Good afternoon, Your Honor. Ray
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Urbanik from Munsch Hardt on behalf of Daniel J. Sherman,
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Chapter 11 trustee, Ondova Ltd. Co.
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MR. FINE: Good afternoon, Your Honor. Jeffrey Fine
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of Dykema Gossett on behalf of the receiver, Peter Vogel. Mr.
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Vogel is also in the courtroom, as is David Schenck, my
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partner.
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THE COURT: Okay.
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MR. SUTHERLAND: Your Honor, in the Ondova case only,
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not making an appearance in Baron just yet, Mike Sutherland
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for Carrington Coleman, also my colleague Jennifer Knapp --
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it's pronounced Knapp but it's K-n-a-p-p.
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THE COURT: Okay.
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MR. FERGUSON: Good afternoon, Your Honor. Dean
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Ferguson, one of the petitioning creditors.
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THE COURT: Okay. All right. On the phone, I think
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we have Mr. Cochell; is that correct?
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MR. COCHELL: Yes, Your Honor. Stephen Cochell
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appearing on behalf of Jeffrey Baron in the Ondova matter
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only.
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THE COURT: All right. Let's start by making sure
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we're all on the same page about what is going to occur today.
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We have set oral arguments on the motion for summary judgment
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filed by the petitioning creditors and the response filed by
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Mr. Baron to that motion for summary judgment.
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As I understood all of this, the sole issue that was
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going to be argued today was the question of as a matter of
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law, are the petitioning creditors not subject of a bona fide
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dispute or are they? So, looking at Section 303 of the
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Bankruptcy Code and the requirement there, that in order for
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petitioning creditors to have standing to commence an
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involuntary bankruptcy case, they must not have claims that
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are either contingent or the subject of a bona fide dispute.
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Looking at that issue, we were going to decide if as
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a matter of law it's one way or another. We have affidavits
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from the petitioning creditors and from the alleged debtor but
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I think we should all be on the same page that we're only here
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to argue and sort of summarize the summary judgment evidence
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on that one standing issue and then we may or may not live
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another day, depending on how the Court rules on that to go
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forward on other issues under 303.
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All right. So, I will start by asking petitioning
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creditor's counsel and alleged debtor's counsel are we all on
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the same page like I think we are on that? Mr. Pronske?
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MR. PRONSKE: Your Honor, I would have to say yes to
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that. When we were here at the last hearing, I don't think
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that was necessarily our intention. I think we thought we
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could prove the whole case with summary judgment but then the
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order was submitted to you and Mr. Fine's office drafted the
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order and it said the sole dispute to be determined is what
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the Court just said it was.
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And so although we had hoped for a more broad summary
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judgment proceeding, Mr. Stromberg raised that issue and I
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think he's right. And so, I think we have to concede that
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we're here just on that one dispute.
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Now what I think that means is -- and we've entered
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into a stipulation with Mr. Stromberg, essentially to say that
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what we are testing today is whether the papers create not
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subject to a bona fide dispute as a matter of law, and then if
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the petitioning creditors do not prevail on that, on the
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summary judgment, then we would have to have a trial
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essentially on both of the issues; bona fide dispute and
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generally not paying debts as they come due.
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THE COURT: All right. And I don't know who is going
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to be taking the lead, Mr. Stromberg or Mr. Bush. You concur?
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MR. STROMBERG: It will be me, Your Honor.
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THE COURT: You concur that that's what we're here on
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today?
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MR. STROMBERG: That's correct.
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THE COURT: All right. Let me ask you, we had a
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motion to continue today's hearing filed and then the
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stipulations Mr. Pronske mentioned were filed. Do I
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understand correctly that the stipulations resolved your
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motion to continue?
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MR. STROMBERG: Yes, Your Honor.
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THE COURT: Okay.
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MR. STROMBERG: To the extent that we're not trying
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the question of insolvency today, if the Court enters an order
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for relief, obviously then -- and grants the summary judgment,
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then at the very least the issue of insolvency is an issue
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that we believe is one that we were told specifically by the
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Court's order would be tried at a later time, if the Court
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found in favor of the petitioning creditors on the issue of
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bona fide dispute.
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So, the motion was filed in an abundance of caution
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to preserve our right to put together a full evidentiary
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record on the issue of insolvency. I believe that the
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stipulation does not foreclose the petitioning creditors of
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arguing that issue today because they indicated that they
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wished to do so but I believe the Court's order does and we
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objected on that basis.
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So, if the issue that the Court is trying today is
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limited to the question of what the papers from the district
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court and/or the Court of Appeals and/or this court's rulings
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in the Ondova matter say about whether or not these claims are
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subject to bona fide dispute or not, limited to that, then
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that obviates the need for a continuance and we can proceed
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and move forward.
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THE COURT: All right. Well, I am just going to
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state here for the record, the Court's order setting this
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involuntary petition for trial entered January 17, 2003 (sic),
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states in the second decretal paragraph, "The sole legal issue
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to be determined by the Court at the trial is whether the
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claims of the petitioning creditors are subject to a bona fide
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dispute with all evidentiary material to be presented solely
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by affidavit."
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So, if I was less than clear at our status conference
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we had January 16th, I hope this order made it clear. So that
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is what we'll do today.
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MR. STROMBERG: Very well.
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THE COURT: I have a housekeeping matter. Each of
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you filed motions to strike portions of each other's summary
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judgment evidence and I've looked at those in chambers. I do
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not need oral argument. All of those objections are overruled
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and the Court is considering the entire summary judgment
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record presented by each side.
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With that, Mr. Pronske, I will let you make the first
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argument.
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MR. PRONSKE: Thank you, Your Honor. Again, Gerrit
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Pronske for the petitioning creditors. And Your Honor, I
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think there were three potential rulings that we would have
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sought from the Court and the first ruling would have been a
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summary judgment based on both of the standards but I think
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we're clear today that we're only on the one standard. So,
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that does away with that potential ruling that we would
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request.
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The second ruling that we would request would be that
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the Court find that as a matter of law, that Judge Ferguson's
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orders and this court's order in the Ondova case are
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sufficient to rule as a matter of law that there is no bona
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fide dispute as to these petitioning creditor's claims. What
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that would leave us then with is a -- basically a trial on --
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only on the issue of whether the debtor is generally paying
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his debts as they come due.
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The third level of request if the Court is not
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comfortable with Judge Ferguson's order for any reason -- for
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one reason or another, the third level of request is that one
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of the petitioning creditors which is my law firm, has an
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additional order from this court in the Ondova case that we
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would ask the Court independently from Judge Ferguson's order
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to give binding effect under the law of collateral estoppel,
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so that the Pronske & Patel claim would not be subject to bona
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fide dispute in a partial summary judgment. And then what
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that would leave us with at trial would be the necessity only
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to find that the remaining seven petitioning creditors, that
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two would remain standing with one dollar of claim each, I
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think would be the -- where we would end up with that. But
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that would, I think -- I think that reflects reality and that
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would be a helpful ruling on a partial summary judgment. So
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those would be basically the two levels that we would seek.
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With respect to the first level, Your Honor, the
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issue before the Court is whether Judge Ferguson's order which
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was entered on May 18, 2011, is sufficient to -- is a
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sufficient ruling to create the point that there is not a
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substantial bona fide dispute as to the petitioning creditors'
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claims.
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The -- and we've likened this to this court's ruling
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in the Henry S. Miller case, basically which holds that as --
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under the facts of the case, if you've had a litigation and
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there's no stay pending appeal, that -- and although it's not
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a blanket ruling but that under the facts of this case, that
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would qualify to not create a -- that the appeal would not
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create a bona fide dispute.
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And Mr. Stromberg has raised the issue that I think
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is a bit of a red herring and it needs to sort of be, I think,
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analytically sliced up a bit to make sense out of the
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argument. He raises the issue that Judge Ferguson stopped the
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enforcement or said that those fees should not be paid and
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essentially what happened, Your Honor, is on May 18th, the
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Judge ordered the fees paid. He later decided that -- as an
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administrative matter, not on the motion for stay pending
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appeal but as an administrative matter, that those fees would
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not be paid. He later changed his mind about a year later and
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he said it's okay to go ahead and pay them now. Then the
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receiver filed a motion for clarification.
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THE COURT: Now is that all on the record?
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MR. PRONSKE: That -- what's in the record, that's
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not in the record. What is in the record is his final order
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which came subsequent to saying don't pay them, then pay them,
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then there's a third order that again says don't pay them.
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And that's the only order that's in the record because Mr.
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Stromberg raised that in his response.
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But without going past the record, Your Honor, what I
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can say is that's not a stay pending appeal. It was not
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raised as a motion for stay pending appeal and the reason I
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think that's important is that from my reading of the law and
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the cases relating to stay pending appeal, and specifically
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with respect to the Fifth Circuit law on stay pending appeal,
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is that of course there are four elements to a stay pending
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appeal. The Fifth Circuit has said that the most important
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element is the first one, which is, is there a likelihood of
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success on the merits?
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So if you want a stay pending appeal, there's a
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judgment that's been entered against you and you want a stay
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pending appeal, you have to go to the Court and file a motion
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for stay pending appeal and you have to prove up those four
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things. Most notably or most importantly, according to the
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Fifth Circuit, you have to prove that there's a likelihood of
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success on the merits.
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The way that's defined in the Fifth Circuit is that
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likelihood of success on the merits means there is a
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substantial issue on appeal. Interestingly, the way you
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defined bona fide dispute in the HSM case is almost the same
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way. There's a substantial issue on an objective standard.
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And so, if you go to the Court and you file a motion
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for stay pending appeal and you win, implicit in that win is
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that there's a bona fide dispute because you've received a
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ruling from a court liken to an injunction under Rule 60 that
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says that there is a bona fide dispute or there is a
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likelihood of success on the merits.
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We don't have that in this case. We basically have
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Judge Ferguson as an administrative issue saying I don't want
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these people paid right now because it had to do with the
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amount of money that was in the case and what the other
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administrative attorneys were being -- were charging and that
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sort of thing.
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THE COURT: So, was there a motion for stay pending
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appeal --
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MR. PRONSKE: No.
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THE COURT: -- of the --
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MR. PRONSKE: This was on his own -- on -- completely
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done on his own.
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THE COURT: Okay, because I've been told there were
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dozens and dozens of appeals of district court orders and
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presumably this May 2011 order was one of the many orders
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appealed.
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MR. PRONSKE: Yes.
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THE COURT: But no motion for a stay pending appeal
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ever --
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MR. PRONSKE: No.
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THE COURT: -- brought.
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MR. PRONSKE: That's correct.
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THE COURT: Okay.
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MR. PRONSKE: And certainly there's nothing in the
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record here but --
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THE COURT: Mr. Urbanik is standing up.
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MR. PRONSKE: Mr. Urbanik is telling me and I knew
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this as correct also, there were seventeen motions for stay
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pending appeal filed with the Fifth Circuit that were all
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denied but I don't believe this one that was either filed or
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filed and denied. I think it just was --
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THE COURT: That's an important point. There's no
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stay pending appeal per se.
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MR. PRONSKE: Correct.
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THE COURT: There's the order that Mr. Stromberg
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referenced but there's no per se stay pending appeal.
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MR. PRONSKE: That is correct.
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THE COURT: Okay.
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MR. PRONSKE: And Mr. Stromberg raises a case that
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has an odd name to it, that -- Tesfamichael, in a footnote and
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I didn't recall the name but I did read the case and -- for
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the proposition that, you know, sort of a -- that by any name,
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it's a stay or that the terms are all used sort of
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interchangeably. And that's actually not what that case says.
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That case very specifically says really the opposite of what
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that footnote says. That case says that in that particular
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case, it said that in -- the word enjoin and the word stay are
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two different words and that some circuits view them the same
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but in the Fifth Circuit they have distinct legal meanings.
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And it was in reading that Tesfamichael case that it
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dawned on me when the Fifth Circuit talks in that particular
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case how important the standard of likelihood of success of
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merits is to a stay pending appeal. It dawned on me that
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that's really the -- to me, seems like the distinction. We
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don't have a request for a stay pending appeal. We don't have
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the court implicitly or explicitly ruling that there was a
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likelihood of success on the merits. And so the existence of
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that appeal without a stay pending appeal, in particular and
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technically, really is of no effect.
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We had a case in Judge Ferguson's court that was on
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notice to everybody. It was tried. People testified. Mr.
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Baron took the Fifth Amendment but that's, you know, sort of a
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personal decision and there was certainly the fair -- full and
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fair opportunity to litigate and the judge adjudicated the
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claims of twenty-six law firms in very specific dollar
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amounts.
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So, based on that, Your Honor, we would ask that
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those rulings mean something and the Fifth Circuit basically
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said in its clarification of the reversal of the receivership
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that was issued on December 31, 2012, that all of the orders
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entered by Judge Ferguson prior to December 18th, the date of
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their opinion, remain in place. And so there's nothing that
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would invalidate that ruling. We don't know what the Fifth
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Circuit is going to do with the receivership overall. They
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have asked for briefs from Mr. Baron on the petition for
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rehearing, which I am told is a sign that there's interest in
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the Fifth Circuit and possibly hearing this en banc but the
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short answer is nobody in this room knows what the Fifth
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Circuit is going to do but what we do know is that they said
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that all of the orders that were entered prior to December
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18th are still in place.
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And I think you have an order here that's in place
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where the judge made a decision to, you know, pay lawyers,
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don't pay lawyers, pay lawyers. He kept kind of going back
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and forth but it's not a stay pending appeal and doesn't have
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the significance of a stay pending appeal. The --
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THE COURT: All right. Just to clarify, the order
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again that Mr. Stromberg has argued essentially created
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something like a stay, it was in response to a receiver's
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motion; do I pay these fees that were previously allowed or
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not and there was one ruling, don't pay them, then yes, pay
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them. Then ultimately, the last standing ruling, June 18,
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2012, is don't pay them.
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MR. PRONSKE: Right. Prior to that, there was an
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order where Judge Ferguson had said go ahead and pay the
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lawyers and then the receiver filed a motion for clarification
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wanting some specifics as to how that should be done and then
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for some reason, Judge Ferguson came back and said well, let's
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go ahead and not pay the lawyers until the appeal is resolved.
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So, that's --
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THE COURT: So your position is there is still an
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unstayed order, final order, allowing claims. It may be
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subject to an appeal but it's unstayed. I'm supposed to apply
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an objective standard under Sims, not subject to the bona fide
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dispute. I'm getting ahead to an issue I said wasn't going to
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be heard today but I guess I'm dangling it out there. Is this
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going to bear on is he generally not paying his debts as they
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become due if I get past the standing issue.
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MR. PRONSKE: I think, Your Honor, at that point --
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THE COURT: If he said don't pay them.
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MR. PRONSKE: You know, there is going to be -- I
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mean, we have twenty-six law firms that are unpaid, each of
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which filed affidavits with the district court and provided
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testimony as to their claims being owing. There are a
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substantial number of law firms and I believe that
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constitutes, if not all or most of Mr. Baron's debts but
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you're correct, Your Honor, if he disputes every one of those
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claims, we're going to have to deal with that.
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I mean it's going to have to get dealt with in some
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form or fashion but -- yes, I mean I think that's all I can
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say to that is -- I don't think he gets a pass because he says
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I don't owe any of those twenty-six people that all worked
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very hard and did good stuff and spent long hours working for
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me; I don't owe them. Therefore, it goes away.
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THE COURT: All right. That's not exactly what I was
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getting at. I was getting at -- well again, I'm dangling an
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issue out there that I said we weren't going to argue about
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today but is he generally paying his debt -- not paying his
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debts as they become due. I'm just thinking out loud if
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there's an order saying I've allowed these fees but receiver
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don't pay them -- receiver don't pay them yet. Let's see what
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happen on the appeal.
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Anyway, I am -- I guess we'll see about that issue.
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But, all right, so going back I did also want to hit on
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another thing you mentioned. You said in December of 2012
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when the Fifth Circuit ruled it said all prior orders remain
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in place. And you would say including this May 2011 order.
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Do you not think there is any issue there about
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whether these fees were subject to being revisited? I mean
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there's language in there about the district court may have to
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re-examine fees.
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MR. PRONSKE: No, I absolutely don't think so on
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that. I think that order -- and actually I read that opinion
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again last night in full and I think it very clearly says that
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the administrative fees that were generated by the receiver
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during the pendency of the receivership would be paid
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generally out of Mr. Baron's assets in the receivership and
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because the receivership was a failed receivership because of
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the reversal, that those fees have to be re-evaluated in light
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of the improper receivership.
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And I think the Circuit's very clear on that, that
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that does not pertain to the former lawyers. All those claims
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existed before the receivership.
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THE COURT: Okay.
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MR. PRONSKE: The next thing, Your Honor, that I want
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to level -- that I want to go down to is with respect to the
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Pronske & Patel claim because it has a couple of twists to it
5
that are a little bit different. And the first twist that is
6
a little bit different is that we had a second trial on those
7
fees or a court proceeding on those fees and that was in the
8
context of a substantial contribution motion brought in the
9
Ondova case.
10
And, Your Honor, the argument is going to be that
11
that order has a collateral estoppel effect which in the Fifth
12
Circuit doesn't require a final judgment. In fact, the Fifth
13
Circuit has been clear in the Chemetron case that we filed,
14
that it doesn't even necessarily require a judgment to be
15
issued. It essentially requires kind of a good common sense
16
view of whether the issue is -- there was a full and fair
17
opportunity to litigate and was there such litigation and a
18
resolution. And I think that that order qualifies under the
19
Fifth Circuit law, very clearly.
20
And in that particular case, although the fees were
21
sought against Ondova, they were based on fees that were owed
22
by Mr. Baron. Mr. Baron's -- all of the legal billings were
23
put into evidence showing that Mr. Baron owed those fees and
24
the argument to the Court was that Mr. Baron provided a
25
substantial contribution to the Ondova case which is what
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503(b)(3) says -- (b)(3)(D) says, "A creditor of the bank
2
shows substantial contribution gets expenses paid and then
3
503(b)(4) says, "the lawyer gets their legal fees paid."
4
So they're the legal fees of Mr. Baron that were
5
adjudicated by this court to have been a substantial
6
contribution in the Ondova case.
7
Further, Your Honor, not only were the parties
8
aligned but Mr. Baron actually filed an objection in the
9
Ondova case as the ultimate owner of Ondova saying please
10
don't pay those fees and we object and here's the problems
11
with them. And then we had a trial and the fact that Mr.
12
Baron didn't get put on evidence doesn't mean he didn't have a
13
full and fair trial and it doesn't mean he didn't have a full
14
and fair opportunity to litigate. It was raised. He
15
litigated and the result of that hearing was obviously due in
16
part to the fact that he was not able to put on evidence but
17
that was because he violated a court order and didn't show up
18
for a court ordered deposition. And that doesn't mean that
19
there was not a full and fair opportunity to litigate.
20
So, I believe that order provides a different, unique
21
among the petitioning creditors, ruling that you know, we've
22
tried this twice now and we've gotten rulings from the Court.
23
And the third thing, Your Honor, interestingly that
24
goes I think to the bona fide dispute issue on the Pronske &
25
Patel claim is, you know, I am looking at the affidavit that
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Mr. Baron filed to create a substantial dispute as to the
2
Pronske & Patel claim and it's paragraphs 33 through 40 of his
3
affidavit and there isn't a single statement in those
4
paragraphs that says that there's not money owing. He
5
disputes -- he says the claim for fees, which was the larger
6
claim. I think it was 241,000 dollar claim in the district
7
court was raised and that's what's on the bill but he does
8
admit that he -- it's kind of interesting because he -- until
9
this affidavit, took the position that he paid 75,000 dollars
10
as a flat fee which was something he started saying after he
11
hired Stan Broome (ph.), the first time we heard those words.
12
And for a while he said it's a flat fee and didn't know owe
13
anything over that and now he's taking the position that it
14
was a retainer which is what it was.
15
And he's saying that our firm did a lot of work,
16
worked long hours, was helpful, helped him, cared about him
17
and then he raises some issues where he says he didn't get
18
regular bills but he doesn't say that he doesn't owe the
19
money.
20
And I think that's significant because your case in
21
HSM says that you have to view this on an objective standard
22
and there's even a quote in the Sims case that you relied on
23
where it says, you know, the debtor doesn't just get to say I
24
don't have the money and sit down. There's got to be some
25
actual dispute that's raised on an objective basis and there
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is nothing in paragraph 33 to 40 and I would challenge Mr.
2
Stromberg to find a single sentence in there that disputes
3
that there's money owed. I think the admission is there's
4
money owed. They just don't think it should be as much as it
5
is. But that -- they don't get to do that. They don't get to
6
just come in and say we don't -- he doesn't even say we don't
7
owe anything. He does on some of the other petitioning
8
creditors, I don't owe anything but he doesn't say that on the
9
Pronske & Patel bill.
10
And so, Your Honor, I don't think that their
11
affidavit even creates a substantial dispute or a bona fide
12
dispute. So, for those reasons, Your Honor, I will sit down
13
and let Mr. Stromberg talk and I want to congratulate him, too
14
or tell him in front of the Court, I think he did an
15
outstanding job, very scholarly papers and I was very --
16
enjoyed reading them from that stand point but I -- what we're
17
requesting of the Court is that we have a ruling that the
18
seven petitioning creditors who are on Judge Ferguson's order
19
are not subject to a bona fide dispute and if the Court does
20
not rule that way, we're asking that at least the Pronske &
21
Patel claim have that status, so that -- to narrow the issue
22
for trial substantially.
23
THE COURT: Okay. And before you sit down, again I
24
just want to clarify once again my understanding of the
25
record. The district court's order in May 2011 came out of a
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receiver's pleading, a receiver's request for assessment and
2
disbursement of former attorney's claims. So a receiver teed
3
it up. I've been talking to these people. I've been trying
4
to mediate, resolve their claims, figure out who is owed what
5
and so he files a pleading to ask the district court to rule
6
on what the various claimants should be paid.
7
As I understand the record, it wasn't an ex parte
8
sort of thing at all. There was a notice to the parties-in-
9
interest including Mr. Baron. It looks like there were
10
twenty-two affidavits submitted prior to the hearing. It
11
looks like Mr. Baron, through counsel, filed a response and
12
affidavit refuting much of what the claimants swore to and
13
then there was a hearing. Several of the claimants, including
14
yourself, testified. You said there was live testimony.
15
MR. PRONSKE: With cross-examination from Mr.
16
Schepps, right.
17
THE COURT: Cross-examination from Mr. Baron's then
18
counsel and then Mr. Baron took the stand but invoked the
19
Fifth Amendment right not to testify and then actually he had
20
withdrawn his declaration, filed ahead of time, I guess. And
21
so, there was no separate evidence put on by Baron at that
22
hearing, just the cross-examination of counsel. And so then
23
the district court order was entered. It did preserve the
24
right of Mr. Baron to assert claims back against claimants but
25
in that event, it preserved the right to the claimants to ask
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for more than 400 dollars an hour, because of that cap that
2
had been imposed and I guess there was also the right to maybe
3
ask for punitives by the claimants, as well.
4
MR. PRONSKE: That's correct.
5
THE COURT: All right. And it's your position that
6
does not in any way affect the finality of the order.
7
MR. PRONSKE: That's correct.
8
THE COURT: Okay.
9
MR. PRONSKE: In that it received its full and fair
10
opportunity to litigate and I think your recitation of the
11
facts is exactly right. I would add that when Mr. Baron was
12
cross-examining it was on the substantive issues with respect
13
to the particular claims.
14
THE COURT: Okay. All right.
15
Mr. Ferguson, I think was standing up.
16
MR. PRONSKE: Thank you.
17
THE COURT: No duplication, please.
18
MR. FERGUSON: No, Your Honor, I just wanted to --
19
what Mr. Pronske said about -- I agree with him that I think
20
that the summary judgment evidence, the standards of
21
collateral estoppel, would say that all of the petitioning
22
creditors, that that should be held not to be subject to a
23
bona fide dispute. But like Mr. Pronske, if you'll review the
24
declarations that I filed originally, the ruling of the Court,
25
my testimony during the hearing, and Mr. Baron's original
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response to my declaration, as well as his response this time
2
around, he does not dispute that he owes me money. He
3
testified previously he thought that 5,000 dollars was fair,
4
not 75,000. But there's not a dispute as to the fact that he,
5
in fact, owes me money. It would just be a matter of the
6
magnitude of that.
7
And I believe that if the Court declines to go full
8
summary judgment on behalf of all the petitioning creditors
9
that like Mr. Pronske, based on Mr. Baron's filed
10
declarations, that I would also stand in partial summary
11
judgment as an unsecured creditor such that even if it's only
12
one dollar and Pronske & Patel's is 100,000 or whatever, as
13
long as we pass the threshold of the 14,425 dollars, I think
14
we now would have at least two of the three necessary
15
petitioning creditors.
16
THE COURT: Okay.
17
MR. FERGUSON: Thank you, Your Honor.
18
THE COURT: All right. Mr. Stromberg?
19
MR. STROMBERG: Thank you, Your Honor. Let me start
20
here where we left off. I believe that the notion of putting
21
in the summary judgment evidence, the declaration of each and
22
everyone of the petitioning creditors and our responding to
23
it, feeling the necessity to do so with a declaration from Mr.
24
Baron, both of these go outside the scope of the specific
25
issue which is whether or not prior orders of this court or of
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the district court foreclose any argument with respect to bona
2
fide disputes.
3
So, basing a ruling on either the absence strangely
4
enough, of a specific declaration in Mr. Baron's affidavit
5
about owing money in any portion of it with respect to any of
6
the creditors is probably not appropriate at this time. It's
7
outside the scope of what the summary judgment is limited to
8
by this court.
9
With respect to Judge Ferguson's order, I think it's
10
really useful to look at it because everybody who has talked
11
about it up to this point has described it as a ruling,
12
adjudication, a finding, but when it comes to the
13
determination of these claims, it is nothing of the sort. I
14
know that I am new to this party and forgive me describing it
15
as such, but there is nothing in the language here in which
16
the Court suggests that it did anything other than create a
17
compromise, a voluntary process pursuant to which people could
18
come in and agree to waive portions of their claims, assuming
19
for the sake of argument that they weren't later contested by
20
Mr. Baron, that people could come in and have their claims
21
reduced on -- in terms of the hourly rate and forego
22
voluntarily, other claims that they may have, as long as it
23
wasn't contested by Mr. Baron.
24
It seems to me useful to think about how Judge
25
Ferguson was framing his orders as being an attempt to resolve
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a particular thorny situation; an intelligent attempt to do
2
so, but not one that constitutes an adjudication in the sense
3
that he was wearing his judicial robes, making a specific
4
finding; this is how much these people are owed, this is a
5
final determination, this is exactly what they're entitled to
6
and all other claims of Mr. Baron are decided by that.
7
He doesn't do that any place in docket number 575,
8
not a single place and I've been through that order a number
9
of times. And the language that he does use is a voluntary
10
process. You get the benefits of number one, having your
11
claim reduced to a specific amount but paid by the receiver or
12
not and if you don't, then the receiver will not pay it. And
13
those people who sign the waivers voluntarily opted in to
14
accept the numbers that the judge had thrown out there for
15
them without specifically having had their claims adjudicated
16
and only in the event that they made the waiver and received
17
the payment and Mr. Baron didn't contest would any of this be
18
effective as a resolution of the claims.
19
Now the issue we're here to talk about, and this is
20
important, is whether or not these rulings such as they are,
21
constitute a judicial determination such that they would
22
foreclose bona fide disputes by Mr. Baron about the fees.
23
THE COURT: Okay. And to be clear, the title of the
24
document is "Findings of Fact, Conclusions of Law and
25
Order" --
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MR. STROMBERG: That's correct.
2
THE COURT: -- "On Assessment and Disbursement of
3
Former Attorney's Fees."
4
MR. STROMBERG: That is absolutely correct.
5
THE COURT: And he heard a bunch of evidence.
6
MR. STROMBERG: That's correct. But the judge
7
doesn't go -- if you read the order itself, he doesn't go
8
through the evidence and say this is the amount of these
9
claims and I find -- which would be the most important part --
10
and I find that any disputes that are raised to those claims
11
are adjudicated against Mr. Baron; quite the opposite in his
12
duplicate paragraph 36 at the end of his order, he says those
13
claims and rights of Mr. Baron are reserved.
14
But not at a single place, notwithstanding the title
15
of the order --
16
THE COURT: The rights to bring counterclaims --
17
MR. STROMBERG: To bring counterclaims which would
18
include among them --
19
THE COURT: -- malpractice or whatever.
20
MR. STROMBERG: Fiduciary duty. And that's an
21
important one in its own right, Your Honor, because fiduciary
22
duty breaches, if they were to be found, would be claims that
23
would not only entitle Mr. Baron to potentially damages but
24
also to disgorgement under Texas law under Burrow v. Arce and
25
its progeny. So those would be direct claims that would have
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a direct impact on whether or not the claims were owed what
2
they claimed.
3
But again, it's important that at not one place in
4
this order does the judge address defenses that Baron would
5
raise. In fact, what he does is he tells the receiver that
6
the receiver has the authority to waive his right to a jury
7
trial. The receiver has the authority to deal with the Baron
8
defenses such as they were and to resolve them if the
9
claimants enter into this voluntary waiver process.
10
So, Judge Ferguson for all of his intelligence in
11
attempting to resolve this thorny problem that had been
12
created by the procedural posture of the case, took off his
13
judicial robes for a moment and said this is how you can get
14
this done. These people should get paid and I've given them a
15
target number to shoot at. They can accept it or decline it.
16
If they accept it, and Mr. Baron challenges it, then they can
17
go after him for more money than what I already said. If Mr.
18
Baron does not challenge it, they will receive payment on
19
their claims and that's what he was contemplating.
20
THE COURT: But was it really a preservation of his
21
right to challenge it or simply a preservation of his right to
22
bring counterclaims? And let's use by comparison, what is the
23
old Fifth Circuit case that -- I think it was Coopers &
24
Lybrand from the old Southmark case where after final fee
25
applications in a Chapter 11 case, someone will stand up and
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correct me if I am remembering this wrong, but then a
2
representative of the estate or maybe former shareholders sued
3
Coopers & Lybrand, a professional who had represented the
4
debtor for, you know, malpractice and whatnot and the Fifth
5
Circuit ultimately ruled collateral estoppel, res judicata.
6
MR. STROMBERG: I --
7
THE COURT: You should have raised that in connection
8
with the final fee application process.
9
MR. STROMBERG: Yes, there's a --
10
THE COURT: Order approving their fees basically
11
estopped any claims like this and what it appears to me, Judge
12
Ferguson may have been doing here is saying I'm not going --
13
you're not going to be Mr. Baron in the situation of these
14
plaintiffs against Coopers & Lybrand. You can bring
15
counterclaims, so therefore, you may have an off debt. But
16
the claims themselves are allowed, aren't they?
17
MR. STROMBERG: Again, Your Honor, when you look at
18
the language of the order, it's -- if anything is clear from
19
it, it's that he never -- Judge Ferguson never makes the
20
assessment in the way that it would be as if it were a
21
determination that these claims are allowed and defenses to
22
them are determined. If that language was in the order, I
23
would not have a leg to stand on.
24
I am familiar with the case law that you're talking
25
about. There's another case that percolated through the Fifth
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Circuit. I want to say it was a Weil Gotshal claim in the
2
mid-2000s where the same issue about legal malpractice claims
3
was, you know, brought up and determined res judicata.
4
But that's not what we have here because in order for
5
that to have happened, you first have to have had a
6
determination -- remember what it is that the petitioning
7
creditors are asking Your Honor to do. They're asking you to
8
say because the Court decided these claims and the defenses,
9
Mr. Baron can't raise his defenses as bona fide disputes and
10
putting aside for the moment the fact that the Court expressly
11
reserved his counterclaims, the Court didn't make any such
12
decision on these claims. If parties were to come back and
13
say I wish to l