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
▬▬▬▬▬▬▬▬▬▬▬
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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
▬▬▬▬▬▬▬▬▬▬▬
From the United States District Court
Northern District of Texas, Dallas Division
Civil Action No. 3-09CV0988-F
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RESPONSE TO VOGEL MOTION
TO LIQUIDATE JEFF BARON’S IRAS
▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬
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TO THE HONORABLE FIFTH CIRCUIT COURT OF APPEALS:
COMES NOW JEFFREY BARON, Appellant, and subject to the
preliminary Fifth Amendment objection and motion previously filed in this cause,
makes this response, objection and motion for relief with respect to Vogel’s
motions to liquidate Jeff Baron’s IRAs.
1
I. ARGUMENT AND AUTHORITY
1. IRAs Are Exempt by Law from Execution and Seizure
Pursuant to Texas Law, Baron’s IRA accounts
2
are exempt from seizure and
execution. Tex.Prop.Code §42.0021; E.g., In re Youngblood, 29 F.3d 225, 226 (5th
Cir. 1994); Janvey v. Alguire, 628 F.3d 164,180 (5th Cir. 2010). As a matter of
long-standing law, receivership is authorized only over non-exempt property. E.g.,
Booth v. Clark, 58 U.S. 322, 331 (1855); Janvey v. Alguire, 628 F.3d 164 (5th Cir.
2010). The public policy behind the exemption of IRAs from execution and
seizure is a significant one— allowing individuals to feel secure in their ability to
be supported in their old age. If the IRA accounts could be lost like any other non-
exempt asset, there would be no real ‘security’ and the entire public policy behind
encouraging the accounts would be defeated. Accordingly, Texas law mandates
that the IRAs are exempt from execution and seizure.
1
9-15-11 SEALED MOTION filed by Appellee Mr. Peter S. Vogel in 11-10113 to Liquidate the
Baron IRA's based on newly discovered evidence and changed circumstances. [10-11202, 11-
10113].
2
Vogel concedes the IRAs are Baron’s and does not contest Baron’s legal right to the funds in
the IRAs. See also Exhibit A, incorporated herein by reference.
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2. Vogel's Erroneous Argument: Withdrawal from IRAs Waives
Exemption over Remaining IRA funds
Vogel's Erroneous Citation of the Law
Vogel’s argument is based on his misciting of the holding of In re Pulliam,
279 B.R. 916, 923 (Bankr.M.D.Ga.2002). Contrary to Vogel's recitation, the
holding of Pulliam is that an IRA distribution check that was “rolled over” into an
IRA ten days before filing bankruptcy by an insolvent debtor could be considered a
fraudulent transfer in bankruptcy if the “roll over” was made with the intent to
hinder, delay or defraud creditors prior to filing bankruptcy.
3
Because the attempt
to “roll over” money into an IRA was found to be a fraudulent transfer, that money
was taken out of the IRA and considered part of the debtor's general estate.
Accordingly, the holding of Pulliam does not support Vogel's argument that if
funds are taken out of an IRA by a party such withdrawal waives the exempt status
of the funds remaining in the IRA. There is no authority in law for the argument
made by Vogel. Notably, Vogel does not contend that Baron attempted to “roll
over” any funds into any IRA, nor that any particular fraudulent transfer into any
IRA is involved. Accordingly, Pulliam has no application with regard to Baron.
4
3
The only finds that were found non-exempt where those funds that had been taken out of an
IRA, and then attempted to be "rolled over" back into an IRA just prior to filing bankruptcy.
4
See e.g., Barber v. Dunbar (In re Dunbar), 313 B.R. 430, 434 (Bankr. C.D.Ill.2004)(explaining
the holding of Pulliam: "[T]he court's determination in In re Pulliam, 279 B.R. 916
(Bankr.M.D.Ga.2002), that the debtor's return of funds withdrawn from his individual retirement
account within the sixty-day period permitted for tax-free rollovers constituted a transfer for
purposes of Section 548(a). Because possession of the withdrawn funds changed from the debtor
to the custodian of the IRA, placing the funds beyond the reach of the debtor's creditors, the
court found that a transfer had been made.”)
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Vogel's Erroneous Citation of the Facts
If it were relevant for any purpose under the law, it is notable that Baron did
not
withdraw funds from any IRA to pay an attorney’s fees. Rather, Vogel
erroneously attempts to pass off the pre-receivership payment to an attorney of the
IRA as a withdrawal of IRA funds by Baron. Specifically, Vogel has failed to
disclose that the fees were paid directly by the IRA for attorney's services
rendered on behalf of the IRA, as a client of the attorney who was paid.
5
The
IRA was, on its own behalf, a party to the lawsuit and was represented by the
attorney in court. See Exhibit C. Similarly, the primary client signatory to the
attorney's contract was the IRA (through its custodian, the Equity Trust
Company).
6
See Exhibit B, page 5. Moreover, the attorney expressly stated that he
was representing and working on behalf of the IRA, and was paid by the IRA on
that basis. See Exhibit A. Accordingly, as a factual matter Baron did not withdraw
funds from an IRA, but rather, the IRA itself paid its attorney for directly
representing the IRA.
5
Vogel’s failure to fully disclose in his motion is troubling because Vogel is a receiver, acting
as an officer of the Court. “[T]he court, as well as all the interested parties have ‘the right to
expect that all its officers,’ including the receiver, will not fail to reveal any pertinent
information”. Phelan v. Middle States Oil Corporation, 154 F.2d 978, 991 (2nd Cir. 1946).
6
Baron, moreover, signed the lawyer’s employment contract only in his capacity as a beneficial
interest holder in the IRA, and expressly not
in his individual capacity. Exhibit B, page 6.
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3. Vogel's Erroneous Argument: IRAs Funded through Fraud Waives
Exception
Vogel's Erroneous Citation to the Law of IRA Exemptions
Vogel miscites the holding of Janvey v. Alguire, 628 F.3d 164 (5th Cir.
2010). Janvey expressly holds that “IRA accounts are exempt from seizure” and
that was not the issue in Janvey. Id. at 180. Rather, the issue in Janvey was
whether “the Employee Defendants received these funds as a fraudulent transfer
from the Stanford Ponzi scheme”. Id. at 181. If the funds were transferred into
employees’ IRAs by a fraudulent transfer (ie, by an insolvent debtor with intent to
hinder his creditors) then the money by law can be returned to the estate of the
insolvent debtor. This has nothing to do with the IRAs per se, and everything to do
with the law of fraudulent transfers. Janvey holds that the normal law of
fraudulent transfer applies to IRAs. Janvey does not
base an IRA’s exemption
from execution and seizure upon the general conduct of the person originally
funding the retirement accounts. Jarvey simply holds that just like money can
be recovered from any other recipient of a fraudulent transfer, money can similarly
be recovered from IRAs. With respect to Baron, there is not even an allegation
that the IRAs were funded recently, or while Baron was insolvent. To the contrary,
when Baron was placed into receivership he was solvent and had over a million
dollars in his savings accounts, plus another half million dollars in stock. Baron’s
IRAs were set up years ago,
7
and there is no claim that Baron made any fraudulent
7
See Exhibit A. incorporated herein by reference.
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transfer to the IRAs. Accordingly, Janvey has no application with respect to
Baron’s IRAs.
Vogel’s “Fraud” Issue is Groundless and Manufactured by Vogel
Notably, there is not even any factual scenario alleged that the IRA funds
belong to any other person than Baron. It is uncontroverted that Baron funded the
IRAs over half a decade ago. (See Exhibit A). Vogel, moreover, has admitted the
IRAs are Baron's. Vogel has offered no evidence and has not asserted any factual
basis of any alleged fraud involving the IRAs.
8
The legal rule of “negative
inference” allows inferences only when someone refuses to “testify in response to
probative evidence offered against them”. Baxter v. Palmigiano, 425 U.S. 308,
318 (1976). Since there was no probative evidence offered against Baron, there
can be no “negative inference”. Id. Moreover, Baron did not refuse to testify
about the IRAs. Instead, the “refusal” relied upon by Vogel was Baron’s refusal to
be personally interrogated by Vogel’s attorneys at a meet & confer between
Baron’s counsel and Vogel’s counsel. The meeting was notably neither a hearing
nor a deposition.
4. Vogel Lacks Standing and Authority to Make His Motion
As a fundamental, and long-stating principle of law, a receiver “[O]wes a
duty of strict impartiality, of ‘undivided loyalty,’ to all persons interested in the
receivership estate, and must not ‘dilute’ that loyalty.” E.g., Phelan v. Middle
8
If there were any such ‘fraud’ it would have long ago been barred by the statute of limitations.
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States Oil Corporation, 154 F.2d 978, 991 (2nd Cir. 1946). Accordingly, a
receiver may not become “[A] partisan, with power to back one litigant
against the other with the assets of the estate. ... As between these two
contending litigants, the receiver is a neutral. ... [A]nd he has ordinarily no
justification for engaging in a controversy with one who claims adversely to him”.
In re Marcuse & Co., 11 F.2d 513, 516 (7th Cir.1926). As a fundamental rule of
law of equity receiverships, the receiver is prohibited from being heard seeking
reconsideration of a court ruling concerning the disposition of receivership
assets. E.g, Bosworth v. St. Louis Terminal Railroad Assn., 174 U.S. 182, 187
(1899). Notably, the Supreme Court held in Bosworth that:
“Neither can he [a receiver] question any subsequent
order or decree of the court distributing the estate in his
hands between the parties to the suit. It is nothing to him
whether all of the property is given to the mortgagee or
all returned to the mortgagor. He is to stand indifferent
between the parties, and may not be heard either in the
court which appointed him, or in the appellate court, as to
the rightfulness of any order which is a mere order of
distribution between the parties.”
Contrary to these clear duties, Vogel has become an aggressive and partisan
advocate against Baron. The District Court announced that it was not going to
allow the liquidation of Baron’s IRAs. Vogel has exceeded his authority and
violated his fundamental duties as a receiver in seeking reconsideration and review
of the ruling of the District Court. A receiver does not have the authority or
standing of an advocate and a receiver is “without authority to participate in the
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litigation”. In re Marcuse, 11 F.2d at 516. As the Supreme Court ruled in
Bosworth, “It is nothing to him [the receiver] whether all of the property is given to
the mortgagee or all returned to the mortgagor. He is to stand indifferent
between the parties, and may not be heard either in the court which appointed
him, or in the appellate court, as to the rightfulness of any order which is a
mere order of distribution between the parties.”
5. There Are No In Rem Claims Against the IRAs
Contrary to the entire underlying basis of Vogel’s motion, there are no in rem
claims against Jeff Baron’s property being held in receivership. Vogel’s motions to
liquidate Baron’s assets are based upon Vogel’s erroneous underlying vision of
receivership as an independent remedy that disposes individuals of their property
without trial and transmutes the property into “equitable property” that can then be
redistributed to alleged general creditors based on a judge’s personal sense of
“equity”. To Vogel's view, the Constitution and a citizen's right to jury trial can be
bypassed by a court simply invoking the magic wand of “receivership power”.
However, as discussed below, receivership is a special equitable remedy that can
be used only
as an ancillary remedy to preserve property so that property can be
disposed of pursuant to some other remedy— recognized by law— pled before the
court and which the court has jurisdiction to impose.
As a long-established rule of law, the sole function of equity receivership is
to preserve property pending disposition pursuant to some other
remedy. E.g.,
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Forgay v. Conrad, 47 U.S. 201,204-205 (1848) (the remedy of 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 a final decree”); Gordon v.
Washington, 295 U.S. 30, 37 (1935) (“[E]quity will not appoint a receiver where
the appointment is not ancillary to some form of final relief which is appropriate
for equity to give.”); Tucker v. Baker, 214 F.2d 627, 632 (5th Cir. 1954) (a court
“may appoint a receiver to preserve and protect the property pending its final
disposition” but “receivership can accomplish no end, but must merely be an end
in itself [to preserve the property].”). Receivership is not a substitute for trial nor a
substantive remedy. See Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 497 (1923).
The Supreme Court held in Pusey that:
“Whether the debtor be an individual or a
corporation, the 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 it a step in the determination
of such a right. It is a means of preserving property
which may ultimately be applied toward the
satisfaction of substantive rights.”
Id.
Equity receivership is solely a tool to preserve property pending trial to determine
how that property should be disposed. E.g., Kelleam v. Maryland Casualty Co. of
Baltimore, 312 U.S. 377, 381 (1941)(“This Court has frequently admonished that a
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-9-
federal court of equity should not appoint a receiver where the appointment is not a
remedy auxiliary to some primary relief which is sought and which equity may
appropriately grant.”). Similarly, receivership does not endow a court with subject
matter jurisdiction it did not already possess by “proper pleadings already before
the court”. Cochrane v. WF Potts Son & Co., 47 F.2d 1026, 1028 (5th Cir.
1931)(“[S]eizing the securities did not, unless the subject-matter was by proper
pleadings already before the court, aid its jurisdiction.”).
Critically for the issue presented here, a receivership action is an in rem
action
. Sumrall v. Moody, 620 F.2d 548, 550 (5th Cir. 1980). Whereas the
establishment of liability for the claims against Baron requires adjudication of in
personam actions against Baron and such claims do not touch the receivership res.
See Hawthorne Savings v. Reliance Ins. Co., 421 F.3d 835, 855 (9th Cir. 2005).
Only the attempt to levy against the res made in connection with a judgment that
has been obtained in personam is an in rem action that relates to a court's dominion
over a receivership res. Id. There is a fundamental distinction between in rem
claims against property held by a receiver and in personam claims against the
owner of such property. Riehle v. Margolies, 279 U.S. 218, 224 (1929). The
Supreme Court again explained this distinction in Underwriters Assur. Co. v. NC
Guaranty Assn., 455 U.S. 691, 718 (1982), holding that a receivership is an action
of control over assets in rem, not of control over in personam claims. The
Supreme Court held in Underwriters Underwriters Assur. that:
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“The Court adopted a two-fold distinction between
control over claims and over assets: "In so far as [a court
order] determines, or recognizes a prior determination of
the existence and amount of the indebtedness of the
defendant to the several creditors seeking to participate, it
does not deal directly with any of the property. [This]
function, which is spoken of as the liquidation of a claim,
is strictly a proceeding in personam…" … "[T]he
distribution of assets of a debtor among creditors
ordinarily has a `twofold aspect.' It deals `directly with
the property' when it fixes the time and manner of
distribution. . . . But proof and allowance of claims are
matters distinct from distribution."”
The distinction made between in rem claims and in personam claims in the
context of receivership is a fundamental jurisdictional distinction. E.g., Chicago
Title & Trust Co. v. Fox Theatres Corporation, 69 F.2d 60, 62 (2nd Cir.
1934)("Since liquidation of a debt does not directly deal with distribution, a suit
seeking such liquidation does not interfere with the jurisdiction of the receivership
court”). This Honorable Court has recognized this fundamental distinction. E.g.,
North Mississippi Sav. & Loan Ass'n v. Hudspeth, 756 F.2d 1096, 1102 (5th Cir.
1985)
9
; Cf. Morrison-Knudsen Co., Inc. v. CHG Intern., Inc., 811 F.2d 1209, 1217
(9th Cir. 1987)
10
.
9
Holding that 12 U.S.C. §1464(d)(6)(C) switches claims to the administrative track and
therefore by statute empowers the FSLIC receivership to do what a receivership normally could
not— adjudicate in personam claims against a debtor because “the adjudication of claims against
a debtor, as opposed to the allocation of assets to satisfy those claims, is not a receivership
function”.
10
Agreeing with the Fifth Circuit that adjudication of in personam claims goes beyond the
authority of a receivership but disagreeing with the Fifth Circuit as to whether “Congress
intended the agency's [FSLIC] receivership powers to go beyond those of an ordinary receiver.”
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Vogel’s argument obfuscates the fundamental distinction between the in rem
receivership proceedings seizing Jeff Baron’s assets and in personam claims
against Jeff Baron. Vogel attempts to circumvent a fundamental step— the
adjudication of Mr. Baron's in personam liability on the underlying alleged state
law “claims”. Notably, the fundamental step of adjudicating in personam liability
is a constitutionally protected step, and with claims at law, invokes a citizen's right
to trial by jury. E.g., Ross v. Bernhard, 396 U.S. 531, 531 (1970). Accordingly,
since the ‘claims’ have not been tried and reduced to final judgments, it is
premature to seek to liquidate Baron’s IRAs.
Further, the matter is currently on appeal and there are no in rem claims to
the receivership res, only the in personam ‘claims’ against Baron. If a receivership
had been imposed against a corporation, the claims against the corporation would
have been claims against the receivership res because a corporation is itself
property. Baron, however, is not property, and the in personam claims against him
are not claims in rem. Accordingly, the District Court lacks subject matter
jurisdiction over the non-diverse in personam state law claims against Baron.
Even though it lacked subject matter jurisdiction, out of a “sense of justice” the
District Court below attempted to create an interest in property that does not
exist. See e.g. Meyerson v. Council Bluffs Sav. Bank, 824 F. Supp. 173, 177 (S.D.
Iowa 1991) (An interest in property “may be created only by contract ... or by
and holding that FSLIC receiverships had no statutory grant of authority to adjudicate in
personam claims.
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some statute or fixed rule of law; it can not be created by the court merely from a
sense of justice.”). The “claims” against Baron are not equitable claims against
Baron’s property. Rather, the “claims” are nothing more than unsecured claims of
alleged simple creditors. An unsecured creditor has, in the absence of statute,
no substantive right, legal or equitable, in or to the property of his alleged
debtor. Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 497 (1923). This is true,
whatever
the nature of the property. Id. The only substantive 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. 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).
6. Irreparable Injury and Costs
Vogel’s motion erroneously fails to apprise the Court of the irreparable
injury and costs involved with the liquidation of the IRAs. As a primary matter
there is a substantial
tax liability which will be incurred with the IRAs’ liquidation.
In addition to income and social security taxes, a 10% additional tax penalty must
be paid. If the IRAs are liquidated wrongfully, the taxes and penalties cannot be
recovered. The loss would be substantial and irreparable.
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7. Equitable Considerations
As a matter of equity, the Court should examine, at least on a prima facie
basis the underlying ‘claims’ for which the IRA sale is sought.
11
These claims have
not been tried before any court, the claims were solicited by Vogel and were
presented to the District Court below in a one-sided ‘report’ that intentionally
excluded all of the exculpatory evidence. SR. v8 p1242-43; SR. v7 p202.
II. CONCLUSION
There are no in rem claims asserted against Jeff Baron’s property held in
receivership, and there is accordingly no basis in law to liquidate his IRAs.
Liquidation of the IRAs controverts the public policy reasons for exempting
individual’s IRAs from seizure and involves costs including taxes and substantial
risk of irreparable injury. The IRAs are exempt by law and should not be executed
upon.
11
A compelling prima facie case is established in the record that the ‘claims’ solicited by Vogel
against Baron are absolutely groundless
. SR. v8 p 1197-1201, 1212- 1243. For example, Doc
522 should be examined. SR. v6 p64. The issues presented in that filing are issues of law based
upon the “claimant’s” own evidence and statements and establish that the ‘claim’ is clearly
groundless, even frivolous. The District Court’s response to being presented with the clear
argument establishing the groundless of the claim was to seal the revelation as if it were some
state secret. SR. v6 p64 (sealing Doc 522).
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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
COUNSEL FOR APPELLANT
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AUTHORITIES CITED
FEDERAL CASES
Barber v. Dunbar (In re Dunbar), 313 B.R. 430, 434 (Bankr. C.D.Ill.2004) ............2
Baxter v. Palmigiano, 425 U.S. 308, 318 (1976)......................................................5
Booth v. Clark, 58 U.S. 322, 331 (1855) ...................................................................1
Bosworth v. St. Louis Terminal Railroad Assn., 174 U.S. 182, 187 (1899).............6
Chicago Title & Trust Co. v. Fox Theatres Corporation, 69 F.2d 60, 62 (2nd Cir.
1934).....................................................................................................................10
Cochrane v. WF Potts Son & Co., 47 F.2d 1026, 1028 (5th Cir. 1931)....................9
Forgay v. Conrad, 47 U.S. 201,204-205 (1848) ........................................................8
Gordon v. Washington, 295 U.S. 30, 37 (1935) ........................................................8
Hawthorne Savings v. Reliance Ins. Co., 421 F.3d 835, 855 (9th Cir. 2005) ...........9
In re Marcuse & Co., 11 F.2d 513, 516 (7th Cir.1926) .........................................6, 7
In re Pulliam, 279 B.R. 916, 923 (Bankr.M.D.Ga.2002)...........................................2
In re Youngblood, 29 F.3d 225, 226 (5th Cir. 1994).................................................1
Janvey v. Alguire, 628 F.3d 164,180 (5th Cir. 2010)............................................1, 4
Kelleam v. Maryland Casualty Co. of Baltimore, 312 U.S. 377, 381 (1941) ...........8
Meyerson v. Council Bluffs Sav. Bank, 824 F. Supp. 173, 177 (S.D. Iowa 1991).11
Morrison-Knudsen Co., Inc. v. CHG Intern., Inc., 811 F.2d 1209, 1217 (9th Cir.
1987).....................................................................................................................10
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North Mississippi Sav. & Loan Ass'n v. Hudspeth, 756 F.2d 1096, 1102 (5th Cir.
1985).....................................................................................................................10
Phelan v. Middle States Oil Corporation, 154 F.2d 978, 991 (2nd Cir. 1946)..........6
Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 497 (1923)................................. 8, 12
Riehle v. Margolies, 279 U.S. 218, 224 (1929).........................................................9
Ross v. Bernhard, 396 U.S. 531, 531 (1970) ...........................................................11
Sumrall v. Moody, 620 F.2d 548, 550 (5th Cir. 1980) ..............................................9
Tucker v. Baker, 214 F.2d 627, 632 (5th Cir. 1954) .................................................8
Underwriters Assur. Co. v. NC Guaranty Assn., 455 U.S. 691, 718 (1982).............9
Williams Holding Co. v. Pennell, 86 F.2d 230 (5th Cir. 1936)...............................12
STATE STATUTES
Tex.Prop.Code §42.0021 ...........................................................................................1
CERTIFICATE OF SERVICE
This is to certify that this motion 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 APPELLANT
Case: 10-11202 Document: 00511613973 Page: 17 Date Filed: 09/26/2011
