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 APPELLANT JEFFREY BARON IN REPLY TO
SHERMAN BRIEFING ON APPEALS
NOS. 11-10289, 11-10390, 11-10501
Case: 10-11202 Document: 00511672920 Page: 1 Date Filed: 11/21/2011
––––––––––––––––––––––––––––––––––––––––––––
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: 10-11202 Document: 00511672920 Page: 2 Date Filed: 11/21/2011
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 JEFFREY BARON
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TABLE OF CONTENTS
TABLE OF CONTENTS.................................................................................4
ABBREVIATIONS ..........................................................................................8
ADOPTION BY REFERENCE......................................................................8
TABLE OF AUTHORITIES...........................................................................9
REPLY ISSUES PRESENTED FOR CONSIDERATION ......................11
REPLY STATEMENT OF FACTS..............................................................13
I. Sherman's Argument that Baron advances “half truths and
outright lies” is Not Supported by Sherman's Own Argument
or the Record. (SBRE. 5-6). ....................................................................13
II. A Number of Factual Allegations Made in Sherman's
Briefing are Not Supported by the Record, as Follows: .......................15
ARGUMENT & AUTHORITY .....................................................................19
REPLY ISSUE 1: THE DISTRICT COURT LACKED SUBJECT
MATTER JURISDICTION CONCERNING THE PROPERTY
SEIZED IN RECEIVERSHIP, AND AS A MATTER OF
ESTABLISHED LAW, THE PROPERTY MUST BE RETURNED. ........... 19
For a Federal Court to have Subject Matter Jurisdiction Over
any Matter, There Must First be a Controversy Concerning
that Matter Pled before the Court.........................................................19
Cochrane v. WF Potts Son & Co. ...........................................................20
REPLY ISSUE 2: THE SUPREME COURT IN GRUPO
MEXICANO DE DESARROLLO, SA V. ALLIANCE BOND
FUND, INC., 527 U.S. 308 (1999), HELD THAT FEDERAL
COURTS LACK THE AUTHORITY TO ACT AGAINST ASSETS
THAT ARE NOT THEMSELVES SUBJECT TO A CLAIM
BEFORE THE COURT, EXCEPT TO ENFORCE A FINAL
JUDGMENT..................................................................................................... 24
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REPLY ISSUE 3: THIS HONORABLE COURT HAS HELD
THAT A FEDERAL COURT'S INHERENT POWER DERIVES
FROM AND IS LIMITED BY THE POWER EXERCISED BY
“THE COMMON LAW EQUITY TOOLS OF A CHANCERY
COURT”. ITT COMMUNITY DEVELOPMENT CORP. V.
BARTON, 569 F.2D 1351, 1359 (5TH CIR. 1978)......................................... 27
The Chancery Court's Exercise of Power was Strictly Limited
with Respect to Imposition of Receiverships ........................................27
Other Circuit’s Governmental Receivership Cases do Not
Apply .......................................................................................................28
REPLY ISSUE 4: THE SUPREME COURT HAS HELD THAT
AN ORDER ISSUED IN VIOLATION OF DUE PROCESS OF
LAW IS VOID IN THE RENDERING. WORLD-WIDE
VOLKSWAGEN CORP. V. WOODSON, 444 US 286, 291 (1980).
THE SUPREME COURT HAS FURTHER HELD THAT SUCH
AN ORDER, VOID WHEN RENDERED, “WILL ALWAYS
REMAIN VOID”, AND CANNOT BECOME VALID BY
SUBSEQUENT DEVELOPMENTS. PENNOYER V. NEFF, 95
US 714, 728 (1878)........................................................................................... 29
Due Process was Clearly Violated in the Proceedings Below ..............29
The District Court’s Decision Must be Reviewed on Appeal
based on the Evidence Relied on by the District Court in
Making its Decision................................................................................30
The Retrospective Justifications Offered by Sherman do Not
Support the Receivership Imposed........................................................32
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REPLY ISSUE 5: “VEXATIOUS LITIGATION” AS A LEGAL
CONCEPT DOES NOT MEAN 'FRUSTRATING AND
IRRITATING THE JUDGE'. RATHER, THIS HONORABLE
COURT HAS HELD THAT IN DETERMINING WHETHER A
PARTY IS A VEXATIOUS LITIGANT “[A] COURT MUST
WEIGH .. THE PARTY'S HISTORY OF LITIGATION, IN
PARTICULAR WHETHER HE HAS FILED VEXATIOUS,
HARASSING, OR DUPLICATIVE LAWSUITS”. BAUM V.
BLUE MOON VENTURES, LLC, 513 F.3D 181, 189 (5TH CIR.
2008). ................................................................................................................ 34
Changing Lawyers Cannot Constitute Vexatious Litigation...............36
REPLY ISSUE 6: IN RE FREDEMAN LITIGATION, 843 F.2D
821 (5TH CIR. 1988)........................................................................................ 38
REPLY ISSUE 7: AN EQUITABLE REMEDY “PROCURED BY
MATERIAL MISREPRESENTATION MAY NOT BE
SUSTAINED.” COASTAL CORP. V. TEXAS EASTERN CORP.,
869 F.2D 817, 818 (5TH CIR. 1989) ............................................................... 40
1. Falsely Misrepresenting that Thomas was Unpaid and
Withdrew ................................................................................................40
2. Falsely Misrepresenting that Baron Caused the Mediation
Process to Fail ........................................................................................41
Conclusion...............................................................................................42
REPLY ISSUE 8: APPEAL DIVESTS THE DISTRICT COURT
OF JURISDICTION OVER THE MATTER APPEALED ............................ 44
Griggs......................................................................................................44
Palmer v. Texas ......................................................................................45
Lion Bonding ..........................................................................................45
Wabash....................................................................................................46
Jeff Baron’s Life Savings .......................................................................47
The Law of Invalid Receiverships .........................................................48
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The Three Distinct Types of Defective Receiverships Cases ...............49
Conclusion...............................................................................................52
REPLY ISSUE 9: 28 U.S.C. § 958 .................................................................. 54
CONCLUSION ...............................................................................................56
CERTIFICATE OF COMPLIANCE ...........................................................57
CERTIFICATE OF SERVICE.....................................................................58
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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 Novo Point LLC and Quantec LLC, 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
Atlantic Trust Co. v. Chapman, 208 U.S. 360, 373 (1908) .....................................50
Citizens' Bank v. Cannon, 164 U.S. 319, 324 (1896)....................................... 23, 50
Cochrane v. Commissioner of Internal Revenue, 26 BTA 1167, 1168 (1932) .......55
Cochrane v. WF Potts Son & Co., 47 F.2d 1026 (5th Cir. 1931)............... 20, 21, 22
Connecticut v. Doehr, 501 U.S. 1, 4 (1991) ............................................................30
Dayton Indep. School Dist. v. US Mineral Prods. Co., 906 F.2d 1059, 1063
(5th Cir. 1990) ......................................................................................................44
Gary W. v. State of La., DHHR, 861 F.2d 1366, 1367 (5th Cir. 1988) ..................55
Goldberg v. Kelly, 397 U.S. 254 (1970)..................................................................31
Gordon v. Washington, 295 U.S. 30, 37-38 (1935).................................................27
Griffin v. Lee, 621 F.3d 380, 388 (5th Cir. 2010) ............................................ 32, 42
Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982) ...................44
Hornsby v. Allen, 326 F.2d 605, 608 (5th Cir. 1964)..............................................30
Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994) .........19
League of United Latin American Citizens, District 19 v. City of Boerne, __ F.3d
__ (5th Cir. 2011) .................................................................................................31
Liner v. Jafco, Inc., 375 U.S. 301, 306 fn3 (1964) ..................................................20
Lion Bonding & Surety Co. v. Karatz, 262 U.S. 640, 642(1923) .............. 22, 45, 50
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Locke v. Board Of Public Instruction of Palm Beach Cty., 499 F.2d 359, 364
(5th Cir. 1974) ......................................................................................................19
McNutt v. General Motors Acceptance Corp., 298 U. S. 178, 182-183 (1936)......19
N.L.R.B. v. Baldwin Locomotive Works, 128 F.2d 39 (3d Cir.1942) ....................55
Palmer v. Texas, 212 U.S. 118, 29 S.Ct. 230 (1909)...............................................45
Pennoyer v. Neff, 95 US 714, 728 (1878) ...............................................................29
Porter v. Cooke, 127 F.2d 853, 859 (5th Cir. 1942) ................................................50
Procter & Gamble Co. v. Amway Corp., 280 F.3d 519, 525 (5th Cir. 2002) .........47
Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 497 (1923)......................................42
Tucker v. Baker, 214 F.2d 627, 631, 632 (5th Cir. 1954) .......................................50
Wabash R. Co. v. Adelbert College of Western Reserve Univ., 208 U.S. 38, 46
(1908)....................................................................................................................46
Williamson v. Tucker, 645 F.2d 404, 411 (5th Cir. 1981) ......................................30
FEDERAL STATUTES
28 U.S.C. § 958................................................................................................. 54, 56
28 U.S.C. §1654.......................................................................................................40
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REPLY ISSUES PRESENTED FOR CONSIDERATION
Reply Issue 1: The District Court lacked Subject Matter Jurisdiction
concerning the property seized in receivership, and as a matter of
established law, the property must be returned.
Reply Issue 2: The Supreme Court in Grupo Mexicano de
Desarrollo, SA v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999),
held that federal courts lack the authority to act against assets that
are not themselves subject to a claim before the court, except to
enforce a final judgment.
Reply Issue 3: This Honorable Court has held that a federal court's
inherent power derives from and is limited by the power exercised
by “the common law equity tools of a Chancery Court”. ITT
Community Development Corp. v. Barton, 569 F.2d 1351, 1359 (5th
Cir. 1978).
Reply Issue 4: The Supreme Court has held that an order issued in
violation of due process of law is void in the rendering. World-Wide
Volkswagen Corp. v. Woodson, 444 US 286, 291 (1980). The
Supreme Court has further held that such an order, void when
rendered, “will always remain void”, and cannot become valid by
subsequent developments. Pennoyer v. Neff, 95 US 714, 728 (1878).
Reply Issue 5: “Vexatious Litigation” as a legal concept does not
mean 'frustrating and irritating the judge'. Rather, this Honorable
Court has held that in determining whether a party is a vexatious
litigant “[A] court must weigh .. the party's history of litigation, in
particular whether he has filed vexatious, harassing, or duplicative
lawsuits”. Baum v. Blue Moon Ventures, LLC, 513 F.3d 181, 189
(5th Cir. 2008).
Reply Issue 6: In re Fredeman Litigation, 843 F.2d 821 (5th Cir.
1988)
Reply Issue 7: An equitable remedy “procured by material
misrepresentation may not be sustained.” Coastal Corp. v. Texas
Eastern Corp., 869 F.2d 817, 818 (5th Cir. 1989)
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Reply Issue 8: Appeal divests the District Court of jurisdiction over
the matter appealed
Reply Issue 9: 28 U.S.C. § 958
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REPLY STATEMENT OF FACTS
I. Sherman's Argument that Baron advances “half truths
and outright lies” is Not Supported by Sherman's Own
Argument or the Record. (SBRE. 5-6).
Sherman points to a single record citation in a footnote of one of
the four briefs which Sherman responds to. Sherman’s argument
correctly points out the weakness of the citation in that the citation
cites to a factual summary and not to the direct record evidence. (SBRE.
5). However, Sherman's argument then concedes the very substantive
averment for which the challenged citation was cited– Gardere's prior
involvement with Baron and Ondova. Moreover, to the extent it
attempts to minimize Gardere's prior involvement, the record does not
support Sherman’s argument. Contrary to the erroneous factual
averments made by Sherman's argument, Gardere also represented
Emke in the second Northern District “servers.com” lawsuit (3-05-cv-
00285-L). SR. v11 p87-88. Moreover, contrary to Sherman's erroneous
averments, Gardere was also involved in yet more lawsuits, and its
involvement continued after 2006. For example, contrary to Sherman’s
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argument’s averments, in 2007 Barry Golden
1
represented FabJob, Inc.
in yet another case Gardere was involved with against Ondova (f/k/a
Compana LLC). SR. v10 p4099. Notably, Sherman's argument concedes
that well before Vogel was appointed special master in the case below,
Baron had formally complained about Gardere’s representation of
Baron’s adversaries– alleging a conflict of interest because Vogel
acquired confidential information from Baron with respect Vogel's
prospective representation of Ondova. The record does not support
Sherman's argument that Baron lied when objecting to Gardere
representing his adversaries in prior lawsuits. Similarly, the record
does not support Sherman's arguments that Baron's briefing contains
“half truths” or “lies”.
Sherman's argument, moreover, has failed to offer any record
citation to rebut any
of the substantive factual averments of Appellants'
briefings in the consolidated appeals.
1
Golden is personally involved in this case as well, and filed Vogel's reply brief in
this appeal.
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II. A Number of Factual Allegations Made in Sherman's
Briefing are Not Supported by the Record, as Follows:
1. That Novo Point LLC and Quantec LLC agreed to be placed
into receivership. (SBRE. 2). Instead, the companies objected, and
after the District Court ruled that they would be placed into the
receivership, (and, after being instructed to do so by the District
Court), agreed to the form of a written order conforming with the
District Court's oral ruling. See the Reply Briefing of Novo Point LLC
and Quantec LLC in appeal no. 11-10113 at pp18-19.
2. That Novo Point LLC and Quantec LLC were controlled by
Baron. (SBRE. 2). No motion made this allegation, no finding of the
District Court supports this allegation, and there is no evidence in
the record to support the allegation.
3. That the District Court declared certain business entities
were owned or controlled by Baron. Instead, the District Court's
orders adding 28 entities into receivership (including Novo Point
LLC and Quantec LLC) did not
make any findings regarding Baron's
ownership or control over the entities. R. 1717, 3934, 3952; SR. v2
p365. Similarly, the District Court did not order any party to turn
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over assets and no party was ordered to turn over their stocks, etc.
Rather the companies themselves were ordered into receivership.
2
Accordingly, a receivership was purportedly imposed upon the
companies. (SBRE. 15).
4. That claims by many of those lawyers against the Ondova
bankruptcy estate threatened its ability to pay other creditors and
increased its administrative costs. (SBRE. 3). There is no evidence in
the record to support this allegation.
5. That Baron hired a total of 19 different firms in matters
related to the case below. (SBRE. 3). The record does not reflect
which, if any, attorneys were hired by Baron, with respect to the
multiple defendants in the multiple duplicative lawsuits filed against
them– which notably, they prevailed in– in multiple jurisdictions.
6. That Peter Barrett represented Baron in the receivership
proceedings and performed $50,000.00 in work. (SBRE. 37). Barrett
expressly appeared only for appellate purposes and in the exclusive
role that he was asked by Schepps to assist at Baron’s FRAP 8(a)
2
Without service of process, notice to the companies or shareholders, pleadings to
support the relief, etc. R. 1717, 3934, 3952; SR. v2 p365.
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hearing on two days. R. 4395-4397.
7. That the District Court appointed Martin Thomas to
represent Baron and his interests in the pending Ondova bankruptcy.
(SBRE. 37). Instead, Thomas was Baron's bankruptcy counsel,
representing Baron in his role as a creditor in the Ondova Bankruptcy
before the receivership was imposed. Then, when the receivership was
imposed it was ordered that neither Jeff Baron nor Thomas had the
authority to object or to consent to any action in the bankruptcy and
Thomas was thereby completely neutralized in his role. SR. v11 p89.
Moreover, Thomas did not get involved in the District Court, and left
that “the purvue [sic] of Mr. Schepps”. Id. Accordingly, not only did
Thomas not represent Baron's interests in the Bankruptcy Court, but
he refused even to comment on proposed orders. Id. Further:
(A) Thomas knew that Sherman had falsely
misrepresented
to the District Court that Baron had not paid Thomas’ fees, filed
an ethics complaint against him, and caused him to withdrawn as
Baron’s bankruptcy counsel; and
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(B) Thomas admitted that he could have “rebutted much of
the testimony” offered at the FRAP 8(a) hearing for relief pending
appeal, SR. v10 p4097;
Yet, Thomas kept his silence, did not inform the District Court of
the truth, and allowed to receivership to proceed against Baron.
3
8. Sherman's representations regarding Novo Point and
Quantec's being represented in the District Court by counsel are not
supported by the record, and are substantially misleading.
3
To Thomas' credit, he initially rejected Vogel's repeated requests for him to
submit a declaration that he was owed money and present a 'claim' to be paid by
Vogel. SR. v10 p4097-4098.
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ARGUMENT & AUTHORITY
REPLY ISSUE 1: THE DISTRICT COURT LACKED SUBJECT
MATTER JURISDICTION CONCERNING THE PROPERTY
SEIZED IN RECEIVERSHIP, AND AS A MATTER OF
ESTABLISHED LAW, THE PROPERTY MUST BE RETURNED.
For a Federal Court to have Subject Matter Jurisdiction
Over any Matter, There Must First be a Controversy
Concerning that Matter Pled before the Court.
Federal courts are courts of limited jurisdiction, and that
jurisdiction cannot to be expanded by judicial decree. Kokkonen v.
Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994). It is to be
presumed
that a matter lies outside a court's subject matter jurisdiction
and the burden of establishing the contrary rests upon the party
asserting jurisdiction. Id.; McNutt v. General Motors Acceptance Corp.,
298 U. S. 178, 182-183 (1936). As a matter of well established law, this
Honorable Court has held that [T]he exercise of judicial power depends
upon the existence of a case or controversy. Locke v. Board Of Public
Instruction of Palm Beach Cty., 499 F.2d 359, 364 (5th Cir. 1974). As a
fundamental and primary matter– the constitution requires that for a
federal court to have subject matter jurisdiction over any matter there
must first be a case or controversy concerning that matter pled before
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the court. See Liner v. Jafco, Inc., 375 U.S. 301, 306 fn3 (1964) (“the
exercise of judicial power depends upon the existence of a case or
controversy.”).
A claim or controversy is not created by a request to impose a
receivership nor the appeal from that order as argued by Sherman.
(SBRE. 31). Rather, the district court must have subject matter
jurisdiction over a controversy concerning the property before a
receivership may be imposed over that property. Thus, in order for a
court to have subject matter jurisdiction pursuant to which a
receivership (otherwise authorized) can be ordered, there must first be a
controversy concerning that property properly pled before the court.
This exact issue
was squarely addressed by this Honorable Court in
Cochrane v. WF Potts Son & Co., 47 F.2d 1026 (5th Cir. 1931).
Cochrane v. WF Potts Son & Co.
In Cochrane, the plaintiff prayed “[T]hat the court appoint a
receiver to take charge of the securities of, and act as successor trustee
in, all
the issues [of stock]”. Id. at 1027. The Cochrane's plaintiff's
prayer was granted and– as requested by the plaintiff– the district
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court placed the all the stock issues (series A-F) into receivership. Id. at
1028. However, outside of series E, no claim had been pled in the
property. Id. at 1027. This Honorable court found that “[S]ince [the
district court] had no jurisdiction over these [other] properties, its order
appointing a receiver to take charge of them was void.” Id. at 1028. In
Cochrane, this Honorable Court announced four clear principles of law,
as follows:
(1) Nothing was alleged in the plaintiff's pleadings to set
up any claim against securities series A-D, or series F, and
therefore “[T]he plaintiffs' pleadings [did not] put their
subject-matter at issue”.
(2) The district court therefore had no subject
matter jurisdiction over the property, and because “[I]t
had no jurisdiction over these properties, its order appointing
a receiver to take charge of them was void”.
(3) “[S]eizing the securities did not, unless the
subject-matter was by proper pleadings already before
the court, aid its jurisdiction.”
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and (4) “Where judicial tribunals have no jurisdiction of
the subject matters on which they assume to act, their
proceedings are absolutely void in the strictest sense of
the term.”
Id. at 1028-1029
The application of this Honorable Court's holding in Cochrane to
the case at bar is clear. No claim or controversy was pled against Novo
Point, LLC, Quantec, LLC, or their property. Similarly, no claim was
pled against the property of Jeff Baron. Since the pleadings did not put
the subject matter of Novo Point LLC's property, Quantec LLC's
property, or Baron's property at issue, the district court “had no
jurisdiction over these properties, and its order appointing a receiver to
take charge of them was void.” See Cochrane at 1028-1029.
As a matter of well established law, the Supreme Court has held
that where a district court lacks subject matter jurisdiction over assets
placed into receivership, the court is without power to make any charge
upon, or disposition of, the property seized. E.g., Lion Bonding & Surety
Co. v. Karatz, 262 U.S. 640, 642(1923). As explained by the Supreme
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Court, “If there were no jurisdiction, there was no power to do
anything but to strike the case from the docket.” Citizens' Bank v.
Cannon, 164 U.S. 319, 324 (1896).
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REPLY ISSUE 2: THE SUPREME COURT IN GRUPO MEXICANO
DE DESARROLLO, SA V. ALLIANCE BOND FUND, INC., 527 U.S.
308 (1999), HELD THAT FEDERAL COURTS LACK THE
AUTHORITY TO ACT AGAINST ASSETS THAT ARE NOT
THEMSELVES SUBJECT TO A CLAIM BEFORE THE COURT,
EXCEPT TO ENFORCE A FINAL JUDGMENT.
The Supreme Court's holding in Grupo Mexicano is explicit:
“[A]n unsecured creditor has no rights at law or in equity
in the property of his debtor. ... [T]o discover assets, or to
impeach transfers, or interfere with the business affairs of
the alleged debtor, would manifestly be susceptible of the
grossest abuse. A more powerful weapon of oppression
could not be placed at the disposal of unscrupulous
litigants. The requirement that the creditor obtain a prior
judgment is a fundamental protection in debtor-creditor
law — rendered all the more important in our federal
system by the debtor's right to a jury trial on the legal
claim. The requirement that the creditor obtain a prior
judgment is a fundamental protection in debtor-creditor
law — rendered all the more important in our federal
system by the debtor's right to a jury trial on the legal
claim.”
Id. at 330.
Further the Supreme Court explained why this is so:
“[T]he equitable powers conferred by the Judiciary Act of
1789 did not include the power to create remedies
previously unknown to equity jurisprudence. Even when
sitting as a court in equity, we have no authority to craft a
‘nuclear weapon’ of the law like the one advocated here.”
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Id. at 332.
Vogel's argument concedes that “One of the goals in issuing the
Receivership Order and creating the Receivership was for the Receiver
to collect evidence regarding the claims of numerous lawyers who Baron
engaged, accepted services from, but failed to pay, leading to multiple
claims against Baron and his related entities for unpaid services (the
‘Former Attorney Claims’). With the district court’s guidance,
instructions, and orders, the Receiver was to disburse assets to resolve
the Former Attorney Claims.” (VBRE. 4.) Similarly, Sherman, has
admitted that the alleged “need to create” the Receivership was
“Baron's [alleged] failure to pay his attorneys”. SR. v5 p238.
However, such an alternative system of justice is precisely what
the Supreme Court forbid in Grupo Mexicano. Moreover, the Supreme
Court explained why the action taken by the District Court below is
outlawed, as follows:
“It would literally place the whole rights and property of
the community under the arbitrary will of the Judge,
acting, if you please, arbitrio boni judicis, and it may be,
ex aequo et bono, according to his own notions and
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conscience; but still acting with a despotic and sovereign
authority”
Id. at 332.
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REPLY ISSUE 3: THIS HONORABLE COURT HAS HELD THAT A
FEDERAL COURT'S INHERENT POWER DERIVES FROM AND IS
LIMITED
BY THE POWER EXERCISED BY “THE COMMON LAW
EQUITY TOOLS OF A CHANCERY COURT”. ITT COMMUNITY
DEVELOPMENT CORP. V. BARTON, 569 F.2D 1351, 1359 (5TH CIR.
1978).
The Chancery Court's Exercise of Power was Strictly
Limited with Respect to Imposition of Receiverships
The Chancery Court's exercise of power was strictly limited with
respect to imposition of receiverships, and accordingly, the Supreme
Court has strictly limited the authority of the federal courts to impose
receiverships. Gordon v. Washington, 295 U.S. 30, 37-38 (1935). The
Supreme Court held in Gordon that “[T]here is no occasion for a court of
equity to appoint a receiver of property of which it is asked to make no
further disposition”, and that a federal court may not “appoint a
receiver where the appointment is not ancillary to some form of final
relief which is appropriate for equity to give.” Id. Thus, a district court
lacks authority to use receivership as a remedy where no claim was pled
for disposition of the property seized, and further a district court lacks
authority to use receivership to provide a primary and independent
remedy.
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Other Circuit’s Governmental Receivership Cases do
Not Apply
Sherman’s argument erroneously offers other circuit's
governmental receivership cases
4
as authority that a federal court's
power has no limit but 'reasonableness'. (SBRE. 21). Those cases apply
only against co-branches of government and the legal reasoning of
expansive judicial power has never been approved by this Honorable
Court or the Supreme Court. Sherman's argument of expansive judicial
power restrained only by ‘reasonableness’ is not supported by the
established holdings of this Honorable Court or the Supreme Court.
4
Finding a source of federal judicial power, 'constitutional power', that is limited
only by reasonableness– but which can be directed only against other branches of
government. E.g., Morgan v. McDonough, 540 F.2d 527, 535 (1st Cir. 1976).
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REPLY ISSUE 4: THE SUPREME COURT HAS HELD THAT AN
ORDER ISSUED IN VIOLATION OF DUE PROCESS OF LAW IS
VOID IN THE RENDERING. WORLD-WIDE VOLKSWAGEN CORP.
V. WOODSON, 444 US 286, 291 (1980). THE SUPREME COURT
HAS FURTHER HELD THAT SUCH AN ORDER, VOID WHEN
RENDERED, “WILL ALWAYS REMAIN VOID”, AND CANNOT
BECOME VALID BY SUBSEQUENT DEVELOPMENTS.
PENNOYER V. NEFF, 95 US 714, 728 (1878).
Due Process was Clearly Violated in the Proceedings
Below
Due process is clearly violated by secret
5
off-the-record
6
, ex parte
proceedings to order all of an individual's property seized in his
absence:
(1) Without any application showing exigent circumstances;
(2) Without any verified allegations;
(3) Without the Court setting an immediate hearing; and
(4) Without any bond required to protect the defendant should
the seizure be wrongful.
5
The proceedings in the District Court below held on 11/24/2010 were secret.
Neither the District Court nor any of the participants have acknowledged their
occurrence. The proceedings were revealed from information provided by third
parties and examination of the creation time of key documents. See SR. v11 p82-83,
demonstrating that the District Court's order granting receivership was signed an
hour before the motion to appoint a receiver was filed. Sherman’s motion notably
certifies that it was emailed and uploaded to PACER, and therefore was either not
presented prior to being uploaded, or was presented with a false certification.
R. 1716.
6
R. 3924.
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See e.g., Connecticut v. Doehr, 501 U.S. 1, 4 (1991). The receivership
order should therefore be declared void for failure of due process, and if
the order is void, no subsequent proceedings held in the District Court
could make the order valid. Pennoyer at 728.
The District Court’s Decision Must be Reviewed on
Appeal based on the Evidence Relied on by the District
Court in Making its Decision
Similarly, this Honorable Court has held that as a basic practice
of fairness in Anglo-Saxon jurisprudence, “the deciding authority may
not base its decision on evidence which has not been specifically brought
before it”. Hornsby v. Allen, 326 F.2d 605, 608 (5th Cir. 1964).
Accordingly, this Honorable Court has held that in “reaching the
validity of the district court's judgment, we must first determine (1) the
action which it took (that is, precisely which motion it granted); (2) the
factual basis of the decision”. Williamson v. Tucker, 645 F.2d 404, 411
(5th Cir. 1981). Thus, the order challenged on appeal must stand or fail
based on what evidence was before the District Judge when he entered
the order. As this Honorable Court has recently held, “[T]he district
court necessarily has great authority over ... motions. However, it must
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base its decision on evidence”. League of United Latin American
Citizens, District 19 v. City of Boerne, __ F.3d __ (5th Cir. 2011, Nos. 10-
50290, 10-50416). A decision must be based upon evidence available
and presented at the time the District Judge makes his decision. A
decision of the district court cannot be based on evidence introduced at
a later date, at other hearings held after the decision has already been
made and appealed. See Id. Similarly, the Supreme Court has held that
as a fundamental principle of due process, a tribunal's decision “must
rest solely on the legal rules and evidence adduced at the hearing”.
Goldberg v. Kelly, 397 U.S. 254 (1970).
There was no evidence offered to the District Judge before he
entered the receivership order challenged in the primary appeal, and no
findings were made in support of the receivership order. The findings
Sherman references in his briefing
7
are findings made months after the
receivership was imposed in denying Baron's FRAP 8 motion for relief
pending appeal. Further, this Honorable Court has held that as a
general rule, a district court cannot accept “new evidence or arguments”
7
E.g., SBRE. 3.
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on an order, while the validity of the order is on appeal. Coastal Corp. v.
Texas Eastern Corp., 869 F.2d 817, 820 (5th Cir. 1989)
The Retrospective Justifications Offered by Sherman do
Not Support the Receivership Imposed
Sherman argues that lawyers were hired as a means of delaying
court proceedings. However, as discussed below, the rules of procedure
do not provide for any delay when new lawyers are hired, and the
District Court did not grant any. Sherman argues that Baron hired
lawyers without the intent to pay them. The record establishes those
'claims' are false and groundless. Such claims moreover, have never
been pled and are non-diverse state law claims well outside of the
subject matter jurisdiction of the district court. Griffin v. Lee, 621 F.3d
380, 388 (5th Cir. 2010). Sherman claims that Baron increased the cost
of litigation for all parties. However, no evidence of any additional cost
is found in the record, and in any case, all parties– including Sherman–
reached a full and final settlement and entered into a stipulated
dismissal with prejudice. R. 2346. Accordingly, all litigants’ 'costs' were
resolved by that settlement. Sherman alleges contempt of orders, but
no specific order can be pointed to. Sherman argues that Baron exposed
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the Ondova Bankruptcy Estate to expense, a fallacious legal argument
that is addressed in Novo Point LLC and Quantec LLC’s reply briefing.
Finally, Sherman alleges that there was an immediate threat that
Baron would transfer assets. No motion raised this 'threat'. No
evidence was offered of this 'threat' other than Pronske's post-appeal
testimony that several months prior to the receivership proceedings, the
trustee of the Village Trust changed from one Cook Islands trustee to
another. Moreover, even if Baron was going to ‘secrete’ all his property,
there was no active claim pled against him. Further, as discussed in
the LLCs’ reply briefing, there was more than a million dollars of
Baron's money, in cash, in the Ondova Bankruptcy.
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REPLY ISSUE 5: “VEXATIOUS LITIGATION” AS A LEGAL
CONCEPT DOES NOT MEAN 'FRUSTRATING AND IRRITATING
THE JUDGE'. RATHER, THIS HONORABLE COURT HAS HELD
THAT IN DETERMINING WHETHER A PARTY IS A VEXATIOUS
LITIGANT “[A] COURT MUST WEIGH .. THE PARTY'S HISTORY
OF LITIGATION, IN PARTICULAR WHETHER HE HAS FILED
VEXATIOUS, HARASSING, OR DUPLICATIVE LAWSUITS”.
BAUM V. BLUE MOON VENTURES, LLC, 513 F.3D 181, 189 (5TH
CIR. 2008).
Baron is not alleged to have filed a single lawsuit. Notably, Baron
is a defendant below, and was (directly or though Ondova) a defendant
in a series of duplicative suits filed by the same plaintiffs. That Baron
was required to retain a large number of attorneys to defend the
multiple duplicative suits filed by the plaintiff's below does not qualify
under the legal concept as a 'vexatious litigant'. E.g., R. 65-66.
8
The concept of 'vexatious litigation' comes about because party
can, in the normal course, file a lawsuit without the approval of any
court. Thus, the power to file a lawsuit can be abused because the court
normally has no control over what lawsuits are filed. The remedy
recognized to control vexatious litigation is ‘pre-filing injunction’ to
make a party's right to file a lawsuit subject to prior court approval.
8
See also the Novo Point LLC and Quantec LLC’s reply briefing in appeal 11-10113,
at page 12.
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See Baum at 187. Pre-filing injunction is notably not authorized as a
punitive measure or as sanction for contempt. Id. at 193.
A party's vexatious filing of lawsuits implicates the subject matter
of the court's control over its own docket. Id. at 187. By stark contrast,
the subject matter of a litigant's property is clearly not implicated in
relation to judicial supervision of a party's procedural right to file
lawsuits. Notably, a pre-filing injunction merely imposes an additional
procedural rule that allows a court to exert control over its own docket.
Without such an injunction the rules of procedure allow a vexatious
party to impose his presence upon the court by filing new lawsuits.
Further, a pre-filing injunction does not interfere with any rights
granted a litigant pursuant to state law. Cf. Id. at 192 (pre-filing
injunction not authorized to extend to state court proceedings). By
contrast, seizure of all
of a litigant's property and property rights, and
prohibiting a litigant from engaging in any business transactions or
earning any wages, directly interferes with the litigant's rights under
state law to (1) work, (2) earn a living, (3) engage in commerce, and
(4) possess and control property, etc. None of those subjects are
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implicated in relation to a court's procedural control over its own docket.
Changing Lawyers Cannot Constitute Vexatious
Litigation
Baron is 'accused' of changing lawyers multiple times in the
lawsuit below. But even if Baron changed lawyers a thousand times –
as a matter of law– that cannot be 'vexatious litigation'. This is because
Baron's change of counsel was always done with the express approval
and authorization of the trial court. The trial court already has full
control over what attorneys will appear at the bar before it, and the
trial court already has the power to approve a motion to withdraw or
substitute counsel. Because the power to control what attorney– if
any– appear at bar before it, already rests in the hands of the trial
court, changing counsel is not a procedural device that a litigant can
use to be 'vexatious'.
9
Clearly, a litigant might 'vex' a court in the sense
of 'frustrate and irritate' a trial judge who does not want a litigant to
change counsel but for whom the court never-the-less permits multiple
counsel to appear before it. In such a case, the fault and responsibility
9
Accordingly, the trial court does not need to seize all of a party's assets to control
what attorney appears before it.
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does not rest with the litigant– it is the trial judge who controls whether
substitution or withdrawal of counsel will be allowed.
Moreover, the changing of counsel does not extend or alter any
deadline, time period, or other obligation of a litigant pursuant to the
Federal Rules of Civil Procedure. Accordingly, a party in a civil lawsuit
cannot unilaterally impact the advancement of a proceeding by
changing counsel. Any delay involved in such a circumstance results
from the court's willing accommodation. Notably, no such
accommodation and no such delay occurred below. The District Court
below allowed withdrawal of counsel but maintained– without allowing
even one day additional for the new counsel– the same discovery
schedule, and even the same deposition setting for Baron. R. 146-147.
Sherman argues that Baron changed counsel too often, and
therefore the District Court had authority to seize all of his assets–
from his house keys to his retirement IRAs, and to prohibit Baron from
engaging in any business transactions. R. 1629, 1612. As authority for
this proposition, Sherman's argument relied on an erroneous view of the
holding of In re Fredeman. (SBRE. 20).
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REPLY ISSUE 6: IN RE FREDEMAN LITIGATION, 843 F.2D 821
(5TH CIR. 1988)
Sherman's argument grossly and fundamentally errs in its
interpretation of In re Fredeman Litigation, 843 F.2d 821 (5th Cir.
1988). In Fredeman, like the proceedings below, the plaintiff's “contend
primarily that the defendants are scoundrels who will try to escape
judgment”. Id. at 826. This Honorable Court held in Fredeman that the
allegation, even if true, “would not
justify the preliminary injunction”.
Id. Notably, in Fredeman a live claim was pled and pending against the
defendant, whereas, in the instant case all claims against Baron had
fully settled, and no claims were asserted against Novo Point LLC or
Quantec LLC. This Honorable Court held in Fredeman, that “The
general federal rule of equity is that a court may not reach a
defendant's assets unrelated to the underlying litigation and freeze
them so that they may be preserved to satisfy a potential money
judgment.” Id. at 824. Accordingly, this Honorable Court held that “as
the Court stated in De Beers, an injunction may issue to protect assets
that are the subject of the dispute”. Id. at 827. Similarly, this
Honorable Court has held in Fredeman that an order “limited to the
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property in dispute or its direct, traceable proceeds, is far different from
the all-inclusive order entered here.” Id.
In the case at bar, no claim was made as to any property– no
assets were subject to any pending disputes what-so-ever. This
Honorable Court was clear in its Fredeman holding, that it has upheld
“injunctions to preserve the particular assets in dispute in actions that
were essentially in rem” and not
to secure awards for damages. Id. at
827. The District Court below did exactly what this Honorable Court
declared in Fredeman, was prohibited, “The district court here, by
contrast, froze essentially all of the defendants' assets, effectively
putting the defendants into involuntary receivership, based on
unproven claims for unliquidated damages.” Id. at 828.
Finally, it is notable that all parties to the suit below had entered
a stipulated dismissal order. R. 2346. The only thing that the District
Court needed to do to process the litigation to a complete resolution was
to sign the stipulated dismissal order.
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REPLY ISSUE 7: AN EQUITABLE REMEDY “PROCURED BY
MATERIAL MISREPRESENTATION MAY NOT BE SUSTAINED.”
COASTAL CORP. V. TEXAS EASTERN CORP., 869 F.2D 817, 818
(5TH CIR. 1989)
Sherman and Vogel succeeded in persuading the District Court to
grant the receivership by convincing the District Court of two key
misrepresented facts, as follows:
1. Falsely Misrepresenting that Thomas was Unpaid and
Withdrew
First, Sherman misrepresented that “Mr. Thomas
10
was
terminating his legal representation of Baron because he had not been
paid and Baron had filed a grievance against him”. SR v2 p353. This
point was a central pillar of Sherman's motion. Sherman falsely alleged
that the Bankruptcy Court had ordered that Baron could either retain
Martin Thomas or proceed pro se in which case it would recommend a
receiver be appointed over Baron.
11
R. 1576. Sherman then fabricated a
story that Baron had not paid Thomas' fees, had filed a grievance
against Thomas, and caused Thomas to withdraw. Sherman's story was
a fabrication. SR. v10 p4097.
10
Baron's counsel representing him as a creditor in the Ondova Bankruptcy.
11
Such an order would clearly violate federal law. 28 U.S.C. §1654.
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2. Falsely Misrepresenting that Baron Caused the
Mediation Process to Fail
Second, Sherman and Vogel misrepresented that “that Baron is
not cooperating in the process outlined by this Court in its Order of
October 13, 2010 regarding the mediation process.” R. 1577. This
representation was clearly false. Vogel, the mediator, had said he
would not even know the costs or scheduling until after November 22,
2010. SR. v10 p4096. If the most preliminary aspects of the mediation–
initial scheduling and setting of the costs for mediation– were not even
scheduled to be determined until after Nov. 22, it is not possible for
Baron to have failed to cooperate with the mediation and cause the
mediation to fail. However, the District Judge believed Sherman and
Vogel, and believed that Baron had caused the mediation to fail. SR v2
p343. Notably, the District Judge, in retrospectively explaining his
reasons for entering the receivership order, expressly relied on “Baron's
failure to cooperate in the process outlined in the Court's October 13,
2010 Order to mediate the claims against Baron for legal fees” as a
reason “why the emergency appointment of a receiver was necessary.”
Id. Accordingly, the District Court would not have issued the
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receivership order if Sherman or Vogel would have told him the
truth– that the mediation hadn't even started and Vogel was not even
ready with preliminary scheduling or figuring out how much he was
going to charge, until after Nov. 22, 2010. SR. v10 p4096.
Conclusion
The District Judge erred on the law in many fundamental ways.
But he was clearly trying to do what he felt, in his perspective, was the
right thing to do. He had ordered Baron to mediation to resolve claims
attorneys had asserted (not in the district court). If Baron was both not
going to pay his lawyers, and was going to thumb his nose at the Judge
by refusing to mediate the fees, then the Judge felt a receivership order
was justified. As a legal matter, the District Court lacks subject matter
jurisdiction over the non-diverse claims of a litigant's counsel. Griffin,
621 F.3d at 388. Receivership is also not a remedy authorized to secure
or resolve the claims of unsecured creditors. E.g., Pusey & Jones Co. v.
Hanssen, 261 U.S. 491, 497 (1923). However, Vogel and Sherman– in
off-the-record, ex parte proceedings, convinced the District Judge to take
that drastic step, by misrepresenting that the mediation the District
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Judge had ordered to help resolve (what the District Judge believed to
be Baron's failure to pay multiple attorneys), had been caused to fail by
more of Baron's misdeeds. Vogel was employed as a Special Master in
the case. Vogel was also the mediator. R. 1574. Vogel thus had
personal knowledge that the mediation– for which he was the
mediator– had not started. Yet, sitting as a judicial officer in his
role as special master, Vogel misled the District Court into
believing that Baron had caused the mediation to fail– in order to
induce the District Judge into appointing him as receiver.
Accordingly, Sherman (and Vogel adopting Sherman's appellate
argument), argue erroneously that it would be inequitable not to allow
Vogel and his law partners their million dollar receivership fees,
approved by the District Court.
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REPLY ISSUE 8: APPEAL DIVESTS THE DISTRICT COURT OF
JURISDICTION OVER THE MATTER APPEALED
Griggs
Sherman argues erroneously that “There is no absolute rule that
the filing of a notice of appeal divests the district court of jurisdiction
with respect to the order appealed from.” (SBRE. 21). Contrary to
Sherman’s argument, that is precisely what an appeal does. Griggs v.
Provident Consumer Discount Co., 459 U.S. 56, 58 (1982). Sherman's
argument is that the District Court and the Court of Appeals share
jurisdiction, so long as the District Court does not act to divest the
Court of Appeals. However, the law is just the opposite. Id. This
Honorable Court has held that a “federal district court and a federal
court of appeals should not attempt to assert jurisdiction over a case
simultaneously.” Dayton Indep. School Dist. v. US Mineral Prods. Co.,
906 F.2d 1059, 1063 (5th Cir. 1990). The District Court maintains
jurisdiction only to enforce the order, and to maintain the status quo
during the pendency of the appeal. E.g., Coastal Corp. v. Texas Eastern
Corp., 869 F.2d 817, 820 (5th Cir. 1989) (power of the district court
during appeal “should be limited to maintaining the status quo”). As
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this Honorable Court held in Dayton, “the district court loses
jurisdiction over all matters which are validly on appeal. “ Id. at
1064.
Palmer v. Texas
Sherman's erroneous argument that a District Court may empty a
receivership res while it is on appeal is not supported by any authority.
The Supreme Court in Palmer v. Texas, 212 U.S. 118, 29 S.Ct. 230
(1909) clearly held that on appeal, the receivership res becomes the
possession of the appellate court, as follows:
“the effect of the appeal was simply ... that the appellate
court still had jurisdiction over the res the same as the
trial court had”.
Lion Bonding
The Supreme Court's holding in Lion Bonding & Surety Co., v.
Karantz, 262 U.S. 640, 642 (1923) is also clear:
“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 his expenses and
compensation”.
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In Lion Bonding, the example offered in the court’s reasoning was loss
of jurisdiction of the matter because of an intervening bankruptcy. In
the instant case, the District Court was divested of jurisdiction over the
matter by an appeal. The legal principle is the same– when the District
Court lost jurisdiction over the matter, it was also divested of authority
to make charges against the receivership res. As the Supreme Court
held in Palmer, the receivership res became the possession of the court
of appeals when the receivership order was appealed.
Wabash
Similarly, the Supreme Court made clear in Wabash R. Co. v.
Adelbert College of Western Reserve Univ., 208 U.S. 38, 46 (1908) that:
“[The] possession [of the receivership res] carried with it
the exclusive jurisdiction to determine all judicial
questions concerning the property”.
Accordingly, pursuant to the Supreme Court's holding in Wabash, when
the jurisdiction over the res passed to the court of appeals, the district
court was without power to determine any questions concerning the
property held in the receivership estate. Similarly, after an appeal is
filed, the District Court is required to maintain the status quo. Coastal
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Corp. at 820. The only way a court of appeals can ensure effective
redress to property wrongfully seized in a receivership, is if the property
is preserved and can be returned to its owner if the receivership is
found wrongful. Accordingly, conservation of the receivership res is
fundamental to maintaining jurisdiction over the appeal.
Jeff Baron’s Life Savings
The authority cited in support of Sherman's argument that
attorneys fees can be awarded while a case is on appeal, Procter &
Gamble, relates to a right to attorneys fees that accrued outside
of the
matter being appealed.
12
Secondly, Procter & Gamble involves the
authority of a district court to adjudicate fees in personam and does not
involve distribution of assets out of the receivership estate. In the case
at bar, Jeff Baron had a million dollars saved up in his savings
accounts. That money was placed into receivership and constituted
receivership res. On appeal, Baron seeks the return of his life's savings.
When Baron's notice of appeal was filed, this Honorable Court obtained
jurisdiction over the matter on appeal, and the District Court was
12
Procter & Gamble Co. v. Amway Corp., 280 F.3d 519, 525 (5th Cir. 2002).
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divested of power to change the status of the matter as it rested before
this Honorable Court. Dayton at 1063. If a district court were allowed
power to distribute Baron’s million dollars as 'receivership fees' while
the case is on appeal, the Court of Appeals would be divested of
jurisdiction over the receivership by the District Court.
The Law of Invalid Receiverships
Sherman erroneously argues that Palmer holds fees can be
awarded by a trial court where a receivership was found to be invalid,
as discussed below. First, the Palmer fees were allowed by the Supreme
Court, the court which was the appellate court in possession of the
receivership res on appeal. Secondly, the fees were awarded at the
resolution of the appeal– not while the appeal was still being decided.
Thirdly, the Palmer receivership was not
found to be outside the
authority nor the subject matter jurisdiction of the trial court, nor was
the Palmer receivership found to be based on a defective claim. Rather,
the Palmer receivership order was reversed out of principles of comity,
to respect the state court receivership. In the circumstance where the
state court receivership was affirmed by the state supreme court, the
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allowance of costs for a receiver while the federal court retained
jurisdiction over the matter was found just. That circumstance does not
apply in the case at bar– the receivership at bar is not based on a valid
claim, and the District Court lacked both subject matter jurisdiction
and authority to impose the receivership. Moreover, the law with
respect to disallowing receivership costs and fees when the receivership
order is reversed because the receivership itself was defective is clear
and well-established, as discussed below.
The Three Distinct Types of Defective Receiverships
Cases
There are three distinct types of cases involving the question of
authority to pay the costs of the receiver’s professionals out of
receivership assets when the receivership is ultimately reversed, as
follows:
The first type of case is where court has authority to impose a
receivership, but the receivership was instituted upon an unfounded
claim. This Honorable Court has held that in that type of case, based
on equitable principles the party who's property was seized is entitled
to have the costs of the receivership charged against those who
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provoked the receivership. Tucker v. Baker, 214 F.2d 627, 631, 632 (5th
Cir. 1954); Porter v. Cooke, 127 F.2d 853, 859 (5th Cir. 1942).
The second type of case involves a situation where a receiver has
taken property under an irregular or unauthorized appointment. The
Supreme Court has held that in those types of cases the receiver must
look for his compensation to the parties at whose instance he was
appointed. Atlantic Trust Co. v. Chapman, 208 U.S. 360, 373 (1908).
The same rule applies if the property of which the receiver takes
possession is determined to belong to persons who are not parties to the
action. Id.
The third type of case involves a situation where the district court
lacks subject matter jurisdiction over the party or assets placed into
receivership. The Supreme Court has held that in such a situation the
courts are without power to make any
charge upon, or disposition of,
the assets. Lion Bonding & Surety Co. v. Karatz, 262 U.S. 640, 642
(1923); Citizens' Bank v. Cannon, 164 U.S. 319, 324 (1896) (If there
were no jurisdiction, there was no power to do anything).
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The receivership imposed below is challenged on appeal based on
the receivership:
(1) being brought on an improper claim;
(2) the District Court’s lacking subject matter jurisdiction to
impose a receivership over the property seized; and
(3) the District Court’s lack of authority to impose receivership as
a primary, independent remedy and absent an ancillary claim
in equity to an interest in the receivership res.
Accordingly, if the receivership is reversed on appeal based on any of
these grounds, taking from the receivership estate to pay costs is
neither authorized by law nor equitable. Sherman’s argument, by
contrast, relies upon Palmer– a case involving a receivership that was
rejected based on comity, not on underlying invalidity. Palmer involved
an underlying state court receivership that was found by the state
supreme court to be authorized and properly instituted. Id. at 129. The
Federal court in Palmer had both the subject matter jurisdiction, and
the authority in law to impose a receivership. However, the state
receivership was imposed first and as a principle of comity was
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respected by the federal courts. Id. In Palmer, upon resolution of the
federal appeal, costs were allowed out of the receivership funds that
were turned over to the state receivership. Since the federal court in
Palmer had (1) subject matter jurisdiction and (2) legal authority to
impose the receivership, and since (3) absent the federal receivership
the costs would have been borne out of receivership res in the state
receivership, costs were allowed from the receivership res upon
dismissal of the case. Notably, these elements are not present in the
case at bar.
Conclusion
Sherman argues that “Justice requires that the costs and fees of
the receivership be recovered even though they were incurred while the
receivership order was on appeal.” However, Sherman’s argument
ignores well-established law, as discussed above. As a matter of
established law, if the district court lacks subject matter jurisdiction, it
has no power to charge the receivership estate. Lion Bonding at 642.
Similarly, if the receivership is found to have been wrongly imposed, as
a matter of established law, ‘Justice requires that the costs and fees of
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the receivership be recovered’ from the party provoking the receivership
and not from the assets taken into receivership. E.g.¸Atlantic Trust Co.
at 373.
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REPLY ISSUE 9: 28 U.S.C. § 958
28 U.S.C. §958 applies to any person “holding any ... office or
employment under the United States or employed by any justice or
judge”. Vogel was clearly employed by district judge as special master,
and was holding the office of special master by virtue of his
appointment, as discussed below.
The office of master has a long history in law. The office of master
in chancery, is of French origin and was imported into England with the
Norman Conquest. See 1 Holdsworth, A History of English Law 416,
441-444 (1956); 1 Pollock and Maitland, History of English Law 193
(1959); Bryant, The Office of Master in Chancery: Early English
Development, A.B.A.Jour. 498 (1954); Kaufman, Masters in the Federal
Courts: Rule 53, 58 Col.L.Rev. 452 (1958). As explained by Professor
Bryant, “In the colonial development of America just as chancery relief
had been required and had become a part of the judicial system of
colonial America, so had the office of master been recognized as an
integral part of the administration of that relief and had become
soundly rooted in the legal thinking and custom. It was from this basis
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that after the Revolution the office of master in chancery or its
equivalent made its way into many of the state and federal systems of
procedure.” Bryant, The Office of Master in Chancery: Colonial
Development, 40 A.B.A.Jour. 595 (1954).
Similarly, federal courts have recognized that the special master
occupies an office. E.g., Cochrane v. Commissioner of Internal Revenue,
26 BTA 1167, 1168 (1932) (“auditor appointed by a judge ... was an
officer or employee of that state within the meaning of section 1211 of
the Revenue Act of 1926, and that such office was analogous to the
office of master in chancery”); N.L.R.B. v. Baldwin Locomotive Works,
128 F.2d 39 (3d Cir.1942)(“[A]ncient office of Master in Chancery”);
Gary W. v. State of La., DHHR, 861 F.2d 1366, 1367 (5th Cir. 1988)
(“Dr. Brenda Lyles was appointed special master on January 1, 1987 ...
The following week the office of special master terminated and Dr.
Lyles was appointed director of an independent monitoring unit”).
As a matter of long-standing and historical law, the office of
special master is a judicial office. Vogel was clearly employed by the
District Court as special master and held that office at the time he was
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appointed as receiver over Baron. Because Vogel then held an “office or
employment” as special master, he was prohibited from being appointed
receiver by 28 U.S.C. § 958.
CONCLUSION
For the foregoing reasons, the receivership order imposed by the
District Court should be reversed and declared void, and the
receivership res should be returned to its original and proper owners.
Jointly and in the alternative, the orders complained on appeal should
be reversed.
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 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 6,884 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 APPELLANT JEFFREY BARON
Case: 10-11202 Document: 00511672920 Page: 57 Date Filed: 11/21/2011
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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 APPELLANT JEFFREY BARON
Case: 10-11202 Document: 00511672920 Page: 58 Date Filed: 11/21/2011
