Filed: Dec. 18, 2012
Latest Update: Mar. 02, 2020
Summary: Case: 10-11202 Document: 00512087819 Page: 1 Date Filed: 12/18/2012 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED December 18, 2012 No. 10-11202 Lyle W. Cayce Clerk NETSPHERE, INC., ET AL, Plaintiffs v. JEFFREY BARON, Defendant - Appellant v. ONDOVA LIMITED COMPANY, Defendant - Appellee - CONS. w/ 11-10113 NETSPHERE, INC., ET AL, Plaintiffs v. JEFFREY BARON, ET AL, Defendants v. QUANTEC, L.L.C.; NOVO POINT, L.L.C., Movants - Appell
Summary: Case: 10-11202 Document: 00512087819 Page: 1 Date Filed: 12/18/2012 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED December 18, 2012 No. 10-11202 Lyle W. Cayce Clerk NETSPHERE, INC., ET AL, Plaintiffs v. JEFFREY BARON, Defendant - Appellant v. ONDOVA LIMITED COMPANY, Defendant - Appellee - CONS. w/ 11-10113 NETSPHERE, INC., ET AL, Plaintiffs v. JEFFREY BARON, ET AL, Defendants v. QUANTEC, L.L.C.; NOVO POINT, L.L.C., Movants - Appella..
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Case: 10-11202 Document: 00512087819 Page: 1 Date Filed: 12/18/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 18, 2012
No. 10-11202
Lyle W. Cayce
Clerk
NETSPHERE, INC., ET AL,
Plaintiffs
v.
JEFFREY BARON,
Defendant - Appellant
v.
ONDOVA LIMITED COMPANY,
Defendant - Appellee
---------------------------------------------------------------------------
CONS. w/ 11-10113
NETSPHERE, INC., ET AL,
Plaintiffs
v.
JEFFREY BARON, ET AL,
Defendants
v.
QUANTEC, L.L.C.; NOVO POINT, L.L.C.,
Movants - Appellants
v.
PETER S. VOGEL,
Case: 10-11202 Document: 00512087819 Page: 2 Date Filed: 12/18/2012
No. 10-11202
Appellee
---------------------------------------------------------------------------
CONS. w/ 11-10289
NETSPHERE, INC., ET AL,
Plaintiffs
v.
JEFFREY BARON,
Defendant - Appellant
v.
DANIEL J. SHERMAN,
Appellee
---------------------------------------------------------------------------
CONS. w/ 11-10290
NETSPHERE, INC., ET AL,
Plaintiffs
v.
JEFFREY BARON, ET AL,
Defendants
v.
QUANTEC, L.L.C.; NOVO POINT, L.L.C.,
Movants - Appellants
2
Case: 10-11202 Document: 00512087819 Page: 3 Date Filed: 12/18/2012
No. 10-11202
v.
PETER S. VOGEL,
Appellee
---------------------------------------------------------------------------
CONS. w/ 11-10390
NETSPHERE, INC., ET AL,
Plaintiffs
v.
JEFFREY BARON,
Defendant - Appellant
QUANTEC, L.L.C.; NOVO POINT, L.L.C.,
Movants - Appellants
v.
ONDOVA LIMITED COMPANY,
Defendant - Appellee
PETER S. VOGEL,
Appellee
---------------------------------------------------------------------------
CONS. w/ 11-10501
NETSPHERE, INC., ET AL,
Plaintiffs
v.
3
Case: 10-11202 Document: 00512087819 Page: 4 Date Filed: 12/18/2012
No. 10-11202
JEFFREY BARON,
Defendant - Appellant
QUANTEC, L.L.C.; NOVO POINT, L.L.C.,
Movants - Appellants
CARRINGTON, COLEMAN, SLOMAN & BLUMENTHAL, L.L.P.,
Appellant
v.
PETER S. VOGEL; DANIEL J. SHERMAN,
Appellees
---------------------------------------------------------------------------
CONS. w/ 12-10003
NETSPHERE, INC., ET AL,
Plaintiffs
v.
JEFFREY BARON,
Defendant - Appellant
QUANTEC, L.L.C.; NOVO POINT, L.L.C.,
Movants - Appellants
GARY SCHEPPS,
Appellant
v.
4
Case: 10-11202 Document: 00512087819 Page: 5 Date Filed: 12/18/2012
No. 10-11202
PETER S. VOGEL,
Appellee
---------------------------------------------------------------------------
CONS. w/ 12-10444
In re: NOVO POINT, L.L.C.,
Petitioner
---------------------------------------------------------------------------
CONS. w/ 12-10489, 12-10657, and 12-10804
NETSPHERE, INC., ET AL,
Plaintiffs
v.
JEFFREY BARON,
Defendant - Appellant
NOVO POINT, L.L.C.; QUANTEC, L.L.C.,
Movants - Appellants
v.
PETER S. VOGEL; DANIEL J. SHERMAN,
Appellees
---------------------------------------------------------------------------
CONS. w/ 12-11082
NETSPHERE, INCORPORATED, ET AL
Plaintiffs
5
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No. 10-11202
v.
JEFFREY BARON,
Defendant - Appellant
QUANTEC L.L.C.; NOVO POINT, L.L.C.,
Movants - Appellants
v.
PETER S. VOGEL,
Appellee
Appeals from the United States District Court
for the Northern District of Texas
Before DeMOSS, SOUTHWICK, and HIGGINSON, Circuit Judges.
LESLIE H. SOUTHWICK, Circuit Judge:
These consolidated interlocutory appeals arise from the district court’s
appointment of a receiver over Jeffrey Baron’s personal property and entities he
owned or controlled. The district court sought to stop Baron’s practice of
regularly firing one lawyer and hiring a new one. This practice vexed the
litigation involving Baron’s alleged breaches of a settlement agreement and a
related bankruptcy. It also created new claims in bankruptcy by unpaid
attorneys. Baron appealed the receivership order and almost every order
entered by the district court thereafter. We hold that the appointment of the
receiver was an abuse of discretion and REVERSE and REMAND.
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No. 10-11202
Numerous motions and a writ of mandamus to overturn the bankruptcy
court’s striking of notices of appeal to the district court are also before us. Most
are denied as moot. We address below the motions that remain relevant.
FACTUAL AND PROCEDURAL HISTORY
Jeffrey Baron and Munish Krishan formed a joint venture involving the
ownership and sale of internet domain names. Disputes arose between the
venturers, resulting in at least seven lawsuits. In April 2009, after four
mediation attempts and several years of litigation, Baron, Krishan, and other
parties signed a Memorandum of Understanding (“MOU”) settling all disputes.
Soon, Baron and one of his companies, Ondova Limited Company, allegedly
breached the MOU. In May 2009, Krishan and his company, Netsphere, Inc.,
filed a lawsuit in the United States District Court for the Northern District of
Texas to enforce the MOU. That suit is the one from which the current appeals
have been brought.
In June 2009, the district court entered a preliminary injunction to compel
Baron’s compliance with the MOU. That injunction was later amended to
include a $50,000 per day penalty for a violation. The injunction was entered to
prevent deletion of domain names and to force compliance with parts of the
MOU. The district court also began expressing concern with the multitude of
lawyers appearing for Baron, concerns that would continue in the months ahead.
In July 2009, Netsphere moved to have Baron held in contempt for
violating the preliminary injunction. On the day before the scheduled contempt
hearing, Baron caused Ondova to file for bankruptcy, which automatically
stayed the district court litigation. Netsphere sought to lift the automatic stay,
arguing that the domain names at issue in the lawsuit were not owned by
Ondova and were not subject to the stay. Ondova allegedly admitted it did not
own the domain names that were the subject of the district court litigation – i.e.,
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the ones involving plaintiff Krishan and defendant Baron that the settlement
provided would be divided between them.
The bankruptcy creditors and Ondova eventually agreed to a settlement,
but Baron continued to hire new lawyers. Many of the lawyers claimed they had
not been paid and began to file claims for legal fees in the bankruptcy
proceedings. In September 2009, in bankruptcy court, Baron asserted his Fifth
Amendment right not to answer questions that might reveal he was violating the
June preliminary injunction. Six days later, the bankruptcy court appointed
Daniel Sherman as Chapter 11 trustee. The bankruptcy court recommended
that the district court appoint a special master to mediate among the trustee,
Baron, and the attorneys with claims against the Ondova bankruptcy estate, but
no master was appointed at that time.
Beginning in February 2010, negotiations began for another settlement.
On May 5, 2010, the bankruptcy court held a status conference. If no settlement
could be reached by May 14, the bankruptcy judge suggested the trustee file to
convert the case to one in Chapter 7. The trustee did so, stating liquidation was
in the best interest of creditors. Several hearings were held over the next
month. On June 22, 2010, the parties announced a global settlement in
principle. At a July 12 bankruptcy court hearing, the parties represented that
most issues had been resolved. Two days later at another hearing, the
bankruptcy judge approved the settlement subject to six remaining issues.
The settlement, dated July 2, 2010, provided for the division of domain
names between companies controlled by Baron and Krishan. The odd-numbered
names were assigned to Quantec, LLC, for Baron’s benefit, while Manila
Industries, Inc. – under Krishan’s control – was assigned the even-numbered
names. The agreement was not to become effective until the “Settlement Date,”
which was defined as “the day after the date on which the Bankruptcy Court’s
order approving this Agreement becomes a Final Settlement Order.” On July 28,
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2010, the bankruptcy court approved the settlement and ordered it to be fully
executed by July 30. The bankruptcy court maintained jurisdiction to resolve
disputes arising under the agreement. Attached to the agreement was a
“Stipulated Dismissal with Prejudice” of the district court suit. Though signed
by the parties and attorneys, the district court never entered the dismissal.
On September 15, 2010, a hearing was held on the settlement agreement.
The trustee said that 30 or 40 items in the agreement had been completed and
the remaining items were the execution of a supplemental agreement appointing
a trustee of a trust and the transfer of domain names to Quantec from Manila.
At this hearing, the trustee’s attorney also addressed Baron’s repeated
hiring and firing of lawyers – he presented a chart identifying 45 lawyers whom
Baron had not paid. Gerrit Pronske, one of Baron’s former attorneys who was
seeking to withdraw, testified that he worked for Baron full-time for six months
and had not been paid. Pronske testified that Baron planned to move assets that
were at the time subject to jurisdiction in the United States to a trust in a
foreign country. The trust to which Pronske was referring was the Village Trust,
a Cook Islands entity which owned Novo Point, LLC and Quantec, LLC. Its
trustee is SouthPac, which is also a Cook Islands entity, and Baron is the trust’s
sole beneficiary. Pronske indicated that the assets being transferred out of the
United States would have been the principal source of payment for his allegedly
unpaid attorney fees. The attorney for the trustee was concerned because the
money to pay the lawyers and satisfy other claims would be lost if the domain
names that Baron’s entities were to own under the settlement left control of the
trust that was subject to the court’s jurisdiction.
At this point, the bankruptcy judge stated that “no more lawyers [are]
going to be allowed. The question is: Whether any are going to be released; is
he going to be pro se; or is he going to have lawyers?” In light of those questions,
the bankruptcy judge said she was considering recommending the district court
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No. 10-11202
appoint a receiver over Baron and his assets “and let that receiver implement
the settlement agreement.” Additionally, the bankruptcy court ordered Baron
to request from the trust that $330,000 be deposited with the bankruptcy trustee
as security, to be held until further court order. The money was deposited and
held “to pay [Baron’s] obligations.”
On October 13, 2010, in a report and recommendation to the district court,
the bankruptcy court reported substantial progress toward the settlement,
including “steps towards transferring the ‘Odd Names Portfolio’ portion of the
internet domain names to a new Registrar away from Ondova.” Included in the
order, in bold, was the bankruptcy court’s judgment that Baron’s hiring and
firing of lawyers was exposing the Ondova bankruptcy estate to great expense
that should be paid by Baron’s other entities such as Quantec and Novo Point.
The court expressed it was “perhaps most concerned about the risk that the
bankruptcy estate has and will be exposed to administrative expense claims”
because of Baron’s failure to pay lawyers.
Also in this October 13, 2010 report, the bankruptcy court recommended
that the district court appoint Peter S. Vogel as special master to mediate the
claims for unpaid legal fees. The bankruptcy court further stated that if Baron
chose not to cooperate with final consummation of the settlement, Baron could
“expect [it] to recommend to His Honor that he appoint a receiver over Mr.
Baron.” The court adopted the bankruptcy court’s recommendation and
appointed Vogel as special master. Baron again fired his attorney. At this point,
the bankruptcy trustee filed an Emergency Motion for Appointment of a Receiver
over Baron on November 24, 2010. The trustee asserted the receivership was
necessary because of Baron’s failure to cooperate with the order to mediate the
legal-fee claims and his continued hiring and firing of lawyers in violation of the
court’s order. The trustee argued that Baron’s practice of hiring and firing
lawyers would expose the bankruptcy estate to additional administrative claims
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No. 10-11202
and further delay the resolution of the bankruptcy proceedings. On November
24, the same day the motion was filed, the district court entered the receivership
order without notice to Baron. On December 2, Baron appealed to the Fifth
Circuit Court of Appeals and five days later moved for a stay. While
“express[ing] no view on the ultimate merits,” we held on December 20, that he
had made an inadequate showing for a stay. Baron renewed his motion on
occasion but was never granted a stay. Somewhat belatedly, we now express our
views on the ultimate merits.
In the district court, the receiver moved to revise the receivership order to
make it clear that Novo Point, LLC and Quantec, LLC had always been subject
to the receivership. The original order identified Novo Point, Inc., and Quantec,
Inc., which are actual but distinct legal entities. The two LLCs filed objections
on several grounds. At a hearing on December 17, 2010, attorneys for Novo
Point, LLC and Quantec, LLC appeared and agreed they were subject to the
receivership order. The district court entered an order stating that the
receivership had always included Novo Point, LLC and Quantec, LLC and
ordered the LLCs to comply with all reasonable instructions given to them by the
receiver. On January 28, 2011, the LLCs filed a notice of appeal challenging
their inclusion as receivership parties.
On January 4, 2011, the district court held an evidentiary hearing on
Baron’s motion to vacate the receivership order. A month later, the district court
entered an order denying Baron’s motion to vacate the receivership. The district
court gave six reasons for denying the motion to vacate: (1) “Baron hired and
fired counsel in bad faith as a means of delaying court proceedings[;]” (2)
“Baron’s vexatious litigation tactics have increased the cost of [the] litigation for
all parties[;]” (3) “Baron’s practice of hiring and firing attorneys exposed the
Ondova bankruptcy estate to significant expense[;]” (4) “Baron has repeatedly
ignored court orders[;]” (5) “Baron repeatedly hired attorneys in bad faith
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No. 10-11202
without the intention of paying them[;]” and (6) “the appointment of a receiver
is necessary to stop Baron from attempting to transfer funds outside the
jurisdiction of the United States.” Nowhere in its order did the district court find
that Baron failed to assign half of the domain names as required by the
settlement agreement.
Baron appealed the appointment of the receiver and then appealed
numerous subsequent orders entered by the district court. An order appointing
a receiver is appealable to courts of appeals as a matter of right. 28 U.S.C. §
1292(a)(2).1 There is less clarity as to which orders during the pendency of a
receivership may properly be appealed. As we later discuss, our conclusions
about the receivership itself make most of the later appeals irrelevant.
DISCUSSION
The central issue on appeal is whether a court can establish a receivership
to control a vexatious litigant. The district court appointed a receiver primarily
to control Baron’s hiring, firing, and non-payment of numerous attorneys. The
receiver was granted exclusive control over assets, including Baron’s personal
property, that were not at issue in the underlying litigation over the domain
names. We find no authority to permit establishing a receivership for this
purpose. We set out below our reasons for that conclusion and its effect on what
has occurred since the receivership was put in place.
1
In one of the consolidated appeals in this case, Carrington, Coleman, Sloman &
Blumenthal, L.L.P. (“CCSB”), a firm that served as counsel to Baron and Ondova in the
bankruptcy proceedings, claimed it is owed $224,232.69 in unpaid fees. CCSB filed a separate
appeal from the district court’s disbursement order providing for payment to unpaid attorneys.
Under the disbursement order, CCSB is to receive no payments from the receivership; instead,
CCSB is to be paid out of the Ondova bankruptcy estate. CCSB agreed that this court lacks
jurisdiction over CCSB’s appeal given that the firm filed a motion to reconsider that remains
pending in the district court. Ross v. Marshall, 426 F.3d 745, 752, n.13 (5th Cir. 2005).
Thus, the CCSB appeal is dismissed.
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No. 10-11202
I. Propriety of the Receivership Order
We review a district court’s appointment of a receiver for an abuse of
discretion. Santibanez v. Weir McMahon & Co., 105 F.3d 234, 242 (5th Cir.
1997). Federal Rule of Civil Procedure 66 gives limited guidance, stating that
the civil rules govern in an action involving a receiver. “Under that rule, the
appointment of a receiver can be sought ‘by anyone showing an interest in
certain property or a relation to the party in control or ownership thereof such
as to justify conservation of the property by a court officer.’”
Santibanez, 105
F.3d at 241 (quoting 7 James Moore et al., Moore’s Federal Practice § 66.05[1]
(2d ed. 1996)). Correspondingly, a district court has authority to place into
receivership assets in litigation “to preserve and protect the property pending its
final disposition.” Gordon v. Washington,
295 U.S. 30, 37 (1935). Examples the
Court gave of the proper use of a receivership included the preservation of
property until the foreclosure of a mortgage, or of trust property until
appointment of a new trustee, or of a debtor’s property until a judgment creditor
has it applied to his judgment.
Id. In none of those situations was the receiver
named simply to secure or preserve funds for the satisfaction of a potential later
judgment. Receivership is “an extraordinary remedy that should be employed
with the utmost caution” and is justified only where there is a clear necessity to
protect a party’s interest in property, legal and less drastic equitable remedies
are inadequate, and the benefits of receivership outweigh the burdens on the
affected parties. See 12 Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 2983 (3d ed. 2012); see also
Santibanez, 105 F.3d at
241-42 (summarizing factors courts must consider before appointing a receiver).
Even if a reasonable basis exists for believing there are benefits to the
court and the parties to imposing a receivership, and those reasons likely existed
here, resort to that remedy may be inappropriate. The cases on which the
district court initially relied in appointing a receiver establish that the court has
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No. 10-11202
inherent power “to manage [its] own affairs so as to achieve the orderly and
expeditious disposition of cases.” Woodson v. Surgitek, Inc., 57 F.3d 1406, 1417
(5th Cir. 1995). These cases, however, refer to a court’s power to dismiss a case
with prejudice and the district court’s authority to impose monetary sanctions.
Id.; FDIC v. Maxxam, Inc.,
523 F.3d 566, 584 (5th Cir. 2008). In a later order
disbursing attorney fees, the district court also relied on precedents stating that
a receivership is an equitable remedy.
Santibanez, 105 F.3d at 241. That is so,
but for the reasons discussed below, equity does not allow a receivership to be
imposed over property that was not the subject of the underlying dispute.
Receivers have been used in a number of contexts. “Secured creditors,
lien- holders, and mortgagees” may seek appointment of a receiver because they
“clearly have an interest in the property in which they have a security interest
that may provide a basis for convincing the court to appoint a receiver ending a
foreclosure suit or any other action to enforce one or more outstanding liens.”
Wright & Miller, supra, § 2983; see also Bookout v. First Nat’l Mortg. & Disc. Co.,
514 F.2d 757, 758 (5th Cir. 1975). Additionally, a receivership is a remedy for
taking possession of a judgment debtor’s property.
Santibanez, 105 F.3d at 241.
A receivership also can be utilized when a judgment creditor seeks “to set aside
allegedly fraudulent conveyances by the judgment debtor, or who has had
execution issued and returned unsatisfied . . . or who otherwise is attempting to
have the debtor’s property preserved from dissipation until his claim can be
satisfied.”
Id. (quoting Wright & Miller, supra, § 2983). Importantly, to justify
the appointment of a receiver such claims would already have been reduced to
judgment. That was not the case here, as the receivership was deemed imposed
for unresolved claims.
The receiver and trustee pointed us to another line of cases where a
receivership was proper as an adjunct to injunctive relief for a securities fraud.
E.g., SEC v. Keller Corp., 323 F.2d 397, 402 (7th Cir. 1963). Receiverships also
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No. 10-11202
have been upheld in derivative actions by stockholders against corporations to
prevent the threatened diversion of assets through fraud or mismanagement.
E.g., Tanzer v. Huffines, 408 F.2d 42, 43 (3d Cir. 1969). Thus, in cases of
non-compliance with SEC regulations, a receiver may be appointed to prevent
the corporation from dissipating corporate assets and to pay defrauded investors.
Id.; SEC v. Hardy,
803 F.2d 1034, 1035 (9th Cir. 1986). Nonetheless, in a
derivative suit or a suit for non-compliance with SEC regulations, the corporate
assets are the underlying subject matter of the dispute. Here, the only assets
that were the subject matter of the dispute were the domain names that were to
be transferred under the settlement agreement. They were transferred.
Last, the receiver and trustee relied on cases where courts appointed
receivers to run institutions where constitutional violations were occurring.
Such receiverships are generally ordered in the context of ensuring a
governmental entity’s compliance with court orders. See, e.g., Morgan v.
McDonough, 540 F.2d 527 (1st Cir. 1976) (upholding a receivership imposed to
insure a high school’s compliance with desegregation orders); Plata v.
Schwarzenegger,
603 F.3d 1088 (9th Cir. 2010) (upholding a receivership to
administer and improve prison health care). This is not a case where a
governmental organization will not comply with the law.
Plata, 603 F.3d at
1094.
We now look at the specific arguments for the receivership presented by
the receiver and trustee and explain why none is consistent with the limited
purposes for this “extraordinary remedy.” Strickland v. Peters, 120 F.2d 53, 56
(5th Cir. 1941).
A. Preserving Jurisdiction and Bringing Litigation to a Close
Among the justifications presented by the receiver and trustee for the
receivership is that it was needed to preserve the court’s jurisdiction over
Baron’s assets, given that one of Baron’s former attorneys had testified that
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No. 10-11202
Baron intended to move assets outside of the country. They further asserted
that the receivership order was a valid exercise of the court’s inherent authority
because bringing the Netsphere litigation and Ondova bankruptcy to a close
required that Baron be prevented from either hiring or firing additional counsel.
The receiver halted the hiring and firing of counsel by seizing all of Baron’s
personal assets and the assets of the companies he controlled.
We first examine the argument that assets needed to satisfy a future
money judgment were being transferred beyond the court’s jurisdiction. The All
Writs Act “empowers a federal court to employ procedures necessary to promote
the resolution of issues in a case properly before it.” ITT Cmty. Dev. Corp. v.
Barton, 569 F.2d 1351, 1359 (5th Cir. 1978); 28 U.S.C. § 1651. This authority,
though, “is firmly circumscribed, its scope depending on the nature of the case
before the court and the legitimacy of the ends sought to be achieved through the
exercise of the power.” ITT Cmty. Dev.
Corp., 569 F.2d at 1358-59. A court is
limited to issuing orders “to curb conduct which threaten[s] improperly to
impede or defeat the subject matter jurisdiction then being exercised by the
court.”
Id. at 1359.
The jurisdiction “being exercised” by the district court in this case prior to
the receivership order was enforcing a settlement agreement and the transfer
of domain names, which would end the Netsphere litigation and the Ondova
bankruptcy. Baron executed the settlement agreement in July 2010 and agreed
to quitclaim the “Even Group” of domain names to Netsphere. Neither the
trustee nor the receiver has pointed to record evidence that Baron failed to
transfer the domain names in accordance with the agreement. He had other
obligations, but there is no record evidence brought to our attention that any
discrete assets subject to the settlement agreement were being moved beyond
the reach of the court.
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At a September 15, 2010 hearing in bankruptcy court, the attorney for the
trustee gave an update on the parties’ progress toward completing the terms of
the settlement agreement. In addition to addressing the few minor unresolved
issues with respect to domain names to be conveyed to Baron, the trustee’s
attorney discussed the increasing number of attorneys who had formerly
represented Baron and Ondova and were now making claims against the
bankruptcy estate. At this point, when the bankruptcy court considered
recommending the district court appoint a receiver, the bankruptcy court was
not responding to a threatened loss of control over domain names or other
discrete property. Instead, it was trying to prevent the loss of the funds
necessary to pay the various claims that continued to mount up against the
Ondova bankruptcy estate. It was at this hearing that the bankruptcy court
heard testimony from Baron’s attorney, Pronske, explaining that he had learned
Baron was planning to transfer “assets” offshore. Based on these allegations, the
bankruptcy court ordered Baron to direct the Village Trust to deposit $330,000
with the bankruptcy trustee as a form of security to pay Baron’s “obligations.”
Baron continued to hire and fire attorneys, causing the bankruptcy trustee
to move for the appointment of a receiver over Baron, followed soon by the
district court’s ex parte appointment of a receiver. In the January 2011 hearing
that followed, the district court provided its justifications for appointing the
receiver. Those justifications centered almost entirely on the court’s concern
that Baron’s vexatious litigation tactics – particularly the hiring and firing of
lawyers – were increasing the costs of litigation and exposing the bankruptcy
estate to additional administrative claims. The court briefly mentioned its
concern that Baron would transfer “funds” outside of the court’s jurisdiction, a
concern grounded in the court’s desire to fashion a remedy through a
receivership to pay the claims of Baron’s former attorneys.
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There certainly was evidence that Baron’s actions were disrupting,
complicating, and making more expensive both the bankruptcy and the district
court suit. We do not, though, find evidence that Baron was threatening to
nullify the global settlement agreement by transferring domain names outside
the court’s jurisdiction. Accordingly, the receivership cannot be justified in this
instance on the basis that it was needed to take control of the property that was
the subject of the litigation. Rather, the receivership was established to pay the
attorneys and to control vexatious litigation. We will now examine each of those
reasons.
B. Paying Attorneys
The district court in its order establishing a receivership referred to the
testimony received by the bankruptcy court on Baron’s debts to former attorneys.
The district court described those debts as the primary rationale for the
receivership. A receiver may be appointed for a secured creditor who has
legitimate fears his security may be dissipated; “an unsecured simple contract
creditor has, in the absence of a statute, no substantive right, legal or equitable,
in or to the property of his debtor.” Pusey & Jones Co. v. Hanssen, 261 U.S. 491,
497 (1923). Baron’s former attorneys were free to make claims against the
bankruptcy estate. Many had done so. Alternatively, to the extent that they
represented Baron or his companies in matters unrelated to the Ondova
bankruptcy, the attorneys could file suit in a court of appropriate jurisdiction to
collect the fees owed, which many had done. Establishing a receivership to
secure a pool of assets to pay Baron’s former attorneys, who were unsecured
contract creditors, was beyond the court’s authority.
Id.
Moreover, for those unpaid attorneys who had filed claims, the claims had
not been reduced to judgment such that a receiver would have been proper to
“set aside allegedly fraudulent conveyances by [Baron].”
Santibanez, 105 F.3d
at 241. “[R]eceivers may be appointed to preserve property pending final
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No. 10-11202
determination of its distribution in supplementary proceedings in aid of
execution.” Id. (internal quotation marks omitted). They may also be properly
appointed for a judgment creditor who “is attempting to have the debtor’s
property preserved from dissipation until his claim can be satisfied.”
Id.
Although the attorneys’ allegations and claims were delaying the district
court and bankruptcy proceedings, they were not the subject matter of the
underlying litigation. “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.” In re
Fredeman Litig.,
843 F.2d 821, 824 (5th Cir. 1988). Fredeman involved a civil
action under RICO for treble damages.
Id. at 822. The district court entered a
preliminary injunction that effectively froze all of the defendants’ assets, which
were unrelated to the underlying lawsuit, based solely on the need to protect the
potential RICO judgment.
Id. at 825. This court set aside the injunction as an
improper exercise of the court’s equitable powers.
Id.
In setting aside the injunction in Fredeman, this court relied on De Beers
Consolidated Mines, Ltd. v. United States,
325 U.S. 212, 222-23 (1945).
Id. In
De Beers, the government sought and obtained a pretrial preliminary injunction
freezing the domestic assets of a foreign corporation suspected of violating
antitrust laws.
DeBeers, 325 U.S. at 215. The government argued that freezing
the corporation’s assets was the only method of ensuring compliance with future
court orders.
Id. The government also speculated that the corporation would
withdraw its domestic assets in an effort to evade the jurisdiction of the courts
of the United States.
Id. at 215-16. Though the Supreme Court acknowledged
a court’s inherent power to protect its jurisdiction, it concluded that the
injunction exceeded the court’s powers.
Id. at 222-23. The Court explained that
if it were to hold otherwise, every plaintiff in an action for a personal judgment
would apply for a “so-called injunction sequestrating his opponent’s assets
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pending recovery and satisfaction of a judgment . . . . No relief of this character
has been thought justified in the long history of equity jurisprudence.” Id.
In a more recent articulation of its “cautious approach to equitable
powers,” the Supreme Court stated that equity is “confined within the broad
boundaries of traditional equitable relief.” Grupo Mexicano de Desarrollo, S.A.
v. Alliance Bond Fund, Inc.,
527 U.S. 308, 322, 329 (1999). The Court identified
the issue as being “whether, in an action for money damages, a United States
District Court has the power to issue a preliminary injunction preventing the
defendant from transferring assets in which no lien or equitable interest is
claimed.”
Id. at 310. The Court answered “no.”
Id. at 333. The opinion
thoroughly reviewed the breadth of equitable powers before reaching that
conclusion.
Id. “[F]ederal courts in this country have traditionally applied the
principle that courts of equity will not, as a general matter, interfere with a
debtor’s disposition of his property at the instance of a nonjudgment creditor.”
Id. at 329. We conclude that the limits of equity there described are relevant to
the receivership remedy, too.
The trustee and receiver are correct that Grupo Mexicano involved a claim
only for money damages, in which the district court improperly relied on its
equitable authority to issue a preliminary injunction to preserve a fund. Even
so, the Court detailed the relevant principles that confine the equitable power
of federal courts. Id. at 319-22. It rejected that the merger of law and equity
had altered the relevant limitations on that power.
Id. at 322. The Grupo
Mexicano Court distinguished its ruling from a case in which the suit sought the
equitable relief of contract rescission and restitution.
Id. at 325 (citing Deckert
v. Independence Shares Corp.,
311 U.S. 282, 287-88 (1940)). The equitable relief
was not, therefore, simply in aid (as in Grupo Mexicano) of a legal claim for a
money judgment.
Id. The case before us is similar to Grupo Mexicano to the
extent that the receivership remedy was for the purpose of controlling Baron’s
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transferring of funds that were to be paid to attorneys – nonjudgment creditors.
This receivership was intended to control vexatiousness, but it is more similar
to Grupo Mexicano than it is to Deckert.
While these precedents dealt with injunctions, the jurisdictional principle
that a court’s equitable powers do not extend to property unrelated to the
underlying litigation applies with equal force to receiverships. A court lacks
jurisdiction to impose a receivership over property that is not the subject of an
underlying claim or controversy. Cochrane v. W.F. Potts Son & Co., 47 F.2d
1026, 1029 (5th Cir. 1931). In Cochrane, a holder of corporate bonds, which were
alleged to be part of a fraud scheme, sought the establishment of a receivership.
Cochrane, 47 F.2d at at 1027. The bondholder only claimed an interest in one
series of bonds – series E.
Id. at 1028. The district court appointed a receiver
over the series E bonds as well as five other series that were not part of the
underlying complaint.
Id. This court held that the district court only had
jurisdiction over the series E bonds, which were the subject of the litigation.
Id.
at 1029. Because the district court lacked subject matter jurisdiction over the
other bonds, which were not at issue in the litigation, it lacked authority to
appoint a receiver over them.
Id.
The receivership ordered in this case encompassed all of Baron’s personal
property, none of which was sought in the Netsphere lawsuit or the Ondova
bankruptcy other than as a possible fund for paying the unsecured claims of
Baron’s current and former attorneys that had not been reduced to judgment.
The receivership also included business entities owned or controlled by Baron,
including Novo Point, LLC and Quantec, LLC. Although Novo Point and
Quantec were listed as parties on the global settlement agreement, they were
never named parties in the Netsphere lawsuit or the Ondova bankruptcy. We
conclude the district court could not impose a receivership over Baron’s personal
property and the assets held by Novo Point and Quantec.
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C. Controlling Vexatious Litigation
Baron’s vexatious litigation tactics were his ignoring court orders and
hiring and firing of attorneys, which delayed court proceedings, increased the
general cost of litigation, and increased expenses for the bankruptcy estate.
Such tactics, though, have not been recognized as a basis for invoking the
equitable remedy of a receivership. A receiver has been allowed to halt
fraudulent, evasive litigation tactics, but only when a specific provision of the
Internal Revenue Code applied. In re McGaughey, 24 F.3d 904 (7th Cir. 1994);
United States v. Bartle, 159 F. App’x 723 (7th Cir. 2005) (unpublished). In
McGaughey, the court derived its power to appoint a receiver to collect unpaid
taxes from a specific provision of the Code. In re
McGaughey, 24 F.3d at 907.
A district court may use authority from
26 U.S. C. § 7403 to appoint a receiver
over a debtor’s assets in a proceeding to enforce a tax lien if the Government
makes the necessary showing of need.
Id. Bartle did not provide its own
extensive analysis but relied on McGaughey to support a receiver for that
purpose. Bartle, 159 F. App’x at 725. Here, unlike in McGaughey and Bartle,
the court had no statutory authority to appoint the receiver nor were the
receivership assets at issue in the litigation.
Baron’s longstanding vexatious litigation tactics presented the district
court with an exceedingly difficult situation. The district court recognized that
it had the inherent authority to address those tactics. At the beginning of the
suit, the district court entered a preliminary injunction to compel compliance
with the first settlement agreement – i.e., the MOU. The court later held a
hearing to address Baron’s non-compliance with the preliminary injunction. The
injunction was amended to include a $50,000 per day penalty for a violation.
When Baron’s hiring and firing of attorneys were first addressed, the court found
clear and convincing evidence of Baron’s contempt of court and said it could
employ such tools as monetary sanctions or jailing Baron until he complied with
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court orders. The court concluded, though, that these remedies were insufficient
because Baron had repeatedly ignored court orders.
If the district court entered a sufficiently specific order, it could have held
Baron in contempt, imposed a fine or imprisoned him for “disobedience . . . to its
lawful . . . command.” 18 U.S.C. § 401. At oral argument in the appeal, it
seemed conceded that no clear order existed. Instead, the receiver and trustee
cited only to hearings at which the district court admonished Baron not to hire
or fire any more attorneys. Whether there was a clear order ultimately does not
matter in our resolution. The question before us concerns the receivership.
The district court also could have required Baron to proceed with the same
lawyer or pro se at his choice. McCuin v. Tex. Power & Light Co., 714 F.2d 1255,
1263 (5th Cir. 1983) (explaining that the right to retain the counsel of one’s
choosing may be restricted where it is misused “for purposes of delay or
obstruction of the orderly conduct of the trial” and when “the needs of effective
administration of justice” so require). The court noted some of these remedies
and determined they would be inadequate. No authority has been cited to us,
though, that a receivership becomes appropriate when traditional means might
not fully prevent a litigant from engaging in vexatious litigation tactics.
A court has undeniable authority to control its docket but not through
creating a receivership over assets, including personal assets, that were not the
subject of the litigation. The terms of the receivership order had far-reaching
implications for Baron’s personal property. For example, the receiver was
empowered to take possession of Baron’s mobile phone and computers and to
divert mail. Baron was required to turn over his bank accounts and keys to any
property he owned or rented, including his own home. Moreover, when Baron
needed funds for medical care, he had to request such funds from the receiver.
We conclude that the receivership improperly targeted assets outside the
scope of litigation to pay claims of Baron’s former attorneys and control Baron’s
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litigation tactics. This was an improper use of the receivership remedy. The
order appointing a receiver is vacated.
II. The Receivership Fees
When a receivership is proper, the general rule is that receivership fees
and expenses “are a charge upon the property administered.” Gaskill v. Gordon,
27 F.3d 248, 251 (7th Cir. 1994); see also Atl. Trust Co. v. Chapman,
208 U.S.
360, 374 (1908). When a receivership is improper or the court lacks equitable
authority to appoint a receiver, the party that sought the receivership at times
has been held accountable for the receivership fees and expenses. W.F. Potts &
Co. v. Cochrane,
59 F.2d 375, 377-78 (5th Cir. 1932). Baron relied on a
somewhat later case for the same point. Porter v. Cooke,
127 F.2d 853 (5th Cir.
1942). That court held that “the parties whose property has been wrongfully
seized are entitled, on equitable principles, to recover costs from those who have
wrongfully provoked the receivership.”
Id. at 859. In the present case, no party
“provoked” the receivership. The bankruptcy court recommended a receiver, and
the trustee then moved in district court for the appointment as recommended.
We discover no controlling rule on assessing costs for an improperly
created receivership other than that equity is the standard. For example, in
W.F. Potts, this court evaluated the assignment of responsibility for the
receivership fees by recognizing that the district court itself ordered the
receivership. W. F. Potts, 59 F.2d at 377-78. After holding that the receivership
should not have been imposed, we rejected that the party who sought the
receivership had to bear its costs:
[The parties whose assets were seized] treat the matter too much as
though this were a suit for the wrongful and forcible taking of
property by plaintiff or its agents. They overlook the fact that,
though it is true that one who invokes without sufficient equitable
grounds the administration by a receiver of the property of another
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may be in a proper case held accountable for the costs and expenses
of the receivership and for losses which the receivership has visited
upon the property, the appointment of a receiver is at last the
court’s appointment; the administration, its administration. We
think it perfectly clear that in a case like this, where there was no
malice nor wrongful purpose, and only an effort to conserve property
in which plaintiff believed, though it did not show, it was interested,
the question of its liability should be considered and adjudged from
the standpoint of working as little hardship as may be, plaintiff in
the end to be held liable for only the actual losses which its
mistaken course has caused.
Id. (citations omitted). An equitable allocation was ordered. The plaintiff who
sought the receivership was not charged with disbursements that benefitted the
fund, but it was ordered to reimburse the defendant for actual losses to the fund.
Id. at 379.
With a similar focus on equity, the Supreme Court evaluated how to assign
the costs of an improper receivership created by a federal court when that court
had erroneously concluded that a state court receivership no longer had
possession of the relevant property. Palmer v. Texas,
212 U.S. 118, 125-26
(1909). The Court reversed the lower court’s assessment of the costs against the
party who had sought the receivership, because the Court concluded “that justice
will be done if the costs of the receivership are paid out of the fund realized in
the Federal court . . . .”
Id. at 132.
These precedents are consistent with analysis in one of our precedents
that without “convincing evidence that the appointment of a receiver was either
collusive, capricious, venal, or in bad faith,” ordinarily the expenses of the
receivership will not be charged “other than against the fund administered by
the receiver, even though the [c]ourts are vested with a discretion in determining
who should pay the costs and expenses of a receivership in unusual instances.”
Commercial Nat’l Bank v. Connolly,
176 F.2d 1004, 1009 (5th Cir. 1949). In
holding that the receivership expenses should be paid out of receivership funds,
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we reasoned that, though appointment of a receiver was a “mistake,” the large
recovery by the plaintiffs in the trial indicated the receivership was not
“needless.” Id. On remand, the lower court was to enter a decree directing the
receiver to pay one-fourth of the costs of the retrial and appeal, the party moving
for the receiver to pay one-half, and the intervenors one-fourth.
Id. at 1010.
We do not find that Baron received any benefit from this receivership.
Nonetheless, these precedents establish that equity controls when addressing
the costs created by an improper receivership. Here, the record supports that
the circumstances that led to the appointment of a receiver were primarily of
Baron’s own making. The district court had an array of fairly onerous remedies
to apply but chose another remedy that it did not have. The manner in which
the district court responded to those circumstances was errant, but the court’s
perception was reasonable that a vigorous response was required.
We must decide how equitably to resolve this misapplication of an
equitable remedy. Baron did in fact contend that the appointment of the
receiver was in bad faith or collusive but fails to convince. He supported the
argument by saying the appointment was prohibited by law by virtue of the
receiver’s previous appointment as special master. Baron relied on this
statutory language: “A person holding any civil or military office or employment
under the United States or employed by any justice or judge of the United States
shall not at the same time be appointed a receiver in any case in any court of the
United States.” 28 U.S.C. § 958. The trustee pointed out that a special master
is neither an employee of the United States nor of the judge who appointed him.
While the special master is subject to the court’s supervision, his fee is paid by
the parties to the litigation, not the court. Fed. R. Civ. P. 53(g)(2). The fact that
the receiver was previously special master is no indication of bad faith or
collusion in the appointment of the receiver.
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Additionally, we hold, based on this record, that in creating the
receivership “there was no malice nor wrongful purpose, and only an effort to
conserve property in which [the court] believed” it was interested in maintaining
for unpaid attorney fees and to control Baron’s vexatious litigation tactics. W.F.
Potts, 59 F.2d at 377-78. We recognize that the district court was dealing with
a conundrum when it decided to appoint the receiver – the problem was great,
but standard remedies seemed inadequate. We also take into account that, to
a large extent, Baron’s own actions resulted in more work and more fees for the
receiver and his attorneys. For these reasons, charging the current receivership
fund for reasonable receivership expenses, without allowing any additional
assets to be sold, is an equitable solution.
In light of our ruling that the receivership was improper, equity may well
require the fees to be discounted meaningfully from what would have been
reasonable under a proper receivership. Fees already paid were calculated on
the basis that the receivership was proper. Therefore, the amount of all fees and
expenses must be reconsidered by the district court. Any other payments made
from the receivership fund may also be reconsidered as appropriate.
We also conclude that everything subject to the receivership other than
cash currently in the receivership, which Baron asserts in a November 26, 2012
motion amounts to $1.6 million, should be expeditiously released to Baron under
a schedule to be determined by the district court for winding up the receivership.
The new determination by the district court of reasonable fees and expenses to
be paid to the receiver, should the amount be set at more than has already been
paid, may be paid from the $1.6 million. To the extent the cash on hand is
insufficient to satisfy fully what is determined to be the reasonable charges by
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the receiver and his attorneys, those charges will go unpaid. No further sales of
domain names or other assets are authorized.2
III. Other Issues
Baron raised other issues related to the receivership. Additionally, there
are multiple outstanding motions. We address those that would remain
unresolved despite our holding that the receivership was improper.
A. Subpoena of IOLTA Account
Baron contended the district court erred in allowing the receiver to
subpoena bank records related to Baron’s attorney’s IOLTA account. When the
receiver learned that Baron’s attorney, Gary Schepps, was paying another Baron
attorney through an IOLTA account, he served a subpoena on the bank holding
the account. The receiver argued that Baron was using the account to hide
receivership assets and retain additional counsel in defiance of the district
court’s orders.
The receiver argued that the issue regarding bank records is moot given
that the subpoena issued, the bank produced the records, and the receiver has
reviewed them. An appeal must be dismissed when “an event occurs while a
case is pending on appeal that makes it impossible for the court to grant any
effectual relief whatever to a prevailing party.” Motient Corp. v. Dondero, 529
F.3d 532, 537 (5th Cir. 2008). Yet, an appellate court’s “continued jurisdiction
does not depend upon being able to provide complete relief; if there is some
means by which we can effectuate a partial remedy, this case remains a live
controversy.” In re Sec. Life Ins. Co. of Am.,
228 F.3d 865, 870 (8th Cir. 2000).
The records have been produced and reviewed by the receiver and there is no
2
We stayed the closing on sales resulting from an auction of domain names. Our
ruling means no closing may occur, and the stay is made permanent.
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relief that this court can provide. Baron’s challenge to the subpoena of his
attorney’s IOLTA account is moot.
B. Section 144 Affidavit
On April 27, 2011, Baron filed a motion for leave to file a motion for
recusal under 28 U.S.C. § 144. Baron attached to the motion an affidavit
detailing his allegations of bias. At the hearing on Baron’s motion, the court
instructed Baron to file a second affidavit with appropriate record citations to
statements by the court that Baron believed evidenced bias. Baron’s attorney
assured the court that providing record cites would be “no problem” because
“everything in the affidavit is directly cut and pasted from the record.”
The court then entered an order granting Baron’s motion for leave to file
a second affidavit, but only under the condition that Baron submit an affidavit
with record citations. On May 6, 2011, Baron’s attorney informed the district
court that a new affidavit was ready, but that it did not comply with the court’s
record cites requirement. In his supplemental affidavit, Baron alleged that the
district court had “a personal bias against giving credence to allegations of poor
conduct by attorneys” and that his personal bias had allowed Baron to be
victimized by his opponents – many of whom were attorneys. The district court
struck the new affidavit, but it allowed Baron to file another affidavit provided
that it complied with the court’s original order. Baron never submitted a
compliant affidavit and did not re-urge his motion to disqualify.
Baron contended that the district court erred in refusing to rule on the
legal sufficiency of the affidavits. The receiver argued that Baron waived this
issue by failing to file an affidavit that complied with the court’s order.
“A judge is to recuse himself if a party to the proceeding makes and files
a timely and sufficient affidavit that the judge before whom the matter is
pending has a personal bias or prejudice either against him or in favor of any
adverse party.” Patterson v. Mobil Oil Corp., 335 F.3d 476, 483 (5th Cir. 2003)
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(internal quotation marks omitted). A district court’s ruling with respect to a
Section 144 affidavit is appealable under 28 U.S.C. § 1292(b). Davis v. Bd. of
Sch. Comm'rs of Mobile Cnty., 517 F.2d 1044, 1047 (5th Cir. 1975).
When a motion is filed under Section 144, the district court “must pass on
the legal sufficiency of the affidavit” without passing on the truth of the matter
asserted. Davis, 517 F.2d at 1051. “A legally sufficient affidavit must: (1) state
material facts with particularity; (2) state facts that, if true, would convince a
reasonable person that a bias exists; and (3) state facts that show the bias is
personal, as opposed to judicial, in nature.”
Patterson, 335 F.3d at 483.
Based on our reading of the record, the district court considered Baron’s
original affidavit, determined that it was insufficient, and ordered Baron to
correct the deficiency by including citations to the record. Baron filed a second
affidavit and admitted that it did not comply with the court’s order. The district
court struck the affidavit, but left Baron the option of filing another affidavit
provided it had record cites. Baron never filed a compliant affidavit; therefore,
he has waived the issue on appeal.
C. Outstanding Motions & Mandamus
In light of our holding that the receivership order was improper, we need
not address the outstanding motions that were carried with the case. Similarly,
we do not find it necessary to address Novo Point’s petition for a writ of
mandamus, which challenged the bankruptcy court’s decision to strike various
notices of appeal filed by Novo Point. The bankruptcy court struck these notices
based on its finding that they violated the terms of the receivership order –
which we have now set aside.
The judgment appointing the receiver is REVERSED with directions to
vacate the receivership and discharge the receiver, his attorneys and employees,
and to charge against the cash in the receivership fund the remaining
receivership fees in accordance with this opinion.
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Carrington, Coleman, Sloman and Blumenthal, LLP’s appeal of the district
court’s disbursement order is DISMISSED.
Baron’s challenge to the subpoena of his attorney’s IOLTA account is
DENIED as moot.
Baron’s challenge to the denial of his Section 144 affidavit was waived.
Should we not have addressed a motion that a party believes still needs
a ruling, that claimed oversight should be suggested on rehearing.
31
