The Federal Court of Appeals for the Fifth Circuit overturned the bankruptcy auction (pdf) of the 150,000+ domain name owned by Jeff Baron and Ondova and found that Receivership set up by a lower court should never have been set up in the first place.
You may recall that 150,000+ domain names of Jeff Baron and Ondova was sold by a bankruptcy court just last month for $5.2 Million dollars.
The court which stayed the bankruptcy sale just two weeks ago by this ruling now ruled that no closing may occur, and the stay is made permanent.”
“The 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.”
Here are some of the more interesting parts of the 30 page opinion:
Jeff 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., 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 theJune 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, 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 thetrust 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 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 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.
“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. ”
“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.”
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.”
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 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.
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.
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.”
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.
“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.
“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 litigation tactics. This was an improper use of the receivership remedy. The order appointing a receiver is vacated.”
“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.
“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,
“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 the receiver and his attorneys, those charges will go unpaid. ”
“No further sales of domain names or other assets are authorized.”Our ruling means no closing may occur, and the stay is made permanent”.
The ruling is dated December 18, 2012.