5th Circuit to Decide If Judge Correctly Appointed Receiver~7 min read

From The Texas Lawyer, July 25, 2011

Can a federal judge put what he calls a “vexatious litigant” into receivership after the litigant allegedly fails to pay hundreds of thousands of dollars in fees to more than 20 lawyers and law firms? That is one of the questions the 5th U.S. Circuit Court of Appeals is considering in an appeal brought by a businessman and his company.

On May 28, 2009, Netsphere filed its original complaint in Netsphere, et al. v. Jeffrey Baron and Ondova Limited Co. in the U.S. District Court for the Northern District of Texas. Netsphere sued Baron and his company, Ondova Limited — a licensed bulk domain name registrar — to enforce the confidential settlement of a state court business dispute between them.

On July 27, 2009, Ondova filed for bankruptcy protection, which stayed the proceedings in Netsphere . Baron continuously changed lawyers in both courts and his outstanding legal fees from his former attorneys accumulated, wrote Senior U.S. District Judge Royal Furgeson of Dallas, who is presiding over Netsphere , in a May 18 order.

On Oct. 12, 2010, U.S. Bankruptcy Judge Stacey G.C. Jernigan recommended that Furgeson appoint a receiver over Baron because of “the Bankruptcy Court’s concerns over . . . hiring and firing of lawyers by Mr. Baron.” According to Jernigan’s report and recommendation to the U.S. District Court, she was most concerned about the risk that the bankruptcy estate had and the administrative expenses as a result of Baron’s behavior.

On Nov. 24, 2010, Furgeson appointed Gardere Wynne Sewell partner Peter Vogel of Dallas to serve as a receiver for Baron and any entity under Baron’s control. One of the goals of the receivership was for Vogel to collect evidence of Baron’s former attorneys’ fee claims and with Furgeson’s guidance, disburse assets to resolve the claims, according to Furgeson’s May 18 order.

On May 6, Furgeson ordered Vogel to cap Baron’s former lawyers’ fees at $400 an hour. And on May 18, Furgeson ordered Vogel to pay a total of $870,237 to 22 different law firms and solo attorneys. Ferguson also rejected a total of $582,971 the firms and attorneys had requested. [See “Pay to the Order of . . .,” below.]

In his May 18 order, Furgeson found that Baron was a “vexatious litigant” who “engaged a massive number of lawyers, accepted their services, but failed to pay them leading to those lawyers alleging claims for unpaid services. It was the Court’s opinion that the pendency of the Former Attorney Claims [filed in the Bankruptcy Court] jeopardized both the completion of the Ondova Bankruptcy and the settlement of the present action, which Baron entered into voluntarily.”

Furgeson explained that putting Baron’s assets in receivership was “at its base level” an equitable remedy. The judge also rejected Baron’s argument that he, as the subject of the receivership, could demand jury trials on the attorneys’ fee claims. If the lawyers won and if the damages were trebled, Baron’s liability could exceed $2.8 million. And if Furgeson allowed two dozen separate suits to proceed, the process “could consume millions of dollars, regardless of any judicial outcome.”

The receiver “effectively proposes a settlement of the Former Attorneys’ claims and the Punitive Claims at a discount of approximately 66% off the potential face amount,” Furgeson wrote in his May 18 order.

Furgeson concluded the order by writing that he “remains concerned about Baron continuing to be a vexatious litigant.” So he allowed Baron’s former attorneys to “bring his or her own Punitive Claims and/or claims to seek the amount of his or her own Fee Cap Reductions against Baron as counterclaims” if Baron sues any of those attorneys.

In one of his interlocutory appeals filed with the 5th Circuit, Baron sought to stay Furgeson’s receivership order. On June 27, the 5th Circuit issued a per curiam order in Netsphere denying that motion. “Appellant is cautioned that further frivolous filings could result in sanction,” the appeals court wrote.

In a July 15 “Appeal of Order Appointing Receiver in Settled Lawsuit” to the 5th Circuit, Baron argues that the trial court put him into receivership “so that he could not hire an attorney.”

“In an act unprecedented in the history of American jurisprudence, the District Court below granted a motion to seize all of an individual’s assets in order to prevent them from hiring an attorney,” according to Baron’s appeal to the 5th Circuit. “Jeff Baron was warned that he was ‘prohibited from retaining any legal counsel’ and that if he did ‘the Receiver may move the Court to find you in contempt. . . . Further, unless this court grants relief, Jeff Baron’s savings accounts have been stripped from him forever. While this matter has been on appeal, the District Court has distributed essentially all of Jeff’s savings account balances to the receiver and his law firm. The amount is staggering — almost a million dollars,” Baron writes.

Baron also disputes the fee claims of some of the lawyers and the allegations that he fired them.

Gary Schepps, a Dallas solo who represents Baron in Netsphere , declines comment. Jennifer Gronwaldt, a senior account supervisor with Hellerman Baretz Communications who represents Baron, says Schepps is representing Baron pro bono. Through Gronwaldt, Baron declines comment.

Gronwaldt writes in an e-mail, “Jeff has never been found to file any groundless pleading. . . . The law’s definition of ‘vexatious litigant’ does not fit Jeff. You had better believe that having an experienced trial lawyer can make a huge difference in getting the facts right. When a judge does not allow that, there is a due process problem. Bad process = Bad results. Unfair process = unfair results. It’s that simple.”

Vogel, who is the receiver in Netsphere , has not yet filed a response to Baron’s July 15 appeal. He did not return a telephone call seeking comment.

John MacPete, a partner in the Dallas office of Locke Lord Bissell & Liddell who represents Netsphere, says Baron has “been very effective of essentially keeping the ball in the air and delaying the ultimate day of reckoning.”

Ryan Lurich, a partner in Dallas’ Friedman & Feiger, submitted a $59,578.37 fee claim asking to be paid for representing Baron in Netsphere and was awarded $54,949.80 in Furgeson’s May 18 order. Lurich says Baron “came to us with a problem that we thought we could help him out with, and he was able to pay a substantial retainer at that time. We didn’t have the faintest idea of the events to come.”

Lurich says he and his firm withdrew from representing Baron after Baron allegedly “put Ondova into bankruptcy without telling us. And he had stopped paying us. And at that time he owed us the amount of money that’s reflected in Furgeson’s order, so we couldn’t continue to keep financing the case for him.”

Lurich says Friedman & Feiger has sued Baron in Dallas state district court to recover its alleged outstanding legal fees, but the suit has been stayed pending the outcome of Netsphere .

Houston solo Dean Ferguson, who represented Baron in the late stages of his bankruptcy case, Ondova Limited Co. v. Netsphere, and was awarded $73,885 in fees in Judge Furgeson’s May 18 order, says he is considering suing Baron to collect his allegedly unpaid legal fees. “He did pay a portion of the bills; I got an upfront retainer,” Ferguson says, noting that Baron paid him $22,000 before he allegedly stopped paying his legal bills.

Ferguson says he withdrew from representing Baron on Sept. 15, 2010, after Ferguson “showed up in court for a hearing and I was introduced to his new lawyer.”