Securities and Exchange Commission v. Ariel Quiros

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 19-11409
________________________
D.C. Docket No. 1:16-cv-21301-DPG
SECURITES AND EXCHANGE COMMISSION,
Plaintiff,
versus
ARIEL QUIROS,
WILLIAM STENGER,
IRONSHORE INDEMNITY, INC.,
MICHAEL I. GOLDBERG,
Defendants-Appellees,
JAY PEAK, INC., et al.,
Defendants,
LEON COSGROVE, LLC,
MITCHELL, SILBERBERG & KNUPP, LLP,
Interested Parties-Appellants.
________________________
Appeals from the United States District Court
for the Southern District of Florida
________________________
(July 20, 2020)
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Before WILSON, MARCUS, and BUSH, * Circuit Judges.
WILSON, Circuit Judge:
A bar order is an extraordinary form of relief. Often sought by a party to a
settlement, a bar order extinguishes extraneous claims against the settling party,
tying up the settling party’s loose ends and encouraging resolution in complex
cases that could otherwise span years. But a bar order buys peace at a high price:
It bars potentially valid claims that non-settling parties could assert against the
settling party.
Because a bar order is a strong cure for the ills of complex litigation, a party
seeking a bar order to facilitate a settlement faces a high bar. It must show, among
other things, that the bar order is essential to the settling parties’ settlement.
This case turns on what it means to be “essential” to a settlement. The
district court here entered a bar order barring the appellants’ claims against the
settling appellees. It concluded that the bar order was essential to the appellees’
settlement because the order was essential to facilitating all settlement payments.
The appellants say this was error. They claim that a bar order is essential only if it
is needed to resolve the settling parties’ litigation. Since the settling parties here
*
Honorable John K. Bush, United States Circuit Judge for the Sixth Circuit, sitting by
designation.
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would have settled their dispute even without the bar order, the appellants claim
that the district court abused its discretion in entering the order.
We agree with the appellants. The record makes clear that the bar order was
not essential to resolving the settling parties’ dispute. And so we vacate the bar
order.
I.
This is a complicated receivership proceeding, so we will recite only the
necessary facts. In 2016, the Securities and Exchange Commission (SEC) filed a
civil enforcement action against Ariel Quiros and some of his corporations. It
claimed that Quiros engaged in securities fraud. Soon after, the district court
appointed Michael I. Goldberg as receiver, empowering him to take control of
Quiros’s corporations and act to benefit their defrauded investors.
Many collateral cases sprung from the SEC action (the fraud-related
actions). Facing multiple lawsuits, Quiros hired Leon Cosgrove, LLC and
Mitchell, Silberberg & Knupp, LLP as counsel (the law firms). But Quiros had a
problem: Back in the SEC action, the district court had frozen Quiros’s assets. He
was thus unable to pay his attorneys.
To obtain funding for his defense, the law firms sought insurance coverage
for Quiros under his professional-liability policy with Ironshore Indemnity, Inc.
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Ironshore disputed coverage. So the law firms sued Ironshore on Quiros’s behalf
in a separate proceeding (the coverage action).
To fund Quiros’s defense in the fraud-related actions while the coverage
action remained pending, the law firms and Ironshore negotiated an Interim
Funding Agreement (the IFA). Under the IFA, Ironshore agreed to advance
defense costs up to $1 million, so long as Quiros would repay those costs if the
coverage-action court ultimately ruled that there was no coverage. The IFA listed
the law firms as approved counsel. It also noted that the law firms did not have to
repay any legal fees if the court ruled for Ironshore on coverage; Quiros alone
would be responsible.
Fighting on several fronts, the law firms quickly burned through the $1
million contractual limit. But before they could file invoices under the IFA, Quiros
fired them. Around the same time, the receiver in the SEC action took the position
that the court’s asset-freeze order blocked Quiros from using even insurance to pay
his counsel. The law firms—contending that they were owed $1 million under the
IFA—tried to intervene in the SEC action to get the district court to clarify (or
modify) the scope of the asset freeze. When the district court denied their motion
to intervene, they appealed.
Eventually, the law firms filed an unopposed motion to modify the asset-
freeze order to permit the dispersal of funds under the IFA. In effect, the proposed
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modification let the law firms proceed against Ironshore unencumbered by the
asset-freeze order. The district court granted the motion, and the law firms
dropped their appeal. They then sued Ironshore in New York state court, seeking
$1 million under the IFA. As far as the record shows, that case remains pending.
Sometime later, the receiver, Ironshore, and Quiros (the appellees) reached a
settlement in the SEC action that purported to resolve the coverage issues. 1 They
agreed that Ironshore would pay $1.4 million dollars to resolve the coverage
action. They also agreed that Ironshore would issue a $500,000 final payment if
the district court entered an order barring related claims, including the law firms’
IFA-lawsuit against Ironshore. The settlement agreement noted, however, that it
did not turn on the final payment; if the district court refused to enter the bar order,
the litigation would still settle for $1.4 million.2
The district court—over the law firms’ objection—entered the bar order. In
doing so, the court found that the bar order was essential to the settlement. The
law firms now appeal.
II.
1
William Stenger—another defendant in the SEC action—was also part of the settlement and is
an appellee. He did not file an appellate brief, though, and his involvement does not change our
analysis. For simplicity, then, we will refer to the receiver, Ironshore, and Quiros as the
appellees.
2
We address the settlement provisions that make this intent clear in Part III.
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A district court has “broad powers and wide discretion to determine relief in
an equity receivership.” S.E.C. v. Elliott, 953 F.2d 1560, 1566 (11th Cir. 1992).
Given the similarity between bankruptcy and receivership proceedings, we often
apply bankruptcy principles to receivership cases because we have limited
receivership precedent. See id. at 1567, 1572–73; see also Sec. & Exch. Comm’n
v. Stanford Int’l Bank, Ltd., 927 F.3d 830, 840 (5th Cir. 2019), cert. denied sub
nom. Becker v. Janvey, ___ S. Ct. ___, No. 19-919, 2020 WL 1496642 (Mar. 30,
2020). We review a district court’s entry of a settlement bar order for abuse of
discretion. In re U.S. Oil & Gas Litig., 967 F.2d 489, 491 (11th Cir. 1992). A
district court abuses its discretion when it makes “a clear error of judgment” or
“applie[s] the wrong legal standard.” Arthur v. Thomas, 739 F.3d 611, 628 (11th
Cir. 2014).
A bar order is an extraordinary remedy—it can bar a third party’s claim,
even though the third party may not be part of the relevant lawsuit or settlement.
For this reason, we’ve warned that courts should enter bar orders “cautiously and
infrequently and only where essential, fair, and equitable.” In re Seaside Eng’g &
Surveying, Inc., 780 F.3d 1070, 1079 (11th Cir. 2015) (citation omitted) (internal
quotation mark omitted). This is a two-part inquiry. The court must conclude that
the bar order is essential. And it must decide that the bar order is fair and
equitable, with an eye toward its effect on the barred parties. See, e.g., In re
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Munford, Inc., 97 F.3d 449, 455 (11th Cir. 1996) (first analyzing whether an order
was essential and then considering whether it was fair and equitable).
We have not yet had the chance to explain what makes a bar order
“essential” when it is entered to facilitate a settlement in a receivership proceeding.
But we find our answer in the analogous bankruptcy context: A bar order is
essential when it is “integral to settlement.” Id.
Yet this answer begs a new question: When is a bar order “integral to
settlement?” Is it “integral” when needed to facilitate all parts of the settlement?
Or is it “integral” when needed to settle the parties’ litigation?
Our case law supports the latter view. In Munford, we held that a
bankruptcy court could issue a bar order only when the settling defendant “would
not have entered into the settlement in the absence of such bar order.” See In re
Seaside, 780 F.3d at 1078; In re Munford, 97 F.3d at 455. Munford thus held that
the bar order there was appropriate because, “[b]ut for the bankruptcy court’s bar
order,” the parties “would not have entered into the settlement agreement.” 97
F.3d at 455. We have also held, in the bankruptcy-restructuring context, that bar
orders should issue only in “unusual cases in which such an order is necessary for
the success of the reorganization.” In re Seaside, 780 F.3d at 1078 (emphasis
added).
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Citing these precedents, many courts in our circuit have held that a bar order
must be “essential” to resolving the settling parties’ dispute. See In re Jiangbo
Pharm., Inc., 520 B.R. 316, 323 (Bankr. S.D. Fla. 2014) (“The evidence before the
Court shows that the Bar Order is an integral part of the Amended Settlement
without which it would not be consummated.”), aff’d sub nom. Brophy v. Salkin,
550 B.R. 595 (S.D. Fla. 2015); In re Rothstein Rosenfeldt Adler, P.A., No.
09-34791-BKC-RBR, 2010 WL 3743885, at *6 (Bankr. S.D. Fla. 2010) (finding
that a bar order was essential because the settlement allowed the parties to
terminate their agreement without the bar order and because the trustee “testified
that without a bar order, the Settling Parties would not have had entered into the
Settlement”); In re Sentinel Funds, Inc., 380 B.R. 902, 905 (Bankr. S.D. Fla. 2008)
(holding that a bar order was “not integral to the settlement” because the settlement
did not rise or fall on the bar order and instead required the trustee only to “use his
best efforts to obtain [the bar order]”).
The policy driving settlement bar orders also supports interpreting
“essential” to mean “essential to settling the litigation.” These orders stem from
“[p]ublic policy strongly favor[ing] pretrial settlement” in complex cases, which
“can occupy a court’s docket for years on end, depleting the resources of the
parties and the taxpayers while rendering meaningful relief increasingly elusive.”
In re U.S. Oil & Gas, 967 F.2d at 493. The orders “play an integral role in
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facilitating settlement,” as they allow defendants to “buy” peace from “cross-
claims for indemnity, contribution, and other causes related to the underlying
litigation.” Id. at 494. As a result, the policy behind settlement bar orders supports
their use only when they are needed to halt the parties’ litigation.
To be sure, we have affirmed a bar order that the settling parties marked as
non-essential to resolving their dispute. See id. at 494–96. But the parties did not
raise essentiality in that appeal. See id. The appellant there challenged the bar
order only for its purportedly overbroad application to the appellant’s indemnity
claims. See id. And further, the court acknowledged that, notwithstanding the
language of the settlement agreement, the parties probably would not have settled
absent the bar order. See id. at 492 (“Plainly, A & A was unwilling to disburse an
eight and a half million dollar [$8,500,000] settlement without the assurance that it
would be protected from further claims for contribution or indemnity.” (alteration
in original)). The opinion also issued before we cemented the essentiality element
in our case law, and so we did not have reason to reflect on whether to strike the
bar order for being non-essential. Compare id. (issued in 1992), with In re
Munford, 97 F.3d at 455 (issued in 1996). We have also limited In re U.S. Oil &
Gas, noting that our holding there reached only the question before us then. See
AAL High Yield Bond Fund v. Deloitte & Touche LLP, 361 F.3d 1305, 1312 (11th
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Cir. 2004). For these reasons, In re U.S. Oil & Gas does not answer the question
before us now.
With all this in mind, we now hold what we’ve long hinted: A bar order
issued to facilitate a settlement is essential only if it is essential to resolving the
settling parties’ litigation. If the parties would have still resolved their dispute
without entry of the bar order, the order is not essential and the court should not
enter it.
III.
Against this backdrop, we have little trouble holding that the district court
made a clear error of judgment when it concluded that the bar order was essential
to the settling parties’ settlement. To do so, we first turn to the best indicator of the
parties’ intent—their settlement agreement.
Recital (K) is the earliest indicator of the bar order’s role in the settlement.
The recital says that the “settlement is contingent on the District Court approving
this Agreement and that the parties shall seek the issuance of a bar order.” Doc.
523-1 at 3 (emphasis added). Key here is that the settlement turns on the parties
“seek[ing] issuance of a bar order,” not on the entry of a bar order. See, e.g., In re
Sentinel Funds, 380 B.R. at 905 (holding that a bar order was “not integral to the
settlement” because the settlement did not rise or fall on the bar order and instead
required the trustee only to “use his best efforts to obtain [the bar order]”).
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Recital (L) then provides context. It explains that the sole conditions
precedent “to the full effectiveness of the settlement” are entry of a proposed
preliminary approval order and proposed final approval order—neither of which
involved a bar order. Doc. 523-1 at 3. The recital later explains that “if the
District Court in the SEC Action enters [the bar order],” Ironshore will make a
“Final Payment” of $500,000. Id. In other words, the bar order triggers a final
payment, but the settlement of the parties’ litigation is fully effective without it.
Finally, if there remained any doubt, Paragraph 3 erased it. The paragraph
provides that, “[f]or avoidance of doubt,” Ironshore will pay $1.4 million
“regardless of whether a Bar Order, if one is issued, becomes final and non-
appealable.” Id. at 4. The paragraph also states that the parties’ claim releases
“shall become irrevocably effective” upon payment of the $1.4 million, no matter
if Ironshore pays the $500,000 final payment. Id.
These provisions are unambiguous. The litigation ceased upon payment of
the $1.4 million. The bar order merely triggered a $500,000 collateral payment.
And thus the plain text of the parties’ agreement makes clear that the bar order was
not essential to resolving the parties’ dispute.
Given the settlement agreement’s clarity, it is arguable that the agreement
was all the district court could consider in deciding whether the bar order was
essential to settling the parties’ litigation. See In re Sublett, 895 F.2d 1381, 1384
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(11th Cir. 1990) (explaining that the meaning of an unambiguous contract is a
question of law that requires no additional extrinsic evidence). We need not decide
this issue, though, because even if the court considered extrinsic evidence, we still
conclude that it made a clear error of judgment. See Arthur, 739 F.3d at 628.
We’ll start by saying that the appellees did not submit traditional extrinsic
evidence on the importance of the bar order to their settlement. The most we find
in the record (aside from the agreement itself) is their memorandum filed in
support of the settlement agreement. Since “[s]tatements by counsel in briefs are
not evidence,” it is again arguable that the district court could not have considered
these statements. Travaglio v. Am. Exp. Co., 735 F.3d 1266, 1270 (11th Cir. 2013)
(quoting Skyline Corp. v. N.L.R.B., 613 F.2d 1328, 1337 (5th Cir. 1980)). But even
if the court could have considered the appellees’ memorandum as evidence of their
intent, their statements there only hurt them, as they confirm the settlement
agreement’s plain language. Indeed, the memorandum explains that the “total
amount” that Ironshore is willing to pay hinges on the entry of a bar order. Doc
523 at 8. It also claims that the bar order is a “condition precedent” to the
$500,000 payment. Id. Layman’s terms: The bar order is essential to issuing an
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extra payment. Nothing in these statements supports the view that the bar order is
essential to settling the parties’ litigation. 3
To leave no stone unturned, we move from the appellees’ memorandum
statements to their arguments at the bar order hearing. There is little to review. At
the hearing, the law firms argued, as they do here, that essential means essential to
resolving the litigation. But of the 60-page transcript, the appellees’ discussion
with the district court about essentiality took just 6 lines:
THE COURT: One of the arguments that was made a moment ago is
that the settlement agreement really isn’t contingent on the bar order.
Is that correct or incorrect?
[IRONSHORE’S COUNSEL]: The $500,000 extra payment is
contingent on the bar order. Yes, the settlement will still go through
but for a lesser amount, but for the bar order.
Doc. 552 at 53–54.
That all but decides the issue. The settlement agreement explains that the
bar order is not essential to resolving the appellees’ litigation. The appellees’
memorandum confirms this intent. And the appellees did not even try to argue
3
We reject the idea that the memorandum’s claim that the bar order “has been a key settlement
term” suffices to support a finding that the bar order was essential to the litigation. Doc 523 at 8.
When viewed alongside the appellees’ other memorandum arguments, it’s clear that they called
the bar order a “key settlement term” because it was “key to facilitating all settlement payments.”
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otherwise at the bar order hearing. To the contrary, counsel for Ironshore admitted
what the settlement agreement makes clear: The settlement would “still go
through” without the bar order. It was essential only to trigger the final settlement
payment. It was not essential to resolve the dispute.
* * *
Bar orders are unusual forms of relief: They can strip non-settling parties of
their day in court, through no fault of their own. When used to facilitate a
settlement, they are warranted only when they are essential to resolve the settling
parties’ litigation. A district court’s entry of a bar order is due respect—we review
the order only for abuse of discretion. But given this settlement’s plain language,
the appellees’ confirming memorandum statements, and their position at the bar
order hearing, we conclude that the court here made a clear error of judgment in
finding that the bar order was essential to the appellees’ settlement. We thus
VACATE the bar order.
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