Securities and Exchange Commission v. Ariel Quiros

966 F.3d 1195

• Court: Court of Appeals for the Eleventh Circuit
• Decided: July 20, 2020
• Docket: 19-11409
• Status: Published

Opinion

Case: 19-11409 Date Filed: 07/20/2020 Page: 1 of 14

[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) Case: 19-11409 Date Filed: 07/20/2020 Page: 2 of 14

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. 2 Case: 19-11409 Date Filed: 07/20/2020 Page: 3 of 14

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.

3 Case: 19-11409 Date Filed: 07/20/2020 Page: 4 of 14

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

4 Case: 19-11409 Date Filed: 07/20/2020 Page: 5 of 14

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. 5 Case: 19-11409 Date Filed: 07/20/2020 Page: 6 of 14

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

6 Case: 19-11409 Date Filed: 07/20/2020 Page: 7 of 14

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).

7 Case: 19-11409 Date Filed: 07/20/2020 Page: 8 of 14

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

8 Case: 19-11409 Date Filed: 07/20/2020 Page: 9 of 14

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

9 Case: 19-11409 Date Filed: 07/20/2020 Page: 10 of 14

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]”).

10 Case: 19-11409 Date Filed: 07/20/2020 Page: 11 of 14

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.” 13 Case: 19-11409 Date Filed: 07/20/2020 Page: 14 of 14

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.