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Securities & Exchange Commission v. First Choice Management Services, Inc.

United States District Court, N.D. Indiana, South Bend Division

April 8, 2015

SECURITIES & EXCHANGE COMMISSION, Plaintiff,
v.
FIRST CHOICE MANAGEMENT SERVICES, INC. AND GARY VAN WAEYENBERGHE, Defendants.

OPINION and ORDER

ROBERT L. MILLER, Jr., District Judge.

CRM Energy Partners, Inc. and John W. Hannah, non-parties to the case, move the court to reconsider its December 5, 2014 show cause order. Receiver Joseph D. Bradley sought sanctions against CRM Energy and Mr. Hannah for two reasons: (1) CRM Energy and Mr. Hannah filed an Operator's Oil and Gas Lien Statement in the Osage County, Oklahoma records against the receivership's Branson Energy Inc. leases located in Osage County, Oklahoma and filed a related petition for lien foreclosure in the District Court in Osage County (the local state court) that named the Receiver as a party defendant; and (2) CRM Energy and Mr. Hannah hadn't complied with the court's May 22, 2014 "Confirmation of Sale Order for Branson Energy, Inc. Leases" that directed parties in possession of or with control over documents pertaining to the operatorship or ownership of the Branson Energy leases, Branson Energy itself, or Branson Energy's property to turn over the documents to the Receiver. The court concluded the lien and foreclosure petition violated the court's 2000 and 2002 orders prohibiting suit against the Receiver in forums other than this court for his actions in his capacity as Receiver, and consequently, ordered CRM Energy and Mr. Hannah to remove the lien and dismiss the foreclosure petition. The court also ordered CRM Energy and Mr. Hannah to turn over documents in their possession or control that belong to the receivership. Lastly, the court denied the Receiver's request for sanctions against the Oklahoma based attorneys, Lee I. Levinson, Terence P. Brennan, Trevor R. Henson, and Evan McLemore of Levinson, Smith, and Huffman, P.C., that represent CRM Energy and Mr. Hannah in the lien foreclosure suit. The court gave CRM Energy and Mr. Hannah until December 15, 2014, ten days from the date of the order, to comply with the order or to show cause why they shouldn't be held in contempt for their failure to do so.

On December 18, CRM Energy and Mr. Hannah filed a motion for reconsideration of the show cause order. The Receiver opposes the motion, and CRM Energy and Mr. Hannah replied to his response.[1]

CRM Energy and Mr. Hannah say the show cause order contains factual and legal errors. They contend that the court incorrectly found they were acting in concert with the parties, incorrectly found the relationship between the Receiver and Mr. Hannah wasn't a continuation of the business, erroneously concluded that Mr. Hannah didn't operate the leases for the Receiver's benefit, incorrectly determined the date when the lien was created, and erroneously found the lien seeks an ownership interest in the leases. CRM Energy and Mr. Hannah also claim to have turned over the documents that belong to Branson Energy, complain that the court didn't order the return of certain property on the leases, and ask the court to stay the imposition of sanctions until the matter is resolved on appeal. In his response, the Receiver asks the court to make several factual findings related to non-parties CRM Energy and Mr. Hannah.

I. STANDARD OF REVIEW

CRM Energy and Mr. Hannah don't cite a legal basis for their motion to reconsider. Federal Rule of Civil Procedure 59(e) allows a court to alter or amend a judgment based on newly discovered evidence or when the judgment reflects a manifest error of law or fact. LB Credit Corp. v. Resolution Trust Corp., 49 F.3d 1263, 1267 (7th Cir. 1995). Rule 59(e) motions aren't to be used to introduce evidence that was available earlier or to advance arguments that could and should have been presented before the court entered judgment. Id . Alternatively, Federal Rule of Civil Procedure 60(b) permits a court to afford relief from a judgment or order for newly discovered evidence, among other reasons. CRM Energy's and Mr. Hannah's motion for reconsideration was filed thirteen days after the show cause order was entered, so it is timely under either rule.[2] The court looks to the substance of the motion to reconsider to determine the appropriate rule under which the motion should be analyzed. Obriecht v. Raemisch, 517 F.3d 489, 493 (7th Cir. 2008). CRM Energy and Mr. Hannah assert errors of fact, a basis encompassed by both Rule 59(e) and Rule 60(b), and errors of law, a basis encompassed by Rule 59(e), but not by Rule 60(b). Id. at 493-494. So, the court treats their motion to reconsider as one made pursuant to Rule 59(e), which covers all of their arguments.

II. LIEN & FORECLOSURE PETITION

CRM Energy and Mr. Hannah continue to assert that this court doesn't have personal jurisdiction over them because they aren't parties to the receivership suit. CRM Energy and Mr. Hannah say the court "admittedly does not have personal jurisdiction over" them and "concedes that it does not have personal jurisdiction" over them. In the show cause order, the court found quite the opposite. The Barton doctrine, under which a party must first obtain leave of the court that appointed a receiver to sue the receiver in another forum for his actions as the receiver, Barton v. Barbour, 104 U.S. 126 (1881), combined with the court's blanket injunction that implemented the Barton doctrine in this case, [3] authorizes the court to reach non-parties (like CRM Energy and Mr. Hannah) that have filed suit against Mr. Bradley in his capacity as the court-appointed Receiver in this case and in Oklahoma state court. Liberte Capital Grp., LLC v. Capwill, 462 F.3d 543, 551 (6th Cir. 2006). The court has personal jurisdiction over CRM Energy and Mr. Hannah for the limited purpose of determining the fate of their lien and petition for lien foreclosure.

CRM Energy and Mr. Hannah again cite United States v. Kirschenbaum, 156 F.3d 784 (7th Cir. 1998), arguing that under Federal Rule of Civil Procedure 65(d), a non-party can only be subject to an injunction if the non-party is acting in concert with an enjoined party or is an agent, employee, officer, etc. of the party. They contend the Kirschenbaum decision directly contradicts the Barton doctrine. The court disagrees. As discussed in In re Linton, 136 F.3d 544 (7th Cir. 1998), [4] it has "long been established that a receiver could not be sued without leave of the court that appointed him." Id. at 545 (protection of equity receiver under the Barton doctrine extended to bankruptcy trustees).[5] Without this injunction, a Receiver "is burdened with having to defend against suits by litigants disappointed by his actions on the court's behalf, [and] his work for the court will be impeded." Id . The Barton doctrine has been a matter of federal common law for more than a hundred years, id., and CRM Energy and Mr. Hannah cite no authority in which the doctrine has been disturbed. Rule 65(d) applies to injunctions generally, but the Barton doctrine only applies in circumstances in which a court has appointed a receiver or a bankruptcy trustee. Rule 65(d) doesn't limit or contradict the Barton doctrine.

The Receiver asserted a theory of liability under Rule 65(d) in the motion for sanctions and in his response to the motion for reconsideration again urges the court to make a factual finding that CRM Energy and Mr. Hannah were acting in concert with Branson Energy to violate the 2003 "Order Requiring Freeze or Turnover of First Choice Management Services, Inc. Assets and the Proceeds Therefrom." CRM Energy and Mr. Hannah make a related argument based on a hypothetical. They argue that had the court found that CRM Energy and Mr. Hannah were acting in concert with parties to the case, which it didn't, the finding would have been erroneous because the determination must be made in a proceeding to which they are a party. See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 112 (1969) (non-party with notice can't be held in contempt until shown to be in concert or participation in a proceeding to which the non-party is a party). Uncertain of how to state it more clearly, the court reiterates its holding from the show cause order: "Regardless of whether CRM Energy and Mr. Hannah acted in concert with Branson Energy, the Receiver doesn't provide the court with evidence of their knowledge of the 2003 freeze order." To be bound by an injunction, Rule 65(d)(2) requires the non-parties acting in concert with the parties to have "actual notice of [the order they allegedly violated] by personal service or otherwise." The Receiver's response also asks the court to make a factual finding that CRM Energy, Mr. Hannah, and their attorneys had notice of the orders in this case, including the 2003 Freeze and Turnover Order, based on the evidence presented by CRM Energy and Mr. Hannah in their motion to intervene. The Receiver doesn't indicate what specific evidence shows that CRM Energy and Mr. Hannah had knowledge of the 2003 Freeze and Turnover Order, and the court declines to scour the record to discover how and when they supposedly gained that knowledge. The Receiver still hasn't shown that CRM Energy and Mr. Hannah had knowledge of the order they allegedly violated (in concert with Branson Energy), so the court needn't reach the question of whether they were acting in concert with Branson Energy or institute proceedings in which they, as non-parties, are parties.[6]

CRM Energy and Mr. Hannah protest that even under Liberte Capital Grp., LLC v. Capwill, 462 F.3d 543 (6th Cir. 2006), a decision cited by the court, due process demands that a party with a colorable claim against a Receiver must be heard. The Barton doctrine doesn't contravene this assertion; it simply requires the party to first apply to the court that appointed the receiver, so the court can exert some control over the claims related to its appointed receiver and the receivership it created. See Liberte Capital Grp., LLC v. Capwill, 462 F.3d 543, 552 (6th Cir. 2006) ("To the extent that a party has a colorable claim against a receiver or the entities in receivership, due process demands that the claimant be heard, but the district court exercises significant control over the time and manner of such proceedings.").

CRM Energy and Mr. Hannah next argue that if the Barton doctrine applies, their Oklahoma litigation falls within the limited statutory exception found in 28 U.S.C. § 959(a) "for situations where the receiver was continuing' the debtor's business, rather than simply administering the estate." In re VistaCare Grp., LLC, 678 F.3d 218, 226-227 (3d Cir. 2012). CRM Energy and Mr. Hannah now claim the Receiver was continuing the business of Branson Energy in his dealings with them.

To begin with, CRM Energy and Mr. Hannah didn't address the Barton doctrine or argue the § 959(a) exception applied to their interactions with the Receiver in their response to the motion for sanctions. See LB Credit Corp. v. Resolution Trust Corp., 49 F.3d 1263, 1267 (7th Cir. 1995) ("[A] motion to alter or amend a judgment is not appropriately used to advance arguments or theories that could and should have been made before the district court rendered a judgment."). Second, CRM Energy and Mr. Hannah don't offer newly discovered evidence to support this assertion. See Id . (A motion to alter or amend a judgment also isn't to be used "to present evidence that was available earlier."). CRM Energy and Mr. Hannah cite a much quoted September 26, 2006 email from the Receiver's counsel to Mr. Hannah, see e.g., CRM Energy and Mr. Hannah Mot. Intervene 9, Doc. No. 881 ("In that letter, the Receiver told the Intervenors: You can return to Tennessee and wait for check. You will be compensated for all your time, effort and money.'"), [7] and several of the Receiver's Status Reports filed in the case over the years. They produce no new evidence about their long and contentious relationship with the Receiver and no evidence (or even allegation) of how their "operation" of the leases benefited the Receiver or the defrauded investors. On the other hand, the Receiver has repeatedly emphasized the damage CRM Energy and Mr. Hannah have inflicted on the receivership estate by remaining on the leases, withholding information from the Receiver, and aggressively litigating their purported rights to the leases only as the receivership was winding down.

Nonetheless, the court must address CRM Energy's and Mr. Hannah's claim that the court didn't explain its conclusion that they weren't operating the leases for the benefit of the Receiver. The court's analysis of the § 959(a) exception was cursory - because CRM Energy and Mr. Hannah hadn't asserted that it applied to them. First, the court reviewed the Receiver's action that provoked the motion to intervene and, when that failed, the Oklahoma litigation:

The Receiver wants to sell the leases, which are an asset of the receivership, to Wilson Operating Company, thereby liquidating the asset for the benefit of the defrauded investors. The Receiver's actions concern an administrative task of the receivership - liquidating assets to benefit and ultimately close the receivership estate.

Show Cause Order 2-3, Doc. No. 962. The court examined the information in the record about the Oklahoma litigation:

The lien claims Branson Energy Partners and Joseph Bradley owe CRM Energy and Mr. Hannah $1, 368, 684.30 for "failure to pay the Owners/Non-operators' proportionate share of the expenses for the material, services, labor and operating" of the leases. The related foreclosure petition claims from 2002 to the present, CRM Energy and Mr. Hannah performed operational, administrative, and managerial work on the leases, provided equipment, and retained independent well service contractors to perform work on the leases. Neither document mentions the receivership or Mr. Bradley's capacity as a Receiver, although "Receiver" follows his name in the list of last known mailing addresses for Owners/Non-operators. Mr. Hannah's affidavit ...

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