In SEC v. Quiros, 966 F.3d 1195 (July 20, 2020), the Eleventh Circuit held that the district court abused its discretion when it entered a bar order extinguishing non-parties’ claims, because entry of the order was not necessary to resolve the parties’ dispute.
In 2016, the SEC filed a civil enforcement action against Ariel Quiros, and the district court appointed a receiver to take control of Quiros’s corporations. Other actions against Quiros followed, and he hired two law firms to defend them. Quiros couldn’t pay the lawyers, though, because the district court in the SEC action had frozen his assets. The law firms sought payment under Quiros’s professional-liability insurance policy, which led to a coverage action. While that was pending, the firms and the insurer reached an interim funding agreement under which the insurer would pay the firms $1 million, subject to repayment by Quiros if the coverage action was resolved in the insurer’s favor. The law firms reached $ 1 million in owed fees and sued the insurer for payment under the interim agreement.
While that action was pending, the receiver, the insurer, and Quiros—but not the law firms—reached a settlement in the SEC action. Under that settlement, the insurer would pay $1.4 million to resolve the coverage action, and would issue an additional $500,000 payment if the district court in the SEC action entered a bar order barring related claims, including the law firms’ claims. The district court entered the bar order over the law firms’ objections, finding that the bar order was essential to the settlement, and the firms appealed.
The Eleventh Circuit, in an opinion written by Judge Wilson and joined by Judge Marcus and Judge Bush visiting from the Sixth Circuit, vacated the bar order. The court began by noting that “[a] bar order is an extraordinary remedy,” and cited its prior decision in In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070, 1079 (11th Cir. 2015), for the proposition that such orders should be entered “cautiously and infrequently and only where essential, fair, and equitable.”
The order in question failed at the first step. To be “essential,” the court held, a bar order must be “needed to settle the parties’ litigation,” not merely “needed to facilitate all parts of the settlement.” The settlement agreement among the receiver, the insurer, and Quiros, however, expressly provided that the “settlement is contingent on the District Court approving this Agreement and that the parties shall seek the issuance of a bar order”—not that the settlement was contingent on the request for a bar order’s actually being granted. This was confirmed at argument in the district court, at which the insurer’s counsel agreed that absent the bar order, “Yes, the settlement will still go through but for a lesser amount. . . .” Given those facts, the Eleventh Circuit concluded that the district court “made a clear error of judgment in finding that the bar order was essential to the appellees’ settlement,” and vacated the bar order.