The Bottom Line

In a 2-1 opinion dated July 22, 2019, the Fifth Circuit held that third parties who paid a receiver to settle estate claims against them are entitled to an order barring other creditors from suing the settling third parties on the creditors’ own claims. See Zacarias v. Stanford International Bank Ltd., No. 17-11073, 2019 WL 3281687 (5th Cir. July 22, 2019). Affirming the district court’s approval of the settlement and its entry of the bar orders enjoining such creditors’ third-party claims, the Fifth Circuit found that allowing creditors to “circumvent” the receivership would “frustrate the central purposes” of the mechanism and “confound the SEC mission to achieve maximum recovery from the malefactors for distribution pro rata to all investors.”

What Happened?


On Feb. 17, 2009, the Securities and Exchange Commission (SEC) filed a complaint in the Northern District of Texas against Robert Allen Stanford, Stanford International Bank (SIB) and other Stanford entities, alleging various violations of U.S. securities laws. In response to this “massive ongoing fraud,” the SEC sought, among other things, an injunction against continued violations of the securities laws, disgorgement of illegal proceeds of the Ponzi scheme, a freeze of the Stanford assets and placement of the Stanford entities in a receivership. The district court appointed Ralph Janvey as Receiver. Pursuant to his court-appointed authority, the Receiver “identified and pursued” participants in the Ponzi scheme “to recover funds for distribution to investor-claimants.”

The Receivership Action

In October 2013, the Receiver, along with an official committee of investors appointed in the receivership (the Investors’ Committee) filed a complaint against Willis of Colorado and its affiliates (collectively, the Willis Defendants) seeking recovery of Ponzi-scheme losses on behalf of the estate (the Receivership Action). One month later, the complaint was amended to add claims against the Stanford entities’ insurance brokers, Bowen, Miclette & Britt, Inc. (BMB). The Receiver and the Investors’ Committee sought recovery for Ponzi-scheme losses on behalf of the estate under six theories, including various breach of fiduciary duty claims.

The Objector Claimants

From 2009 to 2016, several groups of individual investors (the Objector Claimants) filed lawsuits against certain of the Willis Defendants and BMB in state court actions in Florida and Texas and in federal district court in Texas. In each of those lawsuits, the Objector Claimants sought compensation for losses stemming from the alleged Ponzi scheme.

After years of litigation, the parties (not including the Objector Claimants) agreed to terms of settlement in the Receivership Action. The settlement entailed a release of claims against the Willis Defendants and BMB in exchange for more than $130 million, to be paid to the Receiver and distributed to the receivership claimants who held SIB CDs as of February 2009. The Willis Defendants and BMB conditioned settlement of the Receivership Action on “global resolution” of claims arising from the Ponzi scheme and insisted the district court enter bar orders “enjoining Stanford-Ponzi scheme-related claims against them.” In August 2017, the district court approved the settlements and entered the bar orders over the objections of the Objector Claimants. The Objector Claimants appealed. They argued that the district court lacked subject matter jurisdiction to “bar claims not before the court” and that the bar orders were “an improper exercise” of the district court’s authority over the receivership.

Judge Higginbotham’s Opinion

The majority opinion in Zacarias, written by Circuit Judge Patrick E. Higginbotham and joined by Circuit Judge James E. Graves, recognized that the federal securities laws “authorize federal courts’ jurisdiction over actions protecting the market,” including “suits in equity.” See 15 U.S.C. § 77v(a). Pursuant to their jurisdiction under the securities laws, federal courts can make use of receiverships where “a troubled entity will not be able to satisfy all of its liabilities to similarly situated creditors.” See Liberte Capital Grp., LLC v. Capwill, 462 F.3d 543, 552–53 (6th Cir. 2006). In these instances, the district court can take possession of the troubled entity and its assets and vest control in an appointed receiver to “stand in the shoes” of the troubled entity and “override holdout creditors and reach decisions for the aggregate benefit of creditors under the court’s supervision.” See Matter of Still, 963 F.2d 75, 77 (5th Cir. 1992).

Citing to the district court’s “broad” power to determine appropriate relief for a receivership, including “orders preventing interference with its administration of the receivership property,” Judge Higginbotham noted that such orders may include “stays of claim in other courts against the receivership and bar orders foreclosing suit against third-party-defendants with whom the receiver is also engaged in litigation.” See SEC v. Stanford Int’l Bank, Ltd., 424 F. App’x 338, 340 (5th Cir. 2011). Judge Higginbotham held that through its control of the receivership, the district court “enjoins non-party claims in another court — without exercising jurisdiction over them” for the sake of protecting the receivership and its assets. As support for his decision, Judge Higginbotham cited to a series of recent cases clarifying the “breadth and reach of the district court’s power to protect the operation of the receivership and its custody of the receivership res,” including the Fifth Circuit’s 2013 opinion in SEC v. Kaleta. See SEC v. Kaleta, 530 F. App’x 360, 362 (5th Cir. 2013).

Similar to the facts in Zacarias, Kaleta involved an alleged fraudulent scheme and the appointment of a receiver to take control of the troubled Kaleta entities. Kaleta also involved a bar order, which enjoined all other investor-creditors’ claims against a certain third party arising out of the alleged fraudulent scheme. Similar to the Objector Claimants in Zacarias, certain Kaleta investor-creditors objected to the settlement, arguing that the district court lacked authority to bar claims not before the court. The district court approved the settlement and entered the bar order, and the objectors appealed. In Kaleta, the Fifth Circuit affirmed, finding that the district court’s “broad” powers to “fashion relief in the receivership context included the power to enjoin other proceedings by non-parties” where such other proceedings would undermine the receivership’s operation.

Drawing support from the holding in Kaleta, Judge Higginbotham argued that the claims of the Objector Claimants and those in the Receivership Action “seek to address the same harms sustained by the same conduct in the same Ponzi scheme.” In entering the bar orders, Judge Higginbotham reasoned, the district court recognizes the “reality that, given the finite resources in this litigation, Stanford’s investors seeking compensation must recover Ponzi-scheme losses through the receivership distribution process.” Any alternative would afford the Objector Claimants “special treatment,” essentially enabling them to “jump the queue” to the detriment of the other claimants within the receivership distribution process, disrupting the “orderly and equitable distribution” of assets the process seeks to achieve. Therefore, Judge Higginbotham found that the bar orders fell within the broad powers of the district court to protect the receivership res.

Next, Judge Higginbotham turned to Becker v. Certain Underwriters at Lloyd’s of London (In re Stanford International Bank Ltd.), 17-10663, 2019 WL 2496901 (5th Cir. June 17, 2019), an ancillary Stanford appeal, which had been decided by a different panel of the Fifth Circuit a month earlier. Becker involved bar orders entered by the same receivership court in connection with the Receiver’s settlement with Stanford insurance underwriters. In Becker, Circuit Judge Edith H. Jones stated that a receiver has discretion to issue bar orders to prevent dissipation of receivership assets. Judge Higginbotham saw his decision in Zacarias as consistent with Becker. He viewed Becker as approving bar orders where the enjoined creditors had “opportunity to participate in the receivership distribution process.” The bar orders, by enjoining these creditors’ third-party claims, did not constitute an exercise of jurisdiction over the objecting creditors or their claims but rather served as a permissive exercise of jurisdiction over the receivership necessary to protect its assets and operation.

Additionally, Judge Higginbotham found that the bar orders did not violate the Anti-Injunction Act. Under the Act, a United States court “may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” See 28 U.S.C. § 2283. Therefore, federal injunctive relief may be necessary where a state proceeding “threatens to dispose of property that forms the basis for federal in rem jurisdiction.” See Tex. v. United States, 837 F.2d 184, 186 (5th Cir. 1988); see also Newby v. Enron Corp., 302 F.3d 295, 301 (5th Cir. 2002). Judge Higginbotham highlighted the particular part of the res at issue in Zacarias — the $132 million receivable owed to the receivership, which was conditioned upon the bar orders. Noting that the Objector Claimants’ suits in state court implicate this same res and that “any proceeds of the Objector Claimants’ claims are potential receivership assets, falling squarely within the bounds of the Receivership Order,” Judge Higginbotham held that the bar orders prevented the state court proceedings from interfering with the res, which remained in the custody of the district court.

Judge Willett’s Dissent

Circuit Judge Don R. Willett dissented. In his view, the district court lacked subject-matter jurisdiction to bar creditors from suing. According to Judge Willett, the Willis Defendants and BMB injured the Stanford entities by “failing to thwart the Ponzi scheme.” As a result, the Receiver asserted breach of fiduciary duty and negligence claims against the defendants. Yet the Willis Defendants and BMB separately injured the Objector Claimants by sending them letters misrepresenting Stanford’s insurance coverage, resulting in allegations of fraud and negligent misrepresentation. For these reasons, Judge Willett found the Objector Claimants’ injuries to be separate from those sustained by Stanford. In Judge Willett’s view, the Receiver lacked standing to assert claims for the Objector Claimants’ separate injuries. Based on this reasoning, Judge Willett concluded that since no party before the court had standing to assert claims for the Objector Claimants, the district court lacked power to dispose of these claims by affirming the bar orders.

In addition to lack of standing, Judge Willett argued that the district court lacked in rem jurisdiction over the Objector Claimants’ claims, as in rem jurisdiction extends only to the receivership property, consisting of Stanford’s assets but not its victims’ claims. Therefore, Judge Willett concluded that the district court did not have jurisdiction to adjudicate these claims.

Why This Case Is Interesting

The Fifth Circuit’s ruling in Zacarias stands in contrast to the Court’s long-standing ruling that bankruptcy courts lack the authority to grant “non-consensual third party releases in chapter 11 plans.” See, e.g., Bank of N.Y. Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229, 251 (5th Cir. 2009). However, in reasoning that the district court was not exercising jurisdiction over the Objector Claimants or their claims but rather was acting within its broad jurisdiction to protect the receivership res, Judge Higginbotham upheld the bar orders to “effectuate and preserve the coordinating function of the receivership.” Without the bar orders, there may not have been a settlement and $130 million for distribution to Stanford’s creditors.