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Securities and Exchange Commission v. Loving Spirit Foundation Inc.

December 17, 2004


Appeal from the United States District Court for the District of Columbia (No. 89cv01854)

Before: Sentelle, Henderson, and Tatel, Circuit Judges.

The opinion of the court was delivered by: Tatel, Circuit Judge

Argued September 14, 2004

In this case, we consider challenges to a pair of district court orders: one defines the obligations of a court-appointed receiver, and the other denies a motion to recuse the district judge. Finding error in neither ruling, we affirm in all respects. Also, because appellants' lawyers, G. Michael Nelson and David A. Maney, may have violated ethical obligations binding on attorneys practicing in the federal courts, we will order them to show cause why sanctions should not be imposed.


In 1989, a jury sitting in the United States District Court for the Southern District of New York convicted Paul A. Bilzerian of securities fraud and conspiracy to defraud the United States. See United States v. Bilzerian, 926 F.2d 1285, 1289-91, 1294 (2d Cir. 1991) (opinion of Cardamone, J.) (affirming the conviction). Bilzerian was sentenced to four years imprisonment and fined $1.5 million. Id. Following his conviction, the Securities and Exchange Commission filed a civil suit against Bilzerian in the United States District Court for the District of Columbia. That court ordered Bilzerian to disgorge over $62 million, representing profits from his fraudulent activities and prejudgment interest. SEC v. Bilzerian, 814 F. Supp. 116 (D.D.C 1993) (ordering disgorgement of profits), aff'd 29 F.3d 689 (D.C. Cir. 1994); SEC v. Bilzerian, No. 89-1854, 1993 WL 542584 (D.D.C. June 25, 1993) (setting value of interest). Seven years later, with the judgment still unpaid, the district court found Bilzerian in contempt of the disgorgement order, SEC v. Bilzerian, 112 F. Supp. 2d 12 (D.D.C. 2000), aff'd 2003 WL 22176183 (D.C. Cir. Sept. 22, 2003), established a receivership estate "for the purpose of identifying, marshalling, receiving, and liquidating his assets," SEC v. Bilzerian, 127 F. Supp. 2d 232, 232 (D.D.C. 2000), appointed appellee Deborah Meshulam as receiver, id., and sent Bilzerian back to prison for continued noncompliance, SEC v. Bilzerian, No. 89-1854 (D.D.C. Jan. 12, 2001).

Appellants Puma Foundation and Loving Spirit Foundation are nonprofits directed by Bilzerian's wife, Terri Steffen. When the receiver discovered that Bilzerian had a financial interest in the two foundations, which shared an address with the Bilzerian-Steffen residence in Tampa, Florida, the district court froze the foundations' assets and ordered them turned over to the court. SEC v. Bilzerian, No. 89-1854 (D.D.C. May 11, 2001) (order granting ex parte temporary asset freeze and other relief); SEC v. Bilzerian, No. 89-1854 (D.D.C. June 1, 2001) (order granting preliminary possession).

Later, in December 2001, the receiver entered into a consent agreement with Steffen, Puma, Loving-Spirit, and several other Bilzerian-related entities pursuant to which many of the funds and assets they once held (and that were then in the court's registry) were to be transferred to the receiver. One such asset was a large block of stock in Cimetrix, Inc., a publicly traded company once run by Bilzerian. The agreement also called for the sale of the Bilzerian-Steffen residence pursuant to the terms of a separate "Joint Marketing Agreement." Steffen and the receivership estate would split the proceeds of the sale evenly. Finally, the consent agreement provided that once the IRS released the two foundations' tax liabilities, their assets would be donated to the Salvation Army.

Central to this case, one paragraph in the consent agreement called for the settling parties to execute a series of liability releases. Steffen, a trust, and several holding entities agreed to execute releases in favor of Cimetrix. The agreement also provided that Cimetrix, though neither a party to the litigation nor a signatory to the agreement, would "execute a release in favor of Steffen, the Entities, the Foundations, and [another Bilzerian-related entity] in form acceptable to them." After the parties signed the agreement, Cimetrix executed releases in favor of various Bilzerian-related entities -- but not Puma or Loving Spirit.

Along with the consent agreement, the parties executed an escrow agreement. Under that agreement, the receiver's law firm, as escrow agent, would hold all documents not filed with the court until entry of the consent judgment. Once the court entered a final judgment, the escrow agent would transfer certain documents, including the "third party releases involving... Cimetrix" to "counsel for the released parties."

Acting pursuant to the consent agreement, the district court entered judgment in January 2002. SEC v. Bilzerian, No. 89-1854 (D.D.C. Jan. 16, 2002). The judgment incorporated the consent agreement by reference, making its provisions orders of the court. Id., slip op. at 10. Finding the disgorgement agreed to by the parties sufficient to purge Bilzerian's contempt, the court released him from prison. Id.

The consent agreement and judgment, however, failed to bring the receivership proceeding to a close. Over a year after entry of the judgment, in March 2003, Puma and Loving Spirit sued Cimetrix in the United States District Court for the Middle District of Florida, alleging breach of contract and securities fraud. Cimetrix raised several counterclaims, making its failure to release the foundations a matter of immediate concern to them. In a letter to receiver Meshulam, Steffen asserted that the consent agreement required the receiver to procure the unexecuted releases and demanded to know by the end of business that day whether the receiver would do so. Reiterating her demand two days later, Steffen added that "[t]ime is of the essence because Puma and Loving Spirit Foundation will be required to incur substantial additional legal fees in the event I do not receive assurance from you by close of business today that the requested releases will be forthcoming shortly." Hours later, Steffen emailed an attorney for the receiver, threatening that "if I do not receive the Cimetrix releases by the close of business tomorrow, I will be forced to take drastic action." Steffen added that she would "at the very least, be forced to assume that the entire settlement was the result of fraud on the part of the Receiver and the SEC and that the entire agreement should be rescinded." Id.

In response, receiver Meshulam filed a "motion to enforce," asking the district court to clarify whether she had any obligations with regard to the unexecuted releases and warning that Steffen had a history of obstruction that made her threat of "drastic action" particularly serious. Fearing that Steffen might use the releases as an excuse to impede the sale of the Florida property, the receiver also sought an order forbidding Steffen from obstructing marketing efforts in certain specified ways. The two foundations responded that the consent agreement, properly interpreted, required the receiver to obtain the releases. Acting alone, Puma also moved to recuse the district judge, the Honorable Royce C. Lamberth. Puma sought recusal under both 28 U.S.C. § 144, which provides that a judge with "personal bias" shall cease presiding over a case when a party documents the bias in an affidavit, and 28 U.S.C. § 455(a), which provides that a judge "shall disqualify himself" when "his impartiality might reasonably be questioned."

Judge Lamberth denied Puma's motion to recuse. He found the section 144 motion untimely and concluded that the section 455(a) motion fell short of the legal standard required for recusal. SEC v. Bilzerian, No. 89-1854 (D.D.C. June 11, 2003). Judge Lamberth also granted the relief receiver Meshulam requested, observing that nothing in the consent agreement gave the receiver any obligation to procure releases from Cimetrix. SEC v. Bilzerian, No. 89-1854, slip op. at 3-5 (D.D.C. July 17, 2003). As the agreement explicitly assigned other obligations to named individuals and entities, Judge Lamberth added, it would have been equally explicit about the receiver's obligation to obtain releases from Cimetrix had the parties actually intended to assign her that task. Id. at 4.

Puma and Loving Spirit now appeal, arguing that the receiver lacked standing to bring her motion to enforce. On the merits, they argue that the district court incorrectly interpreted the consent agreement's provision concerning the Cimetrix releases. Puma challenges Judge ...

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