Ovation Fund Management II, LLC v. Nossaman LLP, et al.

This case presents a clear conflict regarding the power of federal courts overseeing an equity receivership to extinguish third-party claims against non-receivership entities without the claimant’s consent. Federal courts have long utilized receivers to manage the affairs of corporate debtors and ensure a fair division of funds among its creditors. Somewhat recently, receivers began requesting and receiving from district courts “bar orders” when settling claims for the receivership. The receiver, acting for the receivership entities, settles with an adverse party and, to facilitate the settlement, includes a bar order enjoining all other claims against the settling party relating to the receivership—even claims belonging to third parties. The circuits are split 4-1 on whether federal courts have the power to bar third-party claims agaist nonreceivership entities. The Sixth Circuit holds that federal courts cannot enjoin claims against nonreceivership entities that “belong” to a third party. In stark contrast, the Fifth, Tenth, Eleventh, and now the Ninth Circuit all permit federal courts to bar these third-party claims without consent. The question presented is: Whether a federal court overseeing an equity receivership has the power to enjoin and extinguish claims that belong to non-receivership entities against non-receivership third parties without the claimants’ consent.