Weil v. Markowitz

• Decision Date: 22 September 1987
• Docket Number: 85-6110 and 85-6111,Nos. 85-6002,85-6003,s. 85-6002
• Citation: 264 U.S.App.D.C. 381,829 F.2d 166
• Parties: Donald WEIL, et al., Appellants v. Edward A. MARKOWITZ, et al. (Two Cases). TMG ASSOCIATES CUSTODIAL COMMITTEE, et al., Appellants v. MONETARY GROUP LIMITED, et al. (Two Cases).
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 166

829 F.2d 166

264 U.S.App.D.C. 381

Donald WEIL, et al., Appellants v. Edward A. MARKOWITZ, et al. (Two Cases).

TMG ASSOCIATES CUSTODIAL COMMITTEE, et al., Appellants v. MONETARY GROUP LIMITED, et al. (Two Cases).

Nos. 85-6002, 85-6003, 85-6110 and 85-6111.

United States Court of Appeals District of Columbia Circuit.

Argued Oct. 15, 1986.

Decided Sept. 22, 1987.

Appeals from the United States District Court for the District of Columbia (Civil

Action No. 84-01680 & Civil Action No. 83-03685).

Allan I. Mendelsohn, with whom Marvin L. Szymkowicz, Washington, D.C., was on brief, for appellants.

Charles S. Fax, for appellees. Austin J. Doyle, Jr., Washington, D.C., and Harry A. Suissa, Chevy Chase, Md., were on brief, for appellees.

Joseph Semo, Washington, D.C., was on brief, for amicus curiae.

Before STARR and SILBERMAN, Circuit Judges, and McGOWAN, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge McGOWAN.

McGOWAN, Senior Circuit Judge:

In these appeals, two limited partnerships (appellants) assert that the District Court abused its discretion in its modification and entry of a settlement agreement, as well as in several rulings that preceded settlement. The settlement disposed of two actions: in the first, one of the appellants (TMG II) brought suit against Edward A. Markowitz, Debra Strahan, and three corporate defendants, alleging that these five had diverted partnership property and business to themselves in violation of state and federal laws, and seeking equitable and monetary relief. In the second, the other appellant (Custodial Committee) made similar claims and sought similar relief against Markowitz and two corporate defendants.

These suits coincided with a criminal investigation of the same defendants by the Internal Revenue Service, an investigation that began shortly before the filing of the first civil complaint and ended shortly after the parties reached settlement. This investigation had prompted the defendants to move repeatedly but unsuccessfully for a stay of civil proceedings, assertedly to avoid incriminating responses to discovery requests. The District Court denied the last of these motions in an order suggesting that the motion had been filed in violation of Rule 11 of the Federal Rules of Civil Procedure. Subsequently, the United States intervened, seeking and obtaining a stay, ostensibly to protect its continuing investigation of the defendants and others. The principal parties in the civil suit reached settlement thereafter, but their agreement excluded Strahan. The District Court entered the agreement, and also dismissed Strahan as a defendant, in an order on September 3, 1985 (settlement order), that closely followed Markowitz's guilty plea to four counts of felony tax fraud in the criminal case.

Appellants here challenge the District Court's entry of the settlement order, its dismissal of Strahan from the suit, its failure to impose sanctions for the apparent Rule 11 violation, and its stay of discovery on a motion of the United States Attorney for the Southern District of New York supported by ex parte affidavits. For the reasons that follow below we: (1) remand the District Court's order suggesting that a Rule 11 violation occurred for clarification and possibly for sanctions; (2) affirm the District Court's approval of the settlement agreement; (3) vacate and remand judgment as to defendant Strahan, who was improperly dismissed from the lawsuit; and (4) remand to the District Court's consideration, without passing on the propriety of the contested stays, the question of whether the settlement order should be entered nunc pro tunc.

I.

Appellant TMG II began the proceedings below on December 12, 1983, by filing No. 83-3685 against Edward A. Markowitz, Debra Strahan, and three corporate defendants. ¹ Markowitz was the managing general partner of TMG II, a New York limited partnership formed in 1980; Markowitz also was the president and sole shareholder of the corporate defendants. One of these corporate defendants, MGL, served in turn as the corporate general partner of another limited partnership, TMG Associates, which was formed in 1979. The IRS investigation that ultimately led to Markowitz's undoing prompted him and MGL to resign from their respective posts as general partners on November 15, 1983. In response to MGL's resignation, the remaining limited partners of TMG Associates formed a Custodial Committee, to look after their interests. This Custodial Committee brought an action, No. 84-1680, against Markowitz, MSC, and MGL on May 31, 1984.

Both TMG II and TMG Associates purportedly were formed as broker-dealers and market-makers in the commodities and metal markets. Under Markowitz's direction, however, the actual business of the partnerships apparently became the creation of marketable tax losses through sham transactions in precious metals and government securities. D.E. 20. These schemes ended with the criminal investigation, and with allegations by Markowitz's partners that he and Strahan had diverted partnership business and property to themselves. TMG II initially sought an equity accounting, monetary repayment, and injunctive relief. D.E. 1. On January 20, 1984, TMG II amended its complaint, asking the court to void certain allegedly fraudulent transfers of property to Strahan, and to award damages for violations of the Commodities Exchange Act, 7 U.S.C. Secs. 1-26 (1982), and the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Secs. 1961-68 (1982 & Supp. III 1985). D.E. 45.

The Custodial Committee, too, joined claims for equitable relief against the partners with parallel claims for damages against the corporate defendants. In its five-count complaint, the Custodial Committee requested an equity accounting and repayment of money either misappropriated by Markowitz and MGL, or lost as a result of mismanagement or breaches of fiduciary duty. Violations of the Commodities Exchange Act, 7 U.S.C. Secs. 1-26, also were alleged. D.E. (84-1680) 1.

Before the Custodial Committee had even filed suit, however, Markowitz repeatedly filed motions to dismiss or to stay all civil proceedings in which he was a named defendant. Markowitz filed the first of these motions, none of which succeeded, on December 20, 1983, arguing that he could only respond truthfully to civil discovery by compromising his fifth amendment right against self-incrimination. D.E. 13; Supporting Memorandum in D.E. (84-1680) 1. Markowitz and the corporate defendants then started a series of motions to dismiss the action on either jurisdictional or substantive grounds, or both. Markowitz also renewed his request for a stay, in an oral motion of February 9, 1984, which was denied from the bench. Unnumbered D.E. between 96 and 97. He moved a third time for a complete stay of all proceedings on March 4, 1984.

This third motion again was based on what Markowitz described as the active government investigation of him and other defendants in which, Markowitz asserted, TMG II and its counsel were cooperating by permitting access to discovery responses. In opposing the motion, TMG II asserted that Markowitz had failed, on the merits, to justify a total stay of proceedings pending the outcome of the criminal investigation, and asserted that the motion was interposed for delay in violation of Rule 11. On April 4, 1984, the court denied the motion, stating that "it appeared that the motion was filed in violation of Rule 11."

The government, by contrast, was able to secure the stay that eluded Markowitz. Even though Donald Weil and TMG II's counsel were cooperating with the government the United States Attorney for the Southern District of New York moved to intervene in No. 83-3685 and to stay all discovery, based on the government's asserted need to protect the Markowitz investigation. The motion for a stay was supported by an affidavit of an Assistant U.S. Attorney and by a second, separate affidavit, which was filed by the government ex parte and without notice to opposing counsel. On the basis of these submissions, the government was granted a provisional stay of discovery on May 7, 1984.

In its motion for a stay, the U.S. Attorney charged that Weil and his counsel were intentionally misusing discovery to get an illicit preview of the government investigation, and disclosed that all of the parties to the civil suit were subjects of that same investigation. At a hearing on the motion on May 10, 1984, ² TMG II opposed entry of the stay and argued, in the alternative, that the blanket stay of indefinite duration requested by the government would be unwarranted in fact and law.

On the morning of the hearing, the contents of the ex parte affidavit, which mistakenly was put in the public record, were reported in the Wall Street Journal. The article disclosed many aspects of the government's continuing investigation, including Markowitz's plea agreement with the IRS, his ongoing cooperation with the government investigation, and the nexus between the investigation and the limited partnerships. Record Excerpt (R.E.) 14. The next day, the government publicly but belatedly moved to file the ex parte affidavit under seal.

The court continued the interim stay in a May 15 order but ruled that a blanket stay of discovery and trial proceedings would be too drastic a remedy. Instead of limiting the scope of its request, the government filed two more ex parte affidavits, one on May 22 and one on May 23, 1984. The District Court sealed both communications on May 24, and the U.S. Attorney later filed a motion for leave to file the ex parte documents. D.E. 246.

On June 6, 1984, without reference to its May 15 order, the District Court granted a stay of all discovery and pretrial briefing obligations. ³ At a later hearing to determine whether the ex parte affidavits should be made available to TMG II, the District Court denied TMG II's motion opposing the stay....