Actions for Contempt

4.01 In General

Contempt of court consists of the disregard of judicial authority and a court’s ability to punish such conduct is a part of its inherent authority. Thus, disobedience to the lawful orders of a court constitutes contempt. Enforcement of and Collateral Attack on Injunctions, 11A Fed. Prac. & Proc. Civ. §2960 (2d ed.) (hereinafter “Wright & Miller: Civil”)

Since receivers are frequently appointed in actions involving fraud, it is not uncommon that the fraudsters or those with whom they are in concert will attempt to evade or ignore orders of the receivership (or other) courts. Such contempt can arise, for instance, in connection with concealment of or failure to turn over assets, refusal (or supposed inability) to repatriate assets now being held in a foreign jurisdiction, or failure to honor “freeze” orders or orders for preservation or production of records and other “discovery” orders, to name only a few. Contempt can also arise when third parties, such as banks, fail (sometimes negligently) to comply with freeze or turnover orders.

4.02 Nature and Elements of Contempt

Contempt may be criminal or civil. Civil contempt may be utilized either to coerce the defendant into compliance with a court order or to compensate the complainant for losses sustained by the failure to comply. Electrical Workers Pension Trust Fund v. Gary’s Electric Service Co., 340 F.3d 373, 379, 385 (6th Cir. 2003); Chicago Truck Drivers v. Bhd. Labor Leasing, 207 F.3d 500, 505 (8th Cir. 2000). Whereas criminalcontempt is punitive, civil contempt is remedial: to coerce the defendant into compliance with the court’s order or to compensate the complainant for losses sustained. United States v. Asay, 614 F.2d 655, 659 (9th Cir. 1980); Shakman v. Democratic Org. of Cook Cnty, 533 F.2d 344, 348-49 (7th Cir. 1976) Costs and attorney fees of both the government and the Receiver, in addition to a “fine” for compensatory damages, are also appropriate. CCommodity Futures Trading Comm’n v. Lake Shore Asset Mgmt. Ltd., 07 C 3598, 2007 WL 4591005 (N.D. Ill. Dec. 21, 2007); Shakman, 533 F.2d at 351. Criminal contempt is to be utilized only if the civil remedy is deemed inadequate. Lake Shore Asset Management, 2007 WL 4591005, at *2.

To establish the contempt, it must be shown (by clear and convincing evidence in cases of civil contempt, and beyond a reasonable doubt in criminal contempt cases) that a clear and unambiguous order was violated, and that the defendant had notice of such order. Wright & Miller: Civil 2d, §2960; as to the standard of proof, see Stotler and Co. v. Able, 870 F.2d 1158, 1163 (7th Cir. 1989). However, in instances of civil contempt, the breach need not be willful. Wright, King & Klein, Federal Practice and Procedure: Criminal 3rd §705, n, 7. Thus, in the words of the United States Supreme Court:

The absence of willfulness does not relieve from civil contempt.…Since the purpose is remedial, it matters not with what intent the defendant did the prohibited act. The decree was not fashioned so as to grant or withhold its benefits dependent on the state of minds of respondents.…An act does not cease to be a violation of a law and of a decree merely because it may have been done innocently.” McComb v. Jacksonville Paper Co., 336 U.S. 187, 191 (1949).

See also S.E.C. v. Homa, 99 C 6895, 2004 WL 1093492, at *6 (N.D. Ill. May 13, 2004) (“The state of mind of a party to the underlying action is irrelevant in a civil contempt proceeding. An inadvertent violation does not preclude a contempt citation.…in civil contempt proceedings the issue is not the [contemnor’s] state of mind but simply whether the Court’s order was in fact violated. ‘[S]ince the purpose [of civil contempt] is remedial, it matters not with what intent the defendant did the prohibited act.…An act does not cease to be a violation of the law and of a decree merely because it may have been done innocently.’”) (citations omitted).

Reliance on advice of counsel does not excuse non-compliance with an order that is, in fact, lawful. Asay, 614 F.2d at 661.

As to the procedure for contempt proceedings, including the use of incarceration in civil contempt as a method of coercing compliance with the court’s order, see §5A.06.

4.03 The “Impossibility” Defense – In General

Once clear and convincing evidence of the violation of the court order has been presented by the party seeking entry of the contempt finding, the burden is on the party in contempt to establish a defense to the contempt order, such as “present inability to comply.” United States v. Rylander, 460 U.S. 752, 756-68 (1983) (failure to produce evidence to support asserted impossibility defense not excused by fact that was also claiming Fifth Amendment); United States v. Chusid, 372 F.3d 113, 116-117 (2d Cir. 2004); Gary’s Electric, 340 F.3d at 379; In re Lawrence, 279 F.3d 1294, 1294 (11th Cir. 2002); Chicago Truck Drivers, 207 F.3d at 505; F.T.C. v. Affordable Media, LLC, 179 F.3d 1228, 1239 (9th Cir. 1999); Commodity Futures Trading Comm’n v. Wellington Precious Metals, 950 F.2d 1525 (11th Cir. 1992). See also Roman v. Korson, 307 F. Supp. 2d 908, 914 (W.D. Mich. 2004).

A defendant asserting an “impossibility” defense must show “categorically and in detail” why he or she is unable to comply with the court’s order. Gary’s Electric, 340 F.3d at 379; Lawrence, 279 F.3d at 1297; Chicago Truck Drivers, 207 F.3d at 506 (stating that “an alleged contemnor must ‘…establish that he has made in good faith all reasonable efforts to meet the terms of the court order he is seeking to avoid,” and further holding that this was an “especially high” burden); Affordable Media, 179 F.3d at 1240-41; see also Chusid, 372 F.3d at 117 (“It is his burden, however, ‘to establish his inability clearly, plainly, and unmistakably.’”); Roman, 307 F. Supp. 2d at 914.

An especially strong statement was made by the Eleventh Circuit in Wellington:

Even if the efforts he did make were “substantial,” “diligent” or “in good faith,”…the fact that he did not make ‘all reasonable efforts’ establishes that [respondent] did not sufficiently rebut the…prima facie showing of contempt.” 950 F.2d at 1529 (emphasis supplied).

Reliance on advice of counsel is not a defense. Asay, 614 F.2d at 661.And see below for a discussion on the impact of utilization of asset protection trusts as an attempted means of emasculating the contempt order.

4.04 Self-Induced Impossibility

Even though in Rylander, the Supreme Court spoke in terms of present impossibility as an absolute defense, subsequent lower court decisions have strongly supported the concept that self-induced impossibility is not a defense. Gary’s Electric, 340 F.3d at 381-384 (“…we have decided that a showing of clean hands is essential to the [impossibility] defense.”); Lawrence, 279 F.3d at 1300; Chicago Truck Drivers, 207 F.3d at 506; Asay, 614 F.2d at 659-660. See also Cent. States Se. & Sw. Areas Pension Fund v. Wintz Properties, Inc., 155 F.3d 868, 870, 875 (7th Cir. 1998); Roman, 307 F. Supp. 2d at 914; infra page 37, discussion concerning attempted utilization of asset protection trusts.

In keeping with the principle that self-induced impossibility is not a defense, the courts have held that lack of funds is not a valid “impossibility” defense when the defendant has chosen to instead pay other creditors. Gary’s Electric, 340 F.3d at 383 (“…Pipia’s decision to pay all other creditors and refusal to pay the Funds anything at all is ample evidence from which the district court could conclude that Pipia did not take ‘all reasonable steps’ to ensure Gary’s Electric’s compliance with the court order.”); Wintz, 155 F.3d at 870, 875 (“This is not a case wherein Wintz violated an injunction because it had no money whatsoever; it obviously was paying several creditors except the one entity entitled to Wintz’s money under the terms of the court order.”); Chicago Truck Drivers, 207 F.3d 500 at 504. See also Lawrence, 279 F.3d at 1297-98 (“He maintained that he had used the money for payment of various unsecured loans. We voiced a skepticism that the contemnor, a sophisticated businessman,…made no meaningful attempts to collect on debts due him. We stated that ‘Even more important, however, is the fact that the district court found [contemnor’s] explanations unworthy of belief.’”) (quoting Wellington, 950 F.2d 1525). Additionally, courts have excluded from using the impossibility defense those who created the inability to pay by living an extravagant lifestyle. See S.E.C. v. Douglas, 3:82 CV 29, 2012 WL 3587203 (N.D. Ohio Aug. 20, 2012) (citing S.E.C. v. Solow, 682 F. Supp. 2d 1312, 1323-24 (S.D. Fla. 2010); S.E.C. v. Showalter, 227 F. Supp. 2d 110, 115-21 (D.D.C. 2002)).

The perpetrators of Ponzi and other fraud schemes frequently seek both to “launder” and hide their funds by depositing such moneys overseas, where (the fraudster hopes) they will be beyond the reach of the United States’ courts. However, our courts have frequently ordered that the “overseas” funds be repatriated to the United States..

In an attempt to avoid repatriation, many defendants have established “asset protection trusts” with “duress” clauses, which provide that the foreign trustee would refuse to repatriate funds to the trust settlor if the request was a result of a court order. For a discussion of asset protection trusts, see Affordable Media, 179 F.3d at 1240-1244. In two cases, Courts of Appeal for the Ninth and Eleventh Circuits have held that the trusts did not protect the contemnors against contempt orders and incarceration, either based upon principles of self-induced impossibility or the court’s skepticism concerning the credibility of the contemnor’s testimony. Lawrence, 279 F.3d at 1296-1300 (“Further, the district court found that his testimony that he retained no control over the Trust and that he had not maintained communication with the Trustees lacked credibility. There is no support in the record before us to warrant a rejection of that credibility determination. Even if we were to find that Lawrence had set forth sufficient evidence of impossibility, we must agree with the trial court that Lawrence’s claimed defense is invalid because the asserted impossibility was self-created.”); Affordable Media, 179 F.3d at 1232, 1238-1244 (“…the provisions of the trust were intended to frustrate the operation of domestic courts….In the asset protection trust context, moreover, the burden on the party asserting an impossibility defense will be particularly high because of the likelihood that any attempted compliance with the court’s orders will be merely a charade rather than a good faith effort to comply.”)

Homestead and other exemptions do not apply to a turn over order. Steffen v. Gray, Harris & Robinson, 283 F. Supp. 2d 1272 (M.D. Fla 2003).

In some cases, the only available testimony concerning impossibility may be that of the contemnors, whose propensity for fraud has created the problems. Not surprisingly, district courts are given broad discretion to reject such testimony as lacking in credibility, if that appears to be the case. See Chusid, 372 F.3d at 117 (“…Chusid has engaged in an extended campaign of obfuscatory and even deceptive conduct in an attempt to avoid his restitution and fine obligations.”); Wellington, 950 F.2d at 1530 (“evasive and incomplete testimony will not satisfy burden of production.”)

4.05 Liability of Third Parties

In some instances, the conduct complained of may have been performed, or at least facilitated, by persons that are not parties to the underlying action, which raises the question of enforceability of the order against a third party.
To hold one who is not a party to the action in which the violated order was issued liable in contempt, two additional facts must be established: first, that the purported contemnor had knowledge of the order; and, second, that he “either abets the [party named in the court order] or is legally identified with him.” Stotler, 870 F.2d at 1164; see also Goya Foods, Inc. v. Wallack Mgmt Co., 290 F.3d 63, 75 (1st Cir. 2002).

Nonparties who reside outside the jurisdiction of a district court but who knowingly violate a court’s injunction order or aid and abet others in doing so, are subject to the jurisdiction of the district court, even when there are no other contacts with the jurisdiction. S.E.C. v. Homa, 514 F.3d 661 (7th Cir 2008).

4.06 Procedure

Contempt proceedings are normally summary in nature. See Chapter 7. Wright, Miller & Kane, Federal Practice & Procedure: Civil 2d, §2960. For a discussion of the procedure to be followed in a civil contempt proceeding (and a contrast with criminal contempt), see Wright, King & Klein, Federal Practice and Procedure: Criminal 3rd, §705.

Incarceration may be utilized as a means of coercing compliance by the contemnor.Chicago Truck Drivers, 207 F.3d at 505. See also Chusid, 372 F.3d at 116; Lawrence, 279 F.3d at 1297; Wellington, 950 F.2d at 1526 (11th Cir. 1992). However, the imprisonment for civil contempt must be conditional. Shakman, 533 F.2d at 349 n.8. And “‘although incarceration for civil contempt may continue indefinitely, it cannot last forever.’…If the bankruptcy judge determines that, although Lawrence has the ability to turn over the Trust res, he will steadfastly refuse to do so, the judge will be obligated to release Lawrence because the subject incarceration would no longer serve the civil purpose of coercion.” Lawrence, 279 F.3d at 1300-01. In such an event, however, it would appear that the receiver could petition for incarceration for criminal contempt. And see Wellington: “As long as the judge is satisfied that the coercive sanction might yet produce its intended result, the confinement may continue….many months or perhaps even several years may pass before it becomes necessary to conclude that incarceration will no longer serve the purpose of the civil contempt order.” See also Commodity Futures Trading Comm’n v. Armstrong, 284 F.3d 404, 406 (2d Cir. 2002) (incarceration continued although defendant continued to fail to comply even after two years of incarceration); Chadwick v. Janecka, 312 F.3d 597, 613 (3d Cir. 2002).

Where a contemnor has disobeyed court orders, but seeks to take advantage of the judicial system by appealing a contempt order, the appellate court may, in its discretion, refuse to hear the appeal under the “fugitive disentitlement” doctrine. United States v. Barnette, 129 F.3d 1179 (11th Cir. 1997).

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