Commercial Litigation and Arbitration

“Confusing Overlap” of Contempt vs. Other Sanctions Powers — Higher Burden of Proof If Contempt — Judge’s Duty to Justify Sanctions Imposed (Good Quote)

Securities and Exchange Commission v. First Choice Mgmt. Servs., Inc., 2012 U.S. App. LEXIS 8788 (7th Cir. May 1, 2012):

So the order was violated; but was the sanction proper? Judges have inherent authority to impose sanctions for misconduct by litigants, their lawyers, witnesses, and others who participate in a lawsuit over which the judge is presiding. United Mine Workers of America v. Bagwell, 512 U.S. 821, 831 (1994); Chambers v. NASCO, Inc., 501 U.S. 32, 43-50 (1991). Usually the sanction is a fine, an award of attorneys' fees, or some other monetary exaction, and is simply called a "sanction," and no particular procedures, including specification of the burden of proof, are prescribed for determining whether misconduct warranting a sanction has occurred.

But if the judge terms the misconduct giving rise to a punitive sanction (as distinct from a compensatory one — the domain of civil contempt, discussed below) "contempt of court," he brings into play (if he is a federal judge) rules and a statute that cabin his discretion. A federal court is empowered, so far as bears on this case, to "punish by fine or imprisonment, or both, at its discretion, such contempt of its authority . . . as Disobedience . . . to its lawful . . . order." 18 U.S.C. § 401. The court may act summarily if the contempt was committed in the judge's presence and he saw or heard it, Fed. R. Crim. P. 42(b), but that is not this case. In cases of contempt involving violation of an order rather than acting up in the judge's presence, the judge must among other things appoint a lawyer (normally the U.S. Attorney, see Young v. United States ex rel. Vuitton et Fils S.A., 481 U.S. 787 (1987)) to prosecute a charge of criminal contempt. Fed. R. Crim. P. 42(a)(2). And the contemnor cannot be punished with a jail sentence of six months or more unless he is convicted by a jury. Codispoti v. Pennsyvania, 418 U.S. 506, 512 (1974); Bloom v. Illinois, 391 U.S. 194 (1968).

Jail is irrelevant to this case, as is the judicial power to fine or imprison a civil contemnor in order to coerce his obedience to a court order (for example, an order to turn over a deed to a plaintiff), rather than to "punish" him, the latter being the domain of section 401 and Rule 42. But monetary sanctions for a civil contempt can also be compensatory rather than coercive, as in this case. United Mine Workers v. Bagwell, supra, 512 U.S. at 829. The rules and statute that we cited do not apply to civil contempts, though notice and an opportunity to be heard are required. We'll see that the judge treated SonCo's misbehavior as a civil contempt.

A large body of case law holds that civil contempt must be proved by clear and convincing evidence, FTC v. Trudeau, 579 F.3d 754, 763 (7th Cir. 2009); Goluba v. School District of Ripon, supra, 45 F.3d at 1037; FTC v. Lane Labs-USA, Inc., 624 F.3d 575, 582 (3d Cir. 2010); Southern New England Tel. Co. v. Global NAPs Inc., 624 F.3d 123, 145 (2d Cir. 2010); Eagle Comtronics, Inc. v. Arrow Communication Laboratories, Inc., 305 F.3d 1303, 1314 (Fed. Cir. 2002); 11A Charles Alan Wright et al., Federal Practice and Procedure § 2960, p. 380 and n. 59 (2d ed. 1995) (and cases cited there), though it is in tension with the Supreme Court's insistence on a presumption in favor of the less onerous standard of preponderance of the evidence in federal civil cases. Grogan v. Garner, 498 U.S. 279, 286 (1991); Herman & MacLean v. Huddleston, 459 U.S. 375, 387-91 (1983); see Harrods Ltd. v. Sixty Internet Domain Names, 302 F.3d 214, 225-26 (4th Cir. 2002). The opinion in Herman & MacLean, holding that preponderance is the appropriate standard for securities fraud, notes, as instances in which the presumption is rebutted and the higher standard of clear and convincing evidence is imposed, proceedings to terminate parental rights, involuntary commitment proceedings, and deportation proceedings. 459 U.S. at 389. We have criticized the tendency of federal courts to impose the higher standard unless a statute makes it the standard, Doll v. Brown, 75 F.3d 1200, 1203-04 (7th Cir. 1996), and it is difficult to see why civil contempt should require a higher standard of proof than securities fraud; it has little in common with the examples given in Herman & MacLean of the exceptional cases governed by the higher standard. But we need not try to solve this puzzle in the present case.

What we can't glide over is the confusing overlap between sanctions for contempt on the one hand and sanctions, often indistinguishable from those for contempt, criminal or civil, that a judge can impose in the exercise either of the inherent judicial power that we mentioned earlier or under the authority granted by a rule or statute, such as Rules 11 and 37 of the civil rules or 28 U.S.C. § 1927, to punish misconduct by a lawyer or litigant. The judge can impose such sanctions summarily (though notice usually is required before imposition, to give the lawyer or litigant a chance to defend himself), at least if the sanction takes the form of a payment to the opposing party to compensate him for the consequences of the sanctionable misconduct; if the sanction is purely punitive, and severe, additional process may be required. Mackler Productions, Inc. v. Cohen, 146 F.3d 126, 129-30 (2d Cir. 1998); see Eisenberg v. University of New Mexico, 936 F.2d 1131, 1136-37 (10th Cir. 1991); Donaldson v. Clark, 819 F.2d 1551, 1559 n. 10 (11th Cir. 1987) (en banc). But there is no general requirement of proof by clear and convincing evidence.

The judge in our case used the magic word "contempt" to characterize SonCo's violation of the agreed order; he obviously thought the violation deliberate, rather than the product of a misunderstanding of the order. But he did not think that he was fining SonCo, which would have made this a case of criminal contempt; he thought he was compensating the receiver and ALCO. That is why we said he was treating SonCo's misbehavior as a civil contempt.

The justification he offered for taking away SonCo's leases but not requiring the receiver to return the $600,000 that SonCo had paid the receiver for them, thus in effect imposing a $600,000 sanction on SonCo, was that "that money must be used to compensate the attorneys for Alco and the Receiver . . . [and] also . . . to compensate Alco for the harms caused by SonCo's noncompliance with [the agreed order] . . . . Those uses of the $600,000 will make the Receiver and Alco whole and will replenish funds that should have been returned to defrauded investors but instead have been dipped into as a result of SonCo's contempt of court."

Since the judge intended the remedy he was ordering to be compensatory, he did not have to call the misconduct giving rise to the order "contempt." Had he not called it contempt it would not have had to be proved by clear and convincing evidence. But he called it contempt, so it had to be if the cases that impose that standard survive Herman & MacLean and Grogan, yet he didn't mention the burden of proof. But SonCo is not objecting to that; it's arguing that the remedy isn't really compensatory, but rather punitive, so that the judge actually found SonCo guilty of criminal contempt without complying with the procedural rules governing such contempts.

A judge has to justify the sanctions he imposes. FTC v. Trudeau, supra, 579 F.3d at 770-71; Autotech Technologies LP v. Integral Research & Development Corp., 499 F.3d 737, 752 (7th Cir. 2007); Mid-American Waste Systems, Inc. v. City of Gary, 49 F.3d 286, 293 (7th Cir. 1995); FTC v. Kuykendall, 371 F.3d 745, 763 (10th Cir. 2004) (en banc). Since the judge in this case intended the sanction (perhaps better termed "remedy") to be compensatory, he had to explain what it was compensating for; and he did not do that. For what costs had the receiver and ALCO incurred as a consequence of SonCo's violation of the agreed order, besides the $22,000 in attorneys' fees that the judge directed SonCo to pay? He didn't say. It might seem obvious that ALCO lost the $250,000 in bond money that it would have recovered had SonCo become the operator of the Hull-Silk leases or hired a substitute to operate them. But no; the judge ordered the new lessee, Wilson Operating Company (this was before Wilson assigned the leases), to pay $250,000 to the receiver, to be divided with ALCO. The unstated but inescapable premise was that Wilson's assignee was going either to operate the leases or hire an operator, and in either event would replace ALCO's bond. Without replacement the Texas Railroad Commission would not return ALCO's bond money, which was the guaranty of ALCO's ability to cover at least some of the conservation and environmental costs to which its operation of the wells might give rise.

Maybe ALCO incurred additional costs by virtue of having remained the operator for more than a year after the agreed order was entered. But we cannot find any estimate of those costs anywhere, or for that matter any estimate of the costs incurred by the receiver as a consequence of SonCo's contempt, beyond the attorneys' fees separately compensated for by SonCo. We haven't even been told what the receiver got for assigning the leases to Wilson. It is possible that most--maybe all--of the $600,000 loss that the judge's order imposes on SonCo is a form of punitive damages that would require recharacterizing the finding of civil contempt as a procedurally irregular finding of criminal contempt.

So while we affirm the judge's order insofar as it determines that SonCo willfully violated the agreed order, we vacate the sanction, and remand. The judge on remand will have three options: reimpose the sanction he imposed, upon demonstrating that it is a compensatory remedy for a civil contempt after all; impose a different, or perhaps no, sanction whether for civil contempt or for misconduct not characterized as contempt; or proceed under the rules governing criminal contempts.

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