621 F.3d 687 (7th Cir. 2010), 08-4013, United States S.E.C. v. Hyatt

Docket Nº:08-4013.
Citation:621 F.3d 687
Opinion Judge:SYKES, Circuit Judge.
Party Name:UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Jason R. HYATT, et al., Defendants. Appeal of: BCI Aircraft Leasing, Inc., et al.
Attorney:Benjamin L. Schiffrin, Attorney (argued), Securities and Exchange Commission Office of the General Counsel, Washington, DC, for Plaintiff-Appellee. Gregory B. Kanan, Attorney (argued), Rothgerber, Johnson & Lyons, Denver, CO, Thomas M. Leinenweber, Attorney, Leinenweber & Baroini, Henry M. Basker...
Judge Panel:Before POSNER and SYKES, Circuit Judges, and VAN BOKKELEN, District Judge.[*]
Case Date:September 03, 2010
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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621 F.3d 687 (7th Cir. 2010)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee,

v.

Jason R. HYATT, et al., Defendants.

Appeal of: BCI Aircraft Leasing, Inc., et al.

No. 08-4013.

United States Court of Appeals, Seventh Circuit.

September 3, 2010

Argued May 12, 2009.

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[Copyrighted Material Omitted]

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Benjamin L. Schiffrin, Attorney (argued), Securities and Exchange Commission Office of the General Counsel, Washington, DC, for Plaintiff-Appellee.

Gregory B. Kanan, Attorney (argued), Rothgerber, Johnson & Lyons, Denver, CO, Thomas M. Leinenweber, Attorney, Leinenweber & Baroini, Henry M. Baskerville, Stetler & Duffy, Chicago, IL, for Defendants.

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Before POSNER and SYKES, Circuit Judges, and VAN BOKKELEN, District Judge.[*]

SYKES, Circuit Judge.

Brian Hollnagel and BCI Aircraft Leasing appeal the district court's order holding them in contempt and awarding attorney's fees for their failure to adequately respond to two subpoenas duces tecum served on them by the Securities and Exchange Commission (" SEC" ) in connection with litigation between the SEC and another party. The SEC initiated the contempt proceeding via a motion for a rule to show cause why Hollnagel and BCI should not be held in contempt. The motion asked the court to: (1) order them to fully comply with the subpoenas; and (2) order them to show cause why they should not be held in contempt for their past noncompliance. Accompanying this motion was a notice setting a date and time for a hearing at which the SEC said it would " present, and seek a hearing date regarding" its request for a show-cause order. Hollnagel and BCI interpreted the notice and motion to mean that the initial hearing would be entirely ministerial-that the court would issue a show-cause order and set another date on which the merits of the contempt issue would be heard. So they didn't show up.

When the case was called and Hollnagel and BCI didn't appear, the SEC skipped over the procedural preliminaries and moved right to the main event: The agency's lawyers asked the court to find Hollnagel and BCI in contempt. The court did so, ordered them to fully comply with the subpoenas within two days, and imposed a $1,000-a-day fine for any noncompliance after that date. The court later rescinded the fine, but left the contempt order in place and ordered Hollnagel and BCI to pay the SEC's attorney's fees.

Hollnagel and BCI appealed, raising several procedural challenges to the district court's order. First, they contend that a contempt order cannot issue for noncompliance with a nonparty subpoena duces tecum unless the recipient of the subpoena is first ordered by the court to comply. In the alternative they claim that the SEC's motion for a rule to show cause notified them only that the SEC was seeking a show-cause order setting a future hearing date on the contempt motion, not that the court would immediately adjudicate whether they were in contempt. Accelerating the process, they maintain, deprived them of notice and an opportunity to be heard.

We reject the first of these arguments. Rule 45(e) of the Federal Rules of Civil Procedure specifically provides that a person who fails " without adequate excuse to obey [a] subpoena" may be held in contempt. The rule does not require the court to first order compliance before imposing the sanction of contempt, although subsection (c) of the rule requires an intervening court order if the recipient of the subpoena objects in writing to the production of documents or things. Hollnagel and BCI did not serve a written objection, so the SEC was entitled to seek a contempt sanction. We agree, however, with the alternative argument that the SEC's notice and motion for a rule to show cause did not provide sufficient notice that the district court would decide the contempt issue at the initial hearing. The notice sought only the issuance of a show-cause order and asked the court to set a hearing at which the merits of the contempt issue

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would later be adjudicated. Accordingly, we vacate the contempt order.

I. Background

In district-court litigation between the SEC and Hyatt Johnson Capital, lawyers for the SEC issued two subpoenas duces tecum to nonparties Brian Hollnagel and BCI Aircraft Leasing (collectively " BCI" ). The subpoenas were issued in June and August 2008 and requested a large number of documents related to the underlying litigation. BCI received a two-week extension from the SEC for the June subpoena and responded in July by producing numerous documents on a CD. The SEC thought the production was deficient because some of the e-mails did not contain their original attachments or had attachments that were not produced in their native format. Twice the SEC requested that BCI cure the deficiencies; each time BCI attempted to do so, the SEC's lawyers found problems with the production. After receiving the August subpoena, BCI again asked the SEC for two extra weeks to respond. The SEC rejected this request on August 20, 2008-the due date set in the subpoena-based on the continuing dispute over the adequacy of BCI's compliance with the June subpoena.

On the afternoon of August 28, 2008-the Thursday before Labor Day-the SEC filed a motion in the district court seeking the issuance of a rule to show cause why BCI should not be held in contempt for noncompliance with the subpoenas. The notice accompanying the motion told BCI that the SEC would appear in the district court at 9:30 a.m. on September 3, 2008 (the Wednesday after Labor Day), and would " then and there present, and seek a hearing date regarding" its motion for the issuance of a rule to show cause. The motion asked the court to: (1) order BCI to " fully and completely respond to the SEC's subpoenas" ; and (2) order " BCI and Hollnagel to show cause why they should not be held in contempt of court." In a memorandum filed in support of the motion, the SEC requested the same relief. In the last paragraph of the memorandum, however, the SEC also asked the court to " find BCI and Hollnagel in contempt" and award attorney's fees.

BCI did not appear at the September 3 hearing. When the case was called and BCI's nonappearance was noted, the SEC's lawyers told the judge: " [W]e're here today on our contempt motion against BCI Aircraft Leasing and Hollnagel for not complying with three [sic] subpoenas issued to them." They asked the court to order that " BCI and Hollnagel make a complete and proper production" by noon on September 5. They also asked the court to " find BCI and Hollnagel in contempt for failing to respond to these subpoenas completely" and proposed a fine of $1,000 per day if complete production was not made by...

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