SECURITIES & EXCHANGE COM'N v. Thermodynamics, Inc.

• Decision Date: 18 October 1970
• Docket Number: Civ. A. No. 9121.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. THERMODYNAMICS, INC., a Colorado corporation, Severt H. Reither, Howard B. Maerz, and Robert J. Strawn, Jr., Defendants.
• Court: U.S. District Court — District of Colorado

319 F. Supp. 1380

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. THERMODYNAMICS, INC., a Colorado corporation, Severt H. Reither, Howard B. Maerz, and Robert J. Strawn, Jr., Defendants.

Civ. A. No. 9121.

United States District Court, D. Colorado.

October 18, 1970.

Donald J. Stocking and Joseph F. Krys, Securities and Exchange Commission, Denver, Colo., for plaintiff.

John M. Cogswell, Denver, Colo., for defendant Robert J. Strawn, Jr.

MEMORANDUM OPINION AND ORDER

ARRAJ, Chief Judge.

On May 7, 1965, this Court issued a permanent injunction enjoining the defendant Robert Strawn, inter alia, from offering for sale any securities for which a registration statement filed under the Securities Act of 1933, 15 U.S.C. § 77a et seq., was not in effect, or for which no exemption was available or granted. Strawn now seeks to vacate that injunction under provisions of Federal Rule of Civil Procedure 60(b).

As defendant's argument is cast, two challenges to the validity of that injunction are raised. He asserts that this Court lacked jurisdiction to issue the injunction. Alternatively, Strawn argues that it is no longer equitable for the injunction to prospectively operate against him. We turn now to a consideration of those contentions.

I.

In his consent to entry of the injunction, Strawn stipulated that he did not admit any allegations of the complaint filed by the Securities and Exchange Commission (hereafter Commission), and that he had not willfully violated any provision of federal securities law. On the basis of those reservations, defendant now alleges that the Commission failed to make a "proper showing" necessary to support the injunction since no evidence was presented. He further claims that failure deprived us of jurisdiction to proceed. As we view defendant's contentions, two questions are presented: whether the defendant can now assert a lack of jurisdiction against a proceeding to which he previously acquiesced; and, if not, whether he can now collaterally attack the same proceeding.

We think defendant's jurisdictional contention has been answered by the Supreme Court in Swift & Co. v. United States, 276 U.S. 311, 48 S.Ct. 311, 72 L.Ed. 587 (1928). In consideration of a similar argument, that Court held:

It is contended that the consent decree was without jurisdiction because it was entered without the support of facts. The argument is that jurisdiction under the Anti-Trust Acts cannot be conferred by consent; that jurisdiction can exist only if the transactions complained of are in fact violations of the Act; that merely to allege facts showing violation of the anti-trust laws is not sufficient; that the facts must also be established according to the regular course of chancery procedure; that this requires either admission or proof; and that, here, there was no admission but, on the contrary, a denial of the allegations of the bill, and a recital in the decree that the defendants maintain the truth of their answers, assert their innocence, and consent to the entry of the decree without any finding of fact, only upon condition that their consent shall not constitute or be considered an admission. The argument ignores both the nature of injunctions * * and the legal implications of a consent decree. The allegations of the bill not specifically denied may have afforded ample basis for a decree limited to future acts. If the court erred in finding in these allegations a basis for fear of future wrong sufficient to warrant an injunction, its error was of a character ordinarily remediable on appeal. Such an error is waived by the consent to the decree. Clearly it does not go to the power of the court to adjudicate between the parties. 276 U.S. at 327, 48 S.Ct. at 315 (citations omitted).

We note that the consent injunction questioned by the defendant was issued pursuant to 15 U.S.C. § 77t(b), which provides in part:

Whenever it shall appear to the Commission that any person is engaged or about to engage in any acts or practices which constitute or will constitute a violation of this Act, or of any rule or regulation * * * it may in its discretion, bring an action in any district court of the United States * * * to enjoin such acts or practices, and upon a proper showing a permanent * * * injunction * * shall be granted without bond.

Under that section, we have jurisdiction once it is established that the complaint filed by the Commission has charged a violation of the Securities Act of 1933. S.E.C. v. Bennett & Co., 207 F.Supp. 919 (D.N.J.1962). Fairly construed, the complaint filed in this action met that test. We thus can find no merit to defendant's jurisdictional contention.

Whether defendant can attack the "showing" made by the Commission, a question which arises by implication from his assertion, is dependent upon the nature of a consent judgment. While such a judgment has its inception in an extra-judicial agreement, the Supreme Court has held that:

It is a judicial function and an exercise of the judicial power to render judgment on consent. A judgment upon consent is `a judicial act'. Pope v. United States, 323 U.S. 1, 12, 65 S.Ct. 16, 22, 89 L.Ed. 3 (1944).

See also Hot Springs Coal Co. v. Miller, 107 F.2d 677 (10th Cir. 1940). As such, it is not "a mere authentication or recording of that agreement," and it "involves a determination by the chancellor that it is equitable and in the public interest." United States v. Radio Corporation of America, 46 F.Supp. 654, 655 (D.Del.1942), appeal dismissed 318 U.S. 796, 63 S.Ct. 851, 87 L.Ed. 1161; see also United States v. Southern Railway Co., 278 F.Supp. 60 (W.D.N.C.1967). By approving the consent judgment, the court is adjudicating the plaintiff's right to relief and its extent, both of which are essential elements of any judgment. A. D. Juilliard & Co. v. Johnson, 166 F. Supp. 577 (S.D.N.Y.1957). It merely excuses the plaintiff from making a supporting record, and relieves the court from making findings and drawing conclusions. Thus, the decree entered has the same force and effect as any other judgment, and is a final adjudication on the merits. Nashville C. & St. L. R. Co. v. United States, 113 U.S. 261, 266, 5 S. Ct. 460, 28 L.Ed. 971 (1885); Utah Power & Light Co. v. United States, 42 F.2d 304 (Ct.Cl.1930); A. D. Juilliard & Co. v. Johnson, supra.

Final judgments at law are conclusive between the parties on those issues reached by the litigation. A similar rule has been stated for equitable consent decrees:

For a consent decree, within the purview of the pleadings and the scope of the issues, is valid and binding upon all parties consenting, open neither to direct appeal nor collateral attack. `A fortiori, neither party can deny its effect as a bar of a subsequent suit on any claim included in the decree.' Curry v. Curry, 65 App.D.C. 47, 79 F. 2d 172, 174 (1935).

See also A. D. Juilliard & Co. v. Johnson, supra. The only exception to this rule of conclusiveness is that such a judgment can be attacked by a showing of fraud, Tilton v. Cofield, 93 U.S. 163, 23 L.Ed. 858 (1876); otherwise, "whether right or wrong it is not subject to impeachment in its application to the conditions that existed at its making." United States v. Swift & Co., 286 U.S. 106, 119, 52 S.Ct. 460, 464, 76 L.Ed. 999 (1932). Since defendant has raised no allegation of fraud, we find that he is foreclosed from attacking collaterally the sufficiency of the showing necessary to support the injunction.

II.

Defendant's second contention, the one upon which he places primary reliance, is that it is no longer equitable for the injunction to have prospective application.

In support of this argument, Strawn adduced the following facts by affidavit and oral testimony:

(1) That he was denied loans, although a finance officer of the bank stated that he could not be sure the injunction was the cause of the denial, and that he, in fact, was in favor of granting the loans;

(2) That he was prevented from furthering his business career by becoming a member of a board of directors because the injunction would hamper his ability to authorize the issuance of stock;

(3) That he was unable to raise needed capital for his business through the sale of stock since the Commission refused to grant him a waiver which would have enabled him to make a "Regulation A" offer;

(4) That since the issuance of the injunction, he has continually complied with federal securities law; and

(5) That he has a reputation for good citiznship.

We note initially that defendant is quite correct in asserting that we have the power to modify or vacate a permanent injunction as a corollary of our duty to supervise and enforce that order. See United States v. Swift & Co., 286 U.S. 106, 52 S.Ct. 460 (1932).

The Swift case is the seminal pronouncement concerning the modification of consent injunctions and, we think, applicable to a Rule 60(b) proceeding, such as the one before us. See Morse-Starrett Products Co. v. Steccone, 205 F.2d 244 (9th Cir. 1953). The Supreme Court there stated the test which must be met in order to modify such a decree at the defendant's behest as "nothing less than a clear showing of grievous wrong evoked by new and unforeseen conditions, * * *" 286 U.S. at 119, 52 S.Ct. 460, at 464, 76 L.Ed. 999.

Against this background, the defendant asserts his continued compliance with federal securities law as sufficient to invoke our equitable discretion. We disagree. Since the purpose of the litigation, in the parlance of Swift, was to compel obedience to those laws, defendant's compliance merely demonstrates the effectiveness of the injunction. It does not show its purpose has been fulfilled. As stated by Walling v. Harnischfeger Corp., 242 F.2d 712, 713 (7th Cir. 1957), "we would not approve trading * * * sustained obedience for a dissolution of the injunction. Compliance is what the law expects."

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