Capital Source Finance, LLC v. Delco Oil, Inc., Civil Action No. DKC 2006-2706.

• Decision Date: 17 September 2007
• Docket Number: Civil Action No. DKC 2006-2706.
• Citation: 520 F.Supp.2d 684
• Parties: CAPITAL SOURCE FINANCE, LLC v. DELCO OIL, INC., et al.
• Court: U.S. District Court — District of Maryland

520 F.Supp.2d 684

CAPITAL SOURCE FINANCE, LLC v. DELCO OIL, INC., et al.

Civil Action No. DKC 2006-2706.

United States District Court, D. Maryland.

September 17, 2007.

Brian H. Corcoran, Justin Leonard Krieger, Katten Muchin Rosenman LLP, Washington, DC, Kenneth Joseph Ottaviano, William J. Dorsey, Katten Muchin Rosenman LLP, Chicago, IL, for Plaintiff.

Brent W. Procida, Gregory A. Cross, Venable LLP, Eric Matthew Rigatuso, Thomas Jay Althauser, Eccleston and Wolf PC, Baltimore, MD, for Defendant.

MEMORANDUM OPINION

DEBORAH K. CHASANOW, District Judge.

Presently pending and ready for resolution in this case, which arises from the alleged breach of a loan agreement, is the motion by Plaintiff Capital Source Finance, LLC for an order to show cause why Defendants Stephen B. DeLuca, Richard R. Thames, and Stutsman Thames & Markey, P.A. ("Stutsman") should not be found in contempt of the court's Temporary Restraining Order signed October 16, 2006 ("the TRO").¹ (Paper 17). For the reasons set forth below, the motion will be granted and an evidentiary hearing will be held to resolve factual disputes raised by the parties with respect to this motion.

The background of this case is briefly summarized below, based on Plaintiffs allegations. This case arises from a loan contract between Delco Oil, Inc. ("Delco") and Plaintiff (the "Loan Agreement"). Under the interpretation of the Loan Agreement advanced by Plaintiff, the amount of Delco's revolving line of credit was capped based on a formula for Delco's "Cash Collateral" which included Delco's inventory and its accounts receivable. Delco pledged its Cash Collateral as collateral for the line of credit advanced under the Loan Agreement, and further agreed that payments made upon its accounts receivable would be immediately deposited in an account from which only Plaintiff could make withdrawals (the "Blocked Account"). Plaintiff claims that the documentation regarding Delco's Cash Collateral, upon which the amount of the loans made to Delco were based, was fraudulently inflated and that Delco breached the Loan Agreement by failing to deposit all payments on its accounts receivable into the Blocked Account. DeLuca is Delco's president and sole shareholder.

After the complaint and Plaintiffs motion for emergency relief were filed on October 16, 2006, Defendants' counsel were notified of the pending action and motion by Plaintiff's counsel, and counsel for both parties participated in a telephone conference with the court at 10:45 a.m.² Thames represented Delco and DeLuca's interests during this telephone conference, arguing against entry of a TRO because it would inhibit the functioning of Delco's business, although he never formally entered an appearance in the case. Before concluding the telephone conference, the court advised counsel for both parties that a TRO restricting the use of the Cash Collateral would be entered.

In issuing the TRO, the court found that Plaintiff would suffer irreparable harm if further funds paid on Delco's accounts receivable were diverted rather than being deposited in the Blocked Account, and concluded that Plaintiffs "claim to possession of its Cash Collateral is superior to Delco's claim thereto." (Paper 6, at 2). Accordingly, the court, among other actions, enjoined:

Delco, its officers, agents, servants, employees, and attorneys, and those persons in active concert or participation with them, who receive actual notice of this Order by personal service or otherwise ... from using, diverting, disposing, or otherwise taking any action with respect to Capital Source's Cash Collateral other than depositing these funds in the Blocked Account.

(Id.). The TRO was signed on October 16, 2006, at 11:45 a.m., and was thereafter entered on the docket for this case and transmitted to the parties. DeLuca, Thames, and Stutsman do not contest that three wire transfers were authorized from a bank account in Delco's name on October 16, 2006, or that an additional series of transfers was authorized and completed over subsequent days before the TRO expired by its own terms. Among the transfers on October 16 was a $100,000 transfer to Stutsman.

Plaintiff alleges that DeLuca, Thames, and Stutsman knowingly violated the TRO, and requests compensatory contempt sanctions including attorney's fees. Defendants argue that none of the transfers on October 16, 2006 violated the TRO because they allege these transfers were completed before the TRO was issued or before they had knowledge of the TRO, that the TRO was invalidated by Delco's bankruptcy filing on October 17, 2006, and that any violation of the TRO after that date was not a knowing violation. Thames and Stutsman also challenge the court's personal jurisdiction over them.

I. Standard of Review

Initially, it is necessary to distinguish whether contempt sanctions sought by a plaintiff are properly characterized as civil or criminal. The label applied by the parties is not determinative.

The basic difference between civil and criminal contempt sanctions is that civil contempt sanctions are intended `to coerce the contemnor into compliance with court orders or to compensate the complainant for losses sustained,' while criminal contempt sanctions are intended `to vindicate the authority of the court by punishing the contemnor and deterring future litigants' misconduct. ...'

Bradley v. Am. Household, Inc., 378 F.3d 373, 378 (4th Cir.2004), (quoting Buffington v. Balt. County, 913 F.2d 113, 133 (4th Cir.1990)).

To establish civil Contempt, each of the following elements must be shown by clear and convincing evidence:

(1) the existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) ... that the decree was in the movant's "favor"; (3) ... that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violations; and (4) ... that [the] movant suffered harm as a result.

Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir.2000) (quoting Colonial Williamsburg Found. v. The Kittinger Co., 792 F.Supp. 1397, 1405-06 (E.D.Va.1992), aff'd 38 F.3d 133, 136 (4th Cir.1994)).

The discretion of the District Court in fashioning relief for civil contempt includes the right to order payment of attorney's fees as an element of civil contempt damages[, but] ... [a] contemnor's refusal to comply with a Court Order must rise at least to the level of "obstinence or recalcitrance" before attorney's fees can be ordered.

Columbia Gas Transmission Corp. v. Mangione Enters. of Turf Valley, L.P., 964 F.Supp. 199, 204 (D.Md.1996) (citing Folk v. Wallace Bus. Forms, Inc., 394 F.2d 240, 244 (4th Cir.1968); Omega World Travel, Inc. v. Omega Travel, Inc., 710 F.Supp. 169 (E.D.Va.1989), aff'd 905 F.2d 1530, 1990 WL 74305 (4th Cir.1990)).

II. Personal Jurisdiction over Thames and Stutsman

1. Service of Process

Thames and Stutsman argue that they were not subject to this court's personal jurisdiction at the time of the TRO hearing or the alleged contempt, both because they lacked minimum contacts with Maryland and because they were not defendants in the case and had not been served with process as provided by Fed. R.Civ.P. 4(e). It is unclear whether or not Thames and Stutsman argue that they were not properly served with notice of this contempt proceeding, but service pursuant to Fed.R.Civ.P. 4 was not necessary to initiate the contempt proceedings under the circumstances of this case. Although Stutsman and Thames were not parties to this action at the time of the TRO proceeding, they were added as Defendants and served prior to the time Plaintiffs contempt motion was filed.

Service of process consisting of a summons is generally a necessary step in exercising personal jurisdiction over any defendant, pursuant to Fed.R.Civ.P. 4(k)(1), which provides that [s]ervice of a summons or filing a waiver of service is effective to establish jurisdiction over the person of a defendant ... who could be subjected to the jurisdiction of a court of general jurisdiction in the state in which the district court is located...."

[W]hen it is sought to charge a person with contempt who was not a party to the original action and thus not already within the jurisdiction of the court, that party must be served with process as in any other civil action. Process can be served only within the state in which the court is sitting, except when service beyond the state is authorized by Rule 4.

11A Charles Alan Wright, Arthur R. Miller, & Mary K. Kane, Federal Practice and Procedure, § 2960 at 377 & nn. 44-45 (2d ed.1995) (footnotes omitted in quotation). Service of process consisting of a motion seeking contempt sanctions is not necessary to create personal jurisdiction over a party already served with a summons. See, id. at 876-77 & n. 42.

Thames admits in his verified response to the show cause motion that he was served with a summons and a copy of the amended complaint, which added Thames, Stutsman, and others as Defendants, on October 30, 2006. (Paper 29, at 9). Plaintiff's motion for an order to show cause (paper 17) was filed shortly thereafter, on November 8, 2006. Because Thames and Stutsman had been served with process regarding the amended complaint, service of the contempt papers was not a prerequisite to the court's exercise of personal jurisdiction. See 11A Charles Alan Wright, Arthur R. Miller, & Mary K. Kane, Federal Practice and Procedure, § 2960, at 376-77 & n. 42.

2. Minimum Contacts

Thames and Stutsman also argue that this court cannot properly exercise personal jurisdiction over them for purposes of any contempt proceedings because they lack minimum contacts with Maryland. Plaintiff contends that separate minimum contacts with Maryland are not required for this court to exercise personal jurisdiction over Defendants with respect to any contempt proceedings. While the United States Court of Appeals for the...