O'Connor v. Midwest Pipe Fabrications, Inc.

• Decision Date: 18 August 1992
• Docket Number: No. 89-3131,89-3131
• Citation: 972 F.2d 1204
• Parties: James P. O'CONNOR, Plaintiff-Appellant, v. MIDWEST PIPE FABRICATIONS, INC., Defendant-Counterclaimant-Third-Party Plaintiff-Appellee, v. Elizabeth L. O'CONNOR, Third-Party Defendant-Appellant, and Pipex, Inc., Third-Party Defendant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1204

972 F.2d 1204

James P. O'CONNOR, Plaintiff-Appellant, v. MIDWEST PIPE FABRICATIONS, INC., Defendant-Counterclaimant-Third-Party Plaintiff-Appellee, v. Elizabeth L. O'CONNOR, Third-Party Defendant-Appellant, and Pipex, Inc., Third-Party Defendant.

No. 89-3131.

United States Court of Appeals Tenth Circuit.

Aug. 18, 1992.

Larry L. Simms of Gibson, Dunn & Crutcher, Washington, D.C. (Alicia J. Bentley, Russell G. Petti, Los Angeles, Cal., and Robert W. Planchard, Denver, Colo., with him on the brief), for plaintiff-appellant.

Thomas H. Dahlk of Lieben, Dahlk, Whitted, Houghton & Jahn, Omaha, Neb., for appellee.

Before McKAY, Chief Judge, HOLLOWAY and McWILLIAMS, Circuit Judges.

HOLLOWAY, Circuit Judge.

In this diversity action, Elizabeth and James O'Connor appeal an order of the United States District Court, District of Kansas, finding them in contempt of that court's earlier order to provide an accounting of their assets and liabilities in aid of execution. Because we hold that the district court did not err in finding that the O'Connors did not provide an adequate accounting as required under state law, we affirm the finding of contempt. We vacate the court's imposition of a monetary sanction, however, for further clarification or modification in light of the principles discussed below.

I

Elizabeth O'Connor is the president and sole stockholder of Pipex, Inc., a company that sells pipes, valves and water and waste-water treatment equipment. Her husband, James O'Connor, works as a salesman for Pipex. He also sells such equipment on commission for others.

Sometime in 1985, Mr. O'Connor filed a breach of contract lawsuit against appellee Midwest Pipe Fabricators, Inc. ("Midwest"), alleging that Midwest had failed to pay him certain commissions. Midwest counterclaimed against Mr. O'Connor and filed a third-party complaint against Mrs. O'Connor and Pipex, asserting fraud and other state law claims, as well as a claim under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961-1965 (RICO). In February 1988, following a jury trial, the district court entered a judgment in favor of Midwest on its claims against the O'Connors and Pipex for approximately $1.1 million. That judgment has not been appealed and is not now before us.

After attempts to collect on the judgment failed, Midwest filed a motion in aid of execution asking the district court to direct that approximately $42,000 in promissory notes should remain as assets of the corporation until the status of these corporate loans could be finally determined. These notes were given by Maura O'Connor (the O'Connors' daughter) to Pipex in exchange for loans Pipex made to her. The court granted the motion, and further ordered that the O'Connors "provide an accounting to the court ... of all monies allegedly loaned" to their daughter. II R.Doc. 485 at 3. The O'Connors responded by tendering a letter from Pipex' accountant indicating that Pipex had made cash disbursement loans to Maura O'Connor which Pipex' accountant later discharged by offsetting them as "Director's Fees" paid to Maura.

In reply, Midwest filed a "Motion for Mandatory and Prohibitory Injunctive Relief," contesting the accounting and asserting that the O'Connors were trying to hide their assets. The motion was referred to a magistrate. Midwest argued to the magistrate that approximately $350,000 in after-tax profits, directors fees and salaries had been transferred from Pipex to the O'Connors during the pendency of the lawsuit, but that they now claimed they had no money available to satisfy the judgment. The O'Connors did not refute Midwest's claim that they received the alleged transfers. Accordingly, the magistrate recommended that the O'Connors "should be ordered to account for the current status of the $350,000" pursuant to K.S.A. 60-2419 the Kansas statute governing proceedings in aid of execution. II R.Doc. 497 at 5-6. The magistrate further found that "such a hearing would also be useful in order to discover if the O'Connors remain in control of the $350,000 or of property purchased with these funds. The O'Connors may or may not be able to produce the money or property." Id. at 6. The magistrate also recommended that the O'Connors be ordered "to account for all cash accounts opened anywhere since June, 1986 and all assets purchased anywhere during the pendency of this litigation." Id. at 7.

The magistrate also found that the O'Connors had failed to comply with the district court's June 7, 1988 order by not providing contemporaneous documentation in support of the O'Connor's claim that Pipex actually paid director's fees to their daughter. Id. at 10. Accordingly, the magistrate recommended that the court issue an order to show cause why the O'Connors and Pipex should not be held in contempt for their failure to completely comply with the court's order. The magistrate suggested that the promissory notes should remain as corporate assets. Id.

On August 19, 1988, the district court adopted the magistrate's Report and Recommendation. Specifically, the court ordered an accounting of (1) the $350,000 transferred from Pipex; (2) any cash accounts opened by the O'Connors since June 1986; and (3) all assets purchased by them during the pendency of the litigation. The O'Connors were ordered to "appear before this court for a hearing in aid of execution pursuant to K.S.A. 60-2419[,]" II R.Doc. 498 at 2, and to "show cause why they should not be held in contempt" for failing to comply with the June 7, 1988 order. Id. at 3.

On September 16, 1988, the district court conducted a hearing in aid of execution. The O'Connors both testified concerning their assets and submitted documents. Mr. O'Connor acknowledged that during the litigation he and his wife owned $200,000 in certificates of deposit ("CDs") at two Kansas banks. He asserted, however, that these CDs had since been used to pay off loans the O'Connors owed to these same banks, with any remainder going into Pipex' bank account. X R. at 46-47. He further stated that Pipex had sold the company's Mercedes Benz to pay legal fees. He testified that their Kansas home had no equity value because they had refinanced it for over $100,000 in 1986, using the proceeds for home improvement. ¹ Id. at 48-51.

Moreover, Mr. O'Connor testified that an Olathe apartment complex which the O'Connors held in partnership with others had since gone into foreclosure after the O'Connors stopped making mortgage payments. Id. at 47-48. Mr. O'Connor acknowledged that he and his wife had received $295,650 in salaries and directors fees from Pipex during the litigation. He also stated that his daughter was paid director's fees by Pipex because his daughter "gave my wife tremendous support in Pipex ... after our personal assets and Pipex's assets were attached, until the motion of attachment was quashed[.] ... She was emotionally upset and she relied very heavily on our daughter for support to get her through this particular time." Id. at 30.

Mrs. O'Connor then testified, tendering a handwritten spreadsheet along with accompanying documentation purporting to show that the O'Connors had incurred expenses totalling $342,076 during the litigation. Id. at 54 & Ex. 1. Of this money, she stated that they spent $29,494 in home improvements over the course of the litigation, and another $78,000 to improve the Olathe apartment complex. Id. at 68. She also stated that Pipex had loaned her daughter $42,000 in exchange for the promissory notes, but as president of Pipex, she instructed the accountant to offset these notes by paying her daughter "directors fees" in 1987 and 1988. In response, Midwest submitted a memorandum with supporting attachments to the court. See II R. (Supp.) Doc. 514.

On December 12, 1988, the district court held the O'Connors in contempt "for failure to account for all cash and assets at the hearing in aid of execution as ordered by this court in its August 19, 1988 Memorandum and Order." II R. Doc. 518 at 3. The court found that:

the O'Connors have not adequately satisfied ... the court that they have accounted for all assets available to them to satisfy the judgment. Most notably, they have failed to account for $352,000 which they took out of Pipex, Inc. during the pendency of this lawsuit[.] ... Their attempt to trace this money has not been entirely frank and complete; in attempting to account for the expenditure of this money, they fail to acknowledge that a large portion of those expenditures were paid by other sources. Further, the court rejects the O'Connors' contention that discharged loans to their daughter, Maura, were in payment of director's fees. The evidence on September 16th failed to show that the O'Connors' daughter performed any director's duties.

Id. at 2.

The court stated that the O'Connors could purge themselves of this contempt by "payment into the court of the $350,000" and "by producing for execution all non-exempt assets" and further "producing documentary evidence ... of the transfer or other disposition ... of all other assets allegedly transferred" during the litigation. Id. at 3. The court added, however, that it would review whether the $200,000 CDs were used to pay off loans after the O'Connors paid $150,000 into the court. Id. The court further ruled that the O'Connors' attempt to discharge the promissory notes was "void" and that the notes remained assets of Pipex. Id. at 2.

On December 27, 1988, the O'Connors requested an extension of time pursuant to local rule in which to file a motion for reconsideration. The court granted the extension and on January 5, 1989, the O'Connors moved for reconsideration. In a Memorandum and Order dated May 9, 1989, the court denied reconsideration. Elaborating on its earlier ruling, the court stated that "[t]he evidence at the hearing ... showed that [the O'Connors] had received approximately ... [$600,000] in cash during the relevant years of 1985 throug...