Consumer Fin. Prot. Bureau v. Klopp

Decision Date27 April 2020
Docket NumberNo. 18-1694,18-1694
Citation957 F.3d 454
Parties CONSUMER FINANCIAL PROTECTION BUREAU; Consumer Protection Division, Office of the Attorney General of Maryland, Plaintiffs – Appellees, v. Gary KLOPP, Defendant – Appellant, and Genuine Title, LLC; Brandon Glickstein ; Adam Mandelberg; William J. Peterson, III; Angela Pobletts; Jay Zukerberg; All County Settlements, LLC; BTS Management and Consulting, LLC; Carroll Abstracts, Inc.; Marc, LLC; Mortgage Services, LLC; R&R Marketing Group, LLC, Defendants.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: Harry Levy, SHUMAKER WILLIAMS, PC, Towson, Maryland, for Appellant. Hanna Abrams, OFFICE OF THE ATTORNEY GENERAL OF MARYLAND, Baltimore, Maryland; Joseph Anthony Frisone, CONSUMER FINANCIAL PROTECTION BUREAU, Washington, D.C., for Appellees. ON BRIEF: J. Steven Lovejoy, SHUMAKER WILLIAMS, PC, Towson, Maryland, for Appellant. Mary McLeod, General Counsel, John R. Coleman, Deputy General Counsel, Steven Bressler, Assistant General Counsel, CONSUMER FINANCIAL PROTECTION BUREAU, Washington, D.C.; Brian E. Frosh, Attorney General, Philip D. Ziperman, Assistant Attorney General, OFFICE OF THE ATTORNEY GENERAL OF MARYLAND, Baltimore, Maryland, for Appellees.

Before HARRIS, RICHARDSON, and QUATTLEBAUM, Circuit Judges.

Affirmed in part, vacated in part, and remanded in part by published opinion. Judge Richardson wrote the opinion, in which Judge Harris and Judge Quattlebaum joined.

RICHARDSON, Circuit Judge:

After finding Gary Klopp in violation of a consent order limiting his participation in the mortgage industry, the district court held him in contempt and ordered the disgorgement of over half-a-million dollars of his contemptuous earnings. Klopp appeals the district court’s contempt and disgorgement orders.

The district court cited several proper reasons for holding Klopp in contempt. Because "[a] single violation [of an order] is sufficient to support a finding of contempt," Rainbow School, Inc. v. Rainbow Early Education Holding LLC , 887 F.3d 610, 618 (4th Cir. 2018), we affirm the district court’s contempt decision. Yet the district court rested its disgorgement sanction on an erroneous legal interpretation of the terms of the underlying consent order. Since the disgorgement order rested on improper grounds, we vacate that order and remand for further proceedings.

I. Facts
A. The pay-to-play scheme and Consent Order

Gary Klopp managed a mortgage brokerage branch of the Peoples Bank & Trust in Owings Mills, Maryland. A decade ago, Klopp started taking kickbacks from a title-service company.1 According to regulators, for every loan that Klopp or his agents steered to a particular title company, he received roughly $400 in return. Between 2011 and 2013, the title company funneled more than half-a-million dollars to Klopp through two Maryland shell corporations that Klopp created and controlled. Neither of Klopp’s shell companies provided any genuine services for these payments, and Klopp concealed this kickback arrangement from his customers.

Klopp’s dealings were part of a grander "pay-to-play" scheme uncovered by federal and state regulators. In April 2015, the regulators began a civil action against Klopp and twelve codefendants in the District of Maryland for violating federal and state consumer finance laws. Some of Klopp’s codefendants quickly settled with the regulators. Those early settlements limited the codefendants’ "participation in the Mortgage Industry in any professional capacity" and imposed civil money penalties. E.g. , Dist. Ct. Dkt. No. 14 at 5.

Klopp’s settlement was different. In November 2015, Klopp and the regulators negotiated and proposed a Stipulated Final Judgment and Order to the district court ("Consent Order"). The Consent Order levied a civil money penalty of $75,000. And it imposed various other non-monetary requirements and restrictions, two of which drive this appeal.

In the first set of requirements, Klopp agreed to restrictions on his activities in the mortgage industry. The Consent Order "limited [Klopp] from participation in the Mortgage Industry for two years ... as follows:"

a. [Klopp is] prohibited from contacting, soliciting, or otherwise dealing with consumer borrowers or loan applicants in any capacity with regard to any mortgage business; and
b. [Klopp is] prohibited from contacting, soliciting, or otherwise dealing with any third party businesses engaged in offering any settlement service.

J.A. 49. A safe-harbor provision followed these prohibitions:

c. These limitations shall not prohibit Defendant Klopp from acting solely as a personnel or human-resources manager for a mortgage business operated by an FDIC-insured banking institution ....

Id .

In the second set of requirements, Klopp assented to various reporting measures. Klopp agreed to upload the Order to the Nationwide Mortgage Licensing System and Registry ("Registry") within 60 days. He also promised to report any change in his residence, in his roles in "any business activity," and in "any entity in which [he has] any ownership interest" to the regulators for two years. J.A. 51–52. And Klopp had to notify the regulators "of any development that may affect compliance obligations arising under" the Consent Order. J.A. 51. The district court accepted the Parties’ proposed resolution of Klopp’s case and issued the negotiated Consent Order.

Over the next two years, Klopp defied the Consent Order with aplomb. Without notifying regulators, he rented a house in California and opened a new branch of the Peoples Bank & Trust in Orange County. He continued to deal with third-party businesses engaged in settlement services. And he never uploaded the Consent Order to the Registry.

B. The 2017 civil contempt hearing

When the regulators learned of Klopp’s actions, they moved to hold him in contempt. The district court held a contempt hearing in August 2017.

At the hearing, regulators presented documentary evidence to support their assertions that Klopp had violated the order. Klopp took the stand in defense and made several admissions. He acknowledged that he never uploaded the Consent Order to the Registry. Klopp similarly admitted to continuing to deal with third-party settlement services. E.g. , J.A. 146–47 ("Q: But the fact is that you were asking for a loan—an interest rate concession on a particular consumer loan; isn’t that right? A: It appears that way."). And he admitted that he never notified regulators of his new office in California.

Klopp also described his employment agreement with Peoples Bank & Trust. The agreement compensated Klopp based on the greater of a $2,000 monthly salary or certain profits earned by his brokerage branches. Between January 2016 and March 2017, the business generated an estimated $765,000 in profit, $700,000 of which Klopp allocated to his own earnings.

Based on this evidence, the district court found Klopp violated both the activity restrictions and the reporting requirements of the Consent Order. For the activity restrictions, the court found that he impermissibly managed the business, profited from the mortgage industry, and communicated with settlement servicers. And the district court found that Klopp violated the reporting restrictions by failing to upload the Consent Order to the Registry and not informing the regulators of his California activities.

C. The 2018 sanctions hearing

After holding Klopp in civil contempt, the district court held a sanctions hearing. At the hearing, Klopp acknowledged $987,920 in profits from his business for the period between the effective date of the Consent Order, November 16, 2015, and April 27, 2018. Klopp argued that receiving profits from his business did not violate the Consent Order. But the district court rejected this argument because it "contradict[ed] [its] ruling at the contempt hearing." J.A. 1041 n.8. The district court also rejected Klopp’s suggestion that the money he invested in the business should be deducted from that amount, seeing it as evidence of Klopp’s operation of his mortgage business. The court similarly refused Klopp’s contention that his earnings accruing after the expiration of the Consent Order in November 2017 should not be considered, reasoning that Klopp should not be "shielded by the expiration date of an Order with which he never complied." J.A. 1042.

At the same time, the district court rejected the regulators’ position that all of Klopp’s earnings during this time should be disgorged. Instead, the district court deducted the $2,000 in monthly compensation that it believed Klopp was entitled to as human-resources manager, as well as Klopp’s tax withholdings, which reduced the profits to $526,796.36. The court ordered Klopp to disgorge that amount and expressly barred him from all involvement in the mortgage industry for another two years. Klopp timely appealed.2

II. Discussion

When a litigant violates an order, the court generally may exercise its authority to hold the violator in civil contempt. Rainbow School, Inc. v. Rainbow Early Education Holding LLC , 887 F.3d 610, 617 (4th Cir. 2018). "The essence of civil contempt," we have explained, "is to coerce" compliance with judicial orders. Consolidation Coal Co. v. Local 1702, United Mineworkers of America , 683 F.2d 827, 830 (4th Cir. 1982). And sometimes an award of damages is necessary to "incentivize" compliance. Rainbow School , 887 F.3d at 617 (citing Hutto v. Finney , 437 U.S. 678, 691, 98 S.Ct. 2565, 57 L.Ed.2d 522 (1978) ). Civil contempt orders—and the appropriate consequences for violating them—fall to the district court’s discretion.

Klopp challenges both the district court’s contempt findings and the amount of the disgorgement order. Because the sanctions for civil contempt must be causally related to contemptuous conduct, see Goodyear Tire & Rubber Co. v. Haeger , ––– U.S. ––––, 137 S. Ct. 1178, 1185-86, 197 L.Ed.2d 585 (2017), resolution of Klopp’s sanctions arguments depends on the...

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