F. T. C. v. Southwest Sunsites, Inc.

• Decision Date: 14 January 1982
• Docket Number: No. 80-1793,80-1793
• Citation: 665 F.2d 711
• Parties: 1982-1 Trade Cases 64,466 FEDERAL TRADE COMMISSION, Plaintiff-Appellant Cross-Appellee, v. SOUTHWEST SUNSITES, INC., et al., Defendants-Appellees Cross-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 711

665 F.2d 711

1982-1 Trade Cases 64,466

FEDERAL TRADE COMMISSION, Plaintiff-Appellant Cross-Appellee, v. SOUTHWEST SUNSITES, INC., et al., Defendants-Appellees Cross-Appellants.

No. 80-1793.

United States Court of Appeals Fifth Circuit.

Jan. 14, 1982.

Charles D. Nelson, W. Dennis Cross, F. T. C., Washington, D. C., for plaintiff-appellant cross-appellee.

Stein, Mitchell & Mezines, Glenn A. Mitchell, Washington, D. C., for all defendants-appellees cross-appellants except Porters.

Alston, Miller & Gaines, John H. Brebbia, Washington, D. C., for Porter Realty, Inc. and Irvin Porter.

Appeals from the United States District Court for the Northern District of Texas.

Before INGRAHAM and TATE, Circuit Judges ^*.

INGRAHAM, Circuit Judge:

This case presents novel questions concerning the scope of the Federal Trade Commission's statutory authorization to seek preliminary injunctive relief from the district courts. Federal Trade Commission Act § 13(b), 15 U.S.C. § 53(b) (1976). ¹ Pursuant to Section 13(b), the Commission asked the court below for an order escrowing certain assets of the appellees and other defendants, all of whom were targets of an investigation into land sales in Southwest Texas, and other relief including compulsory notification to consumers who had purchased land from appellees and were continuing to make payments under their contracts. After referral to a magistrate for an evidentiary hearing, the district court preliminarily enjoined appellees from future misrepresentations and omissions in connection with these sales of land in question, but declined to order the ancillary relief requested by the Commission in the belief that Section 13(b) did not authorize such relief. We affirm the order enjoining further violations of the Federal Trade Commission Act, but reverse on the issue of ancillary relief and remand for further consideration of the appropriateness of the Commission's request.

I. Factual Background

The Commission initiated its investigation of appellee Southwest Sunsites, Inc. in late 1973, shortly after the corporation began selling undeveloped land in Culberson and Jeff Davis Counties, located in Southwest Texas. This investigation later expanded to include appellees Green Valley Acres, Inc., and Green Valley Acres, Inc., II. All these companies are Texas corporations, operated by two principal individuals, Sidney Gross and Edwin Kritzler. ² Defendant Porter Realty, a real estate broker which sold approximately sixty per cent of the land in question, was not made subject to the preliminary injunction and is therefore not before us on this appeal.

The findings of the magistrate, as adopted by the district court, show that Culberson and Jeff Davis Counties are sparsely populated, and the climate is generally described as semi-arid to arid. The approximate rainfall is eight to nine inches per year. Appellees acquired large tracts of essentially barren land in this area, subdivided the land and offered it for sale in parcels of between five and forty acres, for approximately $600 to $700 per acre. Among other representations, appellees' main sales claims were that the property had good potential for homesites, farming, ranching and for commercial purposes, that water and utilities were readily accessible to the property, and that the area surrounding the properties was growing and developing.

Contrary to these representations, it appears that portions of the properties are not located above available ground water, and that where ground water is available it is between 325 to 800 feet below the surface. A well to provide water for a family of four on a five acre tract would cost in excess of $6000. Similarly, most of the property is not near electric or telephone utility lines and installation of such services is estimated at up to $2500. In short, the land sold by appellees has no economically feasible commercial application in the relatively small parcels made available, and parcels of this size have no resale value.

The vast majority of purchasers entered into purchase contracts without viewing the property. A majority of the purchasers were not residents of the State of Texas, and had been solicited through extensive nationwide advertising and sales efforts. Under the purchase contracts purchasers were permitted to pay principal plus interest over periods of time up to one hundred and twenty months. Title to the property would not transfer to the purchaser until the full price was paid, and failure to make a payment would subject a purchaser to cancellation of the contract and forfeiture of all monies already paid. According to appellees' records the total balance of outstanding accounts receivable on purchase contracts as of June 1979 was approximately $10,000,000.

The magistrate and district court concluded that there was substantial evidence appellees had misrepresented the value of the land, and omitted and failed to advise purchasers of facts such as the expenditures required for water and utilities, the unfeasibility of farming and ranching on the small tracts made available, and the fact that photographs used in Southwest Sunsites' sales materials were not representative of the land as a whole. On the basis of these and other findings the district court concluded that the Commission had sufficiently established the probability that the defendants had engaged in acts and practices in violation of Section 5 of the Federal Trade Commission Act, ³ that the Commission demonstrated a likelihood of success on the merits in an administrative proceeding against defendants, and that it would be in the public interest to maintain the status quo during pendency of the administrative proceeding under Section 5.

Accordingly, the district court ordered the appellees to cease and desist from making misrepresentations and failing to disclose material facts concerning the investment potential and suitability of appellees' land for homesites or commercial purposes. The court declined, however, to order ancillary relief as requested by the Commission. Pointing to the transfer of funds from the corporate defendants to the various individuals controlling these corporations, the Commission had sought an escrow of present and incoming assets to preserve the possibility of an action for consumer redress under Section 19 of the Federal Trade Commission Act. ⁴ Both the magistrate and the district court concluded that such a "freeze" order was not authorized by Section 13(b). The magistrate did recommend that the appellees be required to notify purchasers of the ongoing proceedings before collecting any further payments; however, this relief was also denied by the district court.

II. Discussion

The Commission raises the following issues on appeal: whether the district court erred in concluding that Section 13(b) of the Federal Trade Commission Act did not permit the court to order ancillary relief in the form of an escrow of corporate assets, and compulsory notification of affected consumers; and whether the requested injunctive relief should have been granted in light of the district court's findings that the defendants had engaged in unfair and deceptive acts and practices. On cross-appeal, appellees attack the injunction as issued, contending that there was no evidence of continuing or future violations of the Federal Trade Commission Act that would justify an injunction and that the injunction order improperly requires reference to the magistrate's recommendations in order to ascertain the acts and practices enjoined.

A. The Scope of Preliminary Relief under Section 13.

In its complaint the Commission requested an injunction preventing future misrepresentations and omissions, and ordering the defendants to do the following: place and maintain in an escrow account, subject to the court's control, all payments to be received under land purchase contracts; make all tax, mortgage and other payments necessary to protect the purchasers' interests in the land; refrain from cancelling any contracts for a purchaser's failure to meet any obligations under the contract; and refrain from transferring, selling, assigning or in any way encumbering the land, sales contracts or other assets of the corporate defendants without specific approval of the district court. The complaint also sought to enjoin the brokers, Porter Realty and Irvin Porter, from receiving further commissions or residual commissions during the pendency of the action. In its brief to this court the Commission explains that this relief is necessary in light of the significant threat of dissipation of corporate assets: the corporations are closely held and pay the individuals involved large loan repayments and a substantial percentage of incoming payments as fixed commissions or "overrides;" and both the corporations and the individuals face a number of other legal actions. Implicit in the Commission's requests is the future availability of an action for consumer redress, including refunds, under Section 19 of the Federal Trade Commission Act. With Section 19 in mind, the Commission argues, the requested relief is within a district court's inherent equitable jurisdiction to preserve the possibility of complete and effective relief at the conclusion of the process of adjudication on the merits. The magistrate and district court concluded that, from a plain reading of Section 13(b), the Commission may seek only that preliminary relief necessary to restrain alleged unfair practices, pending a Section 5 administrative proceeding. In this view, the scope of preliminary relief is limited to the relief which may be ordered by the Commission itself under Section 5. The ancillary relief sought here, the district court stated, could not be characterized as "merely enjoining the improper act or practice found likely to occur." Both the magistrate and district court considered the possibility of an eventual Section 19 consumer...