Federal Sav. & Loan Ins. Corp. v. Dixon

• Decision Date: 28 December 1987
• Docket Number: No. 87-1503,87-1503
• Citation: 835 F.2d 554
• Parties: , 10 Fed.R.Serv.3d 31 FEDERAL SAVINGS & LOAN INSURANCE CORP., In Its Corporate Capacity, Plaintiff- Appellee, v. Don R. DIXON, et al., Defendants, Richard A. Little, Patrick L. Malone, John G. Smith, Patrick G. King, Woody F. Lemons, and John V. Hill, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 554

835 F.2d 554

56 USLW 2381, 10 Fed.R.Serv.3d 31

FEDERAL SAVINGS & LOAN INSURANCE CORP., In Its Corporate Capacity, Plaintiff- Appellee, v. Don R. DIXON, et al., Defendants Richard A. Little, Patrick L. Malone, John G. Smith, Patrick G. King, Woody F. Lemons, and John V. Hill Defendants-Appellants.

No. 87-1503.

United States Court of Appeals Fifth Circuit.

Dec. 28, 1987.

Sean Connelly, Abbe David Lowell, Washington, D.C., David C. Schick, Dallas, Tex., for Little.

Mark Alan Calhoun, J. Douglas Uloth, Calhoun, Gump, Spillman & Stacy, Dallas, Tex., for Malone.

Steve Brutsche, Jones, Brutsche', Hider & Thoeming, Dallas, Tex., for Smith.

Mark C. Clements, Jerry K. Warren, Dallas, Tex., for King.

Burleson, Pate & Gibson, Phil Burleson, Jr., Michael P. Gibson, Dallas, Tex., for Lemons.

Michael P. Carnes, Joanne Hurtekant, Dallas, Tex., for Hill.

David I. Hammond, Dallas, Tex., Harry D. Cornett, Cleveland, Ohio, Samuel J. Winer, Washington, D.C., for Federal Sav. & Loan Ins. Corp.

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

Before BROWN, POLITZ and JOLLY, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

After an investigation that revealed that the officers and directors of Vernon Savings and Loan Association had engaged in risky to the point of illegal lending practices, self-dealing and improper financial accounting, including fudging Vernon's books to conceal their wrongdoing, and justifying exorbitant salaries and bonuses for themselves based upon the nonexistent profits their books showed, FSLIC filed this suit and applied for a preliminary injunction that would prevent these officers and directors from dissipating their allegedly ill-gotten assets. The district court granted an injunction against six defendants: Lemons, Little, Hill, Smith, King and Malone. The district court also discussed the involvement of Dixon, but since he and his company, Dondi Financial Corp., have filed a Chapter 11 bankruptcy petition, they are not affected by this preliminary injunction.

The preliminary injunction, entered June 29, 1987, and which is the subject of this appeal, prohibited the defendants from disposing of any of their property or assets held as of April 28, 1987 without prior written approval of the court or FSLIC. The preliminary injunction excepted from its effect any newly acquired assets, and personal expenditures from old assets up to $3,500 per month, as well as limited and reasonable business expenditures. The defendants were ordered to maintain itemized monthly accountings of their expenditures. The order also provided a procedure for exceptions: the defendant could file a request for release of additional assets with FSLIC, which would have fifteen days to file objections with the court. If FSLIC filed objections, the court would decide whether to allow the release. The defendants were required to file promptly a list of all assets, indicating which were new assets. Finally, the preliminary injunction prohibited them from destroying or concealing any business records.

The defendants appeal this order of preliminary injunction. Finding ample evidence and circumstances to support the need for a preliminary injunction, we affirm most of the district court's decision. We remand, however, for limited modifications in accordance with this opinion.

I

On March 20, 1987, the Federal Home Loan Bank Board ("FHLBB") appointed the Federal Savings & Loan Insurance Corporation ("FSLIC") as receiver for Vernon Savings & Loan Association. On April 27, 1987, FSLIC filed an action as successor to Vernon's claims to recover millions of dollars in damages suffered as a result of the defendants' alleged fraud, gross mismanagement and self-dealing. The complaint requested equitable relief in the form of restitution, an accounting, a constructive trust, and injunctive relief, as well as legal relief in the form of damages.

With the complaint, FSLIC filed a motion for a temporary restraining order and preliminary injunction, along with a motion for authority to conduct expedited discovery. FSLIC sought an order that would enjoin the defendants from secreting or dissipating their assets. On April 28, the district judge held a hearing by telephone on FSLIC's motions for a temporary restraining order and expedited discovery. On April 29, the judge entered a temporary restraining order, limiting the disposition of personal assets for six of the seven individual defendants, Don Dixon having petitioned for bankruptcy. On May 12, the district judge modified the temporary restraining order by increasing the limits on expenditures and by removing any new assets from its reach. On May 18, the court denied FSLIC's motion for a preliminary injunction, and, instead, extended the temporary restraining order as a result of defendant Little's inability to obtain counsel. The court again extended the temporary restraining order on May 28, June 5, June 9, and June 25, until it entered the order of preliminary injunction and memorandum order that is the subject of this appeal.

Five of six defendants appeal. Three of the five, Little, Malone, and King, have filed separate briefs raising separate issues. Lemons and Smith separately seek to adopt all of the arguments raised by the other three. Hill noticed his appeal on August 21, but did not file a brief.

In its memorandum order, the court found that the defendants had participated in a scheme to falsify Vernon's records and financial reports and to overstate Vernon's profits and net worth. The falsified records and reports were then used to justify the defendants' payments to themselves of millions of dollars in inflated salaries, bonuses and dividends. The falsified records and reports also concealed from the FHLBB the defendants' misappropriations and mismanagement. Additionally, the court found specific instances of wasting of assets, fraud, and gross mismanagement.

Upon these findings, the court entered the preliminary injunction described above.

II

A.

We quickly dispose of several of defendants' arguments. This whole case is colored by the fact that FSLIC is representing and protecting the public interest. One defendant tries to argue that because FSLIC has instituted this suit in its corporate capacity, it is not entitled to the solicitation which courts show to governmental agencies. This argument fails. The reason that FSLIC must take on a corporate form, and take control of the savings institution as a receiver is to protect the public interest. Furthermore, "notwithstanding any other provision of law ... the Corporation shall be deemed to be an agency of the United States within the meaning of section 451 of Title 28." 12 U.S.C. Sec. 1730(k)(1). There can be no doubt that FSLIC, in its corporate form or not, is a governmental agency in which the public interest is entrusted.

B.

Some of the defendants argue that the trial court erred in relying upon affidavits that contained hearsay to order the preliminary injunction. In particular, the defendants object to the use of affidavits of the FHLBB examiners made during the investigation of Vernon. First, we note that a preliminary injunction proceeding is not subject to jury trial procedures:

[A] preliminary injunction is customarily granted on the basis of procedures that are less formal and on evidence that is less complete than a trial on the merits. A party thus is not required to prove his case in full at a preliminary injunction hearing.

University of Texas v. Comenisch, 451 U.S. 390, 395, 101 S.Ct. 1830, 1834, 68 L.Ed.2d 175 (1981).

An additional reason for some leniency in the preliminary injunction stage is that it is used when quick action is necessary to prevent irreparable harm. A leading commentator explains:

[I]nasmuch as the grant of preliminary injunction is discretionary, the trial court should be allowed to give even inadmissible evidence some weight when it is thought advisable to do so in order to serve the primary purpose of preventing irreparable harm before a trial can be held....

11 C. Wright & A. Miller, Federal Practice & Procedure Sec. 2949 at 471.

The First Circuit in Asseo v. Pan American Grain Co., Inc., 805 F.2d 23 (1986) recognized the propriety of hearsay evidence in preliminary injunctive proceedings:

Affidavits and other hearsay materials are often received in preliminary injunction proceedings. The dispositive question is not their classification as hearsay but whether, weighing all the attendant factors, including the need for expedition, this type of evidence was appropriate given the character and objectives of the injunctive proceeding.

Id., at 26 (citations omitted).

The court below based its findings of fact on extensive evidence in the form of affidavits, several thousand pages of documents, business records of earnings, sworn statements, admissions of defendants and their answers to the complaint, and defendants' apparent efforts to block discovery. Considering the extensive nature of the record, the fact that FSLIC is safeguarding the public interest, and the fact that the defendants, for whatever reason, have not provided much evidence in response to discovery, the court's reliance on some hearsay evidence at the preliminary injunction stage was not inappropriate. This conclusion is especially so in light of the doctrine that district courts have wide discretion in granting preliminary injunctions. United States v. LULAC, 793 F.2d 636, 642 (5th Cir.1986).

Similarly, the defendants argue that the court abused its discretion by not conducting a full evidentiary hearing but instead invoking Fed.R.Civ.P. 43(e) to employ only affidavits and depositions to rule on the motion for preliminary injunction. FSLIC points out that this court has affirmed a district court's refusal to hold an evidentiary hearing on a motion for preliminary injunction. In Commerce Park at DFW Freeport v. Mardian Construction Co., 729 F.2d 334, 341 (5th...