S.E.C. v. AMX, Intern., Inc.

• Decision Date: 12 November 1993
• Docket Number: No. 92-1376,92-1376
• Citation: 7 F.3d 71
• Parties: , Fed. Sec. L. Rep. P 97,817 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. AMX, INTERNATIONAL, INC., et al., Defendants, William B. Clark, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 71

7 F.3d 71

62 USLW 2335, Fed. Sec. L. Rep. P 97,817

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. AMX, INTERNATIONAL, INC., et al., Defendants William B. Clark, Defendant-Appellee.

No. 92-1376.

United States Court of Appeals Fifth Circuit.

Nov. 12, 1993.

Randall Quinn, Sp. Counsel, S.E.C., Eric Summergrad, Principal Asst. Atty. Gen., Susan K. Straus, Washington, DC, for plaintiff-appellant.

William B. Clark, pro se.

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

Before REYNALDO G. GARZA, KING and DeMOSS, Circuit Judges.

PER CURIAM:

The instant case involves the enforcement of a disgorgement order entered by the district court on August 1, 1990. The Securities and Exchange Commission ("SEC") appeals an order from the district court denying certain requested relief the SEC claimed was necessary to obtain compliance with the disgorgement order. The SEC filed a Motion to Dispense With Oral Argument and Summarily Reverse the District Court's Decision, asserting that our recent holding in Sec. Exch. Comm'n v. Huffman, 996 F.2d 800 (5th Cir.1993), is dispositive of the issue presented. We agree, and we reverse and remand the cause for further proceedings.

I.

Appellee, William B. Clark ("Clark"), was prosecuted by the SEC for alleged violations of the antifraud and other provisions of the federal securities laws. After negotiations, during which Clark was represented by independent counsel, Clark and the SEC on October 26, 1989, entered into a "Consent and Undertaking of William B. Clark" (the "consent agreement") in which Clark consented to the entry of an agreed judgment, including (i) a permanent injunction against future violations of the securities laws alleged to have been violated, and (ii) a disgorgement order. This agreement was filed with the district court on February 2, 1990, and a final judgment of permanent injunction and other equitable relief was entered against Clark on February 5, 1990. ¹

Although Clark agreed to the entry of a disgorgement order, he did not stipulate to a certain amount. Rather, the SEC and Clark agreed to negotiate further a disgorgement sum with the understanding that they could submit the controversy to the court if no such agreement could be reached. ² When the parties failed to agree, the SEC motioned the district court to set a disgorgement amount, submitting documentation purportedly relating to Clark's unlawful profits in support of its request. On August 1, 1990, the district court entered an Order Setting Disgorgement Amount (the "Disgorgement Order"), requiring Clark to pay $218,610 plus post-judgment interest, into the registry of the court within ten days of entry of the order.

Clark allegedly failed to comply with the Disgorgement Order, and the SEC filed a motion to show cause why he should not be held in civil contempt. As neither Clark nor his attorney attended the October 31, 1990, show cause hearing, the district court placed Clark in civil contempt. The SEC then requested the court below to impose contempt sanctions upon Clark to coerce compliance with the Disgorgement Order, suggesting that Clark should be required to pay $125,000 of the amount due within a ninety-day period. If he failed to do so, the SEC asked that he be incarcerated until the payment was made. Clark responded that he was indigent and did not have the financial means to comply with the Disgorgement Order. As evidence of his financial inability, Clark provided the SEC and the district court with a financial statement and personal tax returns for the past three years. Both Clark and his wife submitted to depositions taken by the SEC. Clark also furnished sworn affidavits of "Indigency" and of "Financial Condition," dated January 31, 1991, and December 20, 1991, respectively, as further support for his claim of indigence.

The district court reviewed the various documents provided by Clark and found that "the only meaningful asset belonging to Clark that suggests an ability to comply with the disgorgement [order] is his home, valued at $250,000, which he owns jointly free and clear with his wife." The court determined that this asset was exempt from collection under the Federal Debt Collection Procedures Act of 1990, 28 U.S.C. § 3001 et seq. (the "Debt Collection Act"). It reasoned that Section 3014(a)(2)(A) of the Debt Collection Act permitted a defendant in an equitable proceeding--such as the one at bar--to "elect to take his available exemptions under Texas state law." See 28 U.S.C. § 3014(a)(2)(A). Since Texas law provides an exemption from debt collection with respect to a defendant's homestead, ³ and because Clark had no other demonstrable assets, the court concluded that Clark had satisfied his burden of showing financial inability to comply with the Disgorgement Order. In so holding, the court below intimated that it was unable to consider the value of the home in determining whether Clark had met his burden of showing financial inability.

II.

We note, as a preliminary matter, that financial inability is a defense for failure to comply with a court-ordered disgorgement. Donovan v. Sovereign Sec., Ltd., 726 F.2d 55, 59 (2d Cir.1984). Since Clark invoked the defense of indigency, he had the burden of establishing his inability to pay. Huffman, 996 F.2d at 803. As discussed above, Clark and his wife provided numerous documents and deposition testimony in support of his position. The district court concluded that the assets other than Clark's home were insubstantial and that he had met his burden of demonstrating a lack of pecuniary means to comply with the disgorgement order. The integrity of that evidence and the trial court's conclusion about the non-homestead assets is not at issue on this appeal. Rather, the SEC challenges the district court's failure to consider Clark's residence as an asset in making its determinations as to whether Clark demonstrated financial inability.

A. Standard of Review

Normally, we review a district court's decision whether to grant equitable relief with respect to a disgorgement order for an abuse of discretion. E.g., Commodities Futures Trading Comm'n v. American Metals Exch. Corp., 991 F.2d 71, 76 (3d Cir.1993). However, we read the district court's order to decline to exercise any discretion, believing that it had no authority to consider the home. Its ruling in this regard is therefore purely a question of law, which we review de novo, applying the same standards as did the district court. E.g., King Fisher Marine Serv., Inc. v. 21st Phoenix Corp., 893 F.2d 1155, 1158 (10th Cir.) (holding that district court's determination as to whether subject matter jurisdiction exists is question of law, thus subject to plenary review, while decision whether to exercise that jurisdiction--if existent--is considered under abuse of discretion standard), cert. denied, 496 U.S. 912, 110 S.Ct. 2603, 110 L.Ed.2d 283 (1990); cf. A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020, 1039 (Fed.Cir.1992) (The "appellate court ... may set aside a discretionary decision if the decision rests on an erroneous interpretation of the law....").

B. Treatment of The Disgorgement Order

The only issue raised in this appeal by the SEC is whether a standing disgorgement order constitutes a "debt," thus subject to the provisions of the Debt Collection Act. ⁴ The district court implicitly held that it was when it concluded that the proceeding was subject to the Debt Collection Act. In an almost identical fact-setting, this court held that a disgorgement order does not amount to a "debt" for purposes of the Debt Collection Act. See Huffman, 996 F.2d at 803. Thus, we are bound by the prior panel's holding. We write this opinion separately, however, to address a question left unanswered by Huffman.

As this court notes in Huffman, the Debt Collection Act specifically excludes its application to the collection of any monies owed which are not debts. 28 U.S.C. § 3001(c). "Debt" is defined as:

(A) an amount that is owing to the United States on account of a direct loan, or loan insured or guaranteed by the United States; or

(B) an amount that is owing to the United States on account of a fee, duty, lease, rent, service, sale of real or personal property, overpayment, fine, assessment, penalty, restitution, damages, interest, tax, bail bond forfeiture, reimbursement, recovery of a cost incurred by the United States, or other source of indebtedness to the United States, but that is not owing under the terms of a contract originally entered into by only persons other than the United States; and includes any amount owing to the United States for the benefit of an Indian tribe or individual Indian, but excludes any amount to which the United States is entitled under Section 3011(a). ⁵

28 U.S.C. § 3002(3)(A) and (B). Clark has not contended that Section 3002(3)(A) is relevant to this case, and there would be no basis for concluding that the provision has any application here. Accordingly, the proper focus is upon whether a disgorgement order falls within one of the terms defined in Section 3002(3)(B).

As the Huffman court previously decided, "disgorgement" does not really approximate any of the language used in Section 3002(3)(B). It comes closest to "restitution," but it is important to note that there are several significant differences for our purposes. In Pierce v. Vision Invs., Inc., this court held that court-ordered "disgorgement" payments were in essence "an injunction in the public interest" rather than "a mere money judgment or debt." 779 F.2d 302, 307 (5th Cir.1986). ⁶ "Restitution" on the other hand, has the goal of making the aggrieved party whole. First Penn Corp. v. Fed. Dep. Ins. Corp., 793 F.2d 270, 272 (10th Cir.1986) (The object of restitution is "to return the parties to the position that existed before the transaction occurred."). "The purpose of disgorgement is not to compensate the victims...