S.E.C. v. First Financial Group of Texas, Inc.
| Decision Date | 21 October 1981 |
| Docket Number | No. 80-1895,80-1895 |
| Citation | 659 F.2d 660 |
| Parties | Fed. Sec. L. Rep. P 98,322 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. FIRST FINANCIAL GROUP OF TEXAS, INC., Defendant, William H. Howton, et al., Defendants-Appellants. Summary Calendar. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Rhett G. Campbell, Houston, Tex., for defendants-appellants.
Michael K. Wolensky, Douglas J. Scheidt, Linda D. Fienberg, Paul Gonson, Asst. Gen. Counsels, Securities & Exchange Comm., Washington, D. C., for plaintiffs-appellees.
Appeal from the United States District Court for the Southern District of Texas.
Before AINSWORTH, REAVLEY and RANDALL, Circuit Judges.
William H. Howton and Vining Tower Reynolds, Jr., officers of First Financial Group of Texas, Inc. (First Financial), a Texas corporation engaged in the business of offering and selling securities to the public, appeal from two separate judgments of the United States District Court for the Southern District of Texas which held them in contempt of court and permanently enjoined them from further violations of the federal securities laws. The district court entered these judgments in an action brought by the Securities and Exchange Commission (SEC) to enjoin Howton, Reynolds, and First Financial from continuing to engage in fraudulent practices in connection with the sale of guaranteed student loans. We agree with the district court's holdings and affirm. 1
Beginning in May 1979, Howton and Reynolds, acting as representatives of First Financial, began to market packages of guaranteed student loans and repurchase agreements totalling approximately nine million dollars to several institutional investors. 2 As part of the agreements reached between First Financial and these investors, First Financial agreed to deposit the loans with a third party, such as a bank, and also agreed to repurchase the loans from the investors either on a specified date or at the option of the investor. First Financial dishonored its obligations under these agreements and the SEC subsequently brought this suit against appellants and First Financial under the federal securities laws. 3
The SEC filed its complaint against First Financial on August 24, 1979. District Judge Bue issued a temporary restraining order against appellants and First Financial that day restraining the alleged unlawful conduct, and set a hearing on the SEC's motion for a preliminary injunction for August 31. On August 27, the SEC began discovery proceedings by filing a motion under Fed.R.Civ.P. 30(a) to depose appellants and other persons associated with First Financial and to examine First Financial's corporate and financial records. The SEC then served notice that it would depose Reynolds or any other authorized representative of First Financial on August 28 as well as examine certain specified documents of First Financial. The SEC also subpoenaed Howton and Reynolds to be witnesses at the hearing on the SEC's motion for a preliminary injunction on August 31. Reynolds appeared for the August 28 deposition on behalf of First Financial but refused either to testify or to produce any of the subpoenaed documents. Howton and Reynolds both failed either to appear or to produce any of the subpoenaed material for the August 31 hearing.
At that hearing, District Judge Sterling ordered appellants to make themselves available for discovery. The hearing was not completed that day and Judge Sterling set the remainder of the hearing for September 7. The SEC then served notice upon appellants of its intent to depose them as well as examine First Financial's records on September 5. Appellants again failed either to appear for this deposition or to produce the requested documents. The SEC repeated its procedure on September 5, and issued subpoena's directing appellants to appear for testimony and produce First Financial's records at the September 7 continuation of the SEC's motion for a preliminary injunction. Again, appellants failed either to appear or to produce the subpoenaed material.
At the September 7 hearing, the District Judge ordered appellants to appear for depositions and to produce the subpoenaed material within the next two weeks. The SEC noticed a deposition for September 14 at which both appellants failed to appear or produce any documents. The SEC renoticed a deposition for September 20, which was continued until September 21 at the request of appellants' counsel. Reynolds finally appeared for this deposition, but he refused to testify on any substantive matter or to produce any documents of First Financial.
On November 2, the SEC filed a motion seeking to have the district court compel appellants to submit to discovery before a magistrate. The district court granted this motion, without opposition, on February 15, 1980, and ordered appellants to testify before a magistrate on March 3 and produce the records subpoenaed by the SEC. Reynolds appeared at the March 3 deposition but refused either to testify, produce the subpoenaed material, or assert any privilege to justify his noncompliance with the district court's February 15 order. Howton did not appear or provide the SEC with any documents. The magistrate orally directed appellants at the March 3 deposition to appear before the district court on March 10 to show cause why they should not be held in contempt of the district court's February 15 order. Neither appellant appeared for the March 10 hearing. The district court thereupon held appellants in contempt of court for "totally violat(ing) all of the aforesaid orders of the Court" and ordered appellants confined for ten days unless they purged the contempt.
The SEC subsequently filed a motion for default judgment against appellants under Fed.R.Civ.P. 37(b)(2) requesting a permanent injunction. Appellants did not oppose this motion and on March 20 the district court entered a default judgment against appellants, accompanied by findings of fact and conclusions of law, permanently enjoining appellants from engaging in certain conduct in violation of the federal securities laws. Appellants subsequently moved for a new trial, requesting the district court to vacate its default judgment, and Reynolds also requested a new trial on the district court's contempt order. The district court denied both motions and this appeal followed.
Rule 37(b)(2)(C) of the Federal Rules of Civil Procedure specifically empowers a district court to enter "a judgment by default against the disobedient party" for his failure "to obey an order to provide or permit discovery." See Roadway Express, Inc. v. Piper, 447 U.S. 752, 763, 100 S.Ct. 2455, 2462, 65 L.Ed.2d 488 (1980); National Hockey League v. Metropolitan Hockey Club, 427 U.S. 639, 643, 96 S.Ct. 2778, 2781, 49 L.Ed.2d 747 (1976) (per curiam). District Courts have broad discretion in determining whether to impose a sanction under Rule 37 and, if so, what sanction to impose. National Hockey League v. Metropolitan Hockey Club, supra, 427 U.S. at 642, 96 S.Ct. at 2780; Marshall v. Segona, 621 F.2d 763, 766 (5th Cir. 1980). In reviewing a district court's entry of a Rule 37 sanction our role is limited to a determination of whether important historical findings made by the district court are clearly erroneous and whether the district court abused its discretion in imposing a particular sanction. Marshall v. Segona, supra, 621 F.2d at 766-67. See National Hockey League v. Metropolitan Hockey Club, supra, 427 U.S. at 642, 96 S.Ct. at 2780.
Appellants challenge the default judgment on four grounds. First, appellants contend that the district court's factual findings are clearly erroneous. Second, appellants argue that the district court abused its discretion in entering a default judgment. Third, appellants argue that the district court should have stayed this civil SEC proceeding pending the outcome of a grand jury investigation into the same transactions at issue here. Finally, appellants argue that the district court entered the default judgment without affording them adequate notice of its intention to do so. None of these contentions has merit.
Appellants argue that the district court's factual findings are "wholly inaccurate and clearly erroneous." Appellants have correctly identified our standard of review on this claim which is "limited by the rule that 'findings of fact shall not be set aside unless clearly erroneous.' " SEC v. Blatt, 583 F.2d 1325, 1328 (5th Cir. 1978), quoting Fed.R.Civ.P. 52(a). See McAllister v. United States, 348 U.S. 19, 20, 75 S.Ct. 6, 8, 99 L.Ed. 20 (1954); Stevens v. East-West Towing Co., Inc., 649 F.2d 1104, 1106 (5th Cir. 1981). Appellants bear the burden of demonstrating that the district court's factual findings are clearly erroneous. Gupta v. East Texas State University, 654 F.2d 411, 413 (5th Cir. 1981). The district court's findings, discussed above, detail the SEC's unsuccessful attempts to obtain testimony from Howton and Reynolds as well as the records of First Financial. Appellants do not challenge the district court's findings that they neither appeared, testified, nor produced the subpoenaed records. Nor do appellants contend that they did not in fact have notice of their discovery obligations under the various summonses issued by the SEC and orders issued by the district court. Instead, appellants' primary argument is that there is nothing in the record to support the district court's findings that they received notice of the different depositions and hearings that they were required to attend. However, the record fully supports the district court's findings that the SEC, the magistrate, or the district court itself sufficiently notified appellants of their attendance and production requirements. Appellants'...
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