U.S. v. Darwin Const. Co., Inc.

Decision Date08 May 1989
Docket NumberNo. 88-3066,88-3066
Citation873 F.2d 750
Parties-1340, 89-2 USTC P 9425 UNITED STATES and Special Agent Gail R. Kohorst of the Internal Revenue Service, Plaintiffs-Appellees, v. DARWIN CONSTRUCTION COMPANY, INC.; Lester J. Robinson, Defendants-Appellants.
CourtU.S. Court of Appeals — Fourth Circuit

David Irving Gelfand (R. Stan Mortenson, Randall J. Turk, Miller, Cassidy, Larroca & Lewin, Price O. Gielen, Melnicove, Kaufman, Weiner, Smouse & Garbis, P.A., on brief), for defendants-appellants.

William Anthony Whitledge (William S. Rose, Jr., Asst. Atty. Gen., Gary R. Allen, Charles E. Brookhart, Tax Div., Dept. of Justice, Breckinridge L. Willcox, U.S. Atty., on brief), for plaintiffs-appellees.

Before ERVIN, Chief Judge, RUSSELL, Circuit Judge, and KISER, United States District Judge for the Western District of Virginia, sitting by designation.

DONALD RUSSELL, Circuit Judge:

Darwin Construction Company and its president and sole shareholder, Lester J. Robinson, appeal from an order of the district court which imposed a $30,000 civil contempt fine against Darwin Construction Company, 1 and from the district court's subsequent denial of its motion to set aside or reduce the fine. 2 For the reasons set forth below, we modify the district court's assessment of the civil contempt fine, and as modified, we affirm the assessment.

I.

On May 2, 1985, the Internal Revenue Service ("IRS") served a summons on Lester J. Robinson ("Robinson") demanding that Darwin Construction Company ("Darwin") produce to IRS Special Agent Gail Kohorst twenty-five specified categories of corporate business records, as well as "[a]ll business records or documents pertaining to the corporation" during the period from 1980 to 1983. The summons for production was issued pursuant to an IRS investigation of Robinson's civil and criminal tax liabilities. In response to the summons, Darwin's counsel informed the IRS that Robinson had asserted his fifth amendment privilege and that Robinson refused to produce the business records. 3 On January 6 1986, the IRS and Special Agent Kohorst petitioned the district court for enforcement of the summons, and Robinson moved to intervene as a defendant so that he could assert his fifth amendment privilege. Darwin asserted that compliance with the summons would necessitate testimonial acts of production that were protected under Robinson's privilege.

Following a "show cause" hearing on March 25, 1986, the district court granted Robinson's motion to intervene and ordered Darwin to comply with the IRS summons. Defendants moved for a stay of the order enforcing the summons pending appeal. The district court denied the stay. On appeal, the stay was denied by Judge Murnaghan, who held that enforcement of the court order would not violate Robinson's fifth amendment privilege. As a result of this April 25, 1986 order, Darwin produced some documents, and on May 6 Darwin and Robinson filed a submission in compliance and request for amendment of the order, arguing that Darwin's Comptroller, Stanley Skweres, could produce only a limited number of documents without Robinson's assistance.

On June 10, 1986, the district court held a second hearing to explore Darwin's reasons for having produced documents in only two of the twenty-five categories. The court found that Darwin's showing of inability to comply with the summons was inadequate and ordered it to produce the records by June 20 or appear in court on June 23. Darwin did not produce additional records. At the third hearing on June 23, the district court found that the summoned records were extant, that Darwin, as a corporation, did not have a fifth amendment privilege, and that Darwin had not adequately explained why it had failed to produce the records. The district court held Darwin in civil contempt and ordered it fined $5,000 per day on a weekly basis, 4 ordered it to refrain from dissipating its assets, and denied its motion for stay pending appeal. Darwin and Robinson appealed the district court's decision to this court. 5

Meanwhile, Darwin attempted to comply with the June 23 order. On June 24, Comptroller Skweres and one of Darwin's attorneys delivered nine boxes of documents to the IRS. After a survey of the records, Special Agent Kohorst determined that documents were missing from twelve of the twenty-five categories. After Special Agent Kohorst told Darwin of its deficiencies, Darwin conducted another search of its offices and discovered summoned documents such as the 1983 employee list, checks and bank statements for July through December 1983, and the 1980 ledger. These documents were produced to the IRS on June 30.

On August 5, 1986, the IRS obtained a writ of execution from the clerk of the district court to collect the fine, which it determined to be $45,000 ($5,000 per day for the nine days from Darwin's production of documents on June 24 to the IRS's completion of the inventory on July 2, 1986). Darwin moved to vacate the writ, and on January 22, 1988 the district court held the fourth hearing in this case. In a Memorandum and Order dated February 4, 1988, United States v. Darwin Constr. Co., Inc., 679 F.Supp. 531 (D.Md.1988) ("Darwin I "), the court granted Darwin's motion to vacate the IRS's writ of execution because the writ was issued before there was a judgment regarding the violation of the court's final contempt order. The court, however, found that Darwin had not been in substantial compliance with the court's order for six days--the period between June 23 and June 30, 6 because it did not take "all reasonable steps" to comply with the court's order of June 23, 1986. Darwin I, 679 F.Supp. at 536. The district court stated:

Darwin was the party required to produce the documents. Even if it did not have possession until the date of delivery, Darwin was not released from its obligation to ensure that all its records had been produced. The fact that the documents were found over the weekend of June 27 is proof that the documents were locatable with some effort. Respondent was required to make that effort.... It is obvious, and mandatory, that a party such as Darwin must prepare to produce all the documents requested before they are due. Id.

In sum, the district court found that Darwin's production of records on June 30 did not cure the lack of production prior to June 23, and the court rejected Darwin's proffered substantial compliance defense and good faith defense for the six-day period between June 23 and June 30. Id. at 536-37. The court assessed a $5,000 per day fine for each of the six days Darwin had been in contempt.

Darwin moved to set aside or reduce the fine, pursuant to Fed.R.Civ.P. 59(e). The district court denied the motion but extended the time for payment of the fine. United States v. Darwin Constr. Co., 680 F.Supp. 739 (D.Md.1988) ("Darwin II "). Darwin paid the $30,000 fine and filed this appeal, challenging the district court's finding that Darwin remained in civil contempt for the six days after the entry of the contempt order.

II.

In this appeal, Darwin and Robinson make three arguments to support their contention that the district court committed reversible error in assessing the $5,000 per day civil contempt fine for six days. First, they argue that the nature of the fine is essentially punitive, because it impermissibly punishes Darwin for its failure to gather the documents prior to the June 23 contempt order. Second, they argue that the district court held them to an impermissibly high standard of perfect compliance with the summons. Third, they argue that the district court abused its discretion in assessing the fine and that it failed to make any findings of fact to support its judgment that Darwin did not immediately come into substantial good faith compliance. We deal with these arguments in the order in which they were raised.

III.

Appellants assert that the district court relied on Darwin's alleged inaction prior to the contempt order to convert the contempt judgment to punishment; therefore they characterize the $5,000 per day fine as a criminal contempt fine. Darwin claims that it could not produce the documents earlier than June 24 because Robinson was intent on testing his fifth amendment privilege and had control of the documents until June 23, the day the contempt order was issued. The substitute custodian of the documents, Comptroller Skweres, took possession of the documents only after the issuance of the contempt order and produced them as soon as he could. The gravamen of appellant's argument is that they are in effect being punished for Robinson's assertion of his fifth amendment privilege and thus the fine is of a criminal nature because it seeks to punish for past behavior. See United States v. United Mine Workers, 330 U.S. 258, 302, 67 S.Ct. 677, 700-01, 91 L.Ed. 884 (1947); In re Kave, 760 F.2d 343, 351 (1st Cir.1985).

While criminal contempt proceedings punish for past wrongful conduct, "civil contempt proceedings are for the purpose of coercing compliance with the orders of the court and/or to compensate complainant for losses sustained by defendant's noncompliance." United States v. Professional Air Traffic Controllers, 678 F.2d 1, 4 (1st Cir.1982) (emphasis omitted), citing United States v. United Mine Workers, 330 U.S. 258, 303-04, 67 S.Ct. 677, 701-02, 91 L.Ed. 884 (1947); G & C Merriam Co. v. Webster Dictionary Co., Inc., 639 F.2d 29, 40-41 (1st Cir.1980). See also Petroleos Mexicanos v. Crawford Enterprises, Inc., 826 F.2d 392, 400 (5th Cir.1987) (citations omitted); In re Howe, 800 F.2d 1251, 1253 (4th Cir.1986); Rickard v. Auto Publisher, Inc., 735 F.2d 450, 458 (11th Cir.1984); Consolidation Coal Co. v. Local 1702, United Mine Workers of America, 683 F.2d 827, 830 (4th Cir.1982); Windsor Power House Coal Co. v. District 6, United Mine Workers of America, 530 F.2d 312, 316 (4th Cir.), cert. dismissed, 429 U.S. 876...

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