Whitfield v. Pennington

• Decision Date: 25 November 1987
• Docket Number: No. 87-2140,87-2140
• Citation: 832 F.2d 909
• Parties: 9 Employee Benefits Ca 1116 Dennis E. WHITFIELD, Deputy Secretary of United States Department of Labor, Plaintiff-Appellant, v. Roland R. PENNINGTON, Jr., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 909

832 F.2d 909

9 Employee Benefits Ca 1116

Dennis E. WHITFIELD, Deputy Secretary of United States Department of Labor, Plaintiff-Appellant, v. Roland R. PENNINGTON, Jr., et al., Defendants-Appellees.

No. 87-2140.

United States Court of Appeals Fifth Circuit.

Nov. 25, 1987.

Rehearing Denied Dec. 30, 1987.

Karen L. Handorf, U.S. Dept. of Labor, Plan Benefits Sec. Div., Washington, D.C., for plaintiff-appellant.

Gerald T. Holtzman, Christina Richard, Holtzman & Urquhart, Houston, Tex., for Pennington & Donnell.

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

Before CLARK, Chief Judge, RANDALL and DAVIS, Circuit Judges.

RANDALL, Circuit Judge:

The Secretary of the United States Department of Labor appeals from the district court's denial of the Secretary's motion to reconsider or vacate the district court's earlier decision refusing to hold Roland R. Pennington, Jr. and James M. Donnell in civil contempt for refusing to make specified payments due under a consent order. As we find that the district court abused its discretion by failing to hold Pennington and Donnell in civil contempt, we reverse.

I.

A. The Consent Order

The instant appeal arises from proceedings initiated by the Secretary of the United States Department of Labor ("the Secretary") ¹ seeking civil contempt sanctions against Roland R. Pennington, Jr. ("Pennington") and James M. Donnell ("Donnell") for their failure to make certain payments required by a consent order. ² In 1979, the Secretary began an investigation of the Retirement Plan for Employees of Control Specialties, Inc. ("the Plan") ³ pursuant to section 504 of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Sec. 1001 et seq. Pennington is the Chairman of the Board and the holder of all the voting stock in Control Specialties, Inc. ("CSI"). Pennington and Donnell served as trustees of the Plan. ⁴ The investigation was completed by the end of July, 1984. On September 7, 1984, the Secretary informed Pennington and Donnell of the findings of the investigation and offered them an opportunity to resolve the problems the investigation uncovered by agreeing to a consent decree. After months of negotiation, a complaint was filed with the United States District Court for the Southern District of Texas ⁵ and, on the same day, a proposed order and final judgment ("consent order"), signed by counsel for both parties, was submitted to the district court.

The complaint alleged that the trustees of the Plan had violated a number of the fiduciary and prohibited transaction provisions of ERISA. The relief sought included correction of the prohibited transactions and restitution to the Plan for losses incurred as a result of the trustees' alleged breaches of fiduciary duty. The consent order was submitted to the district court on April 17, 1985 and was entered on August 29, 1985. Among other things, the consent order required Pennington to purchase all common stock of the J.E. Lonergan Company, a former acquisition target of his, from the Plan for $301,616.02. Payment was to be made in three equal installments of $100,538.67 with payments due on June 1, 1985, March 1, 1986, and March 1, 1987. Moreover, Pennington and Donnell were jointly required to make restitution to the Plan in the amount of $140,000 with $46,667 due as an initial payment on June 1, 1985 and payments of $55,224.96 due on June 1, 1986 and June 1, 1987.

B. The Offset of CSI's Account

On February 15, 1983, the Plan obtained a $500,000 loan from BancTexas-Houston ("the Bank") for the purpose of investing in long term residential mortgages. ⁶ On the same day, a guaranty of contribution was executed in which CSI guaranteed to the Bank that it would make annual contributions to the Plan in an amount not less than $150,000 per year until the loan was repaid. This guaranty of contribution gave the Bank the right to offset any amounts owing on the loan against CSI accounts with the Bank in the event that CSI failed to make the required contributions. ⁷ The Plan, in turn, executed a negative pledge of its assets and agreed to apply any and all contributions from CSI toward payment of the loan. On March 9, 1983, CSI's board of directors resolved that CSI would contribute not less than $150,000 annually to the Plan until the loan obligation was discharged. On September 1, 1983, CSI contributed $150,000 to the Plan. This contribution was applied toward payment of the loan and, when combined with earlier payments by the Plan, resulted in a reduction in the principal balance to $300,000. By late 1985, the loan had been renewed twice and the principal had been reduced to $260,000. CSI failed to make its $150,000 contributions to the Plan in 1984, 1985, and 1986.

On November 20, 1985, the Bank advised MBank-Houston ("MBank"), the Plan's independent fiduciary, ⁸ that the Bank was amenable to allowing the note to remain past due until December 1, 1985. On December 15, 1985, MBank received $138,869.01 from a third party from the purchase of real estate owned by the Plan and made a $100,000 payment on the loan. After the payment was allocated between interest and principal, the principal balance stood at $174,953.61. Because CSI had failed to make the annual $150,000 contributions that it had guaranteed would be made to the Plan, the Bank exercised its option under the guaranty of contribution and offset CSI's corporate account in the amount of $179,580.49 on January 29, 1986.

On February 7, 1986, Pennington's counsel met with MBank representatives regarding the offset and agreed that on March 1, 1986, the required date of a payment under the consent order, Pennington would be credited for the offset and would be refunded the difference between the amount due under the consent order and the amount of the offset. The agreement envisioned a $179,932.51 payment from MBank to CSI followed by a $101,390.22 payment to the Plan by Pennington. The Secretary determined that the Plan did not in fact owe CSI any money and disallowed the transaction. ⁹ On March 28, 1986, the Secretary advised Pennington's counsel that he considered all of the 1986 payment as unpaid and made formal demand for payment. ¹⁰

C. The District Court's Decision

On June 18, 1986, the Secretary applied to the district court "for an Order directing Roland R. Pennington, Jr. and James M. Donnell to appear and show cause why they should not be held in civil contempt of the [consent order]." ¹¹ The district court ordered a hearing which was held on October 17, 1986. The Secretary's motion was denied at the close of the hearing. The district court did not issue an opinion nor did it specify its reasons for refusing to find Pennington and Donnell in civil contempt. Apparently, however, the district court concluded that the offset of CSI's corporate account by the Bank fulfilled Pennington's and Donnell's obligations under the consent order. On October 27, 1986, the Secretary timely filed a motion to reconsider or vacate the judgment under Federal Rule of Civil Procedure 59. This motion was denied without opinion by the district court on December 11, 1986 and notice of appeal from that decision was timely filed with this court on February 5, 1987.

The sole issue on appeal is whether the district court abused its discretion when it refused to hold Pennington and Donnell in civil contempt by apparently concluding that their personal obligations to make restitution to the Plan had been satisfied by the Bank's offset of CSI's corporate account.

II.

A consent order, while founded on the agreement of the parties, is nevertheless a judicial act, enforceable by sanctions including a citation for contempt. United States v. City of Miami, 664 F.2d 435, 439-40 (Former 5th Cir.Dec.1981) (en banc). A party may be held in contempt if he violates a definite and specific court order requiring him to perform or refrain from performing a particular act or acts with knowledge of that order. Sec. and Exch. Comm'n v. First Financial Group of Texas, Inc., 659 F.2d 660, 669 (5th Cir.Oct.1981). The civil contempt sanction is coercive rather than punitive and is intended to force a recalcitrant party to comply with a command of the court. American Trucking Ass'n, Inc. v. Interstate Commerce Comm'n, 728 F.2d 254, 255 (Former 5th Cir.), cert. denied, 469 U.S. 930, 105 S.Ct. 324, 83 L.Ed.2d 261 (1984); see also Thyssen, Inc. v. S/S Chuen On, 693 F.2d 1171, 1173-74 (5th Cir.1982). Intent is not an issue in civil contempt proceedings; rather, the question is whether the alleged contemnors have complied with the court's order. Jim Walter Resources v. Int'l Union, United Mine Workers of America, 609 F.2d 165, 168 (5th Cir.1980). In a civil contempt action, proof of contempt must be "clear and convincing." United States v. Rizzo, 539 F.2d 458, 465 (5th Cir.1976). We review a district court's refusal to hold a party in civil contempt under an "abuse of discretion" standard. Neely v. City of Grenada, 799 F.2d 203, 207 (5th Cir.1986).

The consent order clearly and unambiguously required Pennington and Donnell to make restitution to the Plan. Their obligation arose from their breaches of the fiduciary duty they owed to the Plan as trustees. They were charged with the responsibility of managing the Plan's assets. In carrying out that responsibility, they were found by the Secretary to have violated numerous provisions of ERISA. The settlement agreement, later embodied in the consent order, was designed to rectify these violations by putting the Plan in the position it would have been in absent the trustees' breaches of their fiduciary duty. See Katsaros v. Cody, 744 F.2d 270, 281 (2d Cir.), cert. denied, 469 U.S. 1072, 105 S.Ct. 565, 83 L.Ed.2d 506 (1984); Gilliam v. Edwards, 492 F.Supp. 1255, 1266-67 (D.N.J.1980); Freund v. Marshall & Ilsley Bank, 485 F.Supp. 629, 644 n. 7 (W.D.Wis.1979).

The Secretary demonstrated to the district court, by...