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07/27/84 Securities and Exchange v. Ormont Drug & Chemical

UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT


July 27, 1984

SECURITIES AND EXCHANGE COMMISSION

v.

ORMONT DRUG & CHEMICAL COMPANY, INC., APPELLANT APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA (D.C. CIVIL ACTION NO. 82-1685). 1984.CDC.205

UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT.

APPELLATE PANEL:

Tamm and Edwards, Circuit Judges, and Clement F. Haynsworth, Jr.,* Senior Circuit Judge for the Fourth Circuit.

Opinion for the court filed by Circuit Judge TAMM.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE TAMM

This appeal arises from the district court's holding appellant, Ormont Drug and Chemical Company, Incorporated (Ormont), in contempt of an injunctive order. Because we find that the district court did not properly consider Ormont's assertion that compliance with the injunction was impossible, we vacate the contempt order and remand for proceedings consistent with this opinion. I. BACKGROUND

On June 17, 1982, the Securities and Exchange Commission (Commission) filed a complaint charging that Ormont had violated the reporting requirements of the Securities Exchange Act of 1934, 15 U.S.C. 78m(a), 78w(a) (1982). *fn1 Commission's Appendix (App.) at 4. Specifically, the Commission alleged that Ormont failed to file an annual report for 1981 and quarterly reports for the past three quarters. The Commission further alleged that Ormont had established a pattern of delinquency since 1979 in filing reports. App. at 7-10. The Commission therefore requested an order compelling Ormont to file the delinquent reports and enjoining Ormont and its officers from future delinquent filings. App. at 10-11.

Ormont failed to answer the complaint and, at the Commission's request, the district court on December 22, 1982 found Ormont in default and issued an injunctive order. SEC v. Ormont, Civ. No. 82-1685 (D.D.C. Dec. 22, 1982), App. at 12. The court ordered Ormont to file its delinquent reports by January 10, 1983, and it enjoined Ormont and its "officers" and "directors" from failing in the future to file timely reports. Id. at 2, App. at 13. *fn2

Ormont did not comply with the injunction. On May 18, 1983, the district court issued an order directing Ormont and Ormont's Chairman of the Board and Chief Executive Officer, Irving Brand, to show cause why they should not be held in civil contempt. Sec v. Ormont, Civ. No. 82-1685 (D.D.C. May 18, 1983), App. at 16-17. At the show cause hearing on July 22, 1983, Ormont stated that compliance with the injunction had been impossible. Ormont offered testimony and submitted affidavits documenting its efforts to comply with the injunctive order and explaining how lack of funds had delayed preparation of the reports. See Brief for Appellant, Appendix Exhibits 3, 5, 6; App. at 25, 29-30.

The district court disregarded Ormont's impossibility argument and found both Ormont and Mr. Brand in contempt. The court accordingly ordered Ormont and Mr. Brand to file all delinquent reports and further ordered Mr. Brand to pay a fine of $1,000 for each day after August 1, 1983 that the delinquent reports remained unfiled. *fn3 SEC v. Ormont, Civ. No. 82-1685 at 4 (D.D.C. July 22, 1983), App. at 36.

On appeal, Ormont contends that the contempt order should be vacated because the district court failed to consider Ormont's claim that compliance with the injunctive order was impossible. *fn4 We agree. II. ARGUMENT

A contempt order should not issue if the court finds no willful disobedience but only an incapacity to comply:

The sound discretion of an equity court does not embrace enforcement through contempt of a party's duty to comply with an order that calls him "to do an impossibility."

. . . .

It would be unreasonable and unjust to hold in contempt a defendant who demonstrated that he was powerless to comply. An equity court can never exclude claims of inability to render absolute performance, but it must scrutinize such claims carefully. . . .

Natural Resources Defense Council, Inc. v. Train, 166 U.S. App. D.C. 312, 510 F.2d 692, 713 (D.C. Cir. 1975) (quoting Maggio v. Zeitz, 333 U.S. 56, 59, 69, 68 S. Ct. 401, 403, 408, 92 L. Ed. 476 (1948)) (footnotes omitted). See Maggio, 333 U.S. at 72-73, 76-77, 68 S. Ct. at 409-410, 411-412; Brotherhood of Locomotive Firemen and Enginemen v. Bangor & Aroostook R.R., 127 U.S. App. D.C. 23, 380 F.2d 570, 582 (D.C. Cir.), cert. denied, 389 U.S. 327, 88 S. Ct. 437, 19 L. Ed. 2d 560 (1967). In a contempt proceeding, the court thus is obliged to consider carefully a claim by the alleged contemnor that compliance was impossible.

At the contempt hearing in the instant case, Ormont presented testimony and submitted affidavits supporting its contention that it had been unable to comply with the injunctive order. See App. at 25, 29-30; Brief for Appellant, Appendix Exhibits 3, 5, 6. Ormont explained that due to bankruptcy proceedings in 1979 and business difficulties since 1981, it lacked the funds necessary to prepare the delinquent reports. *fn5 See App. at 25-29; Brief for Appellant, Appendix Exhibit 3. In short, contended Ormont, complaince "had been . . . a simple impossibility." App. at 25.

The record indicates that the district court did not properly consider Ormont's impossibility claim. At the contempt hearing, the court made no inquiry into the claim, and indeed, seemed to attach no relevance to it. *fn6 The court also failed to address Ormont's impossibility claim in the comtempt order. Instead, the court summarily asserted that "[Mr.] Brand . . . was in a position to cause Ormont to comply with [the injunctive order], but did not do so." SEC v. Ormont, Civ. No. 82-1685 at 3 (D.D.C. July 22, 1983), App. at 35. The court offered no facts, however, to support this finding. *fn7

The district court, in both the hearing and the contempt order, focused on Ormont's failure to comply with the injunctive order and the length of time that had elapsed since the order issued. See App. at 27, 29, 34-36. Although both the fact and duration of noncompliance with the order are elements to be considered, the court must consider as well Ormont's inability, without fault on its part, to render obedience. See Maggio, 333 U.S. at 76, 68 S. Ct. at 411. Ormont cannot be held in contempt if it lacked the financial ability to comply with the injunctive order. See Natural Resources Defense Council, Inc., 510 F.2d at 713 & n. 111 (citing Am.Jur.2d, Injunctions § 340 (1969)).

We express no opinion as to the validity of Ormont's impossibility claim; we hold only that the claim received inadequate consideration. *fn8 Accordingly, we vacate the contempt order and remand the case for further proceedings consistent with this opinion.

It is so ordered.

APPELLATE PANEL: FOOTNOTES

* Sitting by designation pursuant to 28 U.S.C. § 294(d).


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