The opinion of the court was delivered by: STANLEY S. HARRIS
Plaintiff Securities and Exchange Commission (SEC) applied for an order of civil contempt against defendants Keith Hammond and Med-Fac Investments, Inc. (Med-Fac), and non-parties John Allen Chalk and the MFI Liquidation Trust (MFI Trust). On July 8, the Court directed those four parties (respondents) to show cause why they should not be held in civil contempt for violating its December 5, 1991, temporary restraining order (TRO) and December 18, 1991, preliminary injunction. The Court held a hearing on the SEC's application for civil contempt on August 13, 1992. For the reasons that follow, the Court cites respondents for civil contempt and orders them to purge the contempt within 30 days.
The SEC alleges in its complaint that Med-Fac, Hammond, and fifteen other defendants violated the registration and anti-fraud provisions of the federal securities laws.
On December 5, 1991, the court granted the SEC's unopposed application for a TRO prohibiting further securities violations and for an Order freezing the assets of certain defendants, including the assets of Med-Fac.
The TRO and its freeze order provided in pertinent part:
The defendants Med-Fac, . . . [and] Hammond . . . their subsidiaries, officers, directors, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of this Order by personal service or otherwise . . . shall hold and retain within their control, and otherwise prevent any disposition, transfer or dissipation whatsoever of any and all assets under the direct or indirect control of defendant Med-Fac, . . . or in which [it] holds a direct or indirect beneficial interest (including without limitation, bank, brokerage, and money market accounts in the names of any of these defendants, and any lock boxes); provided, however, that if applicable, any of the defendants subject to this Freeze Order may collect on accounts receivable presently held in inventory, and any and all funds received shall be subject to the provisions of this Freeze Order. (December 5, 1991, Order P IV.)
Prior to filing the complaint, the SEC notified defendants Med-Fac and Hammond of its intention to seek a TRO and its freeze order on November 29, 1991.
On December 2, Hammond consulted with Med-Fac's counsel, respondent Chalk.
On Chalk's advice, Hammond and Med-Fac adopted a plan to liquidate Med-Fac and to create the MFI Trust.
The stated purpose of the plan was "for the assembling and marshalling of the assets of [Med-Fac], the paying of, or making adequate provisions for, the creditors and debtors of the Corporation, and the apportioning of the remaining assets among the shareholders." (Plaintiff's ex. G, at 1.)
Hammond executed the MFI liquidation Trust Agreement creating the trust on behalf of Med-Fac and designating himself as trustee. (Plaintiff's ex. I.) Med-Fac agreed to convey to the MFI Trust more than $ 25,000 in cash and its interest in certain accounts receivable, which it valued in excess of $ 200,000. Hammond executed an assignment of the accounts receivable from Med-Fac to himself as trustee for the MFI Trust, and, on December 3, he transferred the cash from Med-Fac's account to an account for the MFI Trust. (Plaintiff's exs. J and K.) The MFI Trust was created and funded prior to the entry of the TRO on December 5. By express provision of the Trust Agreement, Med-Fac retained the power to revoke the trust at any time.
(Plaintiff's ex. I at 1.) The purpose of the Trust was to "assure the return to [Med-Fac's] creditors of all cash advanced to [it] for use in its business operations." (Id.) Therefore, the Trust Agreement empowered Hammond to distribute its assets to eleven of Med-Fac's creditors, who were listed in an exhibit to the Trust Agreement. (Id. at 2 & ex. B.) Hammond also was authorized to discriminate among the listed creditors.
(Id. at 3.)
From December 9, 1991, through June 18, 1992, Hammond, as trustee of the MFI Trust, disbursed more than $ 60,000 from the Trust to eight of Med-Fac's creditors. (Plaintiff's exs. E, K, L, and M.) In addition, Hammond diverted $ 16,943 from the MFI Trust, by permitting direct payments from Med-Fac's debtors to its creditors. (Plaintiff's ex. K.)
Hammond submitted an accounting on behalf of Med-Fac purportedly in compliance with the TRO. (Plaintiff's ex. D.) The accounting did not list among Med-Fac's assets the cash and receivables that it transferred to the MFI Trust.
(Id.) The SEC first learned of the MFI trust on June 27, 1992, when Hammond disclosed its existence in deposition testimony.
(Plaintiff's ex. E.)
The Court has both an inherent and a statutory power to enforce compliance with its orders. See Shillitani v. United States, 384 U.S. 364, 370, 16 L. Ed. 2d 622, 86 S. Ct. 1531 (1966); 18 U.S.C.A. § 401. The Court may exercise that authority through a ...