In the

United States Court of Appeals

For the Seventh Circuit

No. 12-3308

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

v.

FIRST CHOICE MANAGEMENT SERVICES, INC., et al.,

Defendants.

SONCO HOLDINGS, LLC,

Intervenor-Appellant,

v.

JOSEPH D. BRADLEY, Receiver, and

ALCO OIL & GAS CO., LLC,

Appellees.

Appeal from the United States District Court

for the Northern District of Indiana, South Bend Division.

No. 3:00-cv-00446-RLM-CAN—Robert L. Miller, Jr., Judge.

ARGUED JANUARY 23, 2013—DECIDED MARCH 1, 2013

Before POSNER, RIPPLE, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge. This appeal is a sequel to an

appeal in the same case that we decided last year. 678 F.3d
2 No. 12-3308

538 (7th Cir. 2012). The case had begun in 2000 as a suit by

the SEC charging First Choice and others with fraud in

violation of federal securities law. The district court

had appointed a receiver to take charge of the defendants’ assets and distribute them among the victims of

the $31 million fraud. The receiver went hunting for

the assets and found that some of them had been used

to acquire oil and gas leases in Texas. SonCo Holdings

claimed an interest in the leases. The claim delayed

the receiver’s sale of the assets, but in January 2010, after

protracted negotiations, SonCo made a deal with the

receiver pursuant to which the district court issued an

“agreed order” that required SonCo to pay the receiver

$580,000 (later upped to $600,000 because of SonCo’s

delay in paying) for a quitclaim assignment of the leases

in which it claimed an interest. The parties also agreed

to release each other from all claims and counterclaims

in a parallel Canadian class action—Eaton v. HMS Financial—in which SonCo and its principal were alleged to

have misappropriated funds belonging to the defrauded

investors.

A third party to the agreed order was Alco Oil & Gas,

the operator of the leased wells. (The operator is the

firm or individual legally permitted to extract minerals

pursuant to an oil or gas lease. It is regulated by the

Texas Railroad Commission and can be, and in this instance was, separate from the lessee.) Alco had had to

post a $250,000 cash bond with the Texas Railroad Commission to assure payment of any costs that the Commission might impose on it for failing as operator to

conserve oil and gas and prevent or remedy environ-
No. 12-3308 3

mental damage from its operations. See Texas Natural

Resources Code §§ 91.103, .104, .1041, .1042, .105, .142. Alco

could get its $250,000 back only if it was replaced as

operator and the new operator posted an equivalent

bond. The receiver wanted Alco replaced because the

$250,000 for its bond had come in part from the

defrauded investors (though there is no suggestion that

Alco was guilty of any wrongdoing). So the agreed order

required SonCo to “obtain a bond . . . that shall replace

Alco’s bond so that Alco and the Receiver may obtain the

release of its bond paid for with defrauded investor

funds.” Thus the $250,000 would not stop with Alco if

it ceased to be the operator of the wells—not all $250,000

at any rate. Some (we’ve not been told how much) would

be added to the receiver’s assets because it had come

from victims of the fraud.

Alco wanted to be replaced as operator—wanted desperately because it was incurring mounting liabilities to

the Texas Railroad Commission and perhaps to other

entities as well for environmental damage caused by

the wells, and it had little prospect of generating offsetting revenues. The agreed order therefore not only

required SonCo to replace Alco’s $250,000 bond but

also—according to the interpretation of the order

proposed by the receiver and Alco, adopted by the

district judge, and accepted by us in rejecting SonCo’s

previous appeal, see 678 F.3d at 543—required SonCo

to do whatever had to be done to enable it to replace

Alco as the operator of the wells. The replacement would

require the permission of the Texas Railroad Commission

but the grant of that permission was expected to be
4 No. 12-3308

pro forma—provided that SonCo filed the necessary

papers and demonstrated, presumably by posting

the replacement bond, its financial ability to shoulder

the costs of the environmental liabilities to which the

operator would be subject.

SonCo failed, within the generous final deadline

imposed by the district judge after he had granted

multiple extensions of earlier deadlines, to obtain the

Commission’s authorization to operate the wells. It

had applied for that authorization—but only at the last

minute and its application had been incomplete. It was

apparent that SonCo had never intended to become

the operator. (Its motives in claiming an interest in the

wells in the first place remain murky, as does its motive

for pursuing this appeal, since the receiver had only

$41,350 available for distribution as of December 10,

2012, and is likely to have even less by now. SonCo

claims that it’s looking to encumber another oil and

gas lease the receiver may obtain, but currently doesn’t

have, if the sanction order is reversed; we warn SonCo

against harassing the receiver.)

On motion by the receiver and Alco, the district

judge held SonCo in civil contempt of the 2010 agreed

order and as a sanction ordered it to return the leases to

the receiver. But rather than ordering a simple rescission,

which would have restored the parties to the status quo

before the agreed order, the judge allowed the receiver

to keep the $600,000 that SonCo had paid the receiver

for them. SonCo returned the leases as ordered but appealed the contempt order. It wanted the $600,000 that
No. 12-3308 5

it had paid for the leases returned to it. We upheld

the finding of civil contempt but remanded with respect

to the sanction—the refusal to order the receiver to

return the $600,000.

The justification that the district judge had offered

was that “that money must be used to compensate the

attorneys for Alco and the Receiver . . . [and] also . . . to

compensate Alco for the harms caused by SonCo’s noncompliance with [the agreed order] . . . . Those uses of the

$600,000 will make the Receiver and Alco whole and

will replenish funds that should have been returned

to defrauded investors but instead have been dipped

into as a result of SonCo’s contempt of court.”

A judge has to justify the amount of a monetary

sanction that he imposes for a contempt. FTC v. Trudeau,

579 F.3d 754, 770 (7th Cir. 2007); FTC v. Kuykendall, 371

F.3d 745, 763 (10th Cir. 2004) (en banc). If as in this

case the judge intends the sanction (perhaps better

termed “remedy”) to be compensatory rather than punitive, he has to explain, as we noted in our previous opinion, 678 F.3d at 545, what loss the sanction is

intended to compensate for; and he had not done that,

which is why we remanded. On remand the judge

sought to justify the award, and SonCo has again appealed.

SonCo argues that the district judge denied it due

process by failing to grant its request for an evidentiary

hearing on remand. But as the judge explained, there

was no need for such a hearing. “The due process clause

does not require a hearing...where there is no disputed

issue of material fact to resolve.” Wozniak v. Conry, 236
6 No. 12-3308

F.3d 888, 890 (7th Cir. 2001). The $600,000 sanction was

based on evidence of the costs caused by SonCo’s

delay that had been presented earlier in this protracted

proceeding (now in its thirteenth year). While insisting

that it was not in contempt, SonCo had presented no

evidence contesting the receiver’s $600,000 estimate

of the costs imposed by its dilly-dallying, despite

being given multiple opportunities by the district judge

to do so.

And as the judge explained and the appellees

have demonstrated at length, $600,000 is a gross underestimate of the harm caused by SonCo’s contempt. SonCo

had agreed as part of the “agreed order” to take over

the operation of Alco’s wells within 90 days. By failing to

do so for more than a year after the order was

issued, SonCo exposed Alco to an estimated $490,000

to $780,000 in additional environmental compliance

costs because the Texas Railroad Commission refused

to authorize operation of the wells without costly rehabilitation, and, left nonproducing, the wells had to be

capped as otherwise they would have continued to

cause environmental damage for which Alco, as their

operator, would have been liable. In addition, SonCo

had agreed in the order to replace the $250,000 bond

that Alco had been required to post with its own $250,000

bond, and it had not done so. Furthermore, as part of

the agreed order the receiver had released either

$375,000 or $2 million (the record is unclear on which

figure is correct) in claims of fraud and disgorgement

that had been lodged against SonCo in Eaton v. HMS

Financial. The receiver has also charged $70,000 in addi-
No. 12-3308 7

tional receivership fees because SonCo’s procrastination prolonged the receivership. And he has incurred a

further $30,000 in expenses of overseeing the property

in receivership during the period of procrastination. The

harm inflicted by the contempt exceeded $600,000 by a

large margin. A plausible estimate of the total harm

would be $2 million. SonCo has gotten off lightly.

The district judge remarked SonCo’s “record of truly

brazen intransigence” in this protracted proceeding. That

is an understatement. SonCo will be courting additional

sanctions, of increasing severity, if it does not desist

forthwith from its obstructionist tactics.

AFFIRMED.

3-1-13