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# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 12

- 3308 S EC UR I T I ESAN D E XCHANGE C OM MI S S I ON, P laint if f , v. F IR S T C HOICE M ANAGEM ENT S ERVICES, I NC ., e tal ., D efend a nts.
S ON C O H OLDI NGS, LLC , Int e r ve nor-Appe l l ant, v. J OS EP H D. B RADLEY, Re ce i ve r, a nd A L CO O IL & G AS C O ., LLC , A pp ellees

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A pp eal from the United S t ates Di strictC our t fo r the N o rthernDi stricto f Indian a, S outh Bend D ivisi on. No . 3:0 0-cv-00 44 6-RLM-CAN

—Rob ert L. Miller, Jr. , Judge

. A RG UE D J AN UA RY 23, 2013

— D ECI DE D M AR CH 1, 2013

Befo re P OSNER, R IPPLE, a nd W I L L I A MS, C ircu it Judges . P OSNER, Cir cu i tJudg e . Thi s a pp eal is a s equelto an appeal i n the sam e ca se that w e d eci ded las t year
. 678 F
. 3d2 N o. 12

- 3308 538 ( 7th Ci r. 20 12)
. The cas e had be gun i n 200 0 as a s uitby th e SE C ch ar gin g F irs t C h oic e a n d oth er s w ith f r a u d in viol ation of fed eral secu riti es law

. Th e d istri ct cou rt ha d a ppo i nt ed a r ec ei ve rt o t ak e ch ar g e o f the defen d an ts ’ as set s a nd di str ibute them am ong the v i cti m s o f the $ 31 m i l l i on fra ud

. The r ecei verwent hun ting f or the a sse ts and fou n d t h at som e o fthem had bee n used to acqui re oi land gas l eas es i n Texas. S onCo H ol dings cl ai m ed an i nter es t in the l eas es. The cl ai m del aye d the r ecei ver ’ s s al e o fthe ass ets , bu t in Janu ar y 2 010, after pr o tr ac te d ne g o ti at i o ns , S o nCo made a deal w i ththe re cei verpursuant to wh i ch the dist ri ct c ourti ssued an “ag re ed o rd er” that r equi re d SonCo t o pay the r ecei ver $580 , 000 (later up p ed to $600,000 be cau se of S onC o’s del ay i n payi ng) f ora qu itc l ai m as si gnm ent o fthe l eas es i n w hi ch it c lai m ed an i nter est
. The part i es al so agr eed t o r e l e a s e e a c h o th e rfr o m a l lc l a i ms a n d c o u n t e r c l a i ms i n a paral l el Canad i an c las s acti on

— Eaton v. HM S F i nan ci al

— i n w hi ch So n C o an d i ts pri nci pal were al l ege d to have m i sappropri ate d funds bel onging to t he defra ud ed i nvest or s. A thi rd party t o the a gr eed o rd erwas A l co Oil& Gas, the o per at o ro fthe l ea se d wel l s. ( The o per at o ri s th e firm or in d ivid u al leg ally p er m i t t e d to ex tr ac t m in er als pur su an t to a n o i lo rg as l ea se . I t i s r egulated b y the Te xa s Ra i l r o ad C om m i ss i o n a nd c anb e, a nd in thi s i nsta nce was, se parat e fro m the les see. ) A l co had had to p o s t a $ 2 5 0 , 0 0 0 c a s h b o n d w i th th e T e x a s R a i l r o a d C o mm i s s i o n t o a s s u r e p a y m e n to fa n y c o s t s th a tth e C o mm iss ion m i ght i m pose on i t forf ai l i ng as o perat orto co ns er ve o i la nd g as a nd pr ev en t o rr emedy e nv i r o n-N o. 12

- 3308 3

m entaldam age fro m i ts oper ati ons. S ee Texas N atur al Resour ces Code §§ 91. 103,
. 104,
. 1041 , . 1042, . 105,
. 142. A l co coul d get i ts $250 , 000 backo nl y i fi t was r epl aced as o per at o ra nd the n ew o per at o rpo st ed ane qui va l en t bo nd. The r ec ei ve rwant ed Alc o rep l ac ed be ca us e th e $2 5 0 , 0 0 0 f o r i t s b o n d h a d c o me i n p a r t f r o m t he defr auded i nvest or s ( though there i s no sugg est i on that A l c o wa s g ui l t y o fa nywr o ng do i ng )
. S o the a g r e e d o rder re quir ed So nC o to “obt ai n a bond

. . . that shal l repl ace Alc o ’ s bo nd s o tha t A lco a nd the Re ce i ve rmay o bt ain the re l eas e o fi ts bond pai d fo r w i th defra ud ed i nvest or fu n d s.” T h u s t h e $ 25 0,0 00 w ou ld n otst op w ith A lco if it cea se d to b e th e op er at or of th e w ells

— not al l$2 50, 000 at an y ra te . Som e (w e’v e n ot b e e n t old h ow m u c h ) w ou ld b e a d d e d t o th e r e c e i v e r ’ s a s s e t s b e c a u s e i th a d c o me fr o m v i c t i ms o fthe fr a ud

. A l co w a nted to be re pla ced as oper ato r

— w an ted de sp erate ly because i t was i ncurr i ng m ounti ng l i abi l i ti es to the Texas Rai l ro ad Com m i ssi on a nd per haps to o ther enti ti es as w el lf orenvi ro nm entaldam age cause d by th e w ell s, an d i t had l ittl e pros p ect of genera ting off

se tt in g re ve n u es . Th e a gr ee d o r d er th er efo re n oton ly r equi r ed S o nCo t o re pl ac e Alc o ’ s $2 50 , 00 0 bo nd b ut al so

— acco rdi ng to th e inter preta ti on o fthe or der pr o p o s e d b y th e r e c e i v e ra n d Al c o , a d o p t e d b y t he d istric t ju d ge, an d accep ted by us in rej ectin g SonC o’s previ ous a pp eal, s ee 678 F. 3d at 543

— r e qu i r e d S o nC o to do w h at eve r had to be done to enabl e i t t o re pla ce A lc o a s t h e o p er at or of th e w ells . Th e re p lac em en t w ou ld re quir e the perm i ssi on of the Texas Rai l ro ad Com m i ssi on but the gr ant o fthat p er m i ssi on was expecte d to be4 N o. 12

- 3308 p r o f o r ma

— p rovide d that SonC o fi led t he nec essary pape r s an d de m o ns tr at ed, pr es um ab l y b y po st i ng the r epl acem ent b ond, i ts fi nanci alabi l i ty to shoul der th e co st s o fthe e nv i r o nm en ta lli ab i l i ti es t o whi chthe oper ato r w oul d be s ubj ect. S o nCo f ai l ed, wi thin t he g en er o us fi na lde adl i ne i m p ose d by the di str i ct j ud ge afterhe ha d gra nted m ul ti pl e ex te ns i o ns o fe ar l i erde adl i ne s, t o o btai n the C om m iss ion ’s a u th or iza tio n to op er at e th e w ells . I t had app l i ed f orthatautho ri zati on

—but o nl y a t the l ast m i nute and i ts ap pli cati on had bee n i ncom ple te. I t was a p p a r e n tth a tS o n C o h a d ne v e ri n t e n d e d t o b e c o me th e o per at o r . ( I ts mot i ve s i n c l ai m i nga n interest i n the w ells in the fi rs t pl ace re m ai n m urky, as does i ts m oti ve for p u rs u in g t h is a p p ea l , sin c e t h e re c eiv er h ad on ly $41, 350 avai l abl e fordi str ibuti on a s o fDecem ber10 , 2 0 1 2 , a n d i s l i k e l y t o h a v e e v e n l e s s b y n o w. S o nC o cl ai m s th ati t’ s l o o k i ngt o e nc um bera no th ero i la nd g as l ea se the r ec ei ve rmay o bt ain, b utc ur r en tly do es n’t ha v e , i fthe s a nc t i o n o r de ri s r e v e r s e d; we wa r n S o nC o ag ain sth ar as sin g t h e re c eiv er .) On m oti on bythe re c ei verand A l co, the dist ri ct j ud ge hel d SonCo in ci vi lco ntem pt ofthe 2010 ag re ed or der a nd as a sancti on o rder ed i t t o re turn the l eas es to th e r ec ei ve r . But rath ertha n o r der i nga s i m pl e r es ci ss i o n, whi ch wo u l d h a v e r e s t o r e d th e p a r t i e s t o th e s t a t u s quo bef or e the ag re ed or der, the j ud ge al l owed the re cei ver to kee p the $ 600, 000 that So nC o had paid the r ecei ver f o rthe m. S o nC o r e t urne d the l e a s e s a s o r de r e d b uta ppeal ed the conte m pt or der. I t wa n ted the $600 , 000 thatN o. 12

- 3308 5 it h ad p aid for th e le a s e s ret u rn ed to it. W e u p h eld the fi nd i ng of ci vi l conte m pt but re m anded w i th res p ect to the s ancti on

— the refusal to o rderthe re cei verto re turn the $6 00, 000. The j u st ifi cati on that the di str i ct j ud ge had offer ed was tha t “ th atmone y mustb e us ed to c o m pen sa te the att or n ey s for A l co and the Rece i ver. . . [ and] a l so . . . to co m pen sa te Al co f o rthe ha r m s ca us ed byS o nCo ’ s no nco m pl i an ce wi th[ th e ag r ee d o r der ]
. . . . Thos e us es o fthe $6 00 , 00 0 wi l lmake the Re ce i ve ra nd Al co w hol e an d w i l l re ple ni sh fund s that shoul d hav e b ee n retur ned to defr auded i n ve st or s but i nstea d have be en di pp ed in to as a re su lt of So n C o’s co n te m p t o f co u rt .” A j ud ge ha s to j us tify the am ou nt of a m one t ary sancti on that he i m poses f ora conte m pt
. FTC v. Tr ude au , 579 F. 3d 754, 77 0 ( 7th Ci r. 200 7); FT Cv. Kuy kendall , 37 1 F.3 d 74 5, 76 3 (1 0t h C ir. 20 04 ) (en ba n c ). I f as in t h is case the j ud ge i ntends the sancti on ( perhaps be tte r te rm ed “re m e d y” ) to be co m p en sa to ry rat h er th an p u n it i v e , h e h a s to exp l a i n, a s we n o t e d in o urp r e v i o us o pin ion, 678 F.3d at54 5, w h a t lo ss th e s an c tio n is i ntended to com pensate f or ; and he had notdone that, w hi ch is w hy we re m anded

. On re m and the j ud ge s o ughtt o j us t i fy the awa r d, an d S o nC o ha s ag a i n a pp e a l e d. S o nCo a r g ue s th atthe di st r i ct j udg e den i ed i t due p rocess by fail ing to granti ts requ est for an evide nt iary he aring on rem an d

. Bu t as the j ud ge ex p laine d , there w as no nee d fo r such a hear i ng. “The d u e proces s cl ause does not re quir e a hear i ng ... w h er e there i s no di sputed i ssue of m ate ri alf act to re sol ve. ” Wo z nia kv. C o nry, 23 66 N o. 12

- 3308 F. 3d 888, 89 0 ( 7th Ci r. 20 01)
. The $6 00, 000 sancti on was bas ed on evid en ce of the cos t s c au sed by SonC o’s del ay that ha d b een prese nted ear l i eri n thi s pro tr acte d pr o ce eding( no w i n i ts thi r te en th y ea r )
. W hi l e i ns i st i ng th ati t was no t i n c o nt empt, S onC o ha d pr es en te d no evi dence conte sting the re cei ver ’ s $600 , 000 es ti m ate ofthe cos ts i m posed by i ts dil l y-d al l yi ng, despi te bei ng g i ven m ult i ple o pp or tuni ti es by the dist ri ct j ud ge to do so

. A nd as the j ud ge expla i ned and the appel l ees ha ve d em ons trated at length , $600 , 000 i s a gross u n d e re s t i mat e o f the ha r m c a us e d b y S o nC o ’ s c o nt e mpt
. S o nC o had agr eed as parto fthe “ag reed o rder ” t o tak e o ver the o perat i on o fA l co’ s wel l s withi n 90 days. By f ai l i ng to do so f orm or e than a y earafterthe o rd erwas i ssued, S onCo expose d A lco to an e sti m ate d $490, 000 to $780 , 000 i n additi onalenvi ro nm entalco m p li ance cos ts because the Texas R ai l ro ad Com m i ssi on r efused to author i ze oper ati on o f the w el l s without co stl y r ehabi l i tat i on, and, l eft no nproducing, the w ell s had to be capped as o ther w i se they w oul d ha ve c ontinued to c au se en vir on m en ta l d am ag e fo r w h i c h A lco , as t h eir o pe r a t o r, w o u l d h a v e b e e n l i ab l e . In a d d i t i o n, S o n Co ha d a g r ee d i n the o r derto r epl ac e th e $2 50 , 00 0 bo nd that A l co had been r equi re d to post w i th i ts own $2 50, 000 bond, and i t h ad n ot done so

. Fur ther m or e, as parto f the a gr eed orderthe re cei verhad re l eas ed ei ther $375 , 000 or $2 m i l l i on ( the re cor d i s uncle ar on w h ich fi g ur e i s co r r ect) inc l ai m s o ffr au d a nd di sg o r g ement th atha d b ee n l o dge d againstS o nCo i n E a t o n v . HMS Fi nan ci al . Th e re c eiv er h as als o c h a r g e d $7 0,0 00 in a d d i-N o. 12

- 3308 7 ti onalr ecei ver shi p fees bec ause So nC o’ s pro cra stinat i o n pr o l o ng e d the r e c e i v e r s hi p. And h e h a s i ncurr e d a further$3 0, 000 i n expenses ofo ver see i ng the pro perty i n r ec ei ve r sh i p dur i ngthe pe r iod o fpr o cr as tina ti o n. The harm i nfl ict ed by the conte m pt excee ded $6 00, 000 by a large m argin. A plau sible estim ate of the to tal harm w oul d be $ 2 m i l l i on. S onCo has got ten o ffl i ghtl y. T h e d ist ric t jud ge rem ar ke d Son C o’s “re c o r d of tr u ly bra zen intra nsi gence ” in thi s pro tr acte d p rocee ding. That i s a n und er sta tem ent. S onCo will b e court i ng addit i onal sancti ons, o fi ncre asing se ver ity , if i t doe s no t desi st f or thw i th fro m i ts obs tr ucti oni st tact i cs. A FFI RMED .

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