Opinion ID: 786548
Heading Depth: 2
Heading Rank: 4

Heading: The Senior Kuykendalls

Text: 46 The record justification for holding the Seniors liable is not so clear. A court may find individuals in contempt of injunctions like that involved here under three circumstances. One is exemplified by the liability of H.G. Kuykendall, Jr., and involves the failure of an individual in control of a corporation to prevent the corporation's violation of an injunction. See Wilson, 221 U.S. at 376, 31 S.Ct. 538; Voss, 82 F.3d at 1526. 47 Second, a direct, personal violation of the terms of an injunction would, of course, be a legitimate basis for holding an individual liable. See Voss, 82 F.3d at 1526. For example, Paragraph XVIII of the Permanent Injunction required the individual defendants to inform the FTC within ten days of any change in his employment status. App. at 1038. This is an explicit agreement by the individuals who signed the Permanent Injunction to take a certain action, and failure to do so could be the basis for contempt liability. 48 Finally, an individual could agree contractually in the Permanent Injunction to insure the compliance of a corporate entity. Even if the individual were not officially responsible for oversight of the corporation, if the corporation thereafter violated the Permanent Injunction, the individual could be held in contempt for failing to fulfill the contractual agreement. We discuss these theories in turn. 49 As a preliminary matter, we must note that even in a contempt proceeding, a district court must follow the strictures of Federal Rule of Civil Procedure 52(a) and provide findings of facts on which it bases its judgment sufficient to make possible meaningful appellate review. See Wolfe, 69 F.3d at 1087. The district court's contempt order in this case provides us with very little upon which to base our review of the Seniors' liability. As pointed out above, the only finding in the order that ties the Seniors to the contempt is the conclusion that [e]ach individual defendant, during the applicable time period, controls or has authority to control one or more of the corporate defendants. App. at 557. The order refers to no supporting facts or evidence, specifically those providing any basis for clearly determining whether any particular individual defendant had such control over the organizations' operations that he could have done anything to ensure compliance with the Permanent Injunction. 50 Nonetheless, because of our deferential standard of review, we have studied the record to determine whether it supports the Seniors' joint liability with the other defendants. The five paragraphs of the Permanent Injunction the court found the Seniors to have violated all involve the interaction of the magazine business with customers and potential customers. We have found no evidence or even any allegation that the Seniors were personally involved in these aspects of the business. And, as discussed above, none of the corporate defendants other than DMS was shown to have acted contumaciously, so the Seniors' involvement in those corporations may not be the source of liability. Thus, the Seniors' liability, if any, must flow either from their having agreed to insure DMS's compliance or from official responsibility for the affairs of DMS. 51 As the FTC acknowledged at oral argument, Paragraph X is the provision of the Permanent Injunction that most nearly suggests an agreement by the defendants to insure one another's compliance. That paragraph requires the defendants to implement a compliance program. Because all the signatories to the Permanent Injunction (including the Seniors) are defendants, the FTC argues this obligates all signatories to oversee the compliance monitoring program and other aspects of Paragraph X. 52 Some evidence exists to support such a reading. The strongest such evidence is the Seniors' testimony at the contempt hearing that they understood the Permanent Injunction placed some affirmative obligations on them and that, partly in response to that understanding, they helped the companies set up a compliance system. They also testified that they occasionally received and read the reports generated by the compliance system. App. at 680, 690-91, 704. 53 We are nonetheless not convinced that Paragraph X can be read so broadly as to make the Seniors insurers of the other defendants' compliance. First, it is important to note that nothing in the district court's contempt order suggests the district court was relying on this reading of the Permanent Injunction to find the Seniors in contempt. Equally important, the district court did not find, and the FTC did not even allege, that any defendants, including the Seniors, actually violated Paragraph X. Furthermore, the Permanent Injunction must not be read in the light most favorable to the FTC, but rather must be strictly construed, see Consumers Gas & Oil, Inc. v. Farmland Indus., Inc., 84 F.3d 367, 371 (10th Cir.1996), to ensure it is clear enough to place a defendant on notice of what he must do to comply. See Voss, 82 F.3d at 1525. Any ambiguities should be read in the light most favorable to the defendants. Id. 54 The agreement would have to be much more explicit if it were in fact intended to bind individual defendants as guarantors of compliance for corporations over which they have no official responsibility, particularly in a case where the FTC seeks to hold those individuals liable for $51 million in consumer redress. 8 See id. This contractual theory thus cannot serve as the basis for the Senior's liability. 55 That leaves the control theory suggested by the district court's order and under which the district court appropriately found H.G. Kuykendall, Jr., liable. The FTC and the panel emphasized our holding in Voss that an individual who is responsible for insuring that a corporation complies with a court order cannot escape liability merely by removing himself from the day-to-day operations of the corporation and washing his hands of responsibility. See id. at 1526 (quoting Colonial Williamsburg Foundation v. Kittinger Co., 792 F.Supp. 1397, 1406 (E.D.Va.1992)). We agree, but before this becomes a relevant issue, the FTC must have met its burden of providing clear and convincing evidence that the Seniors had the management control or power to prevent the contempt in the first place. 56 The FTC admits the Seniors did not hold official positions with any of the corporations during the period in question, but asserts they nevertheless had the authority to control the corporations. It bases this assertion on two facts: that the Seniors signed the Permanent Injunction as officers of some of the corporate defendants and that together the Seniors owned a majority of the stock of DMS. See App. at 676-79, 684-85, 697-701. 57 Notably, neither H.G. Kuykendall, Sr., nor C.H. Kuykendall signed as an officer of DMS, the only corporate entity involved in the contumacy, although they both signed the Permanent Injunction individually and as officers of National Marketing Service, Inc.; NPC Corporation of the Midwest, Inc.; and Magazine Club Billing Service, Inc. Since the evidence that the other corporate defendants committed contempt or could control DMS is inadequate, the Seniors' alleged ability to control them is irrelevant to their individual liability and is not a legitimate reason to hold them in contempt. 58 Even if the actions of the other corporations were relevant, these signatures are the only evidence that the Seniors held any official role with any of the corporations during the period in question, and the other evidence, which the FTC does not dispute, shows that neither has had any official position at any corporate defendant since before the execution of the Permanent Injunction. See id. at 164. Both testified at the hearing in this case and provided separate affidavits declaring that they had resigned from all of their corporate positions in March of 1995, well before the dates relevant to this contempt proceeding. Id. at 164-67. The FTC seems to agree, stating in its brief that the Senior Kuykendalls no longer held official positions in the corporations. Aple. Supp. Br. on Reh'g En Banc at 29 (filed July 3, 2003). The FTC in no way claims the Seniors fraudulently led them to believe they actually had control of the corporations at the time they entered into the Permanent Injunction. 59 The Senior Kuykendalls could not confer on themselves actual control over the corporations simply by signing as officers. 9 Since no evidence exists that the Seniors actually were officers, these signatures cannot serve as the basis for finding that the Seniors had the official power necessary to hold them liable. See Wilson, 221 U.S. at 376, 31 S.Ct. 538. 60 The only remaining justification for holding the Seniors liable is their ownership interests in the corporate entities, particularly DMS. The record is again barren on this point. The FTC did not introduce any corporate records or other evidence that the district court could have used to support its finding that the Seniors had the power to prevent the contempt. 61 The only evidence we have as to the Seniors' ownership is their own testimony, which does not support a finding that either H.G. Kuykendall, Sr., or C.H. Kuykendall had a controlling interest in any of the corporations at any time the Permanent Injunction was in effect. H.G. Kuykendall, Sr., did testify that as a co-owner of DMS at the time of the Permanent Injunction he, collectively with C.H., could have removed H.G. Kuykendall, Jr., as president. App. at 677. C.H. Kuykendall testified that he thought the Seniors' combined holdings in DMS was less than eighty-five percent. Id. at 698. The only evidence as to either defendant's individual ownership share is H.G. Kuykendall, Sr.'s statement that he never owned all of it, or half of it. Id. at 687. 62 This limited testimony does not support a finding that either Senior had a controlling interest in any corporate defendant during the relevant time period. Though the Seniors together may have owned a majority interest in the corporations, as noted above, each individual is entitled to an individualized determination of his interests. de la Llana-Castellon v. INS, 16 F.3d 1093, 1096 (10th Cir.1994). In Voss, this court held that there must be a finding that the defendant was somehow personally connected with the contempt. 82 F.3d at 1526 (quotation omitted); see also McGregor v. Chierico, 206 F.3d 1378, 1383-84 (11th Cir.2000) (agreeing with defendant's claim that the FTC and district court had simply lumped together all of the defendants without considering the weight of the evidence as it applied to each individual and corporate defendant). 63 In this case the FTC did not introduce evidence that would support a finding that either individual Senior had effective control of DMS or treated the corporate defendants as alter egos. Cf. Donovan v. Burgett Greenhouses, Inc., 759 F.2d 1483, 1486 (10th Cir.1985). Nor do the FTC or the district court appear to have endeavored to find clear and convincing evidence that the Seniors together in fact exerted control over DMS in such a way as to be personally connected with the contumacy. Indeed, the evidence shows the Seniors had no executive role with any of the corporations from the time of the Permanent Injunction and received no income from DMS. See App. at 678, 688. Because no evidence exists in the record to support the district court's finding that the Seniors could control, and therefore prevent, the contempt committed at DMS, that finding is in error. 64 Though contempt proceedings may have somewhat diluted procedural requirements, they do not lessen the need for clear and convincing evidence of a defendant's liability. See United States v. Microsoft Corp., 147 F.3d 935, 940 (D.C.Cir.1998). The FTC and the district court here simply skipped over a determination of individual culpability, focusing almost entirely on the nature and extent of the contempt itself. Having found such contempt, they then simply assumed every signatory to the original Permanent Injunction was jointly and severally liable for its breach. Even in the streamlined context of a contempt hearing, this falls short of meeting the required standard of proof. See McGregor, 206 F.3d at 1383-84. The district court's ruling that the Seniors were in contempt was thus based on a clearly erroneous fact finding and a misapplication of the law. We therefore reverse the district court's judgment as it relates to the liability of H.G. Kuykendall, Sr., and C.H. Kuykendall.