Court Opinion

ID: 5823
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:10:04+00
Date Added: 2024-06-11T09:37:54.892521
License: Public Domain

United States Court of Appeals,
Fifth Circuit.

                                           No. 92-1363.

       SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee-Cross-Appellant,

                                                  v.

                          Maxwell C. HUFFMAN, Jr., et al., Defendants,

  Maxwell C. Huffman, Jr., James T. Henry and John T. Forsberg, Defendants-Cross-Appellees,

                                                 and

                     James F. Stewart, Defendant-Appellant-Cross-Appellee.

                                           Aug. 2, 1993.

Appeals from the United States District Court for the Northern District of Texas.

Before POLITZ, Chief Judge, GOLDBERG, and JONES, Circuit Judges.

        EDITH H. JONES, Circuit Judge:

        This case calls on us to decide whether an order of disgorgement fashioned at the behest of

the SEC is a "debt" under the Federal Debt Collection Procedures Act of 1990 ("Debt Act"), 28

U.S.C. § 3001 et. seq. If so, its repayment is subject to state property law exemptions incorporated

in the Debt Act. We hold that an order of disgorgement is not a "debt" as contemplated in the Debt

Act. Since the district court concluded otherwise, its order of disgorgement must be reversed and

remanded for a reconsideration of the amounts the defendants must pay.

                                                  I

        In September 1990, the Securities and Exchange Co mmission filed civil suit against

defendants Maxwell C. Huffman, Jr., James F. Stewart , James T. Henry, John J. Forsberg, and

twenty-seven corporate defendants they controlled, alleging misuse of investor funds and fraudulent

financial statements in connection with securities offerings in violation of several provisions of the

securities laws. Without conceding liability,1 the individual defendants consented to permanent

   1
     Despite the fact that defendants made no admission of securities violations, both sides assume
that the amounts ordered to be repaid here are a form of "disgorgement," rather than the simple
settlement of a law suit. An amount owed under a judgment enforcing a settlement agreement,
which is a contract, might well be a "debt" for purposes of the Debt Act. But since defendants do
injunctions and orders to pay disgorgement in an amount representing the funds received from the

illegal activities alleged in the SEC's complaint, subject to a defense by the defendants of inability to

pay some or all of the disgorgement. The district court entered the settlement as a consent order.

It directed the defendants to pay disgorgement in the following amounts: Huffman—$133,774,

Stewart—$513,784, Henry—$201,943, and Forsberg—$152,719.

        The defendants claimed they were unable to pay the disgorgement. Following a hearing, a

magistrate judge appointed by the district court determined that the Debt Act applies to disgorgement

orders and hence reduced the amount each defendant would have to pay in accordance with Texas

homestead, personal property, and retirement plan exemptions. The district court adopted the

magistrate judge's findings and conclusions and ordered the defendants to disgorge the following

amounts: Huffman—$4,000, Stewart—$354,925.59, Henry—$14,000, and Forsberg—nothing.

        Stewart appeals, claiming that the magistrate judge miscalculated the amount he has available

after exemptions are subtracted. The SEC cross-appeals, arguing that the Debt Act does not apply

and that therefore the court was not required to exempt certain of the defendants' assets. Huffman

and Stewart respond that the Debt Act does apply to disgorgement orders.2

                                                   II

        We first address whether the Debt Act applies to disgorgement orders in the context of a

securities violation. The Debt Act is the exclusive means for the United States and its agencies to

collect "debts." It permits an individual debtor to exempt from collection under the Act any property

that is exempt from debt collection under the state law of the debtor's domicile. 28 U.S.C. §

3014(a)(2)(A). The Act expressly does not apply to collection of any monies owed which are not

debts. 28 U.S.C. § 3001(c). The critical question is what the Act means by "debt." The Act defines

a "debt" as

        (A) an amount that is owing to the United States on account of a direct loan, or loan insured

not make the argument that this case should be analyzed under standard contract principles, rather
than under disgorgement principles, we express no opinion on the merits of such an argument.
   2
    Henry and Forsberg are cross-appellants, but they elected not to file briefs. Our opinion
necessarily applies to their orders, however.
       or guaranteed by the United States; or

       (B) an amount that is owing to the United States on account of a fee, duty, lease, rent,
       service, sale of real or personal property, overpayment, fine, assessment, penalty, restitution,
       damages, interest, tax, bail bond forfeiture, reimbursement, recovery of a cost incurred by the
       United States, or other source of indebtedness to the United States, but that is not owing
       under the terms of a contract originally entered into by only persons other than the United
       States.

28 U.S.C. § 3002(3)(A) and (B).

       Although "disgorgement" nowhere appears on this list, the defendants argue that

disgorgement should be considered a form of "restitution" or an "other source of indebtedness to the

United States."

        Despite some casual references in our caselaw to the contrary, see, for example, SEC v. Blatt,

583 F.2d 1325, 1335 (5th Cir.1978) (describing disgorgement order in one isolated phrase as "this

restitution"), disgorgement is not precisely restitution. Disgorgement wrests ill-gotten gains from the

hands of a wrongdoer. Commodities Futures Trading Comm'n v. American Metals Exchange Corp.,

991 F.2d 71, 76 (3rd Cir.1993); SEC v. Blatt, supra. It is an equitable remedy meant to prevent the

wrongdoer from enriching himself by his wrongs. Disgorgement does not ai m to compensate the

victims of the wrongful acts, as restitution does. SEC v. Commonwealth Chemical Securities, Inc.,

574 F.2d 90, 102 (2d Cir.1978). Thus, a disgorgement order might be for an amount more or less

than that required to make the victims whole. It is not restitution.

        A disgorgement order also does not seem to be an "other source of indebtedness to the

United States." Construction of this catch-all phrase turns on the meaning of "indebtedness," which

itself refers to "debt." We have not traditionally understood a disgorgement obligation to be "a mere

money judgment or debt" but rather more akin to "an injunction in the public interest." Pierce v.

Vision Investments Inc., 779 F.2d 302, 307 (5th Cir.1986). Although Pierce involved the question

whether contempt sanctions enforcing a disgorgement order constituted a debt, resolution of the case

turned on the nature of the disgorgement order itself. Because disgorgement is more like a

continuing injunction in the public interest than a debt, we held in Pierce that the disgorgement order

could be enforced by contempt sanctions. Nothing in the Debt Act disturbs this traditional

understanding of the nature of debt in relation to disgorgement. Therefore, disgorgement is not an
"other source of indebtedness to the United States."3

        In short, disgorgement is not a "debt" under the Debt Act. The defendants could not avail

themselves of state law exemptions under the Debt Act. This is not to say, however, that such

exemptions may never be taken into account by the court.

                                                   III

        The district court has broad discretion in fashioning the equitable remedy of a disgorgement

order. See American Metals Exchange, supra. It may decide that some property should be exempt

from such an order and may take state law as its guide. In this case, however, no such discretion was

exercised because the magistrate judge and district court erroneously concluded that the Debt Act

applied to disgorgement, requiring the exemption of certain assets. As a result, we must reverse and

remand so that the district court may reconsider its decision in light of the inapplicability of the Debt

Act to these disgorgement orders.

        Although the necessity for remand renders moot most of Stewart's factual challenges to the

magistrate judge's determination of his ability to pay, he raises one overriding issue that must still be

addressed. The magistrate judge took her cue for evaluating his ability to pay from an old Fifth

Circuit case that held an employer bound to prove "plainly and unmistakably" his inability to comply

with an FLSA injunction. Hodgson v. Hotard, 436 F.2d 1110, 1115 (5th Cir.1971), citing Arnold

v. Ben Kanowsky, Inc., 361 U.S. 388, 392, 80 S. Ct. 453, 456, 4 L. Ed. 2d 393 (1960). Stewart

concedes that he had the burden to prove inability to pay, but he disputes that this burden is greater

than the usual civil preponderance standard. We agree with Stewart. Hodgson does not erect a

more-than-preponderance standard that SEC advocates and the magistrate judge evidently employed.

In Hodgson, egregious facts led to strong language expressing the court's disbelief at Hotard's sudden

alleged penury. As the court emphasized, the sole evidence of Hotard's inability to pay was his

   3
     Defendants mention two other arguments why the Debt Act should apply to the SEC's
disgorgement order. First, they invoke ejusdem generis, asserting that "disgorgement" is
sufficiently like the other 16 types of debt listed in the Debt Act to be an "other source of
indebtedness." For the reasons detailed above, we disagree. Second, they would apply the
Bankruptcy Code's all-encompassing definition of debt. 11 U.S.C. §§ 101(5), 101(12). This is
silly; no reason is advanced to equate terms defined quite differently in different statutes.
unsubst antiated testimony that he had no money. The record suggested he had closed o bank
                                                                                     ut

accounts and t ransferred property to evade an order under the FLSA. The court reversed and

remanded, holding that Hotard must prove objectively his inability to pay; "plain and unmistakable"

proof simply meant more credible proof than had theretofore been presented. In the wake of

Hodgson, Stewart had to prove by a preponderance the extent to which he is unable to pay the

disgorgement order.4 The district court was not bound, however, to accept his unsubstantiated,

self-serving testimony as true.

       We leave to the trial court the decision whether on remand to re-open the evidence or to

re-evaluate it as to all four appellees in light of the thorough record already compiled.

       For the above reasons, the judgment of the district court is REVERSED and the case

REMANDED for further proceedings.

       REVERSED and REMANDED.

   4
     It does not disserve the SEC or other federal agencies to hold that a party bound by a consent
order implicating public rights must satisfy the court of his inability to pay by a preponderance of
the evidence. There is no statutory mandate for a higher burden of proof, and implying one from
the language in Hodgson verges on semantic gamesmanship. Hodgson 's careful description of
the types of evidence Hotard should adduce to prove inability to pay is far more useful to the
public than the vague, unusual call for plain and unmistakable proof.