Petition — Arizona Fuels Corp. v. United States

Supreme Court brief1981

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be 0 & ] § 0 6 Office-Supreme Cour

No. MAR 4 1981

———————

IN THE a

Supreme Court of the United States

OCTOBER TERM, 1980

ARIZONA FUELS CORPORATION

AND

EUGENE DALTON, PRESIDENT, Petitioners,

UNITED STATES OF AMERICA, Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE TEMPORARY EMERGENCY COURT OF

APPEALS OF THE UNITED STATES

ALAN S. NOVINS, ESQUIRE

Counsel of Record

MARTIN LOBEL, ESQUIRE ;

LEE ELLEN HELFRICH, ESQUIRE

LOBEL, Novins & LAMONT

1523 L Street, N.W., Suite 200

Washington, D.C. 20005

(202) 628-0066

LEROY S. AXLAND, ESQUIRE

SUITTER, AXLAND & ARMSTRONG

2150 Beneficial Life Tower

36 South State Street

Salt Lake City, Utah 84111

(801) 532-7300

Attorneys for Petitioners

a i nO EYE OO ERE | STARR IEEE

PRESS OF BYRON S. ADAMS PRINTING, INC., WASHINGTON, D.C.

FIL i]

QUESTIONS PRESENTED

1. Whether, in an enforcement action brought by

the United States seeking to enforce obligations requiring

defendants to pay money, a court can impose a statutory

civil penalty where the defendants were financially

unable to comply with the obligations being enforced?

2. Whether a court can sustain an agency decision

as supported by substantial evidence and impose a civil

penalty on the basis of facts that were not before nor

considered by the agency?

3. Whether, assuming that it can consider evidence

outside of the administrative record, a court can base its

decision and award of civil penalties on facts that did

not exist until after the dates of the violations being

enforced?

iil

TABLE OF CONTENTS

PAGE

Cree BROW ok in cs nde as cies beeen |

PORCTION «ons tincanseidsitieeen eee eee |

(JumerIons PRESENTED 4 6666 oi Salin cs en dese

SLATEMENT OF THE CAGE. o5so.0ckik sc Seen ss cee 2

REASONS FOR GRANTING THE WRIT .............e0000. 9

I. The Decision Below Presents An Important

Question On The Scope Of Permissable Use Of

Civil Penalties in Cases Brought To Enforce

Compliance With Administrative Regulations . . 9

II. The Courts Erred By Relying On Evidence Out-

side The Administrative Record In Order To

Hold That The Agency’s Decisions Were Sup-

ported By Substantial Evidence............... 15

III. The Decision Below Presents An Important

Question In The Area Of Enforcement Of The

Actions Of Administrative Agencies With

Regards To What, In Terms Of Administrative

Law And Relevancy, May Constitute An Ap-

propriate Evidentiary Basis For An Award Of

Civil Penalties: oo. cccscccsscaace eevee 18

ROCIO ois ee eee 0008 0s 0008s os 0ngeneeee 25

APPENDICES:

PPPENINIE Bona ov cess i000 940 60006800204 la

APPORGEK Do. cisccccssvessavencseceianwenn 7a

APPONGIN. © onic ciccescavesnsnssesavevudennee 9a

PRPC DD oki icckiccavcascines sesnqaeneeae lla

PPCRGIR Back cvciceccccviscicnstcéiameee lSa

ADPONGIR Fo csc ie ciescansecivesisseeteee 25a

PREVIOUS PAGE Was BLANK

TABLE OF AUTHORITIES

CASES: PAGE

Basin, Inc. v. Federal Energy Administration, 534 F.2d

324 (Temp. Em. Ct. App. 1976) cert. denied, 434

Coes ee REE ME vc dae tea SAAR eae ewe 17

Chrysler v. Dunlop, 490 F.2d 985 (Temp. Em. Ct. App.

eS e tne eye year rear ey) we 17

Continental Oil Co., 2 F.E.A. € 83,344 (Oct. 14, 1975) . 20

Federal Power Commission v. Transcontinental Gas

Pipeline Corp., 423 U.S. 326 (1976)............. 16, 18

Gulf States Utilities Co. vy. Federal Power Commission,

REE ie FT RNS ei ca ca an eek an Cebae ean 16, 18

International Shoe Machinery Corp. v. United States

Shoe Machinery Corp., 315 F.2d 449 (1st Cir.) cert.

FT o he Bee CE os nn ea ee saureseces 22

Jacob Siegal Co. v. Federal Trade Commission, 327 U.S.

UN cc es Cantcn cca tievede uae Ot es ead a eens 12

Lees v. United States, 150 U.S. 476 (1893)............. 10

Maggio v. Zeitz, 333 U.S. 58 (1947) ............. Zt Bi

N.L.R.B. v. Jones & Laughlin Steel Corp., 331 U.S. 416

thre. fo niin ee ere ee et oreo a ere ne 16

Pacific Coast Meat Jobbers Ass’n vy. Cost of Living

Council, 481 F.2d 1188 (Temp. Em. Ct. All. 1973).. 17

Pasco v. Federal Energy Administration, 525 F.2d 1391

CC a Serre rey ye Teer eer ay $9

Paul Hardeman, Inc. v. Arkansas Power & Light Co.,

380 F. Supp. 298 (E.D. Ark. 1974) ........ccceegs 22

Porter v. Warner Holding Co., 328 U.S. 395 (1945)..... 10

Shillitani v. United States, 384 U.S. 364 (1966) ....... 12, 13

Thomas v. American Cystoscope Makers, Inc., 414 F.

ee Ba AR | er ree ae 22

United States v. Ancorp National Services, Inc., 367 F.

Supp. 1221 (S.D.N.Y. 1973) aff’d, 516 F.2d 198 (2d

Cy PO Ve sarees se eae OE aa eee s 11

Table of Authorities Continued

CASES: PAGE

United States vy. Arizona Fuels Corp., Nos. 9-53, 9-54

(Temp. Em. Ct. App., Dec. 24, 1980) .......... passim

United States v. Arizona Fuels Corp., 9-53 (Temp. Em.

Ct. App., Feb. 2, 1981) (order denying Petition for

I Sn he ence l

United States v. Arizona Fuels Corp., No. CIV 77-689

PHX CAM (D. Ariz., March 25, 1980) (order) ..... we

United States v. Arizona Fuels Corp., No. CIV 77-689

PHX CAM (D. Ariz., June 26, 1980) (order)...... 8, 13

United States v. Arizona Fuels Corp., No. CIV 77-689

PHX CAM (D. Ariz., June 26, 1980) (judgment) .. 7, 8

United States vy. Arizona Fuels Corp., No. CIV 77-680

PHX CAM (D. Ariz., July 28, 1980) (order) ....... 8

United States v. Bledsoe, 531 F.2d 888 (8th cir. i 2

United States v. Boyd, 595 F.2d 120 (3d Cir. 1979) ..... 22

United States v. Bradley, 252 F. Supp. 804 (S.D. Tex.

ME Sater 2 es eae nr) mere Cube hae 10, 11

United States v. Carlo Bianchi & Co., 373 U.S. 709

DUN enna cs cane eee eh ete one tee 16

United States v. Garrett, 296 F. Supp. 1302 (N.D. Ga.

1968) aff'd 418 F.2d 1250 (Sth Cir. 1969) cert.

G@emied, 379 U.S. 927 CIGTO). occu cc lucuccccess li

United States v. Hess, 317 U.S. 537 (1942)............. 12

United States v. ITT Continental Baking Co., 420 U.S.

Rema Ronaia! Reheor tenor ceri anne 10, 11, 12, 20

United States v. James, 555 F.2d 992 (D.D.C. Cir. 1977) 22

Uinted States v. J.B. Williams Company, Inc., 354 F.

Supp. 521 (S.D.N.Y. 1973) rev’d in part on other

grounds, 498 F.2d 414 (2d Cir. 1974) ......., 11, 12, 14

United States v. Manafzadeh, 593 F.2d 81 (2d Cir.

co I ee eo eee dete al Ne 22

Table of Authorities Continued

CASES: PAGE

United States v. Newman, 331 F. Supp. 1240 (D. Hawaii

SFE oc sce secede saben sabe eee eee 11

United States v. Park, 421 U.S. 658 (1975) ............ 12

United States v. Swingline, Inc., 371 F. Supp. 37

Rs es Seas cncaacsbessscshinnculeeeel 10, 12

Wentz Heating & Air Conditioning Co. v. Federal

Energy Administration, 410 F. Supp. 1155 (D. 7

SN 6x6 cdk as hss be eee ee 11, 17

STATUTES AND REGULATIONS:

The Emergency Petroleum Allocation Act of 1973, 15

tk Cae SE | rer oto 14

The Emergency Petroleurn Allocation Act of 1973, 15

Se A. BIS CIP 6 skkoSs we ewewcnatees L, t& te

The Economic Stabilization Act of 1970, 12 U.S.C.

BOO CUI 66 honk 00050404 bese a Ree ee |

The Coal Mines Health and Safety Act, 30 U.S.C.A.

oe | Pee 10

DOE Mandatory Petroleum Allocation Regulations, 10

CPR, Serer CPOE vcs saw sccacducvasuneseeeeee a @

DOE Mandatory Petroleum Allocation Regulations, 10

oh Me RT, | pene he ne 15

MISCELLANEOUS:

Diver, The Assessment and Mitigation of Civil Money

Penalties by Federal Administrative Agencies, 79

* 2 eg), Pee eee 9, 10

Lawrence, Judicial Review of Variable Civil Money

Penalties, 46 U. Cinn. L. Rev. 373 (1977) .. 9, 10, 12, 14

H.R. Rep. No. 531, 93rd Cong., Ist Sess., reprinted in

[1973] U.S. Code Cong. & Admin. News 2582..... 2, 14

Fed. R. Evid. 404(b)

Brief of Appellee, United States v. Arizona Fuels Corp.,

No. 9-53 (Temp. Em. Ct. App., Dec. 24, 1980) .... 18

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

No. heme

ARIZONA FUELS CORPORATION

AND

EUGENE DALTON, PRESIDENT, Petitioners,

UNITED STATES OF AMERICA, Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

The petitioners Arizona Fuels Corporation and

Eugene Dalton respectfully request that a writ of

certiorari issue to review the judgment and the opinion

of the Temporary Emergency Court of Appeals entered

in this proceeding on December 24, 1980.

OPINIONS BELOW

The opinions of the Temporary Emergency Court of

Appeals and the United States District Court for the

District of Arizona, not yet reported, appear in the

Appendices hereto.

JURISDICTION

The judgment of the Temporary Emergency Court

of Appeals was entered on December 24, 1980. A timely

petition for rehearing was denied February 2, 1981, and

this petition for certiorari was filed within 30 days of

that date. This Court’s jurisdiction is invoked under 15

U.S.C.A. §754(a)(1) of the Emergency Petroleum

Allocation Act of 1973 which incorporates by reference

§211(g) of the Economic Stabilization Act of 1970, 12

U.S.C.A. §1904n.

STATEMENT OF THE CASE

The petitioner Arizona Fuels Corporation is a small

independent refinery operating out of Fredonia, Arizona.

It is a family-owned, closely held corporation admin-

istered by petitioner Dalton. Up until September, 1980,

AFC was certified to run approximately 3000 to 3500

barrels of crude oil per day.

In response to the dramatic increases in the price of

crude oil caused by the Arab oil embargo of 1973, the

government set up a regulatory program for the control

of prices for United States oil. Part of the regulatory

reform effort consisted of the entitlements program.

That program represented an attempt to equalize the

cost to refiners of controlled and uncontrolled oil. Under

it, refiners who run a greater percentage of controlled oil

than the national average are required to purchase

entitlements from those refiners who run a _ smaller

percentage of controlled oil.’

Because of the specific congressional intent to

preserve the competitive viability of small refiners,

several mechanisms were built into the program — like

the small refiner bias and the exceptions process — to

prevent undue hardships and gross inequity.’

Since August, 1975, petitioner AFC has_ been

considered a purchaser of entitlements under the

| 10 C.F.R. §211.67; Pasco v. FEA, 525 F.2d 1391, (Temp. Em.

Ct. App. 1975).

2>H.R. Rep. No. 531, 93rd Cong., Ist Sess., reprinted in [1973]

U.S. Code & Admin. News 2582, 2595-2596.

program. At present, AFC’s entitlement obligations

exceed $30 million.

On September 1, 1977, the government filed a

complaint in the U.S. District Court for the District of

Arizona alleging that AFC had failed to purchase a

substantial amount of its entitlements obligations arising

prior to July, 1977, and sought enforcement of those

obligations as well as entitlement obligations arising after

June, 1977. (R. 11-21).* AFC defended on the grounds

that the computation by OHA? of its entitlements

obligations, as modified through the exceptions process,

was erroneous as a matter of law and that, in any event,

payment of the obligations would require AFC to

Operate at a loss and would force it out of business. (R.

32).

On November 28, 1977, the petitioners filed papers

arguing that AFC was not financially able to comply

with the entitlements orders. (R. 36). Those papers

included an affidavit from AFC’s president, Dalton,

concluding that AFC ‘‘is absolutely unable to satisfy the

entitlements purchases demanded of it. . . .”’ (R. 40). On

March 6, 1978, petitioners submitted a further affidavit

from Dalton concluding that AFC ‘‘is and has been

throughout this proceeding financially unable to

purchase the entitlements. .. .’’ (R. 48).

*“OHA”’ is the Office of Hearings and Appeals of the

Department of Energy. The name of that Office went through

changes in the course of the period covered by this litigation. For

simplicity’s sake, we have referred to that office during the time

that it was called the Office of Exceptions and Appeals, and the

Office of Administrative Review, consistently as OHA throughout

this brief. Similarly, references to the Federal Energy

Administration, predecessor in interest of the Department of

Energy, and uniformly herein made to ‘‘DOE.”’

* Citations to ‘‘(R. )’’ are to the record on appeal before

the Temporary Emergency Court of Appeals.

On May 25, 1978, petitioners filed motion papers

requesting a hearing on financial impossibility. (R.

59-64). Supporting this motion, an affidavit of Douglas

D. Jeppson, an independent, certified public accountant,

(R. 65-85), was attached, accompanied by a detailed,

seventeen page, certified, audited financial analysis

which had been submitted to the Federal Energy

Administration and which concluded as of October 31,

1977 (AFC’s fiscal year-end) that:

a) With entitlements paid, AFC would have a

negative net worth of minus $347,551, (R. 71),

b) If the entitlements obligations were valid, AFC

would operate at a net loss (R. 73), and

c) If the entitlements obligations, including those

for the following year, were valid ‘‘the ability

of the Company to continue operation as a

going concern would be severely impaired.’’ (R.

80).

On June 8, 1978, petitioners served a notice calling

for the hearing on these matters to be set for July 20,

1978. (R. 86-87).

On June 8, 1978, the government moved to limit all

evidence at the hearing to the agency’s administrative

record. (R. 88-89). Petitioners opposed that motion,

citing the need for Dalton’s testimony as to impossibility

of payment. (R. 99-107). On July 10, 1978, the court

ruled that it would make its own _ subsequent

determination if any evidence other than the documents

considered by OHA was necessary. (R. 4 (7/10/78

minute entry). The district court has yet to make any

such determination.

On February 26, 1980, the government submitted its

own conclusion as to the petitioners’ ability to pay,

informing the district court that ‘‘the magnitude of their

entitlements obligations now exceeds the value of their

corporation.’’ (R. 174)

The district court ordered that a hearing be held on

April 3, 1980, on what would, in effect, be the issue of

AFC’s inability to pay its entitlements obligations. (R.

189-190). On March 28, 1980, defense counsel notified

the district court that AFC intended to submit financial

data at that hearing to demonstrate that AFC’s revenues,

after deductions for AFC’s expenses, would not leave

enough to pay the entitlements, and further would cover

evidence on what the district court described as ‘‘how’’

much money is now in the possession of the company

and of the individual... .’’ (R. 220). On March 31,

1980, however, the district court observed sua sponte

that counsel for the government had not had adequate

Opportunity to review discovery materials and ordered

that the April 3, 1980 hearing be vacated. (R. 300, 308,

312).

On May 3, 1980, petitioners took the deposition of

James J. Fenton, Program Manager of the Small Refiner

Branch of DOE and the government’s principal auditor

for this litigation. With respect to all the years at issue

here, Mr. Fenton deposed that payment of the

entitlements ordered by OHA would have required AFC

to operate at a loss in each year (1975, 1976, 1977, 1978,

1979, and 1980 to date), (R. 559-561), and that with

respect to the most substantial period of entitlement

obligations (November 1, 1977 to at least October 31,

1979 — no opinion having been reached as to 1980)

AFC simply did not have the financial resources to make

entitlements payments. (R. 557-558).

On May 6, 1980, a hearing was held in Phoenix.

Dalton °"d Quinn Stirland, AFC’s chief financial

officer, came down from Salt Lake City for the purpose

of providing testimony and other evidence on what

defense counsel described to the court as ‘‘the question

of Arizona Fuels’ contentions that it is financially

incapable of purchasing entitlements... .’’ (R. 332).

Counsel for the government objected to the conduct of

the evidentiary hearing prior to argument on a

government discovery sanction motion. (R. 333). The

court ordered petitioners to address the discovery issues

before presenting evidence on the impossibility issue. (R.

334).

On May 7, 1980, at the conclusion of the hearing on

the discovery issue, the court determined that it would

not at that time impose any of the sanctions requested

by the government. (R. 537). With respect to the

petitioners’ continuing request for an evidentiary hearing

on the net loss and impossibility issues, the court ruled

from the bench that ‘‘(a) hearing on the defendants’

claim of financial inability to pay the monthly

entitlements will be held upon the application of the

attorneys for the Government ...’’ after discovery is

completed. (R. 537-538). The court also ruled that

‘incidentally, at that hearing we will also entertain and

decide the other motions that are pending before the

court, the motions for summary judgment and so

forth.’’ (R. 541).

Petitioners also had submitted for consideration

copies of the audited financial statement of Arizona

Fuels for the 1978 fiscal year. (R. 670-689). That

statement showed that petitioners did not have the cash

available to purchase the entitlement obligations as they

accrued.

AFC’s 1978 fiscal year statement presented a picture

of a financially ‘roubled firm. (R. 670-689). In that year,

AFC’s entitlements liability exceeded $13 million (R.

674) but it had cash and unencumbered TCDs of only

$1,424,618. (R. 673, 680, 685). Not only did AFC again

show a _ negative working capital and _ negative

stockholders equity, but also it sustained a negative gross

profit of $481,819. (R. 676), which means it could not

have operated at a profit even if it had not paid its

overhead expenses, such as salaries and wages. Again,

the auditors issued a ‘‘going concern’’ qualification with

their statement. (R. 672).

In addition, the 1979 balance sheet showed that

AFC had total assets of only about $14 million (R. 745)

compared to obligations exceeding $24 million. (R. 325).

No hearings were held in the period from May 7,

1980, the date of the hearing referred to immediately

above, through June 26, 1980. On June 26, 1980, the

district court entered the judgment here appealed,

(Appendix C at 9a), requiring petitioners to pay all

entitlements at issue and imposing a civil penalty on both

petitioners in the amount of $1,000,000.

The district court characterized all of the monthly

entitlements obligai.ons as falling into one of two

exclusive classes: final orders, i.e. , those pre-July, 1977

OHA orders which were not eligible for review by the

Federal Energy Regulatory Commission, and ‘‘non-final

decisions,”’ i.e., those post-June, 1977 orders which were

eligible for review by the Federal Energy Regulatory

Commission and all of which, in fact, had _ been

submitted to that Commission by AFC for

administrative review. Appendix C at 9a; See also

Appendix A at 4a.‘

* FERC has not yet reached any determinations on the merits of

any of those appeals, which are docketed with the Commission as

Nos. RA79-4, RA79-22, and RA80-44.

The district court’s finding as to the final orders

was confined to a finding that OHA’s decisions were

supported by substantial evidence. Appendix A at 4a.

The district court expressed no explicit conclusions as to

issues Of law.

With respect to the final orders, the district court

entered judgment for payment in full of $941,432.00,

plus prejudgment interest of $325,459.74. (R. 584).°

The district court found that ‘‘[t]he record is replete

with evidence of defendants’ willful failure to pay its

entitlement obligations’’ (Appendix B at 7a), and

imposed a civil penalty of $1,000,000.00 on AFC and

Dalton. Appendix C at 9a. AFC objected, asserting that

there was no such evidence in the record. (R. 552-553).

The district court then amplified its findings, citing three

series of transactions aggregating approximately

$3,000,000 at any time (Appendix D at 12a), and

questioning certain AFC accounts held in nominee form

(/d.), all of which were, however, properly reported as

AFC accounts (R. 418-419). The district court found

that AFC had offered no evidence that the transactions

were ordinary and necessary expenses. (Appendix D at

12a).

On December 24, 1980, the Temporary Emergency

Court of Appeals issued a decision affirming in part and

reversing in part the district court’s June 26, 1980

judgment. United States vy. Arizona Fuels Corporation,

Nos. 9-53, 9-54 (Temp. Em. Ct. App., Dec 24, 1980)

* With respect to the non-final, or post-June, 1977, transactions,

the court ruled that all claims of the government on the merits of

these orders would be dismissed, but ordered that AFC and Dalton

make full and immediate payment on all the non-final orders.

These obligations, through February, 1980, total $24,120,198. (R.

325).

(Appendix E at 15a). Petitioners had appealed to the

Temporary Court of Appeals from those portions of the

district court’s judgment imposing civil penalties on

defendants, ordering defendants to pay the pre-July,

1977 entitlements obligations and ordering defendants to

comply with the entitlements program. Jd., No. 9-53.°

The court of appeals affirmed the district court stating

that petitioners had not met their burden of showing

impossibility, and finding that petitioners did have the

resources to purchase their pre-July, 1977 obligations.

Appendix E at 20a-23a.

REASONS FOR GRANTING THE WRIT

I. The Decision Below Presents An Important Question On

The Scope Of Permissable Use Of Civil Penalties In

Cases Brought To Enforce Compliance With

Administrative Regulations.

An increasing number of statutes establishing

regulatory programs provide for the imposition of civil

penalties against regulated individuals held to be in

violation of the pertinent laws and administrative

regulations. See generally, Lawrence, Judicial Review of

Variable Civil Money Penalties, 46 U. CInN. L. REv.

373 (1977); Diver, The Assessment and Mitigation of

Civil Money Penalties by Federal Administrative

Agencies, 79 Cort. L. Rev. 1435 (1979). In fact, as of

1979, there existed 348 statutory civil penalties that could

be imposed by federal agencies. Diver, supra at 1438.

* The government had appealed from that portion of the district

court’s opinion that had dismissed as nonfinal the obligations

arising after July, 1977. United States v. Arizona Fuels

Corporation, No. 9-54 (Temp. Em. Ct. App., Dec. 24, 1980). The

court of appeals reversed that portion of the opinion and remanded

it for reconsideration by the lower court.

Because the civil penalty sanction has proved to be a

simpler, more effective technique of enforcement, it

‘‘has assumed a place of paramount importance in the

compliance arsenal of federal regulations.’’ Jd. at 1436.

In 1977 alone, $52,000,000 was collected by the federal

government through the imposition of civil fines. Jd. at

1445.

In most situations, the agency must invoke the

jurisdiction of the district court in order to collect civil

fines. Jd. at 1439. As this Court stated as early as 1893

‘‘(f]rom the earliest history of the government the

jurisdiction over actions to recover penalties and

forfeitures has been placed in the District Court.’’ Lees

v. United States, 150 U.S. 476, 478 (1893). It is generally

accepted that the defendant in an _ enforcement

proceeding may present the court with evidence to

mitigate the penalty. See, e.g., United States v.

Swingline, Inc., 371 F. Supp. 37 (E.D.N.Y. 1974);

United States v. Bradley, 252 F. Supp. 804 (S.D. Tex.

1966). Some statutes detail the considerations which

should be considered in determining the amount and

mitigation of the civil penalty. See. e.g. The Coal Mines

Health and Safety Act, 30 U.S.C. §820(i) (Supp. 1980).

Yet, in most situations, detailed factors for mitigation

are not provided (Diver, supra at 1443), and thus, it is

left to the district courts to determine what facts are

relevant to a defense against imposition of a fine. See,

e.g., United States v. ITT Continental Baking Co., 420

U.S. 223, 229n.6 (1975); Porter v. Warner Holding Co.,

328 U.S. 395 (1945).

The case law on awards of civil penalties does not

evidence a uniform approach to the defenses available to

civil penalty sanctions. See generally, Lawrence, Judicial

Review of Variable Civil Money Penalties, 46 U. CINN.

L. Rev. 373 (1977). Thus, civil penalties have been

denied or mitigated in various cases because the violation

was not flagrant (United States v. Garrett, 296 F. Supp.

1302 (N.D.Ga. 1968) aff’d, 418 F.2d 1250 (Sth Cir.

1969) cert. denied, 399 U.S. 927 (1970)), because a

penalty would serve no purpose (Wentz Heating & Air

Conditioning Co. v. Federal Energy Administration, 410

F. Supp. 1155 (D. Neb. 1976)), because the violation did

not result in any actual injury (United States v.

Newman, 331 F. Supp. 1240 (D. Hawaii 1971), and

because the lawsuit had been friendly. United States v.

Bradley, 252 F. Supp. 804 (S.D. Tex. 1966). In other

cases, the courts have balanced several factors such as

the public interest, the inability of the defendant to

comply, and the defendant’s good or bad faith. United

States v. J.B. William Company, Inc. 354 F. Supp. 521,

548 (S.D.N.Y. 1973) rev’d in part on other grounds, 498

F.2d 414 (2d Cir 1974). See also United States v.

Ancorp National Services, Inc., 367 F. Supp. 1221

(S.D.N.Y. 1973) aff'd, 516 F.2d 198 (2d Cir. 1974).

Although the actual assessment of an award of civil

penalties has been held to a be a matter of judicial

discretion (United States v. ITT Continental Baking Co.,

420 U.S. 223, 229n.6 (1975)), the above cases indicate

that guidance is needed as to what factors are relevant to

an exercise of that discretion and what defenses are

available to the defendant. The importance of this issue

is underscored by the increased use of the civil penalty

by agencies in enforcement proceedings.

The instant case presents the narrow question of

whether impossibility of compliance can constitute an

affirmative defense to the imposition of an award of

civil penalties. Yet, although the case involves the

assertion of only one defense, the uniqueness of that

defense in relation to the facts presented by the instant

case will enable the Court to use this case as a vehicle

for development of the policy justifications and

guidelines for the lower courts to use as a basis for

determining what factors are relevant to mitigation or

denial of an award of civil penalties.

In other areas involving the exercise of discretion,

this Court has held that the inquiry should focus on the

purposes to be served by the sanction or remedy in

question. See e.g., Shillitani v. United States, 384 U.S.

364 (1966); Maggio v. Zeitz, 333 U.S. 58 (1947); Jacob

Siegal Co. v. Federal Trade Commission, 327 U.S. 608

(1946). See also generally, Lawrence, Judicial Review of

Variable Civil Money Penalties, 46 U. CInN. L. REv.

373 (1977). The cases in which such an inquiry has been

made have often dealt with the claim of impossibility of

compliance. See, Shillitani, supra; Maggio, supra; United

States v. Park, 421 U.S. 658 (1975). Thus, for example,

in United States v. Park, the Court recognized the

availability of the defense of objective impossibility in

the case of the alleged violation of an act providing for

criminal fines and imposing ‘‘the highest standard of

care’ upon the regulated parties.

The purpose underlying an award of civil penalties

is to inspire compliance and to deter or prevent future

violations of the law and regulations in question. United

States v. ITT Continental Baking Co., 420 U.S. 223,

229n.6 (1975); United States v. Hess, 317 U.S. 537, 549

(1942). Thus, civil penalties are remedial and coercive in

nature rather than punitive. Because of these justi-

fications, civil fines are analogous in effect to civil

contempt sanctions.’

See, United States v. Swingline, 371 F. Supp. 37 (E.D.N.Y.

1974); United States v. J.B. Williams Company, Inc., 354 F. Supp.

521, 530 (S.D.N.Y. 1973) rev’d in part on other grounds, 498 F.2d

414 (2d Cir. 1974),

In cases involving civil contempt, it is traditionally

and uniformly held that inability to comply constitutes a

complete defense. Shillitani v. United States, 384 U.S.

364, 368, 371 (1966); Maggio v. Zeitz, 333 U.S. 58, 72

(1977). The rationale behind permitting such a defense is

that if the contemnor lacks the ability to comply with a

court order, neither the coercive or deterrence purposes

will be served by imposition of the sanction. Shillitani,

supra at 371. Rather, to hold a party in civil contempt,

despite his inability to comply, would be to use the

contempt power as a mechanism of punishment.

Maggio, supra, at 72.

In the instant case, the civil penalty statute does not

provide factors for the court to consider in mitigation of

a penalty. 15 U.S.C. §754(a)(3)(A). The district court,

after finding that defendants had violated DOE

regulations, imposed a $1 million civil penalty. Although

the district court did not detail the factors it considered

in making this award, it stated that ‘‘{t]he record is

replete with evidence of [defendants’] willfull failure to

pay entitlement obligations.’ Appendix B at 7a. In that

order, the court did not refer to or apparently consider

the defendants’ contentions that they were financially

unable to comply — a contention that, as the Statement

of the Case indicates, was repeatedly brought to the

attention of the court — despite the fact that the court

had before it petitioners audited financial statements

which clearly indicated their incapacity to comply.*

* In a later order by the court, issued upon petitioners motion to

stay the June 26 order, the court referred to petitioners’ assertion

that they were financially unable to comply. Appendix D at 12a.

The court stated that petitioners had failed to show inability. Jd.

Yet, this assertion is belied by the fact that the court had before it

all of petitioners financial statements and other evidence in the

form of affidavits. In other cases, the district courts have not

The award of civil penalties in the instant case will

not serve a coercive or deterrent function, or the pur-

poses underlying the Emergency Petroleum Allocation

Act of 1973. The imposition of the award, in fact,

makes it more difficult, if not impossible, for the

defendants to comply with their outstanding obligations

— those initially held to be non-final by the district

court. At the time of the district court decision,

petitioners’ entitlements exceeded $24 million. (R. 325).

Yet their total assets were only $14 million. (R. 746).

Thus, imposition of the fine in the instant case is

punitive in nature.

Because of the increasing importance of the civil

penalty in enforcement actions, the need for definitive

guidelines, and the peculiarly inequitable result in the

instant case, this Court should grant this petition for

review.

required more than such evidence from petitioners seeking to

mitigate a civil penalty on the basis of financial inability. See, e.g.,

United States v. J.B. Williams Company, Inc., 354 F. Supp. 521,

548 (S.D.N.Y. 1973) rev’d in part on other grounds, 498 F.2d 414

(2d Cir. 1974).

°> 15 U.S.C.A. §751 et. seg. (1976) At least one author has

asserted that if the court is going to consider the purposes behind

the legislation allegedly violated in making an award of civil

penalties, the court should look at the entire framework and

objectives of the enactment, rather than focusing on a single

Objective. Lawrence, Judicial Review of Variable Civil Money

Penalties, 46 U. CINnN. L. REv. 373, 407 (1977). In this regard it

should be noted that it was Congress’ express intent that the

regulations adopted to enforce the Emergency Petroleum Allocation

Act should be administered in a manner so as not to destroy the

competitive viability of small, independent refiners. H.R. Rep. No.

531, 93d Cong., Ist Sess., reprinted in, [1973] U.S. CopE ConG. &

ADMIN. News 2582, 2595-2596.

Il. The Courts Erred By Relying On Evidence Outside The

Administrative Record In Order To Hold That The

Agency’s Decisions Were Supported By Substantial

Evidence.

A second factor in the instant case which supports

the Court’s granting petitioners’ request for a writ of

certiorari is the fact that the courts below exceeded the

scope of judicial review by relying on evidence outside

the administrative record in order to find the agency’s

decisions supported by substantial evidence.

As indicated in the Statement of the Case, the

instant case involved a single suit by the government in

which it sought enforcement of the agency’s entitlement

obligation orders. Thus, in effect, the case involved

several different orders and _ different agency

determinations. The district court held that the pre-July,

1977 obligations were final orders and granted summary

judgment for the government on the issue of whether the

agency’s denials of exception relief as to those

obligations was supported by substantial evidence.

Under the administrative procedures, the agency

issues a monthly notice of each refiner’s entitlement

obligation. 10 C.F.R. §211.67; Pasco, Inc. v. Federal

Energy Administration, 525 F.2d 1391 (Temp. Em. Ct.

App. 1975). The agency’s computation is based upon

information submitted by each refiner concerning its

crude oil runs to stills and other information about the

business. Jd. An opportunity was afforded by Congress

and the agency for refiners to apply for exceptions relief

if payment of their obligations would cause substantial

hardship or gross inequity. 10 C.F.R. §205.50. In order

to apply for such relief, refiners must submit financial

projections for the period in which the entitlements

obligation will impact refinery operations. Jd. OHA’s

grant or denial of exceptions relief is confined to

findings of fact based upon the above information.

Under the substantial evidence standard of review, a

court reviews the record as it existed at the time of the

agency decision in order to determine if a reasonable

factual base exists for the agency action. Federal Power

Commission v. Transcontinental Gas Pipeline Corp., 432

U.S. 326 (1976); N.L.R.B. v. Jones & Laughlin Steel

Corp., 331 U.S. 416, 422 (1946). (‘‘. . . unless the order

was valid when it was issued, there is no basis whatever

for it and no court can decree its enforcement in the

future’). In other words, naterial reluting to events

subsequent to the agency decision are not considered by

a court because they were not in the agency’s record,

and thus, played no part in the agency’s decision.

... [the substantial evidence] standard goes to the

reasonableness of what the agency did on the basis

of the evidence before it, for a decision may be

supported by substantial evidence even though it

could be refuted by other evidence that was not

presented to the decision-making body.

United States v. Carlo Bianchi & Co. 373 U.S. 709, 715

(1963). The converse of the above is equally true in that

a court cannot sustain an agency decision on the basis of

evidence outside of the administrative record or on

grounds not relied upon by the agency. A court may not

‘supply an alternative, unstated ground to support an

agency’s decision if that ground is one that ‘the agency

alone is authorized to make.’ ’’ Gulf States Utilities Co.

v. Federal Power Commission, 411 U.S. 747, 764 (1973).

The above propositions are equally true in relation

to cases arising under the Emergency Petroleum

Allocation Act of 1973. Section 5(a)(1) of the Act

provides that judicial review of the agency’s orders will

be confined to a determination on whether its action is

in excess of agency authority, or based upon findings

that are not supported by substantial evidence. 15

U.S.C. §754. See also, Basin, Inc. v. Federal Energy

Administration, 534 F.2d 324 (Temp. Em. Ct. App.

1976) cert. denied, 434 U.S. 821 (1977); Chrysler v.

Dunlop, 490 F.2d 985, 988 (Temp. Em. Ct. App. 1973);

Pacific Coast Meat Jobbers Ass’n v. Cost of Living

Council, 481 F.2d 1188 (Temp. Em. Ct. App. 1973);

Wentz Heating & Air Conditioning Co., 410 F. Supp.

1155, 1157 (D. Neb. 1976) (review of enforcement

proceeding). Therefore, in the instant case, the courts

could legitimately review only those facts that existed at

the times in 1977 and before that the defendants applied

for exception relief.

In affirming the district court decision, the

Temporary Emergency Court of Appeals found that

‘‘, .. the company could easily have paid these (pre-

July, 1977) obligations.’’ Appendix E at 22a. In support

the court of appeals stated:

The cause of Arizona Fuels’ financial condition is

not the entitlements program, from which

defendants profited, but is defendant Dalton’s

draining away from Arizona Fuels of its financial

resources.

Id. Earlier, in its opinion, the court of appeals made a

specific reference to the actions of petitioner Dalton

which it felt necessitated affirmance of the agency’s

actions.

...([T]he record indicates that they [petitioners]

could easily have complied at least with the ‘‘final’’

entitlement obligations due for the period August

1975 to July 1977. The sum of over $2.5 million

which Arizona Fuels lent to Dalton and which

Dalton used to purchase a cattle ranch for himself

would easily have covered Arizona Fuels’

entitlement obligations for this period.

Id. at 21a. Yet, the transaction referred to by the court

of appeals did not occur until long after July, 1977. (R.

757-758). In fact, the funds and expenditures recited in

the government’s reply brief to the court of appeals

related to time periods subsequent to July, 1977. Brief of

Appellee at 2-7, United States v. Arizona Fuels Corp;

No. 9-53, (Temp. Em. Ct. App. Dec. 24, 1980).

Even assuming the validity of the court’s rationale,

the loan to defendant Dalton and the transactions relied

on by the government on appeal could not have formed

the basis for OHA’s denial of exceptions relief for

defendants’ pre-July, 1977 entitlement obligations. The

court of appeal’s reliance on the loan, therefore, was

beyond the permissible scope of judicial review of agency

actions in that it relied on evidence outside of the

administrative record, (Federal Power Commission v.

Transcontinental Gas Pipeline Corp., 423 U.S. 326

(1976)), and justified actions on grounds not relied upon

by the agency. Gulf States Utilities Co. v. Federal Power

Commission, 411 U.S. 747 (1973).

The court of appeals’ decision is in direct disregard

of and in conflict with the decisions of this Court, thus

necessitating a review and remand.

Ill. The Decision Below Presents An Important Question In

The Area Of Enforcement Of The Actions Of

Administrative Agencies With Regards To What, In

Terms Of Administrative Law And Relevancy, May

Constitute An Appropriate Evidentiary Basis For An

Award Of Civil Penalties.

In its decision, the Temporary Emergency Court of

Appeals upheld the district court’s imposition of a $1

million penalty for petitioners’ failure to purchase their

pre-July, 1977 entitlement obligations. Appendix E at

20a-2la, 23a. The court of appeals affirmed the district

court’s finding of willfulness and further stated that

petitioners had the financial resources to ‘‘easily’’

comply with ‘‘at least with the ‘final’ entitlement

obligations due for the period August 1975 to July

1977.” Id. at 21a. In support of its latter finding, the

court referred to the sum which Arizona Fuels had

loaned to petitioner Dalton. Jd.

As was discussed in the previous section, the

transaction relied upon by the court of appeals occurred

long after the pre-July, 1977 entitlement obligations

became final. The questions arise as to whether it is

appropriate for a court to base a civil penalty award on

evidence concerning a party which is remote in time

from the violation that constitutes the justification for

the award, and, if use of such evidence is permissible,

can a court justify imposition of a fine on the basis of

an isolated transaction without reviewing all of the

party’s actions and financial resources from the time of

the violation to the time of suit, including the party’s

present ability to comply.

With regards to the first question, it should be

noted at the outset that, in the instant case, the court of

appeals held that entitlement obligations are ‘‘payable at

the end of each month in which they were published by

the Department in the Federal Register.’’ Appendix E at

20a. If this requirement is not met, therefore, the refiner

is in violation of the agency’s regulations. The refiner,

under the regulations, may appeal or seek adjustment of

the published obligation, but such a recourse under the

court of appeals’ decision apparently would not absolve

or negate the violation if the refiner does not purchase

its obligations within the regulatory period. In fact, the

agency’s traditional practice had been to provide the

adjustments granted through the exceptions or appeals

process prospectively. See e.g., Continental Oil Co., 2

FEA § 83,344 (Oct. 14, 1975). Although the agency’s

exceptions and appeals process may eventually produce

an equitable adjustment for the particular refiner, under

the court of appeals decision a ref*cr would still be in

violation of agency regulations if it fa.led to purchase its

entitlements within the regulatory period even if it did

not have the financia! resources in the particular month

to absorb the expense. Therefore, it would appear that

inability to comply, though relevant to an adjustment in

the future, would not be considered a defense to the

initial violation of the refiner’s failure to purchase its

entitlements obligation upon publication by the agency.

The refiner’s failure to purchase its entitlements

within the month of publication constitutes the violation

upon which an award of civil penalties is based.

Although a refiner’s inability to comply on the date the

obligation is due would not excuse the violation, it is

pertinent to the necessity for a civil penalty sanction.

As discussed more fully above, the justifications for

an award of civil penalties are to coerce compliance and

to deter future violations. See discussion, supra pp

12-13. The necessity for a fine has been held to be a

matter of judicial discretion, (United States v. ITT

Continental Baking Co., 420 U.S. 223, 229n.6 (1975)),

and necessarily is equitable in nature. To base an award

of civil penalties on evidence of the party’s conduct or

condition months or years subsequent to the time of the

violation, as was done in the instant case, ignores the

crucial questions as to why the violation occurred, will it

serve the purpose of coercing future compliance, and will

it deter similar violations.

If a refiner is financially unable to purchase its

obligations when due, the fact that it subsequently may

obtain the ability, cannot be said to negate the fact that

at the time of the violation, the refiner did not have the

resources to comply. Thus, to justify an award of civil

penalties on the grounds of a later acquisition of

resources will not serve to coerce or deter future similar

violations. Under the regulatory format, if in the future,

a refiner again lacks the financial ability to purchase its

entitlements when due, it will risk a violation despite the

past impositions of civil fines.

Therefore, in the instant case, the court of appeals’

use of evidence relating to a transaction which occurred

long after the administrative violations in issue was to

base the civil penalty award on factors irrelevant and

remote to the scope of the violations and the

justifications for imposition of such a fine. Business

relationships and financial health, especially today, are

constantly in flux. The defendants’ financial posture

prior to July, 1977 differs from that presented in

subsequent years. The fact that petitioners allegedly had

funds available in 1978 or 1979 does not mean or make

it more probable that those funds were available and,

therefore, the petitioners were financially able to comply

when the pre-July, 1977 entitlement obligations became

due. Each financial period presents a different financial

picture containing different costs, expenditures,

Operations, business judgments and_ entitlement

obligations. In effect, what the court of appeals did in

the instant case was to use a source of funds allegedly

available in a later period in order to establish the fact

of petitioners’ financial ability to comply in a prior

period.

In analogous situations, the courts have held that

evidence of like subsequent situations were irrelevant and

remote to the prior conduct which formed the basis of

the suit. The issue is characterized as a matter of

relevance. One factor in determining the relevance of

evidence to a particular issue is the remoteness of the

event or information to the circumstances involved in the

particular issue being litigated. See, e.g., International

Shoe Machinery Corp. v. United States Shoe Machinery

Corp., 315 F.2d 449 (1st Cir.) cert. denied, 375 U.S. 820

(1963). Thus, for example, the costs incurred by a

second contractor in completing a construction could not

be used to project the costs of the first contractor

because of changed conditions and circumstances. See,

Paul Hardeman, Inc. v. Arkansas Power & Light Co.,

38 F. Supp. 298, 315-316 (E.C.Ark. 1974). And, it has

been held that in assessing punitive damages, evidence of

the defendant’s conduct subsequent to the time of injury

is irrelevant. Thomas v. American Cystoscope Makers,

Inc., 414 F. Supp. 255, 265 (E.D.Pa. 1976).

In addition, the action of the Temporary Emergency

Court of Appeals is analogous to those cases that have

arisen under Fed. R. Evid. 404(b). It is generally held

under that rule that evidence of subsequent events

unrelated to the act in issue cannot be used in order to

prove the existence of that act. See, e.g., United States

v. Boyd, 595 F.2d 120 (3rd Cir. 1978); United States v.

Bledsoe, 531 F.2d 888 (8th Cir. 1976); United States v.

James, 555 F.2d 992 (D.C. Cir. 1977); United States v.

Manafzadeh, 592 F.2d 81 (2d Cir. 1979).

There appears to be no rational reason to treat the

permissible evidence in an enforcement action seeking

civil penalties in a different manner, especially in a

situation where use of such evidence would not be

consistent with the purposes and policies underlying an

award of civil fines.

To find that the expenditures and allegedly available

funds in 1978 and 1979 prove petitioners’ ability to have

complied in 1977 is prejudicial to petitioners’. Certainly,

if those funds were available to petitioners, they could

have covered the pre-July, 1977 obligations. Yet, at the

time of the loan to petitioner Dalton was made,

petitioners had accrued entitlement obligations

amounting to several million dollars over that loaned to

petitioner Dalton and, in fact, more than the actual

worth of the corporation if liquidated. Therefore, the

court of appeals based its decision on a sum of money

that not only did not exist during the pertinent time but

also would not have satisfied even one-half of the

obligation imposed by the agency at the time the

expenditure was made.

Assuming that the court did not err in basing its

decision on the loan to petitioner Dalton, the question

arises as to whether a court can justify imposition of a

civil fine on the basis of an isolated transaction without

reviewing all of the party’s actions and financial

resources from the time of violation to the time of suit,

including the party’s present ability to comply.

As mentioned previously, actions seeking civil

penalties are analogous to proceedings for civil

contempt. See discusion, supra, pp. 12-13. With regards

to civil contempt proceedings, this Court has held that

the courts must examine all of the evidence of events

occurring subsequent to the violated order, and place

particular emphasis on the contemnor’s present ability to

comply. Maggio v. Zeitz, 333 U.S. 59, 76 (1947). Thus,

even if prior events showed that a party could have

complied, if at the time of the contempt charge he had

lost that ability, a judgment of civil contempt should not

be issued. /d. at 75-77. The rationale underlying this

proposition rests upon the fact that to hold one in civil

contempt who lacks the present ability to comply would

be to inflict punishment upon the alleged contemnor,

and, therefore, be contrary to the policies underlying the

civil remedy. Jd. at 72.

In the instant case, the court of appeals justified the

award of civil penalties on the basis of isolated

transactions which occurred more than a year after the

violation in question. There is no indication in the

court’s opinion that a review of all of petitioners

financial affairs and resources from the time of the

violation to the time of the district court judgment was

conducted. In fact, if such a review had been conducted,

it would have shown that at the time of judgment, the

petitioners entitlement obligations exceeded $24 million

dollars (R. 325) whereas their total assets were only $14

million. (R. 746) At the end of 1979, the petitioners had

little in cash and unencumbered TCD’s and showed a

negative stockholders equity (R at 746). Instead of

weighing these facts, the court merely recited the loan to

Dalton as justification for the civil fine. Such a result is

prejudicial to petitioners, and uses the civil penalty as a

mechanism of punishment.'°

‘° The court of appeals also stated that petitioners had not met

their burden to show financial inability, and that their assertion

that a hearing should have been held ‘‘ill suits them in light of their

consistent failure to present substantial evidence of impossibility of

compliance, despite numerous opportunities.’’ Appendix B at 21a.

Yet, as is indicated in the Statement of the Case, petitioners had

repeatedly expressed their desire and preparedness to have an

evidentiary hearing but their opportunity to do so was repeatedly

delayed due to motions by the government and sue sponte rulings

of the district court. In addition, all of petitioners’ financial

statements and some affidavits concerning their financial condition,

as is briefly depicted above, were contained in the record of the

district court.

The above discussion indicates both the evidentiary

problems confronted in an enforcement proceeding

seeking civil penalties, and the appropriateness of the

instant case as a vehicle for this Court’s review of the

question.

CONCLUSION

For the above stated reasons, a writ of certiorari

should issue to review the judgment and opinion of the

Temporary Emergency Court of Appeals.

Respectfully submitted

/S/ ALAN S. Novins

Alan S. Novins

/S/ MARTIN LOBEL

Martin Lobel

LoBEL, Novins & LAMONT

1523 L Street, N.W., Suite

200

Washington, D.C. 20005

(202) 628-0066

LEROY S. AXLAND, ESQUIRE

SUITTER, AXLAND &

ARMSTRONG

2156 Beneficial Life Tower

36 South State Street

Salt Lake City, Utah 84111

(801) 532-7300

Attorneys for Arizona Fuels

APPENDIX

APPENDIX A

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

No. CIV 77-689 PHX CAM

UNITED STATES OF AMERICA, Plaintiff,

ARIZONA FUELS CORPORATION, and EUGENE DALTON,

President, Defendants.

Order

(Filed March 25, 1980)

The above entitled and numbered cause of action was

filed on September 1, 1977.

Upon application and hearing held September 26, 1977,

this Court entered an Order, filed September 27, 1977,

ordering Defendants Arizona Fuels and Eugene Dalton to

comply with the Old Oil Entitlements Program as set forth in

10 C.F.R. §211.67 and, in essence, not to waste the assets of

the corporation.

Upon application and hearing held November 29, 1977,

the Temporary Restraining Order filed September 27, 1977,

was continued in effect.

On February 9, 1978, an Order to Show Cause was

entered, requiring Defendants to appear and show cause why

they should not be held in contempt for failure to comply

with the Court’s Orders of September 27, 1977, and

November 29, 1977. After complete briefing by the parties, a

hearing was held on the matter. At the hearing, held March 6,

1978, the Court heard the arguments of the parties and was

available to hear any arguments or evidence presented by

Defendants. By Order of April 13, 1978, the Court ruled that

Defendants had not shown good cause why they should not

be required to comply with the prior Orders of the Court. The

Court also held that it was Defendants’ burden to show that

they could not comply with the Court’s Orders and stated that

any such showing ‘‘should include the production of

defendants’ books at any future hearings on this matter to

substantiate the claim, and the appearance of defendant to

take the stand and testify under oath, as well as any other

testimony or other evidence that defendant deems

appropriate.”’

On July 20, 1978, the Court heard oral argument on

Defendants’ Motion for Reconsideration and Motion for

Stay, both filed May 25, 1978, in which Defendants sought

reconsideration and stay of the Court’s April, 1978, Order.

After consideration of the evidence, arguments and authorities

presented, the Court ordered, by way of written Order entered

July 20, 1978, that: Defendants establish an escrow account

within 5 days of entry cf the written Order and to provide the

Court with documentary proof of the account; purchase,

through the Department of Energy (DOE), entitlements in the

amount of $444,290.98, within 10 days of entry of the Order,

said amount being the sum of all funds received from an

interpleader proceeding in the United States District Court for

the District of Utah; and, inter alia, comply with the

entitlements purchase requirements of 10 C.F.R. §211.67. The

Court also provided that ‘‘[s]hould defendants fail to comply

with this Order, a Bench Warrant shall issue forthwith for the

President of Arizona Fuels Corporation, Eugene Dalton.’’

To date, the only sums paid by Arizona Fuels toward the

purchase of entitlements, since institution of this lawsuit, are

the funds noted above, Defendants have made no appropriate

effort, in accordance with the Court’s Orders, to convince the

Court that they are unable to comply with the Court’s Orders.

There has been no evidence presented from which the Court

could find that a good faith effort to comply with the Court’s

Orders has been made by Defendants. At no time have the

Defendants sought a stay from DOE as provided by 10

C.F.R. §205.120, et seq.

At the July 20, 1978, hearing, the Court entered an Order

from the bench requiring the parties to submit cross-motions

for summary judgment. In response to that Order,

Defendants submitted ‘‘Defendants’ Memorandum Submitted

Pursuant to This Court’s Order of July 20, 1978’’, said

Memorandum being filed September 1, 1978. In essense, the

memorandum stated that the presence of genuine issues of

material fact precluded Defendants from filing a motion for

summary judgment and that discovery needed to be had

before such a motion could be filed. Plaintiff filed its cross-

motion for summary judgment on September 11, 1978. In

response to Plaintiff’s cross-motion for summary judgment,

Defendants filed, on September 21, 1978, a motion to dismiss

certain of Plaintiff’s claims or, in the alternative, for a stay,

and a memorandum in opposition to Plaintiff’s motion for

summary judgment.

Oral argument on the motions was heard on October 30,

1978, and the matters were taken under advisement. The

parties submitted supplemental information and briefs with

the last submission being filed on March 5, 1979. In June

1979, this matter was inadvertently transferred to the

Honorable Valdemar A. Cordova upon his installation as

United States District Judge for the District of Arizona. On

February 11, 1980, the matter was transferred back to this

Court for resolution of matters that had been previously

argued.

On the 29th of February, 1980, upon application of

Plaintiff, the Court entered an Order to Show Cause,

directing Defendants to appear and show cause why they

should not be held in contempt for failure to comply with the

Court’s Orders of September 27, 1977; November 29, 1977:

April 13, 1978; and July 20, 1978. Memoranda were filed,

including Defendants’ motion to dismiss non-final

administrative actions. The matter was duly heard on March

17, 1980.

The Court’s Order of April 13, 1978, set forth the

showing that Defendants need undertake to show why they

should not be held in contempt for failure to comply with the

Court’s prior Orders. Defendants have made no attempt to

produce competent evidence of their inability to comply with

the Old Oil Entitlements Program. Instead, Defendants argue

that they have complied with the Court’s Orders by seeking

exception relief, as provided by 10 C.F.R. §205.50, ef seq.

This argument, considered in light of Defendants’ failure to

seek a stay of application of the Secretary’s orders in

accordance with 10 C.F.R. §205.120, et seq., carries no

weight.

Defendants have failed to bring forth any evidence that

could be construed to show that a reasonable effort has been

made to comply with the entitlements program.

Furthermore, the Court, having reviewed and considered

the pleadings, regarding Plaintiff’s cross-motion for summary

judgment filed September 11, 1978, and the related pleadings

filed by both parties, including Defendants’ motion to dismiss

or for stay, the transcript of hearing held with respect to said

motions, the administrative record submitted with said

motions, and the authorities cited by the parties, finds that

the record reflects that the appeals decisions upholding the

Department’s denial of exception relief to Defendants are

supported by substantial evidence.

In light of the foregoing,

Ir Is OrpereED that Plaintiff's Cross-Motion for

Summary Judgment, filed September 11, 1978, is granted with

respect to all entitlements obligations incurred prior to July,

1977, for the reasons that the decisions are supported by

substantial evidence and for failure to comply with Orders of

this Court. Rules 55(b)(2) & 56, Fed. R. Civ. P.

The Complaint is dismissed with respect to all non-final

decisions of the Department of Energy from which appeals

have been taken;

The Court’s prior Orders remain in effect with respect to

Defendants’ obligation to purchase entitlements, and dismissal

of the Complaint with respect to non-final agency actions

shall not prevent the Plaintiff from seeking enforcement of

prior Orders of this Court.

IT Is FURTHER ORDERED that Eugene Dalton and Arizona

Fuels Corporation, Defendants in this action, are found to be

in contempt of this Court’s Orders entered September 27,

1977; November 29, 1977; April 13, 1978; and July 20, 1978;

and shall be fined $1,000.00 per day each, until such time as

they show compliance with the Orders of this Court, or

produce evidence of their inability to comply with the Court’s

Orders. Said evidence shall include, at a minimum, the books

and records of Defendant Arizona Fuels Corporation and the

personal books and records of Eugene Dalton, and shall

further include the testimony of Eugene Dalton and any other

persons necessary to establish the validity of the records and

books produced. Said fines shall run from a date one week

(seven days) after entry of this Order.

IT Is FURTHER ORDERED that a Bench Warrant shall issue

the Eugene Dalton seven days after entry of this Order. He

shall remain incarcerated until such time as either (1)

compliance with the prior Orders of this Court has been

proved to the Court or, (2) Defendants have shown their

inability to comply with the prior Orders of the Court.

It Is FURTHER ORDERED that costs are awarded to

Plaintiff.

DATED this 25th day of March, 1980.

/s/ CC. A. MUECKE

C. A. Muecke

Chief Judge

APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

No. CIV 77-689 PHX CAM

UNITED STATES OF AMERICA, Plaintiff,

ARIZONA FUELS CORPORATION, and EUGENE DALTON,

President, Defendants.

Order

(Filed June 26, 1980)

The Court, having received and considered the proposed

form of Judgment submitted by plaintiffs in this matter on

June 3, 1980, and having considered the defendants’

objections filed June 18, 1980, finds and concludes as follows:

The payment by defendants of $450,990.54 on August 17,

1978, was for purchase of entitlements from the department’s

August, 1978, entitlement list as is reflected in the Court’s

Order of July 20, 1978.

The payment into Court of $490,441.56 on March 31,

1980, in no way reduces the interest accrued through March

25, 1980, and can only affect the interest accrued after March

31, 1980.

The fact that the Court has stayed action on civil

penalties in no way affects the fact that defendants are liable

for civil penalties for failure to pay the entitlement obligations

that are the subject of this lawsuit and the judgment entered

this date. The record is replete with evidence of defendants’

willful failure to pay its entitlement obligations, and the Court

finds that the proposed penalty is more than just, particularly

in light of the fact that the fine could legally exceed

$20,000,000.

The burden the defendants have to show that they cannot

pay the judgment as entered does not extinguish the

obligation, but goes to the question of whether or not they

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should be held in contempt for failure to do so together with

any penalties that might be assessed should they be held in

contempt.

Therefore,

It Is ORDERED that the proposed form of judgment

submitted by plaintiff shall be entered forthwith and shall be

satisfied in full within 30 days of entry of this Order.

DaTED this 26th day of June, 1980.

/s/ CC. A. MUECKE

C. A. Muecke

Chief Judge

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

No. CIV 77-689 PHX CAM

Unitep STATES OF AMERICA, Plaintiff,

Vv.

ARIZONA FUELS CORPORATION, and EUGENE DALTON,

President, Defendants.

Judgment

(Filed June 26, 1980)

It is hereby ORDERED AND ADJUDGED:

that plaintiff, the United States of America, recover from

defendants, Arizona Fuels Corporation and Eugene Dalton,

the sum of $941,432, with interest thereon in the amount of

$325,459.74, plus a civil penalty in the amount of $1,000,000,

and plaintiff’s costs of action; and it is further ORDERED AND

ADJUDGED

that the Complaint is dismissed with respect to all non-

final decisions of the Department of Energy from which

appeals have been taken; and it is further ORDERED AND

ADJUDGED

that defendants shall fully comply on a timely basis with

their entitlement obligations as they arise on a monthly basis,

in accordance with 10 C.F.R. §211.67 and orders of this

Court.

DATED this 26th day of June, 1980.

/s/ CC. A. MUECKE

C. A. Muecke

Chief Judge

lla

APPENDIX D

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

No. CIV 77-689 PHX CAM

UNITED STATES OF AMERICA, Plaintiff,

Vv.

ARIZONA FUELS CORPORATION, and EUGENE DALTON,

Defendants.

Order

(Filed July 28, 1980)

The Court has received and considered defendants’

motion for stay pending appeal filed July 21, 1980, pursuant

to Rule 62, Federal Rules of Civil Procedure, and Rule 8(a),

Federal Rules of Appellate Procedure, the memorandum filed

in support of said motion, the Government’s response thereto,

and has heard the oral arguments of the parties with respect

to said motion. The defendants seek a stay of the Court’s

Order and Judgment filed June 26, 1980, in this action in

which the Court entered judgment against defendants in the

principal amount of $941,432.00 together with interest of

$325,459.74 and a civil penalty of $1,000,000.00 as a result of

defendants’ willful failure to pay entitlements obligations in

accordance with 10 C.F.R. §211.67 and the related federal

statutes and regulations.

Defendants allege that the Court had no basis in the

record from which the Court could conclude that defendants

had willfully failed to pay their entitlements obligations.

Defendants are in error.

The record discloses that defendants have been under an

obligation since prior to 1977 to demonstrate to the

Department of Energy, or its predecessor, why they should

not be required to pay their entitlements obligations.

Defendants have repeatedly asserted that they are financially

unable to pay their entitlements obligations and yet, despite

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l2a

innumerable opportunities to do so, have failed to produce a

shred or credible evidence in support of their argument.

Instead, at a hearing held earlier this year the controller

for Arizona Fuels, Quinn Stirland, who was hired by

defendant Dalton, testified that Arizona Fuels had lent

defendant Eugene Dalton $2,650,000.00, as of October 31,

1979, which was used by defendant Dalton to purchase the

San Miguel Ranch; that Arizona Fuels lent San Miguel Ranch

$250,000.00 to use in purchasing a $289,000.00 airplane; and

that defendant Dalton had numerous cash accounts in various

banks in Utah and Nevada which held funds allegedly

belonging to defendant Arizona Fuels but which were in the

name of Dalton, his children, his wife or his former wife. The

record also reflects that Arizona Fuels invested approximately

$250,000.00 in an exploration project, referred to as the

Asphalt Ridge Project, at a time when it was claiming that it

was unable to pay its entitlement obligations. Mineral

exploration is a venture unrelated to the operation of a

refinery. Defendants have made no showing, nor have they

even attempted to show, that the funds lent to Dalton (or San

Miguel Ranch), or used for Dalton’s benefit, were ordinary

and necessary business expenses for Arizona Fuels or that the

manner of use of said funds — which total at least

$3,000,000.00 and may exceed $8,000,000.00 — served any

other necessary business purpose.

Furthermore, defendants have had the burden of making

at least a reasonable showing of inability to pay for

entitlements ever since the institution of agency proceedings,

long before the instant action was filed. Defendants have

made no serious effort to do so. In an attempt to determine

defendants’ ability or inability to pay, the Court took it upon

itself to order the Government to institute discovery

proceedings regarding the financial condition of Arizona Fuels

and Eugene Dalton, even though the burden to do so is not

the Government’s burden. At a recent contempt hearing the

Government was able to put on some of the evidence noted

above and no evidence was offered, by way of offer of proof

l3a

or otherwise, to show that Arizona Fuels had a legitimate

business purpose in mind when it undertook to conceal funds

and bank accounts.

In addition, the Court questions the disinterestedness of

defendants’ attorney Leroy Axland, and his professed concern

for his client’s purported lack of opportunity to present

evidence of his inability to pay. Mr. Axland has repeatedly

asserted that his clients were and are without funds to satisfy

their entitlements obligations, yet at the hearings held earlier

this year it was brought out by the Government, pursuant to

the discovery proceedings ordered by this Court, that one or

more of Arizona Fuels’ accounts was in Mr. Axland’s name,

and that one account had held, at one time or another (and

apparently still held) several thousand dollars. Mr. Axland has

not shown himself to have made any diligent effort to place

evidence before this Court of his clients’ inability to pay

despite having had three years in which to do so.

In sum, the record in this matter, including the evidence

adduced at the hearings held this year, compel the conclusion

that defendants have willfully avoided paying the entitlements

obligations which are the subject of this lawsuit, and the

entitlements obligations which are presently accruing and

which are the subject of ongoing contempt proceedings in this

Court, and have willfully failed to make any effort to meet

their burden to prove financial inability (to the extent of

barely avoiding arrest for contempt of this Court’s Order).

The record reflects that neither Arizona Fuels nor its president

and principle stockholder, Eugene Dalton, have made any

voluntary effort in the three years in which this lawsuit has

been pending to pay Arizona Fuels’ entitlements obligations,

and have taken every opportunity to delay the proceedings

here and forestall, to the extent possible, judgment day in this

case.

In accordance with the foregoing,

It Is ORDERED that defendants’ motion for stay pending

appeal is denied and defendants shall satisfy the judgment

l4da

previously entered in this matter before the close of business

today.

It Is FURTHER ORDERED that should the judgment not be

satisfied as prescribed above, defendant Eugene Dalton and

counsel for Arizona Fuels Corporation shall appear in

Courtroom 2, United States Courthouse, Phoenix, Arizona,

on Tuesday, July 29, 1980, at 9:00 a.m., to show cause why

defendants should not be held in contempt for failure to

comply with this and prior orders of this Court.

It Is FURTHER ORDERED that the parties shall appear in

the above courtroom on Wednesday, September 24, 1980, at

9:00 a.m., for the purpose of determining whether Arizona

Fuels Corporation and Eugene Dalton are financially able to

meet the entitlement obligations incurred subsequent to July,

1977. Should it be proven that Arizona Fuels Corporation

and/or Eugene Dalton are or were able to pay any significant

amount toward entitlement obligations incurred subsequent to

July, 1977, the contempt fines previously levied by this Court

shall be effective as of the date they were initially levied, and

will be due and payable immediately. The Court will consider

reducing the fines if Arizona Fuels and Eugene Dalton meet

their entitlements obligations, insofar as financially feasible,

prior to the September hearing.

DATED this 28th day of July, 1980.

/s/ CC. A. MUECKE

C. A. Muecke

Chief Judge

lSa

APPENDIX E

Cemporary Emergency Court of Appeals

of Che United States

No. 9-53

UNITED STATES OF AMERICA,

PLAINTIFF-APPELLEE,

ARIZONA FUELS CORPORATION, AND

EUGENE DALTON, President,

DEFENDANTS-APPELLANTS.

No. 9-54

UNITED STATES OF AMERICA,

PLAINTIFF-APPELLANT,

ARIZONA FUELS CORPORATION, AND

EUGENE DALTON, President,

DEFENDANTS-APPELLEES.

Appeal from the United States District Court

for the District of Arizona

(No. CIV 77-689 PHX CAM)

ALAN S. NovINS (Argued), of Lobel, Novins & Lamont,

Washington, D.C., with whom Martin Lobel, of the same

firm, and Leroy Axland, Sutter, Axland & Armstrong,

Salt Lake City, Utah, were on the briefs for Arizona Fuels

Corporation and Eugene Dalton.

l6a

KENNETH J. BARNES (Argued), of the Civil Division of the

Department of Justice, Washington, D.C., with whom

Dennis G. Linder and R. John Seibert, of the same Divi-

sion, and Alice Daniel, Assistant Attorney General, and

Michael D. Hawkins, United States Attorney, were on the

briefs for the United States of America.

Before: ESTES, BECKER, and DUNIWAY, Judges

DUNIWAY, Judge:

In No. 9-53 Arizona Fuels Corporation and its sole

stockholder and President, Eugene Dalton, appeal from

those parts of the district court’s judgment that order

them to comply with the Old Oil Allocation Program, 10

C.F.R. § 211.67 (Entitlements Program), to pay $941,432

plus $325,459.74 in interest for unpaid entitlements obliga-

tions, and to pay a civil penalty of $1 million.

In No. 9-54 the United States appeals from the district

court’s dismissal of its claim against Dalton and Arizona

Fuels for additional unmet entitlements obligations as to

which exception applications are currently pending before

the Federal Energy Regulatory Commission (Commis-

sion).

We affirm in No. 9-53; we reverse in No. 9-54.

I. The Facts

Briefly stated, “(t]he Entitlements Program, [10 C.F.R.

§ 211.67,] requires refiners who run a greater percentage

of lower tier price controlled crude than the national aver-

age to purchase entitlements from those refiners who run

a smaller percentage than the national average, thereby

equalizing the cost of crude oil for all refiners.” Husky Oil

Co. v. Department of Energy, 582 F.2d 644, 645 (Em.

App. 1978) (footnote omitted). For a more detailed de-

scription of the Entitlements Program, see Pasco, Inc. v.

FEA, 525 F.2d 1391, 1895 (Em. App. 1975); Cities Service

17a

Co. v. FEA, 529 F.2d 1016, 1020-1021 (Em. App. 1975),

cert. denied, 426 U.S. 947 (1976).

On the basis of information supplied by the refiners, en-

titlements obligations are published by the Department of

Energy (Department) each month and are payable to re-

finers in a sell position by the end of the month. 10 C.F.R.

§ 211.67(b), (c), (i). A refiner may appeal its entitlements

obligation, 10 C.F.R. § 205.100 et seg., as well as apply to

the Office of Hearings and Appeals (OHA) of the Depart-

ment for exception relief from its obligation to purchase

entitlements because of “serious hardship or gross in-

equity.” 10 C.F.R > § 205.50(a)(1).

Arizona Fuels is a small, independent refiner, and until

August, 1975, was a seller of entitlements because of its

use of a high proportion of more expensive new oil. In that

month, however, it began to use a greater proportion of

old oil and thus became subject to Department orders to

buy entitlements. It quickly fell into arrears, and in

September, 1977, the United States brought this action.

At that time, Arizona Fuels owed approximately $1 million

in unpaid entitlements.

After a hearing, the district court, on September 27,

1977, issued a temporary restraining order directing

Arizona Fuels and Dalton to comply with the Entitlements

Program in future months. This order was extended in-

definitely, after a second hearing, on November 29, 1977,

Because Arizona Fuels still failed to comply with its enti-

tlements obligations, the court, on. February 9, 1978, or-

dered Arizona Fuels and Dalton to show cause why they

should not be found in contempt.

After a contempt hearing, the court, on April 13, 1978,

issued a third order requiring Arizona Fuels and Dalton to

pay all entitlements obligations accruing since Sep-

tember 27, 1977. The court further ordered them to place

in escrow any funds received from a legal action concern-

ing Major Oil Co., a subsidiary of Arizona Fuels, for the

18a

purchase of entitlements. The court stated that “[iln the

event that these escrow funds are not sufficient to cover

the costs of purchasing entitlements ... the burden is on

the defendants to make a clear and specific showing of im-

possibility to comply rather than a conclusory affidavit

such as that filed by Eugene Dalton. This showing should

include the production of defendants’ books at any future

hearings on this matter to substantiate the claim, and the

appearance of defendant to take the stand and testify

under oath... .”

The court reaffirmed its April 13 order by an order of

July 20, 1978, following a hearing on Arizona Fuels’ and

Dalton’s motion for reconsideration or stay of the April

order. At this hearing the parties agreed to file cross mo-

tions for summary judgment, and oral argument was held

on these motions in October, 1978.

The case was dormant during 1979, but Arizona Fuels

and Dalton continued to defy the Entitlements Program.

Thus, in February, 1980, when the court granted an order

to show cause why Arizona Fuels and Dalton should not be

held in contempt, Arizona Fuels’ unpaid entitlements obli-

gations had reached the commanding figure of nearly $20

million. A show cause hearing was held March 17, 1980.

On March 25, 1980, the court issued an order finding

Arizona Fuels and Dalton in contempt of court and fining

each of them $1,000 a day until they complied with the

orders of the court or showed evidence of their inability to

comply. The court also granted the government’s motion

for summary judgment as to Arizona Fuels’ entitlements

obligations incurred in the period from August, 1975 to

July, 1977. Arizona Fuels had applied to OHA for excep-

tion relief as to these obligations, but had been granted

only partial relief. Because the Commission, which now

hears appeals from OHA, did not yet exist, OHA’s disposi-

tion as to these entitlements was final and the court found

it to be supported by substantial evidence. However, be-

cause exceptions appeals were still pending before the

19a

Commission as to Arizona Fuels’ post July, 1977, entitle-

ments obligations, the court dismissed the government’s

complaint as to these “non-final” entitlements obligations.

The court once again reaffirmed its earlier orders that

defendants comply with the Entitlements Program.

On May 6 and 7, 1980, the court held hearings on the

government’s motions for imposition of sanctions and for

entry of judgment. Evidence was presented with regard to

defendants’ financial ability to comply with Arizona Fuels’

entitlements obligations, as w. ‘1 as their compliance with

prior discovery orders, and the court entered the judg-

ment appealed from on June 26, 1980. The court awarded

the government $941,432 plus $325,459.74 in interest for

pre-July, 1977 “final” entitlements obligations and further

levied a $1 million civil penalty against both defendants.

The court dismissed the government’s complaint “with re-

spect to all non-final decisions of the Department of

Energy from which appeals have been taken” — Arizona

Fuels’ entitlements obligations from July, 1977, to the

present, amounting to approximately $24 million. Finally,

the court ordered the defendants to “fully comply on a

timely basis with their entitlement obligations as they

arise on a monthly basis.”

IT. The Government's Appeal —No, 9-54.

The government appeals from the dismissal of its claim

to entitlements obligations as to which exception pro-

ceedings are still pending.

The Entitlements Program explicitly states that “{t]he

filing of an application for an exception shall not constitute

grounds for non-compliance with the requirements of the

regulation, ruling or generally applicable requirement

from which an exception is sought unless a stay has been

issued... .” 10 C.F.R. § 205.50(e). Similarly, 10 C.F.R.

Subpart I, § 205.120(c) reiterates: “All applicable DOE

orders, regulations, rulings, and generally applicable re-

20a

quirements shall be complied with unless and until an ap-

plication for a stay or temporary exception is granted.”

Arizona Fuels’ entitlements obligations were payable at

the end of each month in which they were published by the

Department in the Federal Register. 10 C.F.R.

§ 211.67(c) & (i). Arizona Fuels did not receive a stay or

temporary exception under C.F.R. Subpart I, § 205.120 et

seq. or 18 C.F.R. § 140(e)(4). Indeed, it does not appear

from the record that such a stay was even requested. In

these circumstances, Arizona Fuels was bound to comply

with its entitlement obligations, and the district court

erred in dismissing the government’s complaint.

III. Defendants-Appeal —No. 9-53.

A. The Civil Penalty.

Under 15 U.S.C. § 754(8)(A) a civil penalty of up to

$20,000 may be imposed on a company for violation of De-

partment regulations “with respect to activities relating to

the production, distribution, or refining of crude oils.”

Under 15 U.S.C. § 754(4) a corporate director, officer or

agent “who knowingly and willfully authorizes, orders, or

performs any of the acts or practices constituting in whole

or in part a violation [of the entitlements regulations]. . .”

will be subject to the same penalty. In 10 C.F.R.

§ 205.203(a)(2) the Department interprets “each violation”

to refer to each day a firm fails to meet its entitlements

obligations. The $1 million penalty imposed by the court

for defendants’ noncompliance with their entitlements ob-

ligations is thus well within the statutory limit as inter-

preted by the regulation even if the penalty were only

levied for defendants’ failure to pay their “final” pre-July,

1977, obligations.

Although it would not appear that a finding of willful-

ness is necessary under the statute in order to impose civil

penalties on the company as opposed to its officers, the

question is of little moment in this case. Defendants’ ar-

2la

gument that their failure to comply with their obligations

was not willful is without merit; “[t]he record is replete

with evidence of {their} willful failure to pay [their] enti-

tlement obligations.” Order of June 26, 1980, p. 2.

Despite repeated hearings and repeated opportunities

since this action was filed in 1977, defendants have failed

to produce evidence of their inability to comply with their

obligations. Instead, the record indicates that they could

easily have complied at least with the “final” entitlement

obligations due for the period August 1975 to July 1977.

The sum of over $2.5 million which Arizona Fuels lent to

Dalton and which Dalton used to purchase a cattle ranch

for himself would easily have covered Arizona Fuels’ enti-

tlements obligations for this period.

B. The Order to Comply with the Entitlements Pro-

gram,

The district court ordered “that defendants shall fully

comply on a timely basis with their entitlement obligations

as they arise on a monthly basis, in accordance with 10

C.F.R. § 211.67 and orders of this Court.” Defendants

mistakenly understand this order to require them to pay

all of their entitlements obligations including those for

which exception proceedings are yet pending. Even un-

derstood in this way, however, the order is entirely ap-

propriate. Until a stay is granted or until Arizona Fuels

overturns its entitlements obligations through a svccess-

ful appeal or through the grant of exception relief, it is

required under the regulations to pay its entitlements ob-

ligations as published by the Department in the Federal

past due or are just now arising. Moreover, detendants’

argument that an evidentiary hearing should have been

held before the issuance of this order ill suits them in light

of their consistent failure to present substantial evidence

of impossibility of compliance, despite numerous opportu-

nities,

22a

C. Order to Pay Pre-July, 1977, Entitlements Obliga-

tions.

The district court found that OHA’s denial of the excep-

tion relief sought by Arizona Fuels for its pre-July, 1977,

entitlements obligations was supported by substantial evi-

dence. Defendants argue that our decision in Husky Oil

Co. v. DOE, 582 F.2d 644 (Em. App. 1978) requires that

we reverse this portion of the district court’s judgment.

In Husky we held that the Department’s explicit use of

a negative profit margin “for purposes of evaluating cur-

rent financial posture and determining exception relief”

was invalid. 582 F.2d at 653. But here there is nothing in

the record to indicate that OHA knew or should have

known that its action on Arizona Fuels’ applications for

exception relief would impose a negative profit margin on

the company. And in any event, defendants did not pre-

sent substantial evidence before the district court showing

that payment of these obligations would have forced the

company to operate at a loss. Indeed, the record shows

that the company could easily have paid these obligations.

“In the absence of exceptional circumstances not pres-

ent in these cases, there is a rebuttable presumption of

validity of findings of fact by [the] administrative agency,

which casts the burden of proof of invalidity on the party

challenging the findings of fact. Anniston Manufacturing

Co. v. Davis, 301 U.S. 337, 357, 57 S.Ct. 816, 825, &1

L.Ed. 1148, 1156 (1937); Coleman v. PACCAR, Inc., 424

U.S. 1301, 1306, 96 S.Ct. 845, 848, 47 L.Ed.2d 67, 72

(1976) ...” Petraco Valley Oil & Refining Co. v. DOE,

F.2d (TECA Nos. 5-47 and 5-48, 1980).

Arizona Fuels and Dalton have not met their burden of

proof. The cause of Arizona Fuels’ financial condition is

not the entitlements program, from which defendants

profited, but is defendant Dalton’s draining away from

Arizona Fuels of its financial resources.

23a

D. Daltou's Liability,

Finally, Dalton argues that he should not be held per-

sonally liable for Arizona Fuels’ unmet obligations.

Dalton is President and sole stockholder of the company.

The record shows that large amounts of corporate funds

have been diverted to Dalton’s personal use. “. . . |W Jhere

the corporation|'s] . . . financial resources are drained off

by the controlling shareholder . .., there is more justifica-

tion for holding the latter liable... .” Henn, Corpora-

tions, 2d ed. (West), 252, 254. See also cases noted in 51

Harv. L. Rev. 1401, 1402, and 14 Cal. L. Rev. 19-21.

Dalton cannot feign ignorance of the company’s entitle-

ments obligations. In these circumstances, the district

court was correct in holding Dalton jointly liable for

Arizona Fuels’ entitlements obligations.

In No. 9-53 the judgment is affirmed. In No. 9-54 the

portion of the judgment appealed from is reversed and the

matter is remanded for further proceedings consistent

with this opinion.

25a

APPENDIX F

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

No. 9-53 & 9-54

UNITED STATES OF America, Plaintiff-Appellee,

Vv.

ARIZONA FUELS CORPORATION, and EUGENE DALTON,

President, Defendants-Appellants

Before Estes, BECKER, and Duniway, Judges.

Upon consideration of Appellants’ Petition for

Rehearing,

It Is HEREBY ORDERED that said Petition is DENIED. The

mandate will issue February 9, 1981.

FoR THE Court:

/S/ MICHAEL S. LEVINE

Michael S. Levine

Deputy Clerk

February 2, 1981

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