Opposition Brief — Law Practice of J. B. Grossman, P. A. v. Securities & Exchange Commission

—— RE —

JUL 1 1996

No. 95-1766

In the Supreme Court of the United States

OCTOBER TERM, 1998

LAW PRACTICE OF J.B. GROSSM. N, P. A., PETITIONER

*.

SECURITIES AND EXCHANGE COMMISSION

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

BRIEF FOR THE SECURITIES AND

EXCHANGE COMMISSION IN OPPOSITION

WALTER DELLINGER

Acting Solicitor General

Department of Justice

RICHARD mie Ba Washington, D.C. 20530

PAUL GONSON (202) 514-2217

Solicitor

RICHARD M. HUMES

Associate General Counsel

LAURA S. PRUITT

Senior Counsel

Securities and Exchange

Commission

Washington, D.C. 20549

QUESTION PRESENTED

Whether the district court correctly held pe-

titioner in civil contempt for violating a temporary

restraining order (TRO) that was extended a few days

past the 20-day time limitation of Federal Rule of

Civil Procedure 65(b), where the district court con-

ducted a preliminary injunction hearing within the

20-day period and informed the parties at the close of

the hearing that it was extending the TRO until it

ruled on the preliminary injunction.

(I)

TABLE OF CONTENTS

Page

. — e 1

—T—7——

— 2

rene eue seesessssee 68 6

a ³˙ ̃ 12

TABLE OF AUTHORITIES

Cases:

Clements Wire & Mfg. Co. v. NLRB, 589 F.2d

I. 4.9 9

Fernandez- Roque v. Smith, 671 F.2d 426 (11th Cir.

6 — ——— 2 — 9

Granny Goose Foods, Inc. v. Brotherhood of

Teamsters Local No. 70, 415 U.S. 423

„„ 5, 6, 7, 8

Pan American World Airways, Inc. v. Flight

Engineers’ Int'l Ass'n, 306 F. 2d 840 (2d Cir. 1962) . 9

SEC v. Unifund SAL, 910 F.2d 1028 (2d Cir.

L — 9

Sampson v. Murray, 415 U.S. 61 (1974) 6, 9, 10, 11

W.R. Grace & Co. v. Local 759, Int'l Union of the

United Rubber Workers, 461 U.S. 757 (1983) ......... 11

Statutes and rules:

Z 11

e .. ˙— ee 0

Fed. R. Civ. P.:

OIE A AR Ore: 10, 11

D A Ie eee a 6,8

D ne eee 5, 7, 9, 12

(IIT)

In the Supreme Court of the United States

OCTOBER TERM, 1

No. 95-1766

LAW PRACTICE OF J.B. GROSSMAN, P. A., PETITIONER

.

SECURITIES AND EXCHANGE COMMISSION

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

BRIEF FOR THE SECURITIES AND

EXCHANGE COMMISSION IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-18)

is reported at 70 F.3d 1191. The opinion of the district

court (Pet. App. 23-36) is reported at 887 F. Supp.

1521.

JURISDICTION

The judgment of the court of appeals was entered on

| December 1, 1995. A petition for rehearing was denied

| on February 15, 1996. Pet. App. 19-22. The petition

for a writ of certiorari was filed on April 30, 1996.

The jurisdiction of this Court is invoked under 28

U.S.C. 1254(1).

(1)

2

STATEMENT

Petitioner seeks review of the judgment of the

Court of Appeals for the Eleventh Circuit affirming

the order of the United States District Court for the

Southern District of Florida finding petitioner in

civil contempt of a temporary restraining order

entered in an enforcement action brought by the

Securities and Exchange Commission.

1. On May 5, 1994, the Commission brought an

enforcement action against Comcoa, Ltd., a/k/a

Comcoa, Ltd., Inc., and its president, Thomas W.

Berger (collectively, “defendants”), alleging that they

violated antifraud and registration provisions of the

federal securities laws in obtaining from investors

nearly $13.5 million by selling purported FCC

licenses and falsely guaranteeing future profits from

the investment. See Pet. App. 2; Complaint at 3-4. As

relief, the Commission sought, among other things, a

temporary restraining order, a freeze of Comcoa’s

assets, the appointment of a receiver for Comcoa,

preliminary and permanent injunctions, and an

accounting and disgorgement of ill-gotten gains,

together with prejudgment interest and civil

penalties. Petitioner was counsel for the defendants.

On May 6, 1994, the district court entered a

temporary restraining order freezing the defendants’

assets “pending determination of the Commission’s

Motion for a Preliminary Injunction.” C.A. R.E., Tab

10, at 4. The court’s order also appointed a temporary

receiver for Comcoa’s assets. At the time of entry of

the May 6 Order, petitioner, as counsel for the

defendants, held $105,100.00 of Comcoa’s funds in a

firm trust account pursuant to a retainer agreement.

The funds were placed in the account to pay for the

3

anticipated legal fees to be incurred in defending the

Commission’s enforcement action. Pet. App. 24.

On May 16-17, 1994, the district court held a hear-

ing on the Commission’s motion for a preliminary in-

junction. At the conclusion of the hearing, the dis-

trict court informed the parties that the May 6 Order,

and specifically the asset freeze, would remain in

effect until the court ruled on all of the various

pending motions, including the Commission’s motion

for a preliminary injunction.' The district court then

asked if either party had anything further or any

questions, to which petitioner replied, “No, sir.” Pet.

App. 3.

On June 3, 1994, the district court denied all of the

defendants’ pending motions, including their motions

to dismiss and vacate the TRO. See Pet. 3. As part of

that order, the district court also denied the defen-

dants’ motion to use the assets in the frozen Comcoa

trust account maintained by petitioner to pay

attorneys’ fees and expert witness fees. C.A. R.E.,

Tab 54, at 11. Several days later, on June 7, 1994, the

court entered a preliminary injunction nunc pro tunc

as of June 3, 1994, enjoining the defendants from

violating antifraud and registration provisions of the

federal securities laws and continuing a freeze on the

defendants’ assets.

In the meantime, on June 6, 1994, petitioner,

asserting that the May 6 Order had expired, demanded

that the receiver return all of Comcoa’s assets to

Comcoa. When the receiver refused, petitioner filed a

The motions at issue included those filed by defendants

to dismiss for lack of subject matter jurisdiction, to vacate the

TRO, and for the release of funds to pay attorneys’ fees and

expert witnesses. Pet. App. 3; C.A. R.E., Tab 54, at 11.

4

motion in the district court requesting an order

directing the receiver to return all of Comcoa’s

assets. Petitioner, however, did not wait for the

district court to rule on its motion. Instead, pur-

portedly acting at the direction of Comcoa, petitioner

on June 6 transferred $91,500.00 out of the Comcoa

trust account and into an operating account held by

petitioner. The transfer was for the purpose of satis-

fying legal fees and expenses that the defendants

owed petitioner for representing them in connection

with the preliminary injunction proceedings. Pet.

App. 3-4 & n.5, 25. Petitioner refused the receiver's

subsequent demand for the return of the funds. C.A.

R.E., Tab 73, Exh. D.

2. On August 11, 1994, the Commission moved the

district court for an order to show cause why

petitioner should not be held in contempt of the May 6

Order. In response, petitioner argued, inter alia,

that it did not violate the May 6 Order by transferring

the funds on June 6, 1994, because the order had

expired by that date. A show cause hearing was held

2 Petitioner also argued that once the Commission filed its

suit against Comcoa, title to the funds held in the trust account

passed from the defendants to petitioner, pursuant to peti-

tioner’s retainer agreement with Comcoa. That agreement

provided that funds in the trust account “become a minimum

fee retainer upon an asset freezing action or order of civil

penalty(ies) by any government, regulatory agency, and public

or private party” and that the funds in the trust account will

be “non-refundable.” Deposition of Thomas Berger, Exh. 15, at

3. Therefore, petitioner claimed, those funds were never

subject to the asset freeze. The district court rejected that

argument. The court found that the retainer agreement

between petitioner and Comcoa was against public policy and

therefore void and unenforceable. Pet. App. 28-30. Petitioner

did not seek review of that issue in the court of appeals.

5

on February 27, 1995, to determine whether petitioner

should be held in contempt.

On March 13, 1995, the district court found

petitioner in civil contempt. Pet. App. 22-36. The

district court first concluded that the funds in the

trust account that petitioner had transferred were

subject to the May 6 Order freezing Comcos's assets.

Id. at 28-29. The district court further found that

petitioner had consented to an extension of the May 6

Order until the district court rendered a decision on

the Commission’s motion for a preliminary injunc-

tion. Id. at 31-32. The court based its finding of con-

sent on the fact that petitioner had not objected to the

extension of the TRO until the court ruled on the

pending motion, either at the conclusion of the

preliminary injunction hearing or at any time

thereafter. Ibid. Petitioner was ordered to remit the

transferred funds, plus interest from the date of the

demand by the receiver. /d. at 36.

3. On appeal, petitioner argued that under this

Court's decision in Granny Goose Foods, Inc. v.

Brotherhood of Teamsters Local No. 70, 415 U.S. 423

(1974), it was entitled to treat the TRO as having

expired. Petitioner contended that, under Granny

Goose, a temporary restraining order expires after

the 20-day time limit imposed by Fed. R. Civ. P. 65(b)

unless a preliminary injunction containing findings of

fact and conclusions of law is issued by the district

court within that period. Petitioner also challenged

the district court’s finding that petitioner had agreed

to an extension of the TRO.

The court of appeals affirmed the district court’s

order of contempt. Pet. App. 1-18. The court of ap-

peals did not address whether the district court’s

finding that petitioner had consented to the extension

6

of the TRO was clearly erroneous. See id. at 5.

Instead, it addressed the effect of an extension of a

TRO, without consent, beyond the time allowed by

Fed. R. Civ. P. 65. The court concluded that when the

TRO was continued beyond the time permissible

under Rule 65 it was to be treated as a preliminary

injunction. Pet. App. 5-6 (citing Sampson v. Murray,

415 U.S. 61, 87 (1974). The court reasoned that such

treatment is “especially appropriate where, as in this

case, there has been notice to the parties, a full

hearing on a preliminary injunction, and then a stated

and clear decision from the bench to extend the terms

of the restraining order indefinitely, that is, until the

court notified the parties otherwise.” Pet. App. 5-6.

The court of appeals distinguished this Court’s

decision in Granny Goose, explaining that Granny

Goose addressed the distinct situation where no

notice to the parties has been given and no hearing on

the motion for a preliminary injunction had been held.

Pet. App. 6 nn.7-8. Thus, the court of appeals

concluded, “the proper course of conduct for

[petitioner] was to treat the TRO as an erroneously

granted preliminary injunction and to appeal.” Id. at

6.

ARGUMENT

Petitioner violated the May 6, 1994, order when it

transferred the funds in the Comcoa trust account to

its own account despite the district court’s express

continuation of the May 6 order until it decided the

Commission’s motion for a preliminary injunction.

Petitioner’s subjective belief that it was entitled to

ignore the district court’s order based on its mis-

taken reading of Granny Goose does not insulate it

from the consequences of that contemptuous conduct.

7

The decision below affirming the district court’s

finding of contempt is correct and does not conflict

with any decision by this Court or any other court of

appeals. Further review of this case is therefore

unwarranted.

1. Petitioner contends that the court of appeals

mistakenly refused to follow this Court’s decision in

Granny Goose. In petitioner’s view, Granny Goose

holds that “under Rule 65(b), where the restrained

party has not consented to an extension of the TRO

and no written preliminary injunction order has been

issued by the district court, a party may ‘reasonably

assume’ that no valid order exists and act

accordingly.” Pet. 8. Petitioner further claims that

the court of appeals’ conclusion that the TRO became

an enforceable preliminary injunction “contradicts

the plain language of Rule 65(b) and ‘overrules’ the

holding of this Court in Granny Goose.” Pet. 9.

Petitioner’s interpretation of Granny Goose and its

characterization of the decision below are both

mistaken.

a. Granny Goose does not support petitioner’s

argument that it cannot be held in contempt because

it was entitled to treat the asset freeze order as

having expired. Pet. 16. In Granny Goose, a tempo-

rary restraining order was entered by a state court

enjoining strike activity, and the court issued an

order to show cause why a preliminary injunction

should not issue during the pendency of the suit. 415

U.S. at 428. Prior to the hearing date for the order to

show cause, the defendants removed the action to

federal court. Ibid. No preliminary injunction hear-

ing was ever held in the federal court and the labor

unrest apparently dissipated. Id. at 428-429. Several

months later, the sirike activity began again and the

8

union defendants, despite their argument that the

TRO had long since expired, were found in contempt

of the TRO by the district court. Id. at 429-430.

This Court held that, because the TRO was no

longer in existence at the time of the alleged

contempt, the district court’s contempt ruling could

not stand. The Court first noted that the TRO had

expired by its own terms months before the date of

the alleged contempt. 415 U.S. at 431-433. See also

id. at 434-440 (rejecting argument that 28 U.S.C. 1450

had the effect of extending the time of the TRO

indefinitely). The Court also held that the TRO could

not be treated as a preliminary injunction. 415 U.S.

at 440-444. The Court emphasized that there had been

no hearing on whether to issue a preliminary

injunction, id. at 442, and that the parties had not

received “fair and precisely drawn notice of” the

extension of the TRO, id. at 444. Accordingly, the.

Court concluded that there was no injunction in effect

at the time of the allegedly contemptuous conduct.

As the court of appeals recognized, Granny Goose

applies to situations, unlike here, in which there has

been no notice to the parties and no hearing on a

preliminary injunction. Pet. App. 6 nn.7-8. In those

circumstances, a party has “no reason to believe,”

415 U.S. at 423, that the restraint on its conduct has

been extended, and the party therefore “may

reasonably assume that the order has expired within

the time limits imposed by Rule 65(b).” Id. at 445. In

this case, however, the hearing on the Commission’s

motion for a preliminary injunction was held within

the 20-day period for a TRO under Fed. R. Civ. P. 65,

and all parties had notice that the district court was

extending the status quo at that time. Accordingly,

the court of appeals correctly held (Pet. App. 5-6) that

9

the TRO freezing Comcoa’s assets did not merely

expire at the end of the 20-day period, but instead

became, in effect, a preliminary injunction. That

ruling does not conflict with this Court’s decision in

Granny Goose.“

b. As this Court held in Sampson, where a

temporary restraining order is extended beyond the

periods permitted under Rule 65(b), it is immediately

appealable as a preliminary injunction. 415 U.S. at 86-

88.“ Thus, even if petitioner did not consent to the

Judge Hill's concurrence (Pet. App. 8-18) does not

support petitioner’s argument. Judge Hill did not agree with

the majority’s view that “[flor [petitioner] just to disregard the

district court’s order based on his personal belief that it was

invalid, is conduct that warrants a determination of contempt.”

Id. at 12. He nevertheless noted that this case was controlled

by this Court’s decision in Sampson v. Murray “that the

indefinite extension of a TRO not only transforms the TRO

into a preliminary injunction for purposes of appeal, but also

into a valid injunction.” Id. at 17.

See also SEC v. Unifund SAL, 910 F.2d 1028, 1035 (2d

Cir. 1990) (invalidity of extension of TRO caused it to

“technically qualifſy] as a preliminary injunction,” which

would entitle the enjoined party to appeal that order);

Fernandez-Roque v. Smith, 671 F.2d 426, 429 (11th Cir. 1982)

(“a temporary restraining order continued without consent of

the parties beyond the twenty day maximum may be treated as

a preliminary injunction”); Clements Wire & Mfg. Co., v.

NLRB, 589 F.2d 894, 896 (5th Cir. 1979) (where district court

had entered a temporary restraining order that had no date of

expiration, the district court had issued a preliminary in-

junction that was an appealable order); Pan American World

Airways, Inc. v. Flight Engineers’ Int'l Ass’n, 306 F.2d 840, 843

(2d Cir. 1962) ([The continuation of the temporary restrain-

ing order beyond the period of statutory authorization having,

as it does, the same practical effect as the issuance of a prelimi-

nary injunction, is appealable within the meaning and intent of

28 U.S.C. 1292(a)(1).”). 7

10

extension of the May 6 Order—and even if petitioner

believed that extension to be inappropriate—peti-

tioner’s proper course was to challenge the district

court’s action on appeal, not simply to defy the court’s

order.

Petitioner claims that even if an extended TRO is

appealable, the court of appeals should review the

order only for the purpose of holding it invalid per se

because it does not contain the requisite findings to

support a preliminary injunction under Fed. R. Civ.

P. 52(a). Pet. 12-13 (citing Sampson v. Murray, 415

U.S. at 99 (Marshall, J., dissenting)). In petitioner’s

view, because the injunction would have been held

invalid had it been appealed, petitioner cannot be held

in contempt for violating it.

This Court in Sampson squarely rejected that

argument. The Sampson Court specifically noted

that, even though the district court did not comply

with Rule 52(a) in entering the preliminary

injunction in that case, “we do not think that we are

thereby foreclosed from examining the record to de-

termine if sufficient allegations or sufficient evidence

supports the issuance of injunctive relief.” 415 U.S.

5Petitioner’s suggestion (Pet. 13) that the court of appeals

would have vacated the TRO pursuant to Rule 52(a) is mere

speculation. A preliminary injunction hearing had been held,

the defendants testified, and the district court had denied all of

the defendants’ motions (including their motions to dismiss and

for use of frozen funds for attorneys’ fees) prior to the date by

which petitioner claims the TRO had expired. Review of the

district court record by the court of appeals would have

demonstrated the Commission’s entitlement to a preliminary

injunction. In any event, petitioner has not argued that the

injunction was improper, only that it expired before petitioner

transferred the frozen funds.

11

at 87 n. 58. The Court went on to determine whether

the injunetion was justifiable on its merits, and con-

eluded that it was not. Id. at 88-91. As the court be-

low recognized, In jo good reason exists to limit [the

Sampson] rule to one of appellate jurisdiction only: a

preliminary injunction is a preliminary injunction.”

Pet. App. 6 n.8.

When petitioner transferred the funds from the

trust account to its operating account, it had available

a choice of adequate non-contemptuous remedies,

such as pursuing appellate review under 28 U.S.C.

1292(a)(1), or seeking clarification or instructions

from the district court as to the status of the May 6

Order. Petitioner could not, however, merely disobey

the district court’s order, which the court had quite

clearly extended. As this Court has often recognized,

Ait is beyond question that obedience to judicial

orders is an important public policy. An injunction

issued by a court acting within its jurisdiction must

be obeyed until the injunction is vacated or

withdrawn.” W.R. Grace & Co. v. Local 759, Int'l

Union of the United Rubber Workers, 461 U.S. 757,

766 (1983). As the court below observed (Pet. App. 7):

We believe the instances when lawyers can be told

by the district court in no uncertain terms not to

do X“ and, yet, the lawyer can go on to do “X”

with impunity are (and ought to be) few and far

between, especially where the appellate courts—

as in this case—are open to the lawyer to settle

the matter in an orderly way, but the lawyer

pursues no appeal. In these circumstances, for

[petitioner] just to disregard the district court’s

clear order, based on his personal belief that it was

invalid, was not merely bold; it was bad. We

12

conclude his conduct warrants a determination of

contempt. The district court was within its dis-

cretion to hold [petitioner] in contempt of court for

violating the order.

2. Finally, petitioner’s claim must also be rejected

because, as the district court found (Pet. App. 31-32),

petitioner consented to the extension of the TRO past

the 20-day limit. Federal Rule of Civil Procedure

65(b) provides that a TRO may be extended for longer

than a 20-day period if the restrained party consents.

The district court’s finding that petitioner consented

is thus sufficient by itself to establish that a valid

TRO remained in effect at the time petitioner trans-

ferred the funds out of the trust account. It therefore

is also sufficient to support the district court’s order

holding petitioner in contempt for taking that action.

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

WALTER DELLINGER

Acting Solicitor General

RICHARD H. WALKER

General Counsel

PAUL GONSON

Solicitor

RICHARD M. HUMES

Associate General Counsel

LAURA S. PRUITT

Senior Counsel

Securities and Exchange

Commission

JULY 1996