Petition for Writ of Certiorari — Holland Furnace Co. v. Schnackenberg

No. 9 42

as [trees Court, U

f Ce. FILED

MAR 10 1965

JOHN F. DAVIS, CLERK

—————

A

vt

Iu the

Supreme Court of the Anited States

OcroBEeR TERM, 1964.

HOLLAND FURNACE COMPANY,

Petitioner,

vs.

ELMER J. SCHNACKENBERG, ROGER S. KILEY and

LUTHER M. SWYGERT, Circuit Judges,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT.

CHaRLEs TRYNIN

50 Broadway

New York, New York

Counsel for Petitioner

Of Counsel

LerpmMan, WiLLIAMs, BENNETT AND Barrp

208 South LaSalle Street

Chicago, Illinois 6604

March, 1965

The Scheffer Press, Inc—ANdover 2-6850

INDEX.

PAGE

CI: GR IIE FIT sci ericcnicitnctssenniiomernatessinsnniens 1

IE adits csinteticaeentnniacinssianecieininstinnunninnnantons 2°

I rs sinieiaianiesanlapatancenilinasibinn 2

NE NUNN on cans sasddeicsss aenscaceseesiabana ab daioniatinniles 3

PE I cc actershectescadacneerenisdchanevseidesanictmnsenis 3

Reasons Why the Writ Should be Granted ........ 0.0... +)

SII chrcisicidsiseuhectrceasidiemaceesiidaauasaucapeniilsbiatcuibesansndiabonnisin 9

Appendix

Rule 32, Federal Rules of Criminal Procedure ...... la

Court of Appeals Opinion

SE I Tg, HI caratcncttdcesncaniscrecvecnctcstenesiinises 2a

Court of Appeals Judgment Order

I ir, TID peices tk: antnsetrnrsnniversceinatecidessunn 12a

Motion of Holland Furnace Company

Ie BOs chesineteratirnsscenientinnenctrennepeinnctons 16a

Petition of Holland Furnace Company .............000 17a

CITATIONS.

Cases:

Green v. United States, 356 U.S. 165 (1958) ......... 8

Holland Furnace Co. v. Federal Trade Commission,

Se ee Oe Rais RD ceteietartarstrceprinioncccusn 3

Moore v. United States, 150 F.2d 323 (10th Cir. 1945),

cert. denied 326 U.S. 740 (1945) ..........ccsccccsscscsscessesees 8

United States v. Barnett, 376 U.S. 681 (1964) ow. 7,8

United States v. United Mineworkers of America, 330

i allcasses 2,8,9

PAGE

Statutes:

TIE. 2s III Doh cael tenihdeinidiadapsapicieiiisaninnaieisimnatiennntin 2

IE IND sc ics iesicissrecthnepiaieesacomisielomnessanebdeemnenitbioonants 6,9

Miscellaneous:

Rule 32, Federal Rules of Criminal Procedure, 18

IE CD craieitak cubilia na pechineminsinngidllbibaisbtdaplgabillininertici 5, 6

CCH Trade Negulation Reports, Volume 5, paras.

SN IEE siccsicssnchseksny snisaiinlepahacdeceiscenbnsataidhetnsetnihattanneanate 6

In the

Supreme Court of the United States

ie

Ocroser Term, 1964.

No.

HOLLAND rURNACE COMPANY,

Petitioner,

vs.

ELMER J. SCHNACKENBERG, ROGER S. KILEY and

LUTHER M. SWYGERT, Circuit Judges,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

ONITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT.

Petitioner, Holland Furnace Company, a Delaware cor-

poration, prays that a writ of certiorari issue to review

both a judgment of the United States Court of Appeals

for the Seventh Circuit (hereinafter called ‘‘Court of

Appeals’’) entered January 27, 1965, which imposed upon

Petitioner a $190,000 fine for criminal contempt, and also

its subsequent order, which refused, though good cause

was shown, to modify or reduce said fine.

CITATIONS TO OPINIONS BELOW.

The opinion of the Court of Appeals, not yet reported,

is printed in the Appendix hereto, at pp. 2a-lla, R. 18-27.

—

A related opinion, entitled Holland Furnace Co. v. Federal

Trade Commission, is reported in 295 F.2d 302 (7th Cir.

1961).

JURISDICTION.

The judgment of the Court of Appeals was entered on

January 27, 1965. (Appendix pp. 12a-l5a, R. 28-32) A

timely motion for leave to petition for rehearing on sen-

tence was filed on January 29, 1965, (Appendix, pp. 16a-23a,

R. 33-42) and granted by the Court of Appeals on February

11, 1965. On the same day the petition was filed and the

Court entered its order denying the petition and granting

a thirty-day stay of execution. (R. 43) The jurisdiction

of this Court is invoked under 28 U.S.C. Section 1254(1).

QUESTIONS PRESENTED.

1. Whether the failure of the Court of Appeals to

order the pre-sentence investigation provided for by Rule

32 of the Federal Rules of Criminal Procedure, or its

refusal, upon good cause shown, to grant Petitioner a

hearing in which the unusual consequential effects of

the $100,00) fine could be proven, deprived Petitioner

of its right to a fair trial and a just sentence in a Federal

court.

2. Whether the imposition of a $100,000 fine for

crimina] contempt of a temporary court order enjoining

acts prohibited by order of the Federal Trade Commission

is an abuse of discretion, where the purpose of the fine is

solely to vindicate the issuing court’s authority and is

not to compel future compliance.

3. Whether the Court of Appeals ignored the controlling

principles established by this Court in United states

v. United Mineworkers of America, 330 U.S. 258 (1947),

and departed from judicial standards in imposing a fine

ae,

of such magnitude as to jeopardize Petitioner’s continued

corporate existence.

STATUTES INVOLVED.

Rule 32, Federal Rules of Criminal Procedure. Appen-

dix, p. la.

STATEMENT OF THE CASE.

On July 7, 1958, the Federal Trade Commission ordered

Petitioner to cease and desist from eight specified selling

practices found by it to be in violation of Section 5,

Federal Trade Commission Act. On August 5, 1959, the

Court of Appeals restrained Petitioner, pendente lite,

from committing the acts prohibited by the Commission’s

order. That order was made permanent by the Court

of Appeals on November 7, 1961. See Holland Furnace

Co. v. Federal T-ade Commission, 295 F.2d 302 (7th

Cir. 1961).

On March 19, 1962, on the Commission’s petition, the

Court of Appeals issued a rule to show cause why Peti-

tioner should not be adjudged in criminal contempt for

wilful violation of the Court’s order of August 5, 1959,

by reason of acts committed in the period from August

5, 1959 to November 7, 1961. On April 19, 1963, addi-

tional respondents, including the former president and

former members of Petitioner’s board of directors were

added, as parties respondent, in the criminal contempt

proceeding.

On September 28, 1964, the Court of Appeals com-

menced the hearing of evidence in the contempt pro-

ceeding. Previously, the Court had denied Petitioner’s

motion for postponement of trial due to its counsel’s

illness, bui excused Petitioner from appearing, by coun-

a on

sel, at said hearing, ‘‘without prejudice to counsel for

said respondent presenting argument in behalf of the

corporation at the conclusion « the hearing or within

a reasonable time thereafter”. R. i. On November 16,

1964, the day set for final argument, Petitioner’s counsel

appeared before the Court of Appeals to present argu-

ment, but was advised that he would be heard ‘‘as to

the extent of the penalty or punishment’’ upon final

disposition of the matter. The Court of Appeals stated:

‘*You still have a right to be heard in case we hold

against the corporation, and we will hear from you on

the question of the form of relief to be granted.”’ R. 4.

On January 27, 1965, the day set by the Court of

Appeals for rendering its opinion °nd entering judgment,

Petitioner’s counsel appeared to present his argument.

Before the Court rendered its opinion and pronounced

sentence, Petitioner’s counsel was permitted to make a

brief oral argument. R. 9-16. The Court, therevpon, ren-

dered its opinion and entered its judgment finding Peti-

tioner, its former President, Paul Cheff, and two of its

former sales executives guilty of criminal contempt of

the temporary injunction of August 5, 1959. Appendix,

pp. 2a-l5a, R. 18-32. Eight respondents were found not

guilty. Appendix, pp. 13a, l4a, R. 30. Petitioner was

fined $100,000. Cheff, its former President, was sen-

tenced to a six-month term of imprisonment. Fines of $500

were imposed on the two other respondents who were

found guilty.

On January 29, 1965, Petitioner moved the Court of

Appeals for leave to file . sworn Petition to reduce or

modify sentence, and also moved for a hearing thereon

and a stay of execution. Appendix, p. 16a, R. 33. Leave

to file such petition was granted on February 11, 1965,

—

and, instanter, the Court of Appeals denied all relief,

except for a 30-day stay of execution. R. 43-44.

Petitioner’s sworn petition to reduce or modify sen-

tence (Appendix, pp. 17a-23a) affirmatively showed (i) that,

on Ju. 27, 1962, the Cheff management, which had com-

mitted the contumacious acts, was replaced; (ii) that

the new management immediately terminated its retail

furnace business and has since been engaged in the

orderly liquidation of Petitioner’s inventory through in-

dependent dealers, in order to avoid distress sale prices;

(iii) that Petitioner’s assets have declined by approxi-

mately ten million dollars since 1962 and, at the present

time, are probably insufficient to pay, in full, its obliga-

tions to its creditors; (iv) that collection of the fine will

result in the immediate cutting off of operating advances

by secured creditors, thereby precipitating bankruptcy

proceedings and the sale of Petitioner’s remaining in-

ventory at distress prices substantially lower than the

amount which could be realized by orderly iiquidation,

as well as precluding the completion of pending merger

negotiations, which may, if completed, enable Petitioner

to meet its obligations; (v) that, in the circumstances,

there is no possibility of future violation of the Court’s

or the Commission’s orders, since Petitioner is no longer

in the retail furnace business and no violations have been

reported occurring since the management change in July

1962; and (vi) that the effects of the fine will be felt,

‘marily, by Petitioner’s creditors.

REASONS WHY THE WRIT

SHOULD BE GRANTED.

The Court of Appeals’ failure to follow the ore-

sentencing procedures established by Rule 32, Federal

Rules of Criminal Procedure, and its refusal to consider

ities

the effect of the sentence upon Petitioner’s continued

corporate existence, present important and unresolved

questions concerning whether a court of appeals, in im-

posing sentence in a criminal contempt proceeding, must

follow the procedural safeguards contained in the crim-

inal procedure rules and observe rational standards in

imposing sentence in conterapt cases.

I.

Rule 32(a), Federal Rules of Criminai Procedure,

directs that prior to imposition of sentence every defend-

ant shall be given an opportunity to be heard and ‘‘to

present any information in mitigation of punishment’’.

Rule 32(c) provides that ‘‘unless the court otherwise

directs’’, a pre-sentence investigation report shall be

prepared for the court’s assistance ‘‘in imposing sen-

tence... .” Appendix, la. The use of such reports in

fixing sentence is well established in the district courts and

constitutes an integral and important element in the fair

and equitable administration of criminal justice.

The Court of Appeals did not even consider that such

a report was appropriate, and this procedural safeguard, ~

intended to inform the court’s discretion, was ignored

by it.’

Petitioner does not question the power of the Court

of Appeais to try criminal contempts arising out of its

enforcement of Federal Trade Commission orders, al-

though the sentencing procedure followed in this case

*The fine imposed upon Petitioner in this case appears

to be the largest penalty for violation of a Federal Trade

Commission order ever imposed, whether in a civil penalty

suit (15 U.S.C. §45(6)(1)) or a contempt proceeding.

See Volume 5 CCH Trade Reg. Rep. paras. 9701.40 and

9703 and cases cited therein.

Pes ee

clearly supports the suggestion of members of this Court

that appellate tribunals are not equipped to perform,

adequately, the functions of a trial court. United States

v. Barnett, 376 U.S. 681, 724 (1964) (dissenting opinion).

However, the failure of the Court of Appeals to follow

the procedure set forth in Rule 32, and its refusal to

modify its sentence upon a proper showing of mitigating

circumstances, demonstrates the necessity for a ruling

by this Court, imposing the procedural and substantive

standards of fairness contained in the Federal Rules

of Criminal! Procedure upon the courts of appeal in such

cases. In view of the important function of the courts

of appeal in enforcing the valid orders of administrative

agencies. the questions thus presented are significant.

The absence in such eases of any appellate review, other

than by this Court, makes it appropriate and necessary

that procedural safeguards be clearly laid down for the

guidance of the Federal courts.

II.

The record upon which the Court of Appeals rendered

judgment imposing a $100,000 fine upon Petitioner showed

25 violations of its temporary order, all of which occurred

prior to the change in Petitioner’s management. The

Federal Trade Commissica does not contest the ‘‘new

management’s’’ good faith compliance with the order

or the fact that no further violatiors have occurred

in the more than two and one-half years since the ‘‘new

management’’ took over.

It is clear, therefore, that the punitive fine imposed

was solely fo: the purpose of vindicating the Court’s

authority. Assurance of future compliance is manifestly

no longer required from a company which has been in

compliance for two and one-half years and which has

= oe

withdrawn from the business in which the violations

occurred. The absence of any necessity of assuring future

compliance should have been considered in imposing

sentence. United States v. United Mineworkers of

America, 330 U.S. 258, 303 (1947)

Il.

This Court recently, in United States v. Barnett, supra,

upheld the traditional power of Federal courts to punish

criminal contempt without the intervening protection of

the constitutional right of jury trial. This Court has

made it clear, however, that the power to punish for

criminal contempt is not without limits and that Federai

courts have a ‘‘special duty to exercise such an extra-

ordinary power witli the utmost sense of responsibility

and circumspection’’. Green v. United States, 356 US.

165, 188 (1958).

The manifest disregard by the Court of Appeals of

the extraordinary and mitigating circumstances shown in

Petitioner’s petition to reduce sentence, which made clear

the dire effect the fine will have, not only upon Petitioner,

but also upon its creditors (Cf. Moore v. United States,

150 F.2d 323, 325 (10th Cir. 1945), cert. denied 326 U.S.

740 (1945))}, is a clear abuse of the discretion thus vested

‘in Federal courts and indicates a complete failure to

apply the “‘responsibility and cireumspection’’ required in

such cases.

Moreover, such disregard of the effects of the fine

imposed is squarely in conflict with the principle estab-

lished by this Court in United States v. United Mine-

workers of America, supra. In that case, involving the

closing of all of the country’s bitumin‘us coal mines, this

Court reduced a criminal contempt fine from $3,500,000

to $700,000 by treating $2,800,000 of the fine as a condi-

oan OS

tional, or civil, contempt penalty, the payment of which

could de avoided by the union purging itself of contempt.

This Court explicitiy held that Federal courts ‘‘must.. .

in fixing the amount of a fine to be imposed as a punish-

ment or as a means of securing future compliance, con-

sider the amount ef defendant’s resources and the con-

sequent seriousness ef the burden to that particular

defendant’’. (7d. at 304)

The failure of the Court of Appeals to consider the

harshly punitive consequences of its fine upon Petitioner

is in clear conflict with this principle and, since only

this Court can review the decision of the Court of Ap-

peals, this petition should be granted.

The increasing importance and number of Federal

Trade Commission orders, whether enforced by contempt,

as in this case, or by civil penalty suit (15 U.S.C. §45

(6)(1)), require the establishment by this Court of prin-

ciples governing the procedural and substantive aspects

of the imposition of economic penalties required to en-

force administrative orders.

CONCLUSION.

For the foregoing reasons, we respectfully urge this

Court to grant the writ of certiorari requested by the

Petitioner.

Respectfully submitted,

CHarLes TRYNIN

Counsel for Petitioner.

Of Counsel

Lerman, WitiiaMs, BENNETT AND Barrp

208 South LaSalle Street

Chicago, Illinois 60604

March 1965

— >

APPENDIX.

Rule 32

FEDERAL RULES OF CRIMINAL PROCEDURE

(a) Sentence. Sentence shall be imposed without un-

reasonable delay. Pending sentence the court may commit

the defendant or continue or alter the bail. Before im-

posing sentence the court shall afford the defendant an

opportunity to make a statement in his own behalf and

to present any information in mitigation of punishment.

(b) Judgment. A judgment of conviction shall set

forth the plea, the verdict or findings, and the adjudica-

tion and sentence. If the defendant is found not guilty

or for any other reason is entitled to be discharged,

judgment shall be entered accordingly. The judgment

shall be signed by the judge and entered by the clerk.

(c) Presentence Investigation.

(1) When Made. The probation service of the

eourt shall make a presentence investigation and

report to the court before the imposition of sentence

or the granting of probation unless the court other-

wise directs. The report shall not be submitted to

the court or its contents disclosed to anyone unless

the defendant has pleaded guilty or has been found

guilty.

(2) Report. The report of the presentence in-

vestigation shall contain any prior criminal record

of the defendant and such information about his

characteristics. his financial condition and the cir-

cumstances affecting his behavior as may be helpful

in imposing sentence or in granting probation or

in the correctional treatment of the defendant, and

such other information as may be required by the

Court.

a ee

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

No. 13671 SerremsBer Term, 1964 January Session, 1965

In re: Hottanp Furnace Company, et al.

January 27, 1965

(Filed Jan 27 1965)

Before ScHNACKENBERG, Kitey and Swycert, Circuit

Judges.

This criminal contempt proceeding was begun on peti-

tion of the Federal Trade Commission alleging that

respondents ‘‘knowingly, wilfully and intentionally’’ vio-

lated and disobeyed an order of this court of August

5, 1959, directed against respondents, by failing and re-

fusing to comply with said order. The Rules to Show

Cause issued. Issues were joined by respondents’ answers,

and this court, without a jury,’ heard evidence and argu-

ments on the issues.

In the August 5, 1959 order of this court, respondents

were ‘‘commanded forthwith to obey and comply’’ with

an FTC order, entered July 7, 1958, ‘‘until and unless,’’

the Commissicn order ‘‘shall be set aside upon review

by this court or the United States Supreme Court, or

until further order of this court.’’

The Commission order of July 7, 1958 was entered

at the conclusion of hearings of proceedings against

Holland Furnace Company charging unfair methods of

competition and deceptive acts and practices in commerce.

1 Following the Supreme Court’s decision in United States v. Barnett, 376

U.S. 681 (1964), this court denied motions of certain respondents for

jury trial.

—

The order directed “respondent Holland Furnace Com-

pany, a corporation, and its officers, agents, representa-

tives, and employees, directly or through any corporate

or other device’’ in selling or distributing Holland prod-

ucts or services, to cease and desist from:

(1) Representing, directly or indirectly, that any of

its employees are inspectors or are employees or repre-

sentatives of government agencies or of gas or utility

companies.

(2) Representing, contrary to fact, that its salesmen

or servicemen are heating engineers.

(3) Representing that any furnace manufactured by

a competitor is defective or not repairable or that the

continued use of such furnace will result in asphyxiation,

carbon monoxide poisoning, fires, or other damage, or

for any other reason, when such is not a fact.

(4) Tearing down or dismantling any furnace without

the permission of the owner.

(5) Representing that a furnace which has been dis-

mantled cannot be reassembled and used without danger

of asphyxiation, gas poisoning, fires, or other damage,

or for any other reason, when such is not a fact.

(6) Requiring the owner of any furnace which has

been dismantled by respondent’s employees to sign a

release absolving the respondent of liability for its em-

ployees’ negligence, or of any other liability, before

reassembling said furnace.

(7) Refusing to immediately reassemble, at the re-

quest of the owner, any furnace which has been dis-

mantled by respondent’s employees.

(8) Misrepresenting in any manner the condition of

any furnace which has been dismantled by respondent’s

employ ees.

The Commission’s order, as enforced by this court’s

August 5, 1959 order, remained in full foree and effect

and was made permanent by this court’s affirmance of

ceaiiiicis

the Commission’s order on November 7, 1961. Holland

Furnace Co. v. FTC, 295 F.2d 302 (1961). The contempt

charges before us cover the period from August 5, 1959

to the entry of the final judgment by this court.

Certain respondents made requests for findings of

facts ‘‘specialiy,”’ under Rule 23(c), and for ‘‘special

findings.’** The court, in lieu of making the ‘‘special

findings’’ requested, makes its own findings of fact and

conclusions of law on the record and transcript of evi-

dence as follows:

I.

Holland Furnace Company is a Delaware corporation

with principal offices in Holland, Michigan. From April,

1946 to May, 1962 respondent Paul T. Cheff was Hol-

land’s president and chairman of its board of directors,

owning 6,004 shares of stock. His wife, Katherine

Nystrom Cheff, respondent, was a director from March,

1935 to May, 1962, and owned 43,004 shares of stock.

Her nepnew, respondent Edgar P. Landwehr, was a

director from April, 1945 to May, 1962, and owner of

24,410 shares of Holland stock. Respondents John D.

Ames, Ralph Boalt, Robert H. Trenkamp, and George

Spatta were directors, respectively, from April, 1954 to

June, 1961, from April, 1953 to May, 1962, from April,

1953 to July, 1962, and from April, 1951 to February,

1962. Ames owned 200 shares, Boalt 200 shares, Spatta

500-1000 shares, and Trenkamp 200 shares of Holland

stock.

Resondent Alvin W. Klomparens was vice president

and sales manager from Aonril, 1956 to March, 1960.

Richard J. Koerner, respondent, succeeded Klomparens

as sales manager, from April, 1960 to April, 1961, and

was also vice president from April, 1961 to June, 1962.

Respondent Henry Weyenberg was production manager

2‘*That, if any cr all of the above-named respondents is held to have

been in contempt of this Court’s order of August 5, 1959, this Court make

special findings of fact as to the conduct, events, and circumsvances upon

which such contempt conviction is based, eager findings as to the

conduct, events, and circumstances underlying any finding of a violation

of that order by any other respondent in this proceeding, including the

Holland Furnace Company, if such a violation is an element in the finding

that any or all of the above-named respondents has been m contempt.’’

a oe

and chief engineer of Hoiland from April, 1959 to April,

1960 and vice president after 1960. Jay A. Wabeke,

respondent, was manager of Holland’s Product Service

Department from the time of its creation in September,

1959.

The parties to this proceeding stipulated that 164

‘*attachments’’ to the contempt petitions, 132 attachments

to Holland’s answer, and two attachments to the Com-

mission’s reply to Holland’s answer ‘‘may be’’ received

in evidence and be considered by this court as if affiants

were witnesses; and that this court ‘‘may resolve’’ any

conflicts in the affidavits and determine credibility of

affiants. No concessions were made in the stipulation

as to truth or falsity of the statements therein and as

to whether respondents had power or authority over the

‘‘facts’’ stated in the affidavits or any responsibility

for any alleged violations asserted therein. The parties

waived right of confrontation of witnesses and right of

cross-examination.

In its answer to the petition for contempt, Holland

Furnace Company admits that the conduct of its em-

ployees in fifteen transactions, involving twenty-five sep-

arate violations, involving the following customers of

Holland, violated the August 5, 1959 order of this court:

ALLEN, Ailanta, Georgia

BIBEAU, Spokane, Washington

CLAYMANN, Seattle, Washington

CONDON, Denver, Colorado

EHRICH, Albert Lea, Minnesota

EWING, Peabody. Massachusetts

GRUMLINC, Munsfield, Ohio

HENDRICKSON, Albert Lea, Minnesota

HOOKER, San Francisco, California

NIELSEN, Chicago, Illinois

SHELLABARGER, Akron, Ohio

STEWART, Seattle, Washington

TAYLOR, Cuyahoga Falls, Ohio

THOMPSON, Cuyahoga Falls, Ohio

WINK, Spokane, Washington

=— oe

In addition, the testimony shows that the Attorney

General of Minnesota brought an action against Holland

for unfair and deceptive practices by its employees, and

several attorneys general in other states contemplated

or threatened similar action. This testimony and the

fifteen admitted instances of twenty-five violations by

respondent Holland Furnace Company of this court’s

order of August 5, 1959 represent, exemplify and illus-

trate the contempt of this court’s order during the entire

period covered by petition throughout the entire terri-

tory in which respondent Holland Furnace Company

operates, according to a regular and usual method by

which the corporate respondent has in that period and

in that territory sold and offered for sale its furnaces,

heating equipment, and parts therefor.

We are convinced beyond a reasonable doubt, on the

basis of the entire record, that Holland Furnace Com-

pany, acting through certain. of its officers, agents, rep-

resentatives and employees, through a ‘‘regular and

usual’’ sales practice of its employees in commerce has

‘knowingly, wilfully and intentionally’’ violated and dis-

obeyed in one or more instances each of the prohibitions

of the August 5, 1959 order of this court; and accordingly

we find the Holland Furnace Company guilty of criminal

contempt of this court.

a5.

We are convinced beyond a reasonable doubt, on the

evidence in this case, that respondent Paul T. Cheff ts

guilty of ‘‘knowingly, wilfully and intentionally’’ causing

and aiding and abetting in causing, in one or more in-

stances, violations by Holland Furnace Company of each

of the eight prohibitions in the August 5, 1959 order of

this court.

There is abundant evidence from which we find that

Cheff was the dominant head of Holland Furnace Com-

pany in the period during which the Holland sales prac-

tices subject of the Commission’s cease and desist order

occurred; that he was the dominant head of Holland

ome FQ, om

when the Commission’s hearings were conducted, when

the cease and desist order issued, when the August 5,

1959 order of this court was entered, and thereafter

until May, 1962; that he was well aware of the con-

demned salez practices and of the prohibitions in the

order of this court; that following the entry of the order

Cheff made no bona fide attempt to comply or achieve

compliance with the order; that on the contrary he pur-

sued a course of conduct designed to construct an appar-

ent compliance with the order and to devise a defense

against charges of violation; that he established the

Product Service Department, not to ‘‘diseipline’’ the

Holland ovganization or bring about compliance with this

court’s order, but as a faeade behind which to continue

the condemned sales practices; that his appointment of

Wabeke to head the department was in furtherance of

Cheff’s plan to make no substantial change in Holland’s

sales practices since he could not help but know that

Wabeke would not be effective in investigating complaints

and disciplining the sales foree; that Cheff had no in-

tention of permitting Wabeke to be effective; that he

frustrated Wabeke’s sincere attempts to accomplish com-

pliance with this court’s order by telling Wabeke he had

complete authority to discharge salesmen while telling

others that Wabeke could only “recommend” discharge;

that in the Holland Furnace Company house organ, the

‘*Firepot,’’ Cheff complained of recommendations to dis-

charge salesmen, and that with the knowledge and ap-

proval of Cheff, salesmen whom Wabeke had _ recom-

mended discharging were praised in the publication; that

Cheff’s occasional meetings with division sales managers,

without Wabeke, at which he read from extensive notes

to the eight or so in attendance, were apparent rather

than real attempts to comply with Uus court’s order;

that instead of traveling to meet with Better Business

Bureaus in various parts of the country to adjust serious

complaints, he sent Wabeke and Wevenberg, neither of

whom was suited to the purpose; that Cheff did not

himself go out into the field to meet with braneh man-

agers or salesmen, or with Wabeke, to induce compliance

_—

with the order, and did not take pains to see that his

entire sales organization understood the seriousness of

compliance, as did his successors in management by

bringing 2,000 salesmen to Holland, Michigan; that his

bulletin, ‘‘The policy we work by,’’ purporting to bring

about compliance with the courts order, carefully avoided

the word ‘‘discharge’’ and purposely avoided mentioning

restraint on unauthorized dismantling of furnaces—that

the bulletin was ireffective to influence radical changes

in Holland’s sales policy, even if, and there is doubt

of this, it reached the salesmen; and that Cheff’s design

in his relations with directors, employees or customers

was to insulate Holland and himself from compliance

with this court’s order and from guilt for non-compliance.

Cheff made no substantial change after August 5, 1959

in Holland’s sales practices or in the fundamental struc-

ture underlying the practices. Holland’s policy remained

the same: working on the replacement of fur:aces in-

stead of the original furnace market, operating on a

straight commission basis with salesmen, and higher

prices for Holland furnaces than its competitors, and

realizing profit only on sales of furnaces, not on repairs

or cleaning. The loose sales hierarchy, with tenuous

relationship between Cheff and the sales managers, be-

tween them and the division sales managers, and between

them and the branch managers, remained as it had been.

Cheff remained aloof from the sales managers, division

managers and salesmen. All this contributed to a condi-

tion which lent itself to undisciplined sales practices.

Moreover, Cheff’s unbending attitude toward the Com-

missien’s cease and desist order and his confidence in

eventually setting it aside were ar obstruction to change

and to compliance with the court’s order.

= aoe

III.

Alvin W. Klomparens was employed by Holland in

1937, and served as sales manager and vice president

from April, 1956 until April, 1960. He was succeeded

by Richard J. Koerner, who was employed in 1948, and

was a division sales manager when he was appointed by

Cheff as sales manager to succeed Klomparens. After

Koerner served in that position for one year, Cheff

appointed him also a vice president.

We are convinced beyond a reasonabic doubt, by the

evidence in this record, that respondents Klomparezs

and Koerner aided and abetted in causing the proven

violations of this court’s order of August 5, 1959 during

the respective periods of time each served as sales

manager.

Both of these respondents were well aware of Holland’s

sales practices, of the proceedings before the Federal

Trade Commission, and of the August 5, 1959 order of

this court. The oral and documentary proof has convinced

us beyond a reasonable deubt that each of these respond-

ents willingly lent himself to Cheff’s program of main-

taining the sales practices which were prohibited by this

court’s order. They not only aided and abetted Cheii’s

design by disregarding what obligation the office of sales

manager imposed on them in view of the order of this

court, but they aided and abetted the violation of that

order in an affirmative way. Klomparens edited the

‘*Firepot,’’ and requested, wrote and approved articles

directed at the sales force with the intention of neutraliz-

ing any attempt by Wabeke’s Product Service Depart-

ment to bring about compliance. And Koerner, after his

appointment as sales manager, wrote division sales man-

agers that only he and Cheff had power to discharge

and that sales managers must fight ‘‘obstacles’’ such as

the Product Service Department and the Better Business

Bureaus.

—

IV.

We find that the evidence does not prove beyond a

reasonable doubt that Henry Weyenberg and Jay A.

Wabeke caused or aided and abetted in causing respond-

ent Holland Furnace Company to violate and disobey,

and fail and refuse to comply with, the order of this

court. They have not committed criminal contempts of

this court and of its lawful authority.

During the period covered by the contempt citation

herein, respondents Weyenberg and Wabeke had no real

or effective power or authority over or responsibility

for the sales operations of the company or the actions

of its agents, representatives, and employees in connec-

tion with the offering for sale, sale, and distribution

of its products and services, and no real or effective

power or authority over or responsibility for the selec-

tion, employment, promotion, demotion, transfer, removal,

or discharge of those agents, representatives and em-

ployees.

V.

We find the record shows that directors John D. Ames,

Ralph Boali, George Spatta, and Robert H. Trenkamp

were grossly negligent in failing to perform fully their

duties as directors of Holland Furnace Company. and

in relying upon Cheff’s assurances that this court’s order

was not being violated or disobeyed. The gross negligence

in this case does not, however, constitute criminal con-

tempt. Trenkamp’s position, as attorney for Holland

during and after the proceedings before the Commission,

imposed upon him a special responsibility, in addition

to that which he had as director. It is questionable, to

say the least, whether this professional responsibility

was discharged by Trenkamp in a manner that reflected

fully an awareness of this added responsibility.

There is no justification u»on testimony in the hearing

and the facts stated in their answers to the petition,

which we are taking as true, to infer that these respond-

ents did anything affirmatively or’ positively to cause

—lla—

or to aid and abet in causing violations of this court's

order. We have a reasonable doubt that they knowingly,

wilfully and intentionally caused or aided and abetted

in causing respondent Holland Furnace Company to vio-

late the order. We find that the evidence does not prove

beyond a reascnable doubt that directors Ames, Boalt,

Spatta, and Trenkamp are guilty of the criminal con-

tempt charged against them. The rule to show cause

as to them is discharged.

What we have said in the next preceding paragraph

about the above-named four directors applies equally

to Katherine Nystrom Cheff and Edgar P. Landwehr,

who filed no answers. The record is virtually silent as

to them, and justifies only the inference that they were

grossly negligent in their duties. It does not justify an

inference that they knowingly, wilfully and intentionally

caused or aided and abetted in causing the violation

of this court’s order. The rule to show cause as to them

is discharged.

a

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Chicago 4, Illinois

January 27, 1965

Before

Hon. Elmer J. Schnackenberg, Circuit Judge

Hon. Roger J. Kiley, Cirenit Judge

Hon. Luther M. Swvgert, Circuit Judge

In re: HOLLAND FURNACE COMPANY ) Petition

) for Crimi-

No. 1367] ) nal Con-

) tempt.

JUDGMENT ORDER

(Filed Jan 27 1965)

This cause having come on to be heard in open court on

the petition of the Federal Trade Commission, filed March

19, 1962, and the order to show cause as prayed in said

petition, which order was issued March 19, 1962, and

which order directed Holland Furnace Company to an-

swer said petition and to show cause, if any there be,

why it should not be adjudged in criminal contempt of

this court, and punished for such criminal contempt, by

reason of having knowingly, wilfully and intentionally

violated and disobeyed, and failed and refused to comply

with an order of this court entered on August 5, 1959, in

Canse No. 12451, entitled on the records of this court

“Holland Furnace Company, Petitioner, v. Federal Trade

Commission, Respondent,” all as appears from the said

petition of the Federal Trade Commission, and the an-

swer of Holland Furnace Company filed August 15, 1962,

— 13a —

and its further answer filed November 27, 1962, a reply

to said answer and further answer filed April 18, 1963 by

the prosecutors appointed by this court, together with

said prosecutors’ motion for a finding that Holland Fur-

nace Company has committed criminal] contempt of this

court and that the court adjudge punishment «ccordingly,

as well as the answer of Holland filed September 30,

1963; and

This cause also having been heard on the verified peti-

tion filed April 19, 1963 by the attorneys appointed to

prosecute on behalf of the court, which petition named as

additional respondents herein Paul Theodore Cheff, Kath-

erine Nystrom Cheff, Edgar P. Landwehr, John D. Ames,

Ralph Boalt, Robert H. Trenkamp, George Spatta, Alvin

W. Klomparens, Richard J. Koerner, Henry Weyenberg

and Jay A. Wabeke; and the answer of said additional

respondents filed herein, including the amendments to

answer and a supplemental answer, the prosecution’s

replies to all of said respondents’ answers, and the court

having reserved its ruling on the motions of respondents

Wabeke and Weyenberg that the order to show cause be

discharged as to them; and

The court having heard and considered the evidence

offered in open court in support of the petitions and the

evidence offered by various respondents, and the cause

having been submitted to the court thereon, and the court

having considered the motions of the various respondents

for a discharge of the rale to show cause and having con-

sidered the various briefs and memoranda of law filed by

counsel representing all respondents and said prosecutor,

and the court having this day filed a written opinion which

makes findings of fact in this case ;

The court finds that, as to the respondents Wabeke and

Weyenberg, it has not been proved by evidence beyond a

— l4a —

reasonable doubt that they knowingly, wilfully and inten-

tionally caused, or aided and abetted in causing respond-

ent Holland Furnace Company to violate, disobey and

fail and refuse to comply with said order of this court

entered on August 5, 1959.

As to respondent Katherine Nystrom Cheff, the court

finds that it has not been proved by evidence beyond a

reasonable doubt that she knowingly, wilfully and inten-

tionally caused, or aided and abetted in causing respondent

Holland Furnace Compary to violate, disobey and fail

and refuse to comply with said order of this court en-

tered on August 5, 1959.

As to the respondents Edgar P. Landwehr, John D.

Ames, Ralph Boalt, Robert H. Trenkamp and George

Spatta, the court finds that it has not been proved by evi-

dence beyond a reasonable doubt that they knowingly,

wilfully and intentionally caused, or aided and abeted in

causing respondent Holland Furnace Company to violate

and disobey, and fail and refuse to comply with said

order of this court entered on August 5, 1959.

It Is Therefore Ordered that said rule to show cause

is hereby discharged as to said Henry Weyenberg, Jay

A. Wabeke, Katherine Nystrom Cheff, Edgar P. Land-

wehr, John D. Ames, Ralph Boalt, Robert H. Trenkamp

and George Spatta.

And having considered the evidence offered in open

eourt and the admissions made in the answer of respond-

ent Holland Furnace Company, the court finds that it has

been proved beyond a reasonable doubt that said respond-

ent knowingiy, wilfully and intentionally violated, dis-

obeyed, failed and refused to comply with said order

of this court entered on August 5, 1959; that, as to re-

spondents Paul Theodore Cheff, Alvin W. Klomparens

and Richard J. Koerner, the court finds that it has been

— 15a —

proved beyond a reasonable doubt that they and each of

them knowingly, wilfully and intentionally caused, and

aided and abetted in causing, the aforesaid violations by

Holland Furnace Company of the said order of this court,

entered-on August 5, 1959; and said Company and Cheff,

Klomparens and Koerner have thereby committed crimi-

nal contempt of this court and of its lawful authority.

It Is, Therefore, Ordered that said Holland Furnace

Company, Paul Theodore Cheff, Alvin W. Klomparens

and Richard J. Koerner be and they are hereby each

adjudged in criminal contempt of this court, by reason

whereof the court imposes a fine on said Holland Furnace

Company of One Hundred Thousand Dollars, and cos

to be taxed by the clerk of this court, payable vont

and that execution issue therefor; and also by reason

whereof the court sentences Paul Theodore Cheff to

imprisonment for a period of six months and he is

ordered committed to the custody of the Attorney Gen-

eral of the United States or his authorized representative

for imprisonment for said period of six months; and also

by reason whereof the court sentences the respondents

Alvin W. Klomparens and Richard J. Koerner each to

pay a fine of Five Hundred Dollars forthwith, and in

default of payment of said fine each is to stand com-

mitted to the custody of the Attorney General of the

United States or his authorized representative for im-

prisonment until said fine be paid or until otherwise dis.

charged as provided by law, said fines and costs to be

payable to the clerk of this court, either in United States

currency or a bank’s certified check.

It Is Ordered that the clerk deliver a certified copy of

this judgment order and commitment to the United States

marshal and that the said copy serve as the commitment

of those respondents subject to commital as aforesaid,

— 16a —

In tHE Unrrep Srates Court or APPEALS

For The Seventh Circuit

No. 13671

In re

HOLLAND FURNACE COMPANY, ET AL.

MOTION OF RESPONDENT HOLLAND FURNACE

COMPANY FOR LEAVE TO FILE PETITION FOR

RECONSIDERATION, FOR REDUCTION OR REMIS-

SION OF FINE, FOR A HEARING IN SUPPORT

THEREOF, FOR RECONSIDERATION OF THE MO-

TION FOR A STAY OF EXECUTION AND FOR A

FURTHER STAY OF EXECUTION

(Filed Jan 29 1965)

Respondent, Holland Furnace Company, by its attor-

ney, Charles Trynin, respectfully moves this Court for

leave to file the attached petition for a reduction or re-

mission of the fine imposed on Holland Furnace Company,

for a hearing at which Holland Furnace Company, (as

constituted under new management since July 27, 1962),

its creditors and stockholders may present facts and be

heard, and for reconsideration of this Court’s denial of

a stay of execution, and for a further stay of execution,

all as prayed for in the attached petition.

Dated: January 29, 1965.

/s/ Charles Trynin

Charles Trynin

Attorney for Respondent

Holland Furnace Company

c/o Leibman, Williams, Bennett

and Baird

208 South LaSalle Street

Chicago, Illinois 60604

FInancial 6-2200

—17a—

In THE Untrep States Courr or APPEALS

For The Seventh Circuit

No. 13671

In re

HOLLAND FURNACE COMPANY, ET AL.

PETITION OF HOLLAND FURNACE COMPANY

To

Hon. Elmer J. Schnackenberg, Circuit Judge

Hon. Roger J. Kiley, Circuit Judge

Hon. Luther M. Swygert, Circuit Judge

The petition of Holland Furnace Company (herein the

“Corporation”) by Charles Trynin (herein the “affiant’’)

respectfully shows to this Court, as follows:

1. The affiant, a member of the New York bar for

thirty-five years, is a director and the secretary of re-

spondent, Holland Furnace Company, and has been such

since July 27, 1962, the date on which new independent

management not affiliated with the Cheff group took con-

trol of said Corporation. He makes this petition, solely

on behalf of respondent Corporation, in support of the

attached motion, and is fully familiar with the matters

herein set forth.

2. Because of affiant’s illness, this Court most courte-

ously, by order dated September 22, 1964, excused affiant

from appearing as counsel for respondent Holland Fur-

nace Company at the September 28, 1964 hearing and pro-

vided that substitute counsel for said respondent need not

appear at said hearing and that counsel would be given

an opportunity to present argument in behalf of the Cor-

= oe

poration at the conclusion of the hearing or within a

reasonable time thereafter. As will more fully appear

hereinafter, affiant desires an cpportunity to present to

the Court facts and circumstances which have transpired

since the period in which occurred the actions which are

the subject of this proceeding.

3. The affiant believes that because of new, unusual

and special circumstances, to be set forth below, this

Court will wish to consider setting a hearing at which

such circumstances can be properly presented and will

wish to consider, in the light of such circumstances, the

appropriateness of the $100,000 fine imposed on said re-

spondent and the impact of such fine on various banks

and other creditors of respondent who are not connected

in any way with the wrongs sought to be punished by said

fine. These circumstances, have not heretofore been pre-

sented because no necessity therefor was apparent prior

to the announcement of the Court’s judgment. The pro-

nouncement of the United States Supreme Court in United

States v. United Mine Workers of America, 330 U.S. 258,

304, (see Brief for Petitioner appended) leads affiant to

believe that it would be appropriate for the Court to

consider such circumstances.

4. The special, unusual and new facts (not presently

in the record since they arose after the events which were

the subject of this contempt proceeding), which the Cor-

poration desires the opportunity of presenting, establish

the following:

(a) New Management Simce July 27, 1962.

On July 27, 1962, new and independent manage-

ment, unrelated to the Cheff groun, took control] of

respondent Corporation. Affiant has been a director

and secretary since that date.

(b)

(ec)

(d)

(e)

— 19a —

Old Sales Program Abolished and New Distribution

Policy Instituted. :

By action taken by the new management on July

27, 1962 all branches were immediately closed, all

branch managers, retail salesmen and _ installers

were immediately discharged and the factory at

Holland, Michigan was closed. Since that date sales

of furnaces have been made solely to dealers. All

Sani-Vae Trucks have been disposed of and since

July 27, 1962 the Corporation has not engaged in

the furnace cleaning business. The entire sales

policy out of which the complaints to the Federal

Trade Commission arose was, on July 27, 1962,

abolished. 4

Complete Compliance Since July 27, 1962,

The Corporation has been in complete compliance

with the orders of this Court siree at least July

27, 1962, and no complaint has been filed with the

Federal Trade Commission (or, to the knowledge

of the Corporation, with any Better Business Bu-

reau or State Attorney General) based on any sale

made after July 27, 1962 or based on the sales

practices of the Corporation in force after the

abolition of the old sales policies on such date.

Corporation Liquidating.

The Corporation has been in liquidation since

August i, 1962 and has suffered a decline and loss

of assets exceeding $10,000,000 since that date.

Banks and Insurance Company Are Principal Credi-

tors.

The First National Bank of Chicago, Continental

Illinois National Bank & Trust Company of Chi-

(f)

(g)

=

cago, Prudential Life Insurance Company of Amer-

ica, The Chase Manhattan Bank, Morgan Guaranty

Trust Company, and First National City Bank are

the principal creditors of the Corporation. All of

its assets, (except inventory), are pledged to these

creditors as collateral for loans mad¥ prior to

1961. As a result of the process of liquidation,

these loans have been reduced to approximately

$1,934,000 as of January 8, 1965.

Financial Evaluation by First National.

According to a valuation made by The First Na-

tional Bank of Chicago as of January 12, 1965, the

estimated forced sale value of this collateral is

approximately $973,100, or $961,900 less than the

unpaid balance of the loans. Other creditors’

claims aggregate approximately $712,000. in the

event of a forced saie of such collateral, the esti-

mated $961,900 deficiency of secured loans and the

$712,000 of general creditors’ claims would aggre-

gate $1,674,000. To meet this $1,674,000 of un-

secured indebtedness, the Corporation’s only free

assets consist of inventory made in 1962, having

a book value of $1,389,000, including approximately

5,000 coal furnaces which are saleable only at the

rate of about 1,000 furnaces a year.

Discretionary Advances by Banks.

The Corporation has no free funds or working capi-

tal with which to continue, except discretionary ad-

vances out of collateral made on a week-to-week

basis by the secured creditors to defray the oper-

ating costs of continued liquidation.

— 2la —

(h) Possibility of Merger.

(i)

The Corporation’s only hope for survival and the

only hope of creditors for payment in full lies in

the consummation of a merger with another com-

pany which has been under discussion for several

weeks. If this does not materialize within 30 days,

the banks have announced that they will terminate

the voluntary weekly advances to the Corporation.

Should it appear imminent that these funds So re-

leased by these banks would be levied upon under

the fine imposed in this proceeding, such advances

would be immediately terminated, and the Corpo-

ration would be precipitated into bankruptcy. Merg-

er possibilities would thereby be irrevocably lost.

Impact of Fine on Banks and Other Creditors.

Under the foregoing situation, the entire burden of

the fine imposed by this Court would fail on the

creditors of the Corporation, both secured and

unsecured.

(j) Banks Wish To Be Heard.

Promptly after the announcement of the judgment

of this Court, affiant communicated with an officer

of The First National Bank of Chicago, the desig-

nated agent for the secured creditors, and affiant is

authorized to advise the Court that legal counsel

for the secured creditors desire an opportunity,

with the Court’s permission, to present facts and

evidence to support the claim that they and other

creditors are the principal parties who would be

seriously prejudiced and affected by the fine im-

posed upon the Corporation.

= “ae

ad

5. Petitioner believes that the equities of this situation,

where “unsuspecting creditors or innocent stockholders”

would be affected by the fine imposed, should be con-

sidered upon a motion to reduce or remit the fine. (See

Brief appended).

6. In view of the very unusual and special circum-

stances set forth above which have developed since the

cessation of the acts which are the subject of this pro-

ceeding, and in view of the absolute compliance by the

Corporation since July, 1962, and the impossibility of

any further violations by the Corporation, it is respect-

fully submitted that a hearing should be held on this

petition and that upon proof of the matters herein related

the fine should be substantially reduced or remitted.

7. Petitioner respectfully suggests that, if the Court

determines that a hearing on this matter is appropriate,

a stay of execution should be granted pending such hear-

ing and the disposition thereof.

8. Petitioner respectfully snggests that the Court order

a further stay of execution for a reasonable period of

time, to enable the Corporation, by legal action, to seek

exoneration from the former directors whose wilful con-

duct or gross negligence resulted in the imposition of the

fine. By this means, harm to creditors and stockholders

may be avoided, and those individuals (all financially re-

sponsible) whose actions or failure to act resulted in the

Corporation being fined, may be required to bear the

burden in the first instance.

Wherefore, Holland Furnace Company respectfully

prays as follows: that this Court grant a hearing at which

petitioner, its creditors and stockholders may be heard

and may present evidence of the facts alleged herein for

the consideration of this Court in determining the reason-

a

ableness of the fine, if any, which should be imposed upon

petitioner; that pending such hearing and the determina-

tion thereof, this Court stay the execution of its judg-

ment dated January 27, 1965 against Holland Furnace

Company; that this Court reconsider the fine imposed

upon Holland Furnace Company, and reduce or remit

said fine; that, unless said fine is remitted, this Court

grant a further stay of execution pending the completion

of an action to compel payment of such fine by one or

more of the individual respondents hereii.; and that this

Court grant to petitioner such other and further relief

as may be proper.

Heliand Furnace Company

By /s/ Charles Trynin

‘Seeretary and Director

State of Illinois )

County of Cook )

Charles Trynin, being first duly sworn, deposes and

says that he is the Secretary and a Director of Holland

Furnace Company, that he has read the above and fore-

going Petition subscribed to by him, and that the matters

set forth therein are true and correct.

SS.

/s/ Charles Trynin

Subscribed and sworn

to before me this 29th

day of January, 1965.

/s/ Dorothy M. Belina

Notary Public