7th Circuit Shows How "An Ounce of Prevention Is Worth a Pound of Cure"

Busy lawyers often assume that it's ok to skip a ministerial presentment hearing and await the Court's order scheduling a hearing on the merits.  Today's opinion from the 7th Circuit in United States v. Hyatt, reversing the finding of contempt and award of attorneys' fees for failing to respond to two subpoenas served on them by the SEC, shows why it's a BIG mistake to do so.   Here's the background from the Court's opinion:

The SEC initiated the contempt proceeding via a motion for a rule to show cause why Hollnagel and BCI should not be held in contempt.  The motion asked the court to: (1) order them to fully comply with the subpoenas; and (2) order them to show cause why they should not be held in contempt for their past noncompliance.  Accompanying this motion was a notice setting a date and time for a hearing at which the SEC said it would “present, and seek a hearing date regarding” its request for a show cause order. Hollnagel and BCI interpreted the notice and motion to mean that the initial hearing would be entirely ministerial—that the court would issue a showcause order and set another date on which the merits of
the contempt issue would be heard.  So they didn’t show up.

When the case was called and Hollnagel and BCI didn’t appear, the SEC skipped over the procedural preliminaries and moved right to the main event:  The agency’s lawyers asked the court to find Hollnagel and BCI in contempt.  The court did so, ordered them to fully comply with the subpoenas within two days, and imposed a $1,000-a-day fine for any noncompliance after that date.  The court later rescinded the fine, but left the contempt order in place and ordered Hollnagel and BCI to pay the [$33,000 in] SEC’s attorney’s fees, [which the district court later reduced to $6,000].

The 7th Circuit's opinion is especially valuable for its discussion of whether show-cause orders are even contemplated by the Federal Rules of Civil Procedure (it concludes they are not despite the fact that lawyers "routinely ask for such orders to be issued" and courts in the district "regularly treat show-cause motions as distinct from other motions").  The opinion is also valuable for its review of the contempt sanctions available under Rule 45 for not complying with subpoenas issued by an attorney (it concludes that "[while] nothing in Rule 45 or the accompanying commentary purports to limit the contempt power to subpoenas issued with more direct district court involvement or to require an intervening court order when the subpoena is issued by an attorney ... [i]t does not follow that a contempt motion for disobedience of a nonparty subpoena should be treated in exactly the same way as a contempt motion for violation of another kind of court order").

Notably, the day after the district court entered the contempt order, the non-party (BCI) filed a motion to vacate, arguing that it had been making reasonable efforts to comply with the subpoenas and therefore was not in contempt.  The district judge, however, denied the motion as moot because he thought BCI had waived its opportunity to contest the contempt finding by failing to show up at the September 3 hearing, and it was on this point that the 7th Circuit reversed and vacated the contempt order, saying:

As we have explained, although it was imprudent not to attend that hearing, the SEC’s notice and motion failed to give BCI notice that the agency would seek a contempt ruling at that time. As such, there was no waiver on the merits of the contempt issue. The district court never considered BCI’s claim that it had been making a good-faith effort to comply with the subpoenas. Had it done so, it might not have found BCI in contempt. See FED. R. CIV. P. 45(e) (“The issuing court may hold in contempt a person who, having been served, fails without adequate excuse to obey the subpoena.” (emphasis added)).  Treating the SEC’s procedural motion for rule to show cause as a substantive motion for contempt prejudiced BCI.  CONTEMPT ORDER VACATED.

Perhaps all's well that end's well, but BCI's attorneys could have saved themselves and their client a huge, expensive headache had they simply shown up at a five minute hearing on presentment of the motion and thereby avoided this entire tangled mess. 

The obvious practical lesson is that if you plan on skipping a hearing because you don't think anything substantive will happen, or perhaps you think your opponent or the Court won't overreach, then hopefully you'll recall the old adage first ascribed to the famous English jurist, Henry de Bracton, who regularly advised his clients that:

"An ounce of prevention is worth a pound of cure." 

Thanks for reading!

© Steve Jakubowski 2010

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