The Sixth Circuit Court of Appeals recently concluded that distributing all of a company's cash to its owners after a class action settlement was reached but before the court's order to pay became final, thus leaving the company without the ability to pay class counsel's fees or administration costs as required under the settlement agreement, did not constitute contempt.
The trial court had originally determined that the distribution of the money constituted contempt because the defendant had knowingly violated the court's order to pay class counsel's fees. The Sixth Circuit, however, concluded that a finding of contempt is limited to the violation of a definite and specific court order. Although the court order was specific, it was not definite because it was conditioned on the settlement agreement being affirmed by the highest court from which any party sought review.
Accordingly, the Sixth Circuit reversed the trial court's ruling.
A copy of the opinion is available at: Link to Opinion
The defendant owned and operated a number of gyms. The plaintiffs were members of those gyms and believed defendant misrepresented the terms of its gym memberships, and brought a class action against defendant. The parties ultimately reached a settlement, and the settlement agreement required defendant to pay (1) $1.3 million to the class members, (2) class counsel's fees as ordered by the court, and (3) the claims administrator's fees and costs.
Some of the class members objected to the settlement. After a fairness hearing, the district court approved the agreement and ordered the parties to implement its terms. Some class members appealed the final order. The Sixth Circuit affirmed the trial court's order, and the Supreme Court denied certiorari. With the denial of certiorari, the trial court's order was final, and it was time for defendant to pay. The defendant, however, was out of money. It had sold all of its gyms and distributed nearly $10.4 million of the sale proceeds to its four owners through what it termed "tax distributions."
The terms of the settlement agreement had required the defendant to place in escrow the amount owed to the class members, but it did not include any such requirement for the amounts owed to class counsel or the administrator. Two days before its payment obligations under the settlement agreement came due, the defendant notified the trial court it was out of money and could not meet its remaining obligations under the agreement.
The plaintiffs asked the trial court to hold defendant and its four owners in civil contempt. The trial court did so, and ordered them to pay the full amount owed to class counsel and the claims administrator. The defendant and four owners appealed the contempt finding.
The Sixth Circuit quickly acknowledged that contempt is a serious finding, and that courts "must exercise the contempt sanction with caution and use the least possible power adequate to the end proposed." According to the Court, "contempt is a measure of last resort, not first resort."
The Court then identified the issue on appeal as: "A party cannot be held in contempt unless it has violated a definite and specific court order. Exactly when a court order becomes definite and specific is the question."
For purposes of contempt, the court order at issue must be both definite and specific. "When deciding whether a court order is 'definite and specific,' courts must construe any ambiguity in favor of the party charged with contempt." According to the Sixth Circuit, the burden of showing that an order is definite and specific is "heavy."
The Sixth Circuit observed that the date on which a court's order becomes definite and specific is normally not difficult to determine, but the question becomes more complicated where the court's command is conditioned to take effect upon the happening of a future event.
That complication existed here. The settlement agreement provided that defendant's obligation to pay would not become effective until the agreement was "fully and finally affirmed by the highest court" from which any party sought review. The trial court's order required defendant to pay class counsel and the claims administrator "in accordance with the terms and conditions set forth in the Settlement Agreement."
Based on this condition, the Sixth Circuit concluded that the trial court's order was specific, but not definite.
In particular, the timing of the payments was dictated by whether either party appealed. And the objecting class members did appeal, first to the Sixth Circuit and then they sought a writ of certiorari from the Supreme Court, which was denied. It was only after the time to request a rehearing expired that the trial court's order became definite.
The Sixth Circuit reasoned that until the order was "fully and finally affirmed" it remained possible that attorneys' fees could be reduced or the order reversed altogether. Although it would have been good business practice to set the money aside, according to the Court, the contempt power is not meant to force businesses into good business practices.
The Court also observed that the contempt power is not meant to force parties to comply with contracts, where a breach of contract action would be more appropriate. The Court concluded that defendant did not knowingly violate a clear and specific command of the court until its payment obligations under the order became effective, which was after the deadline to request a rehearing with the Supreme Court expired.
The Sixth Circuit acknowledged the well-settled rule that parties must comply with court orders even while appeals are pending, but held that the rule is inapplicable in the unusual circumstances where the command to act becomes effective only after the appeals are exhausted.
The Court then made the practical observation that plaintiffs could have required defendant to escrow the class counsel and administrator fees the way they did for the class payment. The Court was critical of plaintiffs' failure to do so. "If the plaintiffs wanted to ensure that defendant would be able to pay class counsel and the claims administrator, they could have insisted that defendant escrow those funds during the appeals. When a class-action settlement calls for payment from a company with shaky finances, self-help is indispensable. Concerned parties are well-advised to insist upon an escrow provision, or even personal guarantees from individual defendants."
The Sixth Circuit then addressed defendant's argument that it was impossible to comply with the trial court's order once it became definite. To show impossibility, a party has the burden to demonstrate that (1) it was unable to comply with the court's order, (2) its inability to comply was not self-induced, and (3) it took all reasonable steps to comply.
Although the trial court had held that defendant's inability to pay was self-induced, the Sixth Circuit concluded the trial court erred because it took into account defendant's actions that took place before the court's order became definite and specific. Accordingly, the Court remanded the matter to the trial court for the evaluation of defendant's conduct after the court order directing payment became final, and whether that conduct constituted contempt.
Finally, the Sixth Circuit rejected the argument that contempt proceedings are not the proper vehicle for enforcing a monetary award. The Court also rejected the owners' argument that the Court lacked jurisdiction over them because they were not a party to the settlement or the court order. "It is well settled law that courts have personal jurisdiction over non-party corporate officers who have notice of an injunction directed at their company and its contents. Second, those non-party corporate officers can be held in contempt for the corporation's failure to comply with the court's order, so long as they were responsible for the corporation's conduct and failed to take appropriate action to ensure performance."
The Sixth Circuit also concluded that the trial court erred in holding that the owners were jointly and severally liable. The Court instructed the trial court that, if the owners are found to be in contempt, the trial court is to determine the extent to which each owner is responsible.
The Sixth Circuit clarified when a court order becomes definite and specific in the unusual circumstance of when the order is dependent on future events. In doing so, the Court determined that the trial court erred in taking into consideration conduct that occurred prior to the order becoming final. Accordingly, the Sixth Circuit reversed the trial court's ruling, and remanded the case for further evaluation.
Ralph T. Wutscher
Maurice Wutscher LLP
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