7th Circuit vacates sanction in contempt judgment

The 7th Circuit Court of Appeals found that an order, while unclear, did require a company to become the operator of leases involving oil and gas fields in Texas. But the judges held the District Court judge didn’t fully explain why he was imposing the sanction he did, so the 7th Circuit vacated the sanction.

At issue in Securities and Exchange Commission v. First Choice Management Services Inc. et al.; SonCo Holdings LLC v. Joseph D. Bradley, receiver, and ALCO Oil & Gas Co. LLC, No. 11-1702, is the sanction imposed stemming from a settlement SonCo Holdings entered into with the receiver of First Choice Management Services, which had defrauded victims out of $31 million. Some of First Choice’s assets had been used to acquire “Hull-Silk” oil and gas leases in Texas through a sham corporation. SonCo claimed to have a valid legal interest in the leases obtained through the sham corporation. ALCO Oil & Gas Co. was the operator of the leases.

As part of the settlement, SonCo paid the receiver $600,000 and was ordered to "obtain a bond … that shall replace ALCO’s bond so that ALCO and the receiver may obtain the release of its bond paid for with the defrauded investor funds." ALCO had paid a $250,000 cash bond with the Texas Railroad Commission to assure payment of any costs the commission might impose on ALCO for failing as operator of the wells.  
 
SonCo failed to post the bond that would replace ALCO’s bond and didn’t obtain the commission’s authorization to operate the wells. The District Court held SonCo in contempt, ordered it to return the Hull-Silk leases to the receiver, and allowed the receiver to keep the $600,000 SonCo paid to the receiver. The receiver then assigned them to another company, which in turn assigned them to an unrelated party.

The 7th Circuit found the agreed order was poorly drafted but the language did indicate that SonCo posted a bond so ALCO’s could be released. The order doesn’t say that SonCo must be the operator; it could have engaged with another oil company to become the operator, noted Judge Richard Posner.

Since the District judge in this case used the term “contempt” when sanctioning SonCo, he had to prove the contempt by clear and convincing evidence, which he did not do. The 7th Circuit vacated the sanction and remanded with instructions: the District judge can reimpose the sanction he imposed upon demonstration that it is a compensatory remedy for a civil contempt after all; impose a different or even no sanction, whether for civil contempt or for misconduct not characterized as contempt; or proceed under the rules governing criminal contempts, wrote Posner.