Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

THE NATIONAL SPIRITUAL ASSEMBLY OF THE BAHÁ’ÍS OF THE UNITED STATES OF AMERICA UNDER THE HEREDITARY GUARDIANSHIP v. NATIONAL SPIRITUAL ASSEMBLY OF THE BAHÁ’ÍS OF THE UNITED STATES OF AMERICA (November 23, 2010)

The Bahá’í faith dates back to Persia and the mid-19th century. Its original group of followers in the United States formed the National Spiritual Assembly (the "Assembly") in 1909. In 1964, a group led by Charles Remey split off from the Assembly because of a disagreement over the line of succession. That group formed the National Spiritual Assembly Under the Hereditary Guardianship (the "Guardianship"). The Guardianship brought a lawsuit against the Assembly in the Northern District of Illinois. The suit sought possession of the Assembly's properties, including its magnificent house of worship in Wilmette, Illinois. The Assembly counterclaimed for trademark infringement and unfair competition. The district court held for the Assembly, finding that it was the highest authority for the Bahá’í Faith in the United States and was entitled to the exclusive use of its marks. In 1966 , the court entered an injunction prohibiting the use of the Assembly's marks by the Guardianship. The Guardianship dissolved shortly thereafter. Forty years later, the Assembly returned to court seeking contempt sanctions against the several individuals and organizations: a) Joel Marangella, who was Remey's assistant and actively involved in the Guardianship, but who later split off from Remey and organized several religious assemblies, including the Provisional National Bahá’í Council (the "Council") b) Franklin Schlatter, who was a founder, officer, and active member of the Guardianship, but who also later joined the Council, c) the Council, and d) two organizations created by Dr. Leland Jensen (Jensen served at one time as a Guardianship Board member but was no longer active in the organization at the time of the earlier litigation), one of which handles administrative matters and the other of which publishes books regarding the Bahá’í faith. After a thorough evidentiary hearing, Judge St. Eve (N.D. Ill.) concluded that the respondents were not in privity with the Guardianship and were thus not bound by the injunction. In so holding, she expressly rejected the Merriam decision from the First Circuit. The Assembly appeals.

In their opinion, Seventh Circuit Judges Bauer, Manion, and Sykes affirmed. The Court first commented briefly on the content of the original injunction. A few years after it was entered, the Supreme Court decided Presbyterian Church, in which it stated that a civil court could decide church property claims based on "neutral principles of law," but could not resolve underlying disputes over doctrine. The Court found certain aspects of the original injunction in tension with Presbyterian Church. Although the content of the injunction was not under review, the Court stated that it would proceed with some sensitivity to the constitutional issue. On the merits, the principal issue was whether the respondents, all non-parties to the original litigation, were nonetheless bound by the terms of the injunction. The general rule is that one is not bound by a judgment in litigation in which one is not a party. One exception is for a party's officers or agents. But that exception only applies when they act in their official capacities. Since the Guardianship dissolved decades ago, that exception cannot apply. Another exception applies to people acting in concert with a bound party. On the facts in this record, the exception also is not implicated. Finally, there is an exception for those in "privity" with a bound party. Although there is no hard and fast rule for what constitutes privity, the Court emphasized that the doctrine is bound by due process and it is restricted to those so closely tied with bound parties that it is reasonable to conclude that their interests were represented in the original litigation. The Court identified two categories of parties in privity -- successors in interest and those "legally identified" with a bound party. The two principal authorities on "legally identified" are Judge Hand's decision in Alemite and the First Circuit's decision in Merriam. The district court declined to follow Merriam because of a perceived tension with Alemite. The Court disagreed, concluding that the opinions could be reconciled. While Alemite's conclusion was that a salesman was not bound by an injunction issued against his corporation, the court recognized that a class of persons that are legally identified with the bound party could be bound. In Merriam, the court held that a key employee could be bound if there is a very close identity of interest combined with significant control in the organization and an involvement in the underlying litigation. Although the Court concluded that the district court erred in not following Merriam, it ultimately concluded that the court reached the right result. The Merriam inquiry includes factors such as a person’s position and degree of responsibility in a corporation, the person's participation in the original litigation, and the similarities between the activities of the bound party and the respondent. Here, with respect to Marangella, Schlatter, and the Council, the Court identified the significant dissimilarities between the activities of the Council and those of the Guardianship. Although Marangella and Schlatter participated in the Guardianship to varying degrees, they broke off and formed a new organization that was not a mere continuation of the old. In fact, the district court found a "robust doctrinal divide" between the organizations. They should not be considered "legally identified" with the Guardianship. Next, with respect to the Jensen organizations, the Court focused on Jensen's disassociation from any active governing role in the organization before the injunction was issued. Thus, Jensen does not even satisfy the “key employee” prong of the Merriam test. Finally, the Court rejected the argument that a trademark registration filing that claimed a path of successorship from Remey to the current president of Jensen’s organizations established legal successorship so as to bind those organizations. There was no evidence of any link between Remey and the organizations other than the filing.

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IN RE: RESOURCE TECHNOLOGY CORP. (October 1, 2010)

Resource Technology Corporation (RTC) used to be in the business of converting gas emissions from garbage landfills to electricity. It had exclusive gas conversion rights at several Illinois landfills. The business failed and RTC entered bankruptcy. The bankruptcy trustee entered into a settlement agreement with Chiplease and Scattered, two creditors founded by former RTC officers and directors. Among other things, the agreement provided: a) the trustee agreed to assume several of the landfill contracts and assign them to Chiplease and Scattered, b) Chiplease agreed to pay RTC's operating expenses during the bankruptcy, and c) Chiplease agreed to place $500,000 in escrow as security for the operating expense agreement. The bankruptcy court approved the settlement. The landfill owners objected to the assignment, arguing that § 365's "adequate assurance of future performance" requirement was not met. The principals of Chiplease and Scattered testified that the two companies would lend the requisite $3 million to the trust that had been set up to run the business. Nevertheless, the bankruptcy court rejected the assignment. It concluded that the trust was not capable of performing, that the trust could not require Chiplease and Scattered to lend the money, and that the two companies had financial problems of their own. Judge Kennelly (N.D. Ill.) affirmed. The trust appeals.

Meanwhile, Chiplease never established the $500,000 escrow as required by the agreement. Acting on a complaint by administrative claimants, the bankruptcy court rejected Chiplease's argument that it should be excused because it had already actually paid over $1 million in expenses and ordered it to establish the escrow. Judge Kennelly again affirmed. He also ordered Chiplease to establish the escrow and found it in contempt when it failed to do so. Chiplease appeals.

In their opinion, Judges Ripple, Rovner, and Sykes affirmed on the consolidated appeals. First, with respect to the assignment of the contracts, the Court recited the factors relevant to "adequate assurance”: financial ability, economic climate, whether a guarantee exists, the reputation of the party, and any past history. The bankruptcy court applied the correct standard -- a "more likely than not" requirement. The record showed that performance would require $3 million, that financing was essential, that the trust had no enforceable right to financing, and that the trust was controlled by the same people who controlled RTC when it entered bankruptcy. In addition, the record was practically silent with respect to how Chiplease and Scattered were going to raise the necessary funds. The bankruptcy court acted within its discretion in concluding that the trust failed to carry its burden. With respect to the escrow appeal, the Court concluded that the bankruptcy court did not abuse its discretion in requiring Chiplease to comply with the clear and unambiguous terms of the order. The bankruptcy court was interpreting its own order and is entitled to substantial deference. Finally, with respect to the contempt appeal, the Court concluded that the district court did not abuse its discretion. There was actually no dispute that Chiplease failed to comply with the court's order. Its only response was an “inability to pay” defense. Particularly in light of evidence that Chiplease presented in support of the landfill contract assumption that it had millions of dollars in assets, Chiplease did not meet its burden of proving that inability.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION v. HYATT (September 3, 2010)

In June and August of 2008, the SEC issued two third-party subpoenas to Brian Hollnagel and BCI Aircraft Leasing (BCI) in connection with other federal litigation. Over several weeks, BCI produced a significant amount of material. The SEC found problems with each production and requested additional information. The SEC ultimately became frustrated with what it believed to be inadequate compliance. On August 28, it filed a motion for a rule to show cause why BCI should not be held in contempt. The notice of motion indicated that the SEC would appear in court on September 3 and "seek a hearing date" on its motion. On September 3, BCI did not appear and the SEC asked the court to order a complete and proper production, to hold BCI in contempt, and to award attorney's fees. The court did so. It then issued two orders. The first indicated that the matter was continued to September 10 and asked for BCI's response to the motion by September 5. The second order was prepared by the SEC -- it held BCI in contempt, it ordered a full and complete production by September 5, it imposed a $1000 per day fine for noncompliance, and it awarded attorneys fees. The court vacated its first order the following day. Although BCI filed a substantive response, the court struck it as moot. Eventually, Judge Lindberg (N.D. Ill.) found that BCI had substantially complied with the subpoenas and rescinded the fine. He did not, however, vacate the contempt finding or the award of fees. BCI appeals.

In their opinion, Circuit Judges Posner and Sykes and District Judge Van Bokkelen vacated the contempt order. The Court first rejected BCI's argument that the subpoenas, which were issued by the SEC attorney, were not court orders and could not therefore be the basis for a contempt finding. Rule 45 of the Federal Rules of Civil Procedure is on point. Rule 45(e) specifically states that a court may hold a person in contempt for failure to comply with a subpoena and does not distinguish between a subpoena issued by a court or one prepared by an attorney. The Advisory Committee Notes make the point even more clearly. The notes, however, also make it clear that a court's contempt power should be used more sparingly and with greater attention to the non-party's rights when the subpoena is issued by an attorney. Although BCI did not exercise its rights to object to or move to quash the subpoenas, it was certainly entitled to adequate notice of an attempt to hold it in contempt. At a minimum, the SEC was required to give notice of the place and time for a hearing. Here, the Court noted that the SEC could have simply moved for a finding of contempt and provided notice to BCI of the time and place when it would appear on its motion. But it did not. Instead it used the obsolete and unnecessary “motion for rule to show cause” procedure. Under that procedure, the first appearance of the parties seeks only a preliminary order directing the alleged contemnor to "show cause" why it should not be held in contempt. The Court concluded that the SEC, having chosen to proceed in a certain manner, should be held to the traditional practice associated with that procedure. BCI did not have adequate notice that a hearing on contempt was to be held on September 3.

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RUSSIAN MEDIA GROUP v. CABLE AMERICA (March 10, 2010)

Russian Media Group (RMG) sells Russian language television programming to residential customers. It charges a monthly fee to its subscribers and, in return, obtains programming and maintains transmission hardware. RMG filed suit against Cable America, alleging that Cable America unfairly competed with it by obtaining similar programming by fraud. The district court found that Cable America distributed programming at twenty different multi-family residential properties by pirating an individual subscriber's satellite signal and distributing the signal to other residents of the properties for a fee. RMG moved for a preliminary injunction on its claim under the Illinois Cable Piracy Act. The district court granted the injunction and ordered Cable America to stop distributing the Russian language programming at the twenty properties and to disconnect any of its receivers. Cable America appealed that order but did not comply with the injunction. It was held in contempt for its conduct. Months later, Cable America filed an "emergency motion” to modify the injunction. The motion was denied on the grounds that it was not timely, it was not a real emergency, and that the district court lacked jurisdiction to modify an injunction that was on appeal. Cable America appeals.

In their opinion, Judges Flaum, Rovner and Hamilton affirmed. The Court first rejected Cable America's challenge to the breadth of the injunction. A district court has wide discretion in defining the parameters of an injunction, particularly where there is a record of unlawful conduct. The injunction may even prohibit otherwise lawful conduct when that is necessary to ensure appropriate relief to the plaintiff. The Court noted a pattern of deception and misconduct on the part of Cable America in the district court in concluding that the court did not abuse its discretion. The Court then refused to even consider the argument that the injunction was invalid because the Illinois Cable Piracy Act was preempted by federal copyright law. Defendants never raised that argument at the district court level. Finally, the Court rejected Cable America’s res judicata defense. Although the parties did settle a prior lawsuit that arose from a set of similar facts, the facts alleged and proved in the case before the Court occurred after the prior settlement and the injunction was based on a violation of a law that did not even exist at the time of the prior settlement.

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AMERICAN RIVER TRANSPORTATION CO. v. RYAN (August 27, 2009)

Kerrie Vesolowski was a passenger on a motor boat when it collided with a barge. Vesolowski sued American River Transportation Co. to recover for injuries in state court. American filed an action in federal court pursuant to the Shipowner's Limitation of Liability Act. The Act limits a shipowner's liability to the value of its ship if it can prove that the acts complained of occurred without its privity or knowledge. The Act also requires that any claims brought against the owner “cease” during the pendency of the proceedings. The district court ordered that Vesolowski’s proceedings be stayed. Vesolowski complied. After more than a year, American asked the court to find Vesolowski (and others) in contempt and to impose sanctions. The court granted the motion and required Vesolowski to dismiss her state court action. Vesolowski appeals.

In their opinion, Judges Bauer, Ripple and Wood reversed and remanded. The Court first clarified its jurisdiction, noting that it has jurisdiction over an order modifying an injunction but lacks jurisdiction over an order interpreting an injunction. The Court concluded that the order modified the earlier injunction because it required that the case be dismissed, rather than merely stayed. Addressing the merits, the Court noted that the order had two possible bases: 1) the Act requires a dismissal rather than a stay, or 2) the Act requires only a stay and the dismissal is a sanction for Vesolowski's actions during the stay. The Court rejected the first basis. The use of the word "cease" in the Act and the Act's provision preserving Vesolowski's right to her state court remedy convinced the Court that the Act only requires a stay. The Court rejected the second basis as well, as it found no grounds for a sanction. The state case remained stayed. Vesolowski's only action was to add additional defendants and theories of liability. American never had to respond in state court. The Court expressed its opinion that the district court did not intend the dismissal order to be a sanction. If it did, however, it was an abuse of discretion.

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