United States Court of Appeals,
Fifth Circuit.
No. 92-1363.
SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee-Cross-Appellant,
v.
Maxwell C. HUFFMAN, Jr., et al., Defendants,
Maxwell C. Huffman, Jr., James T. Henry and John T. Forsberg, Defendants-Cross-Appellees,
and
James F. Stewart, Defendant-Appellant-Cross-Appellee.
Aug. 2, 1993.
Appeals from the United States District Court for the Northern District of Texas.
Before POLITZ, Chief Judge, GOLDBERG, and JONES, Circuit Judges.
EDITH H. JONES, Circuit Judge:
This case calls on us to decide whether an order of disgorgement fashioned at the behest of
the SEC is a "debt" under the Federal Debt Collection Procedures Act of 1990 ("Debt Act"), 28
U.S.C. § 3001 et. seq. If so, its repayment is subject to state property law exemptions incorporated
in the Debt Act. We hold that an order of disgorgement is not a "debt" as contemplated in the Debt
Act. Since the district court concluded otherwise, its order of disgorgement must be reversed and
remanded for a reconsideration of the amounts the defendants must pay.
I
In September 1990, the Securities and Exchange Co mmission filed civil suit against
defendants Maxwell C. Huffman, Jr., James F. Stewart , James T. Henry, John J. Forsberg, and
twenty-seven corporate defendants they controlled, alleging misuse of investor funds and fraudulent
financial statements in connection with securities offerings in violation of several provisions of the
securities laws. Without conceding liability,1 the individual defendants consented to permanent
1
Despite the fact that defendants made no admission of securities violations, both sides assume
that the amounts ordered to be repaid here are a form of "disgorgement," rather than the simple
settlement of a law suit. An amount owed under a judgment enforcing a settlement agreement,
which is a contract, might well be a "debt" for purposes of the Debt Act. But since defendants do
injunctions and orders to pay disgorgement in an amount representing the funds received from the
illegal activities alleged in the SEC's complaint, subject to a defense by the defendants of inability to
pay some or all of the disgorgement. The district court entered the settlement as a consent order.
It directed the defendants to pay disgorgement in the following amounts: Huffman—$133,774,
Stewart—$513,784, Henry—$201,943, and Forsberg—$152,719.
The defendants claimed they were unable to pay the disgorgement. Following a hearing, a
magistrate judge appointed by the district court determined that the Debt Act applies to disgorgement
orders and hence reduced the amount each defendant would have to pay in accordance with Texas
homestead, personal property, and retirement plan exemptions. The district court adopted the
magistrate judge's findings and conclusions and ordered the defendants to disgorge the following
amounts: Huffman—$4,000, Stewart—$354,925.59, Henry—$14,000, and Forsberg—nothing.
Stewart appeals, claiming that the magistrate judge miscalculated the amount he has available
after exemptions are subtracted. The SEC cross-appeals, arguing that the Debt Act does not apply
and that therefore the court was not required to exempt certain of the defendants' assets. Huffman
and Stewart respond that the Debt Act does apply to disgorgement orders.2
II
We first address whether the Debt Act applies to disgorgement orders in the context of a
securities violation. The Debt Act is the exclusive means for the United States and its agencies to
collect "debts." It permits an individual debtor to exempt from collection under the Act any property
that is exempt from debt collection under the state law of the debtor's domicile. 28 U.S.C. §
3014(a)(2)(A). The Act expressly does not apply to collection of any monies owed which are not
debts. 28 U.S.C. § 3001(c). The critical question is what the Act means by "debt." The Act defines
a "debt" as
(A) an amount that is owing to the United States on account of a direct loan, or loan insured
not make the argument that this case should be analyzed under standard contract principles, rather
than under disgorgement principles, we express no opinion on the merits of such an argument.
2
Henry and Forsberg are cross-appellants, but they elected not to file briefs. Our opinion
necessarily applies to their orders, however.
or guaranteed by the United States; or
(B) an amount that is owing to the United States on account of a fee, duty, lease, rent,
service, sale of real or personal property, overpayment, fine, assessment, penalty, restitution,
damages, interest, tax, bail bond forfeiture, reimbursement, recovery of a cost incurred by the
United States, or other source of indebtedness to the United States, but that is not owing
under the terms of a contract originally entered into by only persons other than the United
States.
28 U.S.C. § 3002(3)(A) and (B).
Although "disgorgement" nowhere appears on this list, the defendants argue that
disgorgement should be considered a form of "restitution" or an "other source of indebtedness to the
United States."
Despite some casual references in our caselaw to the contrary, see, for example, SEC v. Blatt,
583 F.2d 1325, 1335 (5th Cir.1978) (describing disgorgement order in one isolated phrase as "this
restitution"), disgorgement is not precisely restitution. Disgorgement wrests ill-gotten gains from the
hands of a wrongdoer. Commodities Futures Trading Comm'n v. American Metals Exchange Corp.,
991 F.2d 71, 76 (3rd Cir.1993); SEC v. Blatt, supra. It is an equitable remedy meant to prevent the
wrongdoer from enriching himself by his wrongs. Disgorgement does not ai m to compensate the
victims of the wrongful acts, as restitution does. SEC v. Commonwealth Chemical Securities, Inc.,
574 F.2d 90, 102 (2d Cir.1978). Thus, a disgorgement order might be for an amount more or less
than that required to make the victims whole. It is not restitution.
A disgorgement order also does not seem to be an "other source of indebtedness to the
United States." Construction of this catch-all phrase turns on the meaning of "indebtedness," which
itself refers to "debt." We have not traditionally understood a disgorgement obligation to be "a mere
money judgment or debt" but rather more akin to "an injunction in the public interest." Pierce v.
Vision Investments Inc., 779 F.2d 302, 307 (5th Cir.1986). Although Pierce involved the question
whether contempt sanctions enforcing a disgorgement order constituted a debt, resolution of the case
turned on the nature of the disgorgement order itself. Because disgorgement is more like a
continuing injunction in the public interest than a debt, we held in Pierce that the disgorgement order
could be enforced by contempt sanctions. Nothing in the Debt Act disturbs this traditional
understanding of the nature of debt in relation to disgorgement. Therefore, disgorgement is not an
"other source of indebtedness to the United States."3
In short, disgorgement is not a "debt" under the Debt Act. The defendants could not avail
themselves of state law exemptions under the Debt Act. This is not to say, however, that such
exemptions may never be taken into account by the court.
III
The district court has broad discretion in fashioning the equitable remedy of a disgorgement
order. See American Metals Exchange, supra. It may decide that some property should be exempt
from such an order and may take state law as its guide. In this case, however, no such discretion was
exercised because the magistrate judge and district court erroneously concluded that the Debt Act
applied to disgorgement, requiring the exemption of certain assets. As a result, we must reverse and
remand so that the district court may reconsider its decision in light of the inapplicability of the Debt
Act to these disgorgement orders.
Although the necessity for remand renders moot most of Stewart's factual challenges to the
magistrate judge's determination of his ability to pay, he raises one overriding issue that must still be
addressed. The magistrate judge took her cue for evaluating his ability to pay from an old Fifth
Circuit case that held an employer bound to prove "plainly and unmistakably" his inability to comply
with an FLSA injunction. Hodgson v. Hotard, 436 F.2d 1110, 1115 (5th Cir.1971), citing Arnold
v. Ben Kanowsky, Inc., 361 U.S. 388, 392, 80 S.Ct. 453, 456, 4 L.Ed.2d 393 (1960). Stewart
concedes that he had the burden to prove inability to pay, but he disputes that this burden is greater
than the usual civil preponderance standard. We agree with Stewart. Hodgson does not erect a
more-than-preponderance standard that SEC advocates and the magistrate judge evidently employed.
In Hodgson, egregious facts led to strong language expressing the court's disbelief at Hotard's sudden
alleged penury. As the court emphasized, the sole evidence of Hotard's inability to pay was his
3
Defendants mention two other arguments why the Debt Act should apply to the SEC's
disgorgement order. First, they invoke ejusdem generis, asserting that "disgorgement" is
sufficiently like the other 16 types of debt listed in the Debt Act to be an "other source of
indebtedness." For the reasons detailed above, we disagree. Second, they would apply the
Bankruptcy Code's all-encompassing definition of debt. 11 U.S.C. §§ 101(5), 101(12). This is
silly; no reason is advanced to equate terms defined quite differently in different statutes.
unsubst antiated testimony that he had no money. The record suggested he had closed o bank
ut
accounts and t ransferred property to evade an order under the FLSA. The court reversed and
remanded, holding that Hotard must prove objectively his inability to pay; "plain and unmistakable"
proof simply meant more credible proof than had theretofore been presented. In the wake of
Hodgson, Stewart had to prove by a preponderance the extent to which he is unable to pay the
disgorgement order.4 The district court was not bound, however, to accept his unsubstantiated,
self-serving testimony as true.
We leave to the trial court the decision whether on remand to re-open the evidence or to
re-evaluate it as to all four appellees in light of the thorough record already compiled.
For the above reasons, the judgment of the district court is REVERSED and the case
REMANDED for further proceedings.
REVERSED and REMANDED.
4
It does not disserve the SEC or other federal agencies to hold that a party bound by a consent
order implicating public rights must satisfy the court of his inability to pay by a preponderance of
the evidence. There is no statutory mandate for a higher burden of proof, and implying one from
the language in Hodgson verges on semantic gamesmanship. Hodgson 's careful description of
the types of evidence Hotard should adduce to prove inability to pay is far more useful to the
public than the vague, unusual call for plain and unmistakable proof.