United States District Court, E.D. Virginia, Newport News Division
MEMORANDUM OPINION & ORDER
RAYMOND A. JACKSON, District Judge.
Before the Court is Plaintiff Chesapeake Bank's Emergency Motion for an Order to Show Cause and the immediate appointment of a receiver. Plaintiff alleges that Defendants have violated the Temporary Restraining Order entered by this Court on June 13, 2014, and the Preliminary Injunction entered by this Court on July 14, 2014. The parties have fully briefed the issue and the Court held a hearing on the Motion on October 14, 2014. The matter is now ripe for judicial determination. For the reasons stated in open court, which are set forth more fully below, the Court FINDS Defendants in civil contempt, and ORDERS the appointment of a receiver.
I. PROCEDURAL AND FACTUAL HISTORY
On June 4, 2014, Chesapeake Bank filed a Complaint against Stuart and Deborah Berger, the sole shareholders of Alternatives Unlimited, Inc. Alternatives Unlimited is the entity to which Chesapeake Bank provided a revolving line of credit in 2010 pursuant to a Cash Flow Agreement. That credit was extended and modified over the years, and Chespeake Bank alleges that Alternatives Unlimited owes it over $7 million. Compl. ¶ 45. In 2013, the Bergers resigned as officers of Alternatives Unlimited.
Chesapeake Bank has also sued six LLCs, which it alleges are entities controlled and owned by the Bergers. The LLCs executed guaranty agreements and pledged real property as collateral to secure the repayment of Alternatives Unlimited's line of credit. It has further named as a defendant The Unlimited Group, Inc., also owned and controlled by the Bergers and the management agent for the LLCs. The final defendant is The Law Offices of Stuart Berger, PLLC, also owned and controlled by the Bergers. The Complaint alleges that Alternatives Unlimited fraudulently transferred funds to all defendants.
The Complaint has six counts. Count I seeks preliminary and final injunctive relief against the LLCs, the management company, and the Bergers. It alleges that the Bergers have diverted Alternatives Unlimited funds to the LLCs and the management company, and have also caused the LLCs to sell real property and use sales proceeds to pay other creditors. Chesapeake Banks says the funds it loaned were only intended to benefit Alternatives Unlimited, and needs the injunction to preserve assets pledged to secure its loans. Count II seeks appointment of a receiver for the LLCs and the management company pursuant to Fed.R.Civ.P. 66 and 28 U.S.C. § 754 to ensure the assets are disposed of in an orderly fashion.
Count III is a breach of contract claim against S & D Unlimited of Texas, LLC, alleging that it is obligated under a guaranty agreement to pay Chesapeake Bank because Alternatives Unlimited is in default but has not done so despite demand for payment. Count IV seeks a declaration that the Bergers' transfers of Alternatives Unlimited Funds were fraudulent and therefore void under Virginia law. Count V alleges all defendants were unjustly enriched by the funds transfers. Count VI seeks the imposition of a constructive trust.
On June 6, 2014, Chesapeake Bank filed a Notice of Hearing, with a certificate of service attesting that the notice was mailed by UPS overnight delivery to the Bergers and three attorneys, and by regular United States Mail to the LLCs, the management company, and the law firm. On June 10, 2014, it filed a Notice of Supplemental Exhibits, including two Alternatives Unlimited Quick books ledgers.
On June 12, 2014, this Court held a hearing on Plaintiffs Motion for a Temporary Restraining Order. Counsel conferred and submitted an agreed Temporary Restraining Order which this Court granted in part on June 13, 2014.
On July 11, 2014, this Court held a Motion Hearing on Plaintiffs Motion for a Preliminary Injunction. On July 14, 2014, the Court issued the Preliminary Injunction and deferred appointment of a receiver. Specifically, Defendants are enjoined from paying out or transferring any funds or property to any person or entity other than as specified in the injunction Order. Defendants are also required to provide the Bank with a full and complete accounting of any and all expenses paid during the pendency of the prior Temporary Restraining Order and the subsequent extension thereof within ten days of the date of the Order, and every thirty days during the pendency of the Preliminary Injunction.
On September 25, 2014, Plaintiff filed the instant Motion for an Order to Show Cause and renewed its Motion for Appointment of a Receiver. On September 29, 2014, the Court issued an Order requiring Defendants to appear on October 14, 2014, and to show cause why (1) Defendants should not be held in contempt for violating the Preliminary Injunction of July 14, 2014, and (2) the Court should not immediately appoint a receiver.
On October 14, 2014, the Court held a hearing on the Motion, wherein the Court heard witness testimony and received exhibits as evidence. As articulated from the bench, the Court FINDS Defendants in civil contempt and ORDERS the appointment of a receiver.
II. LEGAL STANDARDS
A. Contempts - Civil vs. Criminal
It is well-established that federal courts possess an inherent power to punish for contempts. Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991). This power reaches to contempts that occur before the court (i.e., "direct" contempts) and to contempts that occur out of court (i.e., "indirect" contempts). See Int'l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 833 (1994). In this case, indirect contempts are at issue.
As an initial matter, the Court must determine the whether the movant seeks to hold the defendant in civil or criminal contempt. Major v. Orthopedic Equip. Co., 496 F.Supp. 604, 611 (E.D.Va. 1980). This determination is important from the out set as it "may bear on the type of notice required, the applicable standard of proof, and other issues." Buffington v. Baltimore Cnty, Maryland, 913 F.2d 113, 133 (4th Cir. 1990) (citing Smith v. Sullivan, 611 F.2d 1050, 1052 (5th Cir. 1980)). "[C]riminal contempt [is] a crime in the ordinary sense, '" Young v. United States ex rel. Vuitton et Fils S.A., 481 U.S. 787, 799 (quoting Bloom v. Illinois, 391 U.S. 194, 201 (1968)), such that the subject of the sanctions is "entitled to full criminal process, " Bagwell, 512 U.S. at 827, including the use of an independent prosecutor, United States v. Neal, 101 F.3d 993, 997 (4th Cir. 1996). In contrast, civil contempt sanctions call for fewer procedural protections; notice and an opportunity to be heard are required. Bagwell, 512 U.S. at 827. Unlike criminal contempt, ...