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Securities & Exchange Commission v. Huffman

decided as corrected: August 2, 1993.

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.



Appeals from the United States District Court for the Northern District of Texas. D.C. DOCKET NUMBER CA3-90-2036-H. JUDGE Barefoot Sanders

Before Politz, Chief Judge, Goldberg, and Jones, Circuit Judges.

Author: Jones

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 Commission 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,*fn1 the individual defendants consented to permanent 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.*fn2

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 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 ...


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