Labor Logic

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John D. Finerty, Jr.

In previous columns, I have discussed tips for drafting settlement agreements, making offers for judgment, and the tax implications of settlements and judgments in employment cases. But what should a party do when a defendant refuses to comply with the terms of settlement? The recent case of Tranzact Technologies, Inc. v. 1Source Worldsite, et al., Case No. 04-1418 (7th Cir. May 4, 2005), provides some guidance.

Background

Tranzact sued 1Source for breach of contract and unjust enrichment after 1Source failed to make good on a $200,000 promissory note. Fortunately for Tranzact, the note also included a collateral agreement that assigned 1Source’s computer assets to Tranzact.

Prior to trial before a federal magistrate judge, the parties stipulated to a judgment based on 1Source’s representations that it had limited assets to satisfy any judgment. The parties consented to judgment being entered against 1Source as of Feb. 14, 2003; the order required 1Source’s chairman, John Wang, to deliver the collateral to Tranzact, free and clear of any liens, claims, or encumbrances.

The parties agreed to a specific provision directing 1Source to turn over collateral on the promissory note to Tranzact. The specific provision included in the order was as follows:

"Plaintiff is entitled to possession of the Collateral and John Wang, as agent for the Defendant, shall deliver, or cause to be delivered, all of the Collateral, free and clear of any liens, claims or encumbrances, to the Plaintiff on or before Feb. 12, 2003, or such other date as the Parties expressly agree to in writing."

Wang did not deliver the collateral to Tranzact, so Tranzact filed a motion in the District Court, seeking an order to show cause why Wang should not be held in contempt, and sought attorneys’ fees and costs. In response, Wang gave Tranzact the name and address for the warehouse storing the computer equipment, but insisted that Tranzact pay storage costs.

The magistrate judge awarded attorneys’ fees against 1Source, but the company had gone out of business. It did not award fees against Wang. The court then denied the balance of the contempt motion on the basis that Tranzact had failed to mitigate its damages by paying the storage costs. Tranzact appealed.
Jurisdictional Issues

As in most cases, the Court of Appeals first addressed the question of appellate jurisdiction. The court held it had jurisdiction under 28 U.S.C. § 1291, that makes final orders or judgment appealable as a matter of right. This case was a bit different, however, because the underlying merits of the case had been settled and the only "order" to appeal from was the magistrate judge’s order that denied Tranzact’s motion for contempt.

The court held that Tranzact’s contempt motion was a post-judgment proceeding, and that such proceedings are treated as a separate lawsuit under Sec. 1291 and appealable, if final. The court cited Transp. Cybernetics, Inc. v. Forest Transit Comm’n, 950 F.2d 350, 352 (7th Cir. 1991); and SEC v. Suter, 832 F.2d 988, 990 (7th Cir. 1987).

The Merits of Tranzact’s Contempt Motion

Not withstanding the defendants’ objections to jurisdiction (there were undecided issues after the District Court initially denied Tranzact’s contempt motion and a motion to reconsider), the court reviewed the denial of Tranzact’s contempt motion for an abuse of discretion.

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It held Tranzact did not have a duty to mitigate because the stipulation and judgment order issued in 2003 was clear, and denying the contempt motion on that basis was erroneous as a matter of law. The court also held that the magistrate’s failure to resolve disputed questions of fact — here, the issue of which party was responsible for storage costs — was an abuse of discretion. According to the court, due process requires a district court to resolve relevant factual disputes and allow discovery and an evidentiary hearing, if necessary, in a civil contempt proceeding.

An Important Lesson Learned from this Case

The defendants argued on appeal that the provision in the order that required Wang to deliver collateral to Tranzact was not enforceable through a contempt proceeding because it was nothing more than a contract provision. If correct, the plaintiff would have had to commence a separate breach of contract claim and, if it wanted to be in federal court, establish a separate basis for federal jurisdiction.

The court’s order was not a settlement agreement however, but rather a court order. That is, the provisions concerning surrender of collateral did not simply incorporate by reference the terms of settlement — they were specifically set forth in the order itself. The court held the order was "clear, unambiguous, and perfectly amenable to being enforced through a contempt proceeding."

For more information on this case or for assistance with federal litigation, contact John D. Finerty, Jr. at Michael Best & Friedrich LLP at (414) 225-8269 or on the Internet at [email protected].