957 F.3d 454
4th Cir.2020Background
- Klopp managed a Peoples Bank & Trust mortgage brokerage and received roughly $400 per steered loan via two Maryland shell companies, totaling over $500,000 in kickbacks.
- In November 2015 Klopp entered a Consent Order: $75,000 civil penalty, two‑year activity restrictions limiting participation "as follows" (prohibiting contacting/soliciting/dealing with consumer borrowers and certain settlement service providers), a safe harbor permitting acting solely as a personnel/HR manager for an FDIC‑insured bank, and reporting obligations including uploading the Order to the Nationwide Mortgage Licensing System and notifying regulators of changes in residence, roles, or ownership.
- Klopp failed to upload the Order, moved to California and opened a new branch without notice, continued communications with lenders and title/settlement service providers, and allocated substantial branch profits to himself.
- The district court held Klopp in civil contempt for violating the activity and reporting provisions and later ordered disgorgement of $526,796.36 (after deducting monthly HR pay and taxes).
- On appeal, the Fourth Circuit affirmed the contempt findings based on communications with third parties and reporting failures but concluded the district court misinterpreted the Consent Order as banning management and profit‑taking.
- Because disgorgement was calculated by treating all business profits as contemptuous (based on the erroneous broad interpretation), the Fourth Circuit vacated the disgorgement order and remanded for reconsideration tied to the actual violations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Klopp violated the Consent Order's activity restrictions | Klopp ran the mortgage business, profited, and communicated with lenders/settlement servicers in violation of the Order | Management and profit‑taking are not prohibited by the Order; restrictions only bar certain communications | Affirmed contempt based on impermissible communications with third parties; but management/profits are not categorically barred by the Order |
| Whether Klopp violated the reporting requirements (Registry upload; notice of residence/roles) | Failure to upload and failure to notify harmed regulators and counterparties through informational asymmetries | No concrete monetary harm resulted from those reporting failures | Affirmed contempt for reporting violations; informational harm sufficed |
| Proper interpretation of the Consent Order (scope of prohibitions and safe harbor) | Order should be read broadly to bar Klopp from participation beyond HR functions | Order should be interpreted within its four corners; prohibitions are limited to contacting/soliciting/dealing with specified parties and safe harbor permits HR roles | Court rejects overbroad reading; Order limited to specified restrictions and safe harbor narrows scope |
| Appropriateness and calculation of disgorgement sanction | Disgorgement of profits is proper to deter and deprive ill‑gotten gains | Disgorgement lacked causal connection because management/profits were not prohibited; sanction must be tied to actual contemptuous conduct | Vacated disgorgement and remanded because district court based award on an improper interpretation that treated all profits as contemptuous |
Key Cases Cited
- Rainbow School, Inc. v. Rainbow Early Education Holding LLC, 887 F.3d 610 (4th Cir. 2018) (single violation can support contempt; recognizes informational harms)
- Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct. 1178 (2017) (sanctions must be causally related to contemptuous conduct)
- United v. Ali, 874 F.3d 825 (4th Cir. 2017) (elements and burden‑shifting framework for civil contempt)
- United States v. Armour & Co., 402 U.S. 673 (1971) (consent decrees must be interpreted from their four corners as negotiated agreements)
- Kokesh v. S.E.C., 137 S. Ct. 1635 (2017) (disgorgement serves primarily to deprive violators of ill‑gotten gains for deterrence)
- In re Under Seal, 749 F.3d 276 (4th Cir. 2014) (standard of appellate review for civil contempt orders)