James D. Locke, Graydon O. Pleasants, William F. Shaffner,iii, Daniel Parker, Ronald Wisner, Robert O.tyler, S. William Burke, John R.newcomb, Ralph M. Hitchcock,jr., Richardrosenberg, Appellees, v. Fsi Finance, N.v.; Fsi Financial Group of Virginia, Inc.;jeanne A. Farnan, Yolanda M. Palmer, Appellants,sorrel Shares, Inc., Suriel Finance N.v., Linda Jennings,defendants.barclay Properties, Inc.; James D. Locke; Graydon O.pleasants; William F. Shaffner, Iii; Daniel Parker;ronald Wisner; Robert O. Tyler; S. William Burke; Johnr. Newcomb; Ralph M. Hitchcock, Jr.,; Richard Rosenberg,united States of America, Appellees, v. Jeanne A. Farnan; Fsi Financial Group of Va., Inc., Appellants,fsi Financial Group, Inc.; Fsi Financial Services Corp.;carolyn Holliday; Stanley Resnick; Fsi Finance, N.v.;yolanda M. Palmer; Sorrel Shares, Inc.; Suriel Finance,n.v.; Linda Jennings, Defendants.james D. Locke; Graydon O. Pleasants; William F. Shaffner,iii; Daniel Parker; Ronald Wisner; Robert O. Tyler; S.william Burke; John R. Newcomb; Ralph M. Hitchcock, Jr.;richard Rosenberg, Appellees, v. Fsi Finance, N.v.; Fsi Financial Group of Virginia, Inc.;jeanne A. Farnan; Linda Jennings; Appellants,yolanda M. Palmer; Sorrel Shares, Inc.; Suriel Finance,n.v., Defendants.barclay Properties, Inc.; James D. Locke; Graydon O.pleasants; William F. Shaffner, Iii, Appellees, v. Fsi Financial Group of Va., Inc.; Jeanne A. Farnan;thoroughbreds of Va., Inc; Linda Jennings, Appellants,carolyn B. Holliday, Trustee; First Federal Savings Andloan Assoc. of Wash.; Douglas A. Brooks, Trustee; Dewitthartewell, Trustee; Yolanda M. Palmer, Trustee; Piedmontfederal Savings and Loan Assoc.; Stanley Owens, Trustee;thomas O. Beane, Trustee; Marian J. Gemza, Trustee; Ralphd. Kaiser Co., Inc.; Christian Farnan, Defendants.barclay Properties, Inc.; James D. Locke; Graydon O.pleasants; William F. Shaffner, Iii; Daniel Parker;daniel G. Grove; Susan A. Sinclair; Ronald Wisner; Roberto. Tyler; S. William Burke; John R. Newcomb; Ralph M.hitchcock, Jr.; Richard Rosenberg; Appellees, v. Yolanda M. Palmer, Appellant,fsi Finance, N.v.; Fsi Financial Group of Virginia, Inc.;jeanne A. Farnan; Sorrel Shares, Inc.; Surielfinance, N.v.; Linda Jennings, Defendants.barclay Properties, Inc., James D. Locke; Graydon O.pleasants, William F. Shaffner, Iii, Daniel Parker, Ronaldwisner, Robert O. Tyler, Ralph M. Hitchcock, Jr. and Richardrosenberg, S. William Burke, John R. Newcomb, United Statesof America, Appellees, v. Yolanda M. Palmer, Appellant,fsi Finance, N.v., Fsi Financial Group of Virginia, Inc.,jeanne A. Farnan, Sorrel Shares, Inc., Surielfinance, N.v., Linda Jennings, Defendants.barclay Properties, Inc., James D. Locke, Graydon O.pleasants, William F. Shaffner, Iii, Appellees, v. Jeanne A. Farnan, Fsi Financial Group of Virginia, Inc., Fsifinance, N.v., Linda K. Jennings, Thoroughbreds Ofvirginia, Inc., Appellants,carolyn Holliday, Stanley Resnick, Defendants.james D. Locke, Graydon O. Pleasants, William F. Shaffner,iii, Daniel Parker, Ronald Wisner, Robert O.tyler, S. William Burke, John R.newcomb, Ralph M. Hitchcock,jr., Richardrosenberg, Appellees, v. Jeanne A. Farnan, Fsi Financial Group of Virginia, Inc., Fsifinance, N.v., Linda K. Jennings, Thoroughbreds Ofvirginia, Inc. Appellants,yolanda M. Palmer, Sorrel Shares, Inc., Suriel Finance,n.v., Defendants.barclay Properties, Inc., James D. Locke, Graydon O.pleasants, William F. Shaffner, Iii, Daniel Parker, Ronaldwisner, Robert O. Tyler, Ralph M. Hitchcock, Jr., Andrichard Rosenberg, S. William Burke, John R. Newcomb, Appellees, v. Yolanda M. Palmer, Appellant,fsi Finance, N.v., Fsi Financial Group of Virginia, Inc.,jeanne Farnan, Sorrel Shares, Inc., Surielfinance, N.v., Linda Jennings, Defendants.barclay Properties, Inc., James D. Locke, Graydon O.pleasants, William F. Shaffner, Iii, Daniel Parker, Ronaldwisner, Robert O. Tyler, Ralph M. Hitchcock, Jr., Richardrosenberg, S. William Burke, John R. Newcomb, Appellees, v. Yolanda M. Palmer, Appellant,jeanne A. Farnan, Fsi Financial Group of Virginia, Inc., Fsifinance, N.v., Linda K. J, 835 F.2d 874 (4th Cir. 1987)

These consolidated appeals raise a number of issues. In the course of argument, it was developed that a case pending in the Supreme Court of the United States, United States v. Klayminc, Nos. 85-1308, 85-6207, would, when decided, probably have a significant effect on one of the substantial issues. We therefore stayed our decision pending the Court's decision in Klayminc. Klayminc has been decided along with Young v. United States, with which it was consolidated, under the style Young v. United States, --U.S. ---107 S. Ct. 2124 (May 26, 1987). The parties have filed supplemental memoranda, which we have read and considered, as to the application of Young to our case, and so we now proceed to decision. We see no necessity for further oral argument.

We affirm in part and reverse in part and remand for further proceedings.

These consolidated appeals arise from these essential facts:

In August, 1982 plaintiffs James D. Locke and Barclay Properties brought an action against Jean Farnan and several companies owned by Ms. Farnan for fraud and breach of contract. The jury returned a verdict for plaintiffs against Farnan and FSI Financial Group, Inc. of Virginia and assessed damages at $2.45 million. Prior to entry of judgment on this verdict, defendants Farnan, Palmer, and FSI of Virginia organized a new corporation, FSI, N.V. FSI, N.V. is the alter ego of Farnan and Palmer and a wholly owned subsidiary of FSI of Va.

Plaintiffs thereafter sought to collect their judgment. They were granted a temporary restraining order in June 1983 to restrain the defendants from converting, assigning, moving, or disposing of their monies or assets "except to pay operating expenses," and on July 25, 1983, the order became a permanent injunction. Defendant Yolanda Palmer, a member of the Board of FSI, N.V., received notice of the injunction. After civil contempt proceedings on January 3, 1984, the district court found that the defendants were in contempt of court for violation of the permanent injunction. The district court found that FSI, N.V. had paid monies to satisfy the personal obligations of Farnan and to pay the salaries and expenses of persons not employed by FSI Finance, N.V. Farnan also engaged in efforts to conceal her assets from the plaintiffs. The defendants have appealed this order (the "civil contempt appeal").

In March and April of 1984, the district court issued orders to show cause why defendants Farnan, FSI of Va., and Palmer should not be held in criminal contempt for willful violations of the permanent injunction. On December 6, 1984, the district court found Farnan and FSI of Va. in criminal contempt. On May 9, 1985, the district court found Palmer in criminal and civil contempt. The defendants appeal both of these orders (the "criminal contempt appeals").

With regard to Farnan and FSI of Va., the district court found that the defendants had failed, under oath, to disclose the existence of FSI, N.V. in order to prevent the plaintiffs from collecting their judgment. The defendants also used the bank account of FSI, N.V. to avoid paying the judgment against them. FSI, N.V. authorized payments to Farnan for her personal use and to fulfill Farnan's personal obligations. These monies were transferred from FSI, N.V. in order to prevent the plaintiffs from collecting their judgment. These actions were knowing and willful violations of the permanent injunction. Farnan also knowingly denied the existence of some of these personal accounts.

With regard to defendant Palmer, the district court found that Palmer, as a member of the Board of Directors of FSI, N.V., authorized the payment of monies to Farnan in violation of the permanent injunction. These actions were taken knowingly and willfully for the purpose of evading payment of the judgment against Farnan and FSI of Va. The district court also found that Palmer, an attorney, filed an affidavit under oath stating that Farnan was not receiving $100,000 from the corporate account.

Subsequent to these decisions, Locke, Pleasants and Shaffner, joined later by Barclay, filed suit against Farnan, FSI, N.V., and Palmer alleging fraud and wrongful conversion. Default judgments were entered against Farnan and FSI, N.V. which are not appealed. The district court entered summary judgment against Palmer on the grounds that there were no material facts in dispute. Palmer had failed to respond to the plaintiffs' motion for summary judgment with affidavits or other evidence of specific facts. In addition, the district court found that the record contained sufficient evidence to justify awarding summary judgment against Palmer. Palmer appeals from this decision.

On March 20, 1984, Barclay filed an action to invalidate fraudulent transfers made by Farnan to shield certain real property from attachment. A judgment was entered in favor of Barclay on February 28, 1985. The district court found that the defendants had created a trust and transferred property to conceal their assets from the plaintiffs. The defendants appeal. On August 30, 1985, the district court awarded attorneys' fees for fees and costs incurred in this action. The defendants also appeal these orders.

On January 11, 1984, the defendants filed a counterclaim against the plaintiffs and their lawyers. The counterclaims alleged that the plaintiffs had obtained an unconstitutional prejudgment attachment, violated the antitrust laws, conspired to destroy the defendants' business relationships, defamed the plaintiffs, violated RICO, and unconstitutionally seized the defendants' property. The district court dismissed the counterclaim on the ground that the counterclaim did not state a claim for which relief could be granted. The district court also imposed Rule 11 sanctions on several defendants excluding Palmer. Defendant Palmer appeals these orders.

In the aspect of the proceedings in which Farnan and FSI of Va. were found guilty of criminal contempt and in which Palmer was found guilty of criminal and civil contempt, the district court had appointed Daniel Grove, Esq., to act as special prosecutor. Grove is a private attorney who represented the plaintiffs in obtaining their judgment for $2.45 million against defendants.

Young unmistakably holds that the district court erred in appointing Grove to prosecute the criminal contempt actions because he was an attorney interested in the outcome of the proceedings. The only dispute before us about the application of Young is whether the failure of some or all defendants to object in the district court to Grove's appointment waived their right to assert reversible error on appeal. We think not. A plurality of the Court in Young ruled that the appointment of interested counsel to prosecute criminal contempt convictions is so fundamental as not to be subject to the harmless error doctrine. This view was expressed in Part III-B of the opinion of Justice Brennan in which Justices Marshall, Blackmun, and Stevens joined. We think that this is tantamount to an expression of view that such an appointment was plain error that we note despite a failure by counsel to object before the district court. Further, we read the opinion of Justice Scalia, concurring in the judgment of reversal, as agreeing to the unavailability of the harmless error doctrine and thus, in our view, to be read as a fifth expression of view that an appointment of interested counsel was plain error, providing a majority vote for that ruling.

While we see no other errors in the criminal contempt convictions, we hold, as a consequence of our reading of Young, that the criminal contempt convictions of Palmer, FSI of Va., and Palmer must be reversed because they were prosecuted by an attorney having an interest in the proceedings. We remand this aspect of their cases for further proceedings consistent with these views.

We see no basis on which to disturb the order holding Palmer in civil contempt. The findings of the district court that Palmer committed civil contempt have substantial evidentiary support and are thus not clearly erroneous.

We also think that the summary judgment entered against Palmer is unassailable. She failed to demonstrate a dispute as to any material fact. Conversely, plaintiffs showed facts that entitled them to judgment as a matter of law.

With regard to the district court's invalidation of a fraudulent transfer made by Farnan, we think that the district court had jurisdiction over the action. We also think that the proof adduced showed that the district court's factual conclusion that the transfer was fraudulent is not clearly erroneous and it embodied a correct interpretation and application of pertinent Virginia statutory law.

We affirm the dismissal of Palmer's counterclaim against the plaintiffs. We previously dismissed the appeals of Palmer's co-plaintiffs because their appeals were untimely. In what remains of the counterclaim, we agree that Palmer did not allege a claim for defamation. She failed to allege that the challenged words were untrue, that she suffered damage therefrom or that the words were spoken with malice so that damage could be presumed. She also failed to allege a pattern of racketeering activity so as to state a cause of action under 18 U.S.C. § 1962.

Finally, we conclude that the district court's award of attorneys' fees must be modified. We find no fault in the manner in which the fees were fixed or the district court's findings as to the time and work spent on the case. But we note that the total allowance included compensation for prosecution of the criminal contempt proceedings. Since we conclude in Part II hereof that the convictions for criminal contempt cannot stand, it follows that the award must be reduced by the allowance attributable to this aspect of the case. We therefore vacate the award and remand this aspect of the case for recomputation of attorneys' fees so as to eliminate fees incurred in prosecuting the citations for criminal contempt.

AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.