Thomas v. Hughes ( 2022 )

Case: 20-50827 Document: 00516223473 Page: 1 Date Filed: 03/03/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
March 3, 2022
No. 20-50827 Lyle W. Cayce
Clerk
Johnny Thomas, a Bankruptcy Trustee of Performance
Products, Inc.; Carolyn Pearcy, in her capacity as Trustee of the
Pearcy Family Trust, Trustee of the Pearcy Marital Trust,
and Executor of the Estate of James Pearcy,
Plaintiffs—Appellees,
versus
Lou Ann Hughes; Advanced Probiotics, L.L.C.;
Performance Probiotics, L.L.C.,
Defendants—Appellants.
Appeal from the United States District Court
for the Western District of Texas
USDC No. 5:16-CV-951
Before Higginbotham, Stewart, and Wilson, Circuit Judges.
Cory T. Wilson, Circuit Judge:
This case presents a coda to its companion appeal, No. 20-50671. In
that case, Lou Ann Hughes and Performance Probiotics, LLC appealed the
district court’s final judgment, entered after a jury verdict, awarding the
plaintiffs $3,911,252.80, consisting of compensatory and exemplary damages,
injunctive relief, and attorney’s fees and costs. See Thomas v. Hughes, No.
20-50671, ––– F.4th –––– (5th Cir. Mar. 3, 2022). Hughes and Performance
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Probiotics challenged certain of the district court’s evidentiary rulings, the
sufficiency of the evidence in support of the jury’s verdict, and other aspects
of the court’s judgment. We affirmed, save for one clerical modification to
the judgment to dispel any concern of a double recovery on Pearcy’s claim
for misappropriation of trade secrets. See id., slip op. at 27–28, 32–33. In this
appeal, Hughes seeks to vacate a post-judgment order the district court
entered (after Hughes noticed the primary appeal) that charges Hughes’s
membership interest in M. G. & Sons, a single-member LLC, and requires
both Hughes and M. G. & Sons to obtain leave of court before transferring
assets to third parties. Hughes contends that the order violates Texas’s
charging order statute. We disagree and affirm the order, as modified below.
I.
In November 2019, a federal jury found that Hughes fraudulently
transferred assets to evade a prior state-court judgment, that Hughes and
Performance Probiotics misappropriated trade secrets, and that Hughes
breached her fiduciary duties owed to Performance Products, Inc. (“PPI”),
as PPI’s attorney. The district court confirmed the jury’s findings and
entered a final judgment against Hughes and Performance Probiotics in
March 2020. In that judgment, the district court awarded Pearcy
$1,442,580.06 in compensatory damages and $1,200,000 in exemplary
damages. It also ordered Hughes to forfeit $859,490 in compensation she
received from Performance Probiotics and pay that amount to PPI and
awarded $409,182.74 in attorney’s fees and expenses to Pearcy and Thomas.
The total amount of the final judgment against Hughes and Performance
Probiotics was $3,911,252.80. 1
1
The district court also awarded post-judgment interest.
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Post judgment, after Hughes had appealed both the judgment and the
district court’s denial of her post-trial motions for judgment as a matter of
law and for a new trial, Pearcy and Thomas applied for a charging order
against Hughes’s membership interest in M. G. & Sons, LLC, of which
Hughes is the sole member. Hughes formed M. G. & Sons in January 2010,
a month before the underlying state-court lawsuit proceeded to trial. The
sole asset of M. G. & Sons is real property at 737 Isom Road, San Antonio,
Texas (the “Property”), which Hughes owned personally for several years
before transferring it to M. G. & Sons.
Over Hughes’s opposition, the district court granted Pearcy and
Thomas’s motion in September 2020. The resulting order stated that Pearcy
and Thomas “have the right to receive any distribution to which Hughes
would otherwise be entitled in respect of her membership interest in M. G.
& Sons, LLC.” The order further provided that:
Hughes and M. G. & Sons, LLC must obtain leave of this court
before [a)] transferring the Property to any third party;
b) transferring any funds to any third party except for
transactions in the ordinary course of business; or
c) transferring Hughes’[s] interest (or any part thereof) in M.
G. & Sons, LLC to any third party.
The district court found these restrictions “justified in light of Hughes’s
history of fraudulent transfers to avoid payment of a judgment.” 2
Hughes now challenges the order, specifically its requirement that
Hughes and M. G. & Sons must obtain leave of court before transferring the
Property, funds, or Hughes’s membership interest to any third party.
2
Hughes’s actions over the course of the now decade-long litigation between the
parties are discussed in greater detail in our opinion addressing the underlying merits. See
Thomas, No. 20-50671, slip op. at 2–5.
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Hughes contends that this restriction contravenes Texas law because it
exceeds the governing statute’s scope and interferes with M. G. & Sons’s
business. Accordingly, she asks this court to vacate the district court’s order.
II.
“[O]ur appellate standard of review is governed by federal law, even
in this diversity case.” DeJoria v. Maghreb Petroleum Expl., S.A., 935 F.3d
381, 390 (5th Cir. 2019). Because a charging order is a post-judgment remedy
entered against a judgment debtor, we apply a standard of review analogous
to the standard we apply in reviewing garnishments and turnover
proceedings. See United States v. Mire, 838 F.3d 621, 625 (5th Cir. 2016)
(reviewing garnishment order for abuse of discretion); Maiz v. Virani, 311
F.3d 334, 338 (5th Cir. 2002) (reviewing turnover order for abuse of
discretion). Accordingly, we review the district court’s issuance of the
charging order here for abuse of discretion. Accord Int. of M.W.M., No. 05-
19-00757-CV, 2020 WL 6054337, at *2 (Tex. App.—Dallas Oct. 14, 2020,
no pet.) (mem. op.); 3 see also Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223,
226 (Tex. 1991) (turnover orders); Gen. Elec. Cap. Corp. v. ICO, Inc., 230
S.W.3d 702, 705 (Tex. App.—Houston [14th Dist.] 2007, pet. denied)
(garnishments). Likewise, “we review the district court’s decision to grant
injunctive relief for abuse of discretion.” MacPhail v. Oceaneering Int’l, Inc.,
302 F.3d 274, 277 (5th Cir. 2002).
“In doing so, we note that a trial court’s failure to properly analyze
the law or apply it to the facts is an abuse of discretion.” Maiz, 311 F.3d at
338 (citing Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992)). “We review
3
“In Texas, all opinions and memorandum opinions issued by the state courts of
appeals in civil cases after January 1, 2003 have precedential value.” Lyda Swinerton
Builders, Inc. v. Okla. Sur. Co., 903 F.3d 435, 448 n.2 (5th Cir. 2018) (citing Tex. R. App.
P. 47.7 cmt.).
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a district court’s interpretation of a state statute de novo.” Occidental Chem.
Corp. v. Elliott Turbomachinery Co., 84 F.3d 172, 175 (5th Cir. 1996); accord
Pajooh v. Royal W. Invs. LLC, Series E, 518 S.W.3d 557, 562 (Tex. App.—
Houston [1st Dist.] 2017, no pet.).
III.
Under Texas law, “[o]n application by a judgment creditor of a
member of a limited liability company or of any other owner of a membership
interest in a limited liability company, a court having jurisdiction may charge
the membership interest of the judgment debtor to satisfy the judgment.”
Tex. Bus. Orgs. Code Ann. § 101.112(a). If a charging order is issued,
“the judgment creditor has only the right to receive any distribution to which
the judgment debtor would otherwise be entitled in respect of the
membership interest.” Id. § 101.112(b). The creditor “does not have the
right to obtain possession of, or otherwise exercise legal or equitable remedies
with respect to, the property of the limited liability company.” Id.
§ 101.112(f). Moreover, the statute states that “[t]he entry of a charging
order is the exclusive remedy by which a judgment creditor of a member or
of any other owner of a membership interest may satisfy a judgment out of
the judgment debtor’s membership interest.” Id. § 101.112(d).
The order at issue, in addition to charging Hughes’s distributions
from M. G. & Sons, requires Hughes and M. G. & Sons to obtain leave from
the district court before transferring the Property, any funds (excepting
transactions in the ordinary course of business), or Hughes’s membership
interest to any third party. Hughes contends that this restriction constitutes
an improper “legal or equitable remed[y] with respect to[] the property of
the limited liability company,” prohibited by the charging order statute. And
because a charging order is the “exclusive remedy” by which Pearcy and
Thomas, as judgment creditors, may satisfy their judgment out of Hughes’s
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interest in M. G. & Sons, Hughes asserts that the restriction on asset
transfers is invalid.
We disagree with Hughes’s reading of the district court’s order. It is
axiomatic that federal courts possess “inherent power to enforce [their]
judgments.” Peacock v. Thomas, 516 U.S. 349, 356 (1996); see also Test Masters
Educ. Servs., Inc. v. Singh, 428 F.3d 559, 577 (5th Cir. 2005) (“District courts
can enter injunctions as a means to enforce prior judgments.”). Likewise,
the Texas Supreme Court has held that “every court having jurisdiction to
render a judgment has the inherent power to enforce its judgments” and
“may employ suitable methods” to do so. Arndt v. Farris, 633 S.W.2d 497,
499 (Tex. 1982). “Those methods include, among other things, charging
orders and injunctive relief.” M.W.M., 2020 WL 6054337, at *2.
In M.W.M., the trial court entered a charging order that “charged” a
“[f]ather’s interest in certain entities with [his ex-wife’s] judgments and
ordered those entities not to pay [the f]ather any money or expend any money
for [his] personal benefit until the judgments were paid.” Id. at *1. The
father argued on appeal that the order “act[ed] as an injunction” and thus
exceeded the court’s authority under the charging statute. Id. at *3. But the
Texas Court of Appeals rejected that argument, finding that the statute “was
not the trial court’s sole means of enforcing its judgments.” Id. Instead, the
court held that “[i]njunctive relief is an available means to enforce a
judgment.” Id. And in doing so, it affirmed the order’s restrictions on the
LLCs’ payments as a form of injunctive relief. Id.
The same reasoning applies here. The district court entered a valid
charging order, requiring “any distribution to which Hughes would
otherwise be entitled in respect of her membership interest in M. G. & Sons”
to go to satisfy Pearcy and Thomas’s judgment. See Tex. Bus. Orgs.
Code Ann. § 101.112(a)–(b). Then the district court added injunctive
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relief as a means of enforcing its judgment, just as in M.W.M. The district
court did not abuse its discretion in fashioning relief as it did.
Hughes maintains that injunctive relief is also inappropriate because
Pearcy and Thomas did not specifically request a post-judgment injunction.
But the “nature of a motion is determined by its substance, not its caption.”
In re Brookshire Grocery Co., 250 S.W.3d 66, 72 (Tex. 2008). Though Pearcy
and Thomas’s “application did not use the word ‘injunction,’” M.W.M.,
2020 WL 6054337, at *3, their requested relief involved enjoining Hughes
and M. G. & Sons from transferring assets to third parties without court
approval. And Hughes’s own brief refers to this transfer restriction as an
“injunction.” We decline to elevate form over substance and instead
conclude that the district court’s restriction on asset transfers from M. G. &
Sons without prior leave is, in substance, a post-judgment injunction that
despite § 101.112’s limitations can coexist with the charging order under the
facts of this case. See id.
But this does not conclude our analysis. We must yet address whether
injunctive relief was proper.
Texas law provides that, in the post-judgment context, a “trial court
may enjoin the judgment debtor ‘from dissipating or transferring assets to
avoid satisfaction of the judgment.’” Emeritus Corp. v. Ofczarzak, 198
S.W.3d 222, 227 (Tex. App.—San Antonio 2006, no pet.) (quoting Tex.
Civ. Prac. & Rem. Code Ann. § 52.006 and Tex. R. App. P. 24.2).
“[T]he applicable standard is a factual matter requiring the trial court to
determine whether the judgment debtor is likely to dissipate or transfer its
assets to avoid satisfaction of the judgment.” Id.; see also Sargeant v. Al Saleh,
512 S.W.3d 399, 409 n.2 (Tex. App.—Corpus Christi–Edinburg 2016, no
pet.). A trial court abuses its discretion in granting such relief “if the only
reasonable decision that could be drawn from the evidence is that the
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judgment debtor would not dissipate or transfer its assets.” Emeritus Corp.,
198 S.W.3d at 227.
Here, the district court concluded that the transfer restriction was
“justified in light of Hughes’s history of fraudulent transfers to avoid
payment of a judgment.” In other words, the district court not only
conjectured that Hughes was “likely to dissipate or transfer” assets to avoid
the court’s judgment, id.; it rested its injunction on, inter alia, the fact that
the jury found that she already had. Specifically, the jury found that prior to
this case, Hughes had fraudulently transferred assets from one entity she
controlled to another to evade the underlying state court judgment—a
judgment that remains unsatisfied. The district court did not abuse its
discretion in granting injunctive relief to account for Hughes’s decade-long
pattern of “evading the payment of monetary judgments,” which was amply
supported by the record evidence.
Hughes contends that, irrespective of the charging statute’s
limitations, the transfer restriction is also invalid because it interferes with
M. G. & Sons’s day-to-day business. See Tex. Civ. Prac. & Rem.
Code Ann. § 52.006(e) (“[T]he trial court may not make any order that
interferes with the judgment debtor’s use, transfer, conveyance, or
dissipation of assets in the normal course of business.”). But the district
court explicitly exempted “transactions in the ordinary course of business”
from its order. Thus, the transfer restriction imposed by the court does not
interfere with M. G. & Sons’s day-to-day business. See Miga v. Jensen, No.
02-11-00074-CV, 2012 WL 745329, at *14 (Tex. App.—Fort Worth Mar. 8,
2012, no pet.) (mem. op.) (holding that “injunction [was] . . . not overly
broad” because it “allow[ed the judgment debtor] to continue to spend
money in the ordinary course of business”).
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Finally, Hughes asserts that the district court erred by subjecting M.
G. & Sons to its injunctive relief, because M. G. & Sons is neither a judgment
debtor nor a party to this action. On this point we agree with Hughes. See
Tex. Bus. Orgs. Code Ann. § 101.112(a)–(d) (referencing only the
“judgment debtor”); Emeritus Corp., 198 S.W.3d at 227 (discussing a trial
court’s authority to “enjoin the judgment debtor”); see also Sargeant, 512
S.W.3d at 409 n.2 (same). Unlike Hughes, M. G. & Sons bears no liability
for the underlying judgment and thus cannot be considered a judgment
debtor with respect to it.
Therefore, we modify the district court’s order to the extent that it
enjoins M. G. & Sons by striking M. G. & Sons from the order, as follows:
c. Hughes and M. G. & Sons, LLC must obtain leave of
this court before a) transferring the Property to any third party;
b) transferring any M. G. & Sons funds to any third party
except for transactions in the ordinary course of business; or
c) transferring Hughes’s interest (or any part thereof) in M. G.
& Sons, LLC to any third party.
In doing so, we also clarify that we read the district court’s order, even as
unmodified, to enjoin Hughes, as the judgment debtor and as M. G. & Sons’s
sole member, from causing M. G. & Sons to effectuate any proscribed transfer
indirectly that Hughes could not make directly. In other words, even with
M. G. & Sons excised from the order, Hughes cannot accomplish indirectly
what she is enjoined from doing directly.
IV.
It is well established that courts have the power to enforce their
judgments through injunctive relief. The district court properly exercised
this power, in addition to charging Hughes’s interest in M. G. & Sons
according to Texas law, by restricting Hughes from transferring assets to
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evade the court’s judgment. Accordingly, we AFFIRM the district court’s
order, as MODIFIED above.
AFFIRMED AS MODIFIED.
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