Evanston Insurance v. Chargois & Ernster ( 2010 )

REVISED MARCH 31, 2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 15, 2010
No. 09-20261
Charles R. Fulbruge III
Clerk
EVANSTON INSURANCE COMPANY,
Plaintiff
v.
DILLARD DEPARTMENT STORES INC,
Defendant-Third Party Plaintiff-Appellee
v.
DAMON J. CHARGOIS, CLETUS P. ERNSTER, III,
Third Party Defendants – Appellants
Appeals from the United States District Court
for the Southern District of Texas
Before REAVLEY, CLEMENT, and SOUTHWICK, Circuit Judges.
PER CURIAM:
Damon Chargois and Cletus Ernster appeal the district court’s judgment
holding them personally liable to Dillard Department Stores, Inc. for a judgment
originally entered against their law firm partnership. For the following reasons,
we affirm the judgment of the district court.
No. 09-20261
FACTS AND PROCEEDINGS
Damon Chargois and Cletus Ernster formed a law partnership in 2002.
They registered it as a limited liability partnership, known as Chargois &
Ernster, L.L.P. (CELLP), with the State of Texas in 2002. CELLP prosecuted
lawsuits against Dillard Department Stores, Inc. (Dillard’s), alleging that
Dillard’s racially discriminated against its customers. In an attempt to solicit
business, CELLP developed a website in June 2003 which included a link using
the “Dillard’s” name and logo. Clicking this link took visitors to
dillardsalert.com, a separate website documenting acts of alleged racial profiling
by the department stores.
On July 14, 2003, Dillard’s sued CELLP in Texas state court for trademark
infringement and various business torts. It sought damages and an injunction
against CELLP’s use of its trademark. On October 31, 2003, CELLP’s
professional liability insurer, Evanston Insurance Co., filed a declaratory
judgment action in federal district court, seeking a declaration that its policy did
not insure CELLP against Dillard’s claims. On November 21, 2003, after
voluntarily dismissing the state court lawsuit, Dillard’s filed a cross-claim in the
Evanston case against CELLP reasserting its allegations and adding federal
cyberpiracy and trademark claims. On January 15, 2004, pursuant to the
parties’ agreement, the court dismissed Evanston’s claims for declaratory relief.
Dillard’s third-party claims against CELLP were all that remained.
On February 9, 2004, while the litigation continued, Chargois and Ernster
executed a separation agreement that provided for “dissolution” of the
partnership on February 27, 2004. CELLP’s registration as an LLP was not
renewed and, on July 25, 2004, the registration expired under Texas law.
Notwithstanding these facts, the defunct LLP remained a party to the Dillard’s
litigation, and no party was substituted on its behalf. On November 2, 2004, the
2
No. 09-20261
court entered a final judgment ordering “Chargois & Ernster, L.L.P.” to pay
Dillard’s $143,500.
Dillard’s attempt to collect on the judgment did not succeed.1 On January
10, 2008, in the docket of the Evanston case, Dillard’s filed a third-party
complaint for a declaratory judgment against Chargois and Ernster in their
individual capacities. Dillard’s sought a declaration that the two were
personally liable, jointly and severally, for the 2004 final judgment entered
against CELLP. Both Chargois and Ernster were personally served with the
third-party complaint, and each moved to dismiss. Dillard’s then restyled its
third-party complaint as a first amended complaint, which reasserted the
allegations of personal liability against Chargois and Ernster (hereinafter, the
“2008 action”). Dillard’s filed a motion for summary judgment, to which both
defendants responded with lengthy opposition briefs. The court granted
judgment for Dillard’s in the amount of $143,500 against Chargois and Ernster,
jointly and severally, and each appealed.
STANDARD OF REVIEW
“We review a district court’s grant of summary judgment de novo.”
Goodman v. Harris County, 571 F.3d 388, 393 (5th Cir. 2009). “Summary
judgment is appropriate ‘if the pleadings, the discovery and disclosure materials
on file, and any affidavits show that there is no genuine issue as to any material
fact and that the movant is entitled to judgment as a matter of law.’” Id. (quoting
1
On June 29, 2006, Cletus Ernster, acting individually, filed a lawsuit in
Texas state court against Dillard’s and its counsel. Ernster alleged that in
seeking to collect its judgment, Dillard’s had filed false public records which
interfered with Ernster’s ability to purchase real estate and commence a new
law practice. Dillard’s moved to enjoin proceedings in Ernster’s state lawsuit,
arguing that an injunction was necessary for the federal court to protect and
effectuate its judgment. The district court granted Dillard’s motion. Ernster
appealed and this court summarily affirmed. Evanston Ins. Co. v. Dillard Dep’t
Stores, Inc., 228 F. App’x 478 (5th Cir. 2007) (unpublished).
3
No. 09-20261
FED. R. CIV. P. 56(c)). “We consider the evidence in a light most favorable
to . . . the non-movant, but [he] must point to evidence showing that there is a
genuine fact issue for trial to survive summary judgment.” Id. (quotation
omitted).
DISCUSSION
Chargois and Ernster press four main arguments, two of which present
issues of federal law and two of which present issues of Texas law. We consider
the contentions under federal law before turning to the state law issues.
A. Federal Law
(1) Subject Matter Jurisdiction
Appellants first contend that summary judgment in the 2008 action was
improper because the district court lacked subject matter jurisdiction. They
argue that the court exceeded the bounds of its ancillary, or supplemental,
jurisdiction. See generally Peacock v. Thomas, 516 U.S. 349 (1996); Kokkonen v.
Guardian Life Ins. Co. of Am., 511 U.S. 375 (1994). This argument fails because
it ignores diversity of citizenship as the primary basis for the district court’s
jurisdiction. The parties to the 2008 action are citizens of different states and
the amount-in-controversy exceeded $75,000; thus, the requirements of 28
U.S.C. § 1332 were plainly satisfied and the district court had subject matter
jurisdiction.
(2) Due Process
Appellants next argue that they were denied due process by the court’s
grant of summary judgment in Dillard’s favor. They argue that they did not
participate in the original 2003 lawsuit involving CELLP and that the court’s
imposition of personal liability upon them in 2008 amounts to a denial of due
process.
They rely on Nelson v. Adams USA, Inc. for the proposition that “‘[t]he
law, at its most fundamental, does not render judgment simply because a person
4
No. 09-20261
might have been found liable had he been charged.’” 529 U.S. 460, 471 (2000)
(quoting Ohio Cellular Prods. Corp. v. Adams USA, Inc., 175 F.3d 1343, 1354
(Fed. Cir. 1999) (Newman, J., dissenting)). In Nelson, liability was imposed
upon the individual shareholder of a defendant corporation at the same moment
the pleadings were amended to add that shareholder as a defendant. Id. at 466.
The shareholder had no “opportunity to respond and contest his personal
liability for the award after he was made a party and before the entry of
judgment against him,” and was therefore deprived of due process. Id. at 463.
Chargois and Ernster, on the other hand, had an opportunity to contest their
personal liability for CELLP’s judgment and, in fact, vigorously did so before a
judgment was entered against them individually. The Nelson Court emphasized
that “the right to contest on the merits [one’s] personal liability . . . . is just what
due process affords.” Id. at 472. Because Chargois and Ernster had that
opportunity (and, indeed, availed themselves of it), there was no due process
deprivation.2
B. State Law
It is undisputed that CELLP was formed in 2002 and ceased to exist as a
registered LLP on July 25, 2004. Therefore, the Texas Revised Partnership Act
(TRPA) applies to this dispute. See TRPA § 11.03(c) (codified at TEX. REV. CIV.
STAT. ANN. art. 6132b-11.03(c)).3 Appellants advance two main arguments under
2
Ernster also argues that an interlocutory order of the district court was
contrary to law. In 2008, the court ordered Ernster to deposit all proceeds from
his cases against Dillard’s into the court’s registry. He argues that contingent
fee contracts for legal services may not be assumed by another party. See In re
Tonry, 724 F.2d 467, 469 (5th Cir. 1984). His argument overstates the scope of
the district court’s order; its terms did not require him to assign contingent fee
contracts but only to deposit “all funds collected in those actions.” Ernster fails
to demonstrate error in the district court’s order.
3
Even though the TRPA expired January 1, 2010, it continues to apply
here. In 2003, the Texas legislature enacted the Texas Business Organizations
5
No. 09-20261
state law. First, they contend that Texas partnership law confers immunity
upon them as individual partners, whether of an LLP or general partnership.
Second, they contend that the statute of limitations bars Dillard’s 2008 action
to hold them personally liable for the judgment against CELLP.
(1) Immunity from Personal Liability
a. TRPA §§ 3.04 and 3.08
As a general matter, the TRPA imposes joint and several liability on
individual partners for all debts and obligations of a partnership. Section 3.04
of the TRPA provides:
Except as provided by Section 3.07 or 3.08(a), all
partners are liable jointly and severally for all debts
and obligations of the partnership unless otherwise
agreed by the claimant or provided by law.
TEX. REV. CIV. STAT. ANN. art. 6132b-3.04. Under this provision, appellants are
liable for the debts and obligations of CELLP unless one of the enumerated
exceptions applies. See, e.g., ROBERT W. HAMILTON ET AL., 19 TEXAS PRACTICE
§ 8.5 (2d ed. 2009) (“In general, each partner is personally liable for all debts and
obligations of the partnership.”). The first exception, § 3.07, concerns the
liability of incoming partners and is not relevant in this case.
As for the second exception, TRPA § 3.08(a) limits liability for partners of
registered LLPs. It provides:
(a) Liability of Partner. (1) Except as provided in
Subsection (a)(2), a partner in a registered limited
liability partnership is not individually liable, directly
Code (TBOC), which, effective January 1, 2006, governed domestic entities
formed after that date. See TEX. BUS. ORGS. CODE § 402.001(a)(1). CELLP is not
such an entity because it was formed in 2002 and, more important, no longer
existed when the TBOC became effective. Even if CELLP still existed and were
now subject to the TBOC, the TBOC makes clear that prior law, such as the
TRPA, would have applied to this dispute. See id. § 402.006.
6
No. 09-20261
or indirectly, by contribution, indemnity, or otherwise,
for debts and obligations of the partnership incurred
while the partnership is a registered limited liability
partnership.
(2) A partner in a registered limited liability
partnership is not individually liable, directly or
indirectly, by contribution, indemnity, or otherwise, for
debts and obligations of the partnership arising from
errors, omissions, negligence, incompetence, or
malfeasance committed while the partnership is a
registered limited liability partnership and in the
course of the partnership business by another partner
or a representative of the partnership not working
under the supervision or direction of the first partner
unless the first partner:
(A) was directly involved in the specific activity in
which the errors, omissions, negligence,
incompetence, or malfeasance were committed by
the other partner or representative; or
(B) had notice or knowledge of the errors,
omissions, negligence, incompetence, or
malfeasance by the other partner or
representative at the time of occurrence and then
failed to take reasonable steps to prevent or cure
the errors, omissions, negligence, incompetence,
or malfeasance.
7
No. 09-20261
TEX. REV. CIV. STAT. ANN. art. 6132b-3.08.4 Appellants argue that § 3.08(a)(1)
insulates them from liability because CELLP’s debt5 was incurred when the
infringing website was created in June 2003, at which time CELLP was still a
registered limited liability partnership. Dillard’s, meanwhile, contends that the
debt was incurred when the judgment was entered on November 2, 2004, at
which time the erstwhile LLP had lost its liability-limiting attributes.6
In Texas, “[t]he meaning of a statute is a legal question,” which is reviewed
“de novo to ascertain and give effect to the Legislature’s intent.” Entergy Gulf
States, Inc. v. Summers, 282 S.W.3d 433, 437 (Tex. 2009). “Where text is clear,
text is determinative of that intent.” Id. “We must interpret a statute according
to its terms, giving meaning to the language consistent with other provisions in
the statute.” Dallas County Cmty. Coll. Dist. v. Bolton, 185 S.W.3d 868, 874
(Tex. 2005). “Only when [the legislature’s] words are ambiguous do we resort to
rules of construction or extrinsic aids.” Entergy Gulf States, 282 S.W.3d at 437
(quotation omitted).
4
We note that § 3.08 was amended in 1997 to add subsection (a)(1),
including the key reference to when a debt or obligation is “incurred.” See 1997
Tex. Sess. Law Serv. Ch. 375, § 113. The amendment moved the content of
former subsection (a)(1) to subsection (a)(2). In light of this change, the Texas
Bar Committee’s 1993 comment, which might appear to support a construction
contrary to that adopted here, see TEX. REV. CIV. STAT. ANN. art. 6132b-3.08 bar
committee’s 1993 cmt. (“Subsection (a)(1) clarifies that the partnership must be
a registered limited liability partnership at the time of the errors and omissions
for which partner liability is limited.”), no longer refers to the correct subsection.
5
The parties characterize the 2004 judgment against CELLP as a “debt”
rather than an “obligation.” We assume, without deciding, that this
characterization is correct.
6
Dillard’s does not argue that personal liability should be imposed
pursuant to the exception to liability protection contained in § 3.08(a)(2).
Neither Chargois nor Ernster argues that he cannot be held liable because the
LLP’s debt arose from the malfeasance of the other partner.
8
No. 09-20261
Although the terms “debt” and “incurred” are not defined by the TRPA, a
plain reading of the statute’s text supports Dillard’s profferred interpretation.
Neither partner was necessarily aware in June 2003 that displaying the
Dillard’s mark on the law firm website would ultimately lead to a partnership
debt. The underlying conduct gave rise to the possibility of a future debt, but to
say that a debt was “incurred” at that time unrealistically distorts the meaning
of the word. After all, CELLP’s conduct may have gone undetected, it may have
been adjudged perfectly innocent, or Dillard’s may have opted not to sue. Under
any of those scenarios, no debt would ever have been incurred, let alone incurred
in June 2003. It was only when the district court entered judgment against
CELLP in November 2004 that a payable debt came into existence. It was then
that CELLP incurred the debt within the meaning of the provision.
Moreover, the neighboring language of § 3.08(a)(2) demonstrates that the
Texas legislature, when it so chooses, is capable of drafting a provision that
focuses on the commission of events that lead to liability, rather than the fixing
of consequent liability from those events. In that provision, the legislature
insulated an LLP partner from personal liability “arising from errors, omissions,
negligence, incompetence, or malfeasance committed” by another partner “while
the partnership is a registered limited liability partnership.” TRPA § 3.08(a)(2)
(emphasis added). Thus, to decide whether the first partner’s liability is limited
for the second partner’s malfeasance under §3.08(a)(2), a court must look to
when the second partner committed the malfeasance. Had the legislature
intended to enact the same “when committed” approach for § 3.08(a)(1), it could
have used the language from § 3.08(a)(2). See 2A NORMAN J. SINGER ET AL .,
SUTHERLAND STATUTES AND STATUTORY CONSTRUCTION § 46:6 (“[W]hen the
legislature uses certain language in one part of the statute and different
9
No. 09-20261
language in another, the court assumes different meanings were intended.”).7
It chose, however, to use different language, and created a regime in which
partners could be held individually liable for debts and obligations incurred
when the partnership was not a registered LLP [§ 3.08(a)(1)], but in which
partners would not bear liability for one another’s independent malfeasance
committed while the LLP existed [§ 3.08(a)(2)].
Because CELLP’s registration had expired, it was not a valid registered
LLP at the time its debt was incurred. Therefore, § 3.08 does not foreclose
individual liability and § 3.04’s default rule operates to hold appellants
personally liable for CELLP’s debt.8
b. TRPA § 3.05
Appellants further argue that in addition to suing CELLP in 2003,
Dillard’s was required to sue the partners themselves on the trademark and tort
claims in order to later hold them individually liable. They rely on TRPA
§ 3.05(c), which provides:
A judgment against a partnership is not by itself a
judgment against a partner, but a judgment may be
entered against a partner who has been served with
process in a suit against the partnership.
7
The statutory text is not ambiguous. Our reference to a rule of
construction, see Entergy Gulf States, 282 S.W.3d at 437, demonstrates that,
even if it were, our conclusion would not differ.
8
The district court did not expressly rely on § 3.08(a) to support its
judgment. Instead its finding of personal liability was based on a conclusion
that Chargois and Ernster continued doing business under the law firm’s name
rather than wind up the partnership, and that, in so doing, they “essentially
ratified the firm’s debts.” Because a summary judgment may be affirmed on any
ground supported by the record, see McIntosh v. Partridge, 540 F.3d 315, 326
(5th Cir. 2008), we need not assess this alternative disposition.
10
No. 09-20261
TEX. REV. CIV. STAT. ANN. art. 6132b-3.05. This provision is unhelpful to
appellants, however, because Dillard’s does not rely on the 2004 judgment
against the LLP “by itself” to support their individual liability. Instead, it relies
on the 2008 judgment it obtained against them individually.
Appellants’ reliance on Kao Holdings, L.P. v. Young is also unavailing.
261 S.W.3d 60 (Tex. 2008). Construing § 3.05(c), the Texas Supreme Court held
that
its purpose appears to be to make clear that while
partners are generally liable for the partnership’s
obligations, a judgment against the partnership is not
automatically a judgment against the partner, and that
judgment cannot be rendered against a partner who has
not been served merely because judgment has been
rendered against the partnership.
Id. at 64 (footnote omitted). Here, the record belies any argument that judgment
against the partners was entered “automatically”; instead, Chargois and Ernster
were defendants in a different action that they lost after defending their
individual interests vigorously on the merits.
Cothrum Drilling Co. v. Partee, cited by appellants, is also distinguishable.
790 S.W.2d 796 (Tex. App. 1990). In Cothrum Drilling, a Texas intermediate
appellate court held that judgment could not be entered against those partners
“who were not served with citation before the statute of limitations had run.” Id.
at 800. That case involved the potential liability of individual
partners—alongside their partnership—for the tort of conversion. It did not, like
this case, involve a separate lawsuit seeking to enforce a preexisting judgment
by holding individual partners liable for the partnership’s debt.
(2) Statute of Limitations
Finally, appellants assert that Dillard’s 2008 action is barred by the
statute of limitations. The inquiry depends on the nature of Dillard’s cause of
11
No. 09-20261
action. Dillard’s contends that the cause of action is one for debt, that is, to
enforce the 2004 judgment against the partners on the basis of their statutorily
compelled individual liability. Appellants, meanwhile, argue that the causes of
action are for tort and trademark infringement; appellants view the 2008 claims
as identical to those contained in Dillard’s 2003 cross-claim against CELLP.
Dillard’s amended complaint does not contain any allegations of individual
wrongdoing, nor does it identify the individual conduct of either appellant as a
basis for personal liability. If, counterfactually, Dillard’s were suing appellants
for personal wrongdoing in June 2003—the same conduct for which it sued
CELLP—then its cause of action would have accrued at that time and the tort
or trademark limitations period would apply. Instead, Dillard’s seeks to impose
liability on Chargois and Ernster for partnership debt by operation of Texas law.
In Texas, a person must bring a suit for debt “not later than four years
after the day the cause of action accrues.” TEX. CIV. PRAC. & REMEDIES CODE
ANN. § 16.004(a)(3). The cause of action accrued, at the earliest, upon entry of
judgment against CELLP on November 2, 2004. Because Dillard’s filed its third-
party complaint (which was eventually replaced by its amended complaint) on
January 10, 2008, its action fell within this four-year limitations period and is
not time-barred.
Relevant case law also supports our conclusion. In re Jones, decided prior
to the TRPA’s enactment, is on point. 161 B.R. 180 (Bankr. N.D. Tex. 1993). In
that case, a trustee obtained a final judgment against a partnership but could
not recover fully from it. The trustee then brought a separate action “against the
partners to collect the remainder of the judgment.” Id. at 183. The court held
that the limitations period “began to run against the partners only when the
district court’s judgment became final,” and that § 16.004(a)(3)’s four-year
limitations period applied. Id. The court reasoned:
12
No. 09-20261
Under the entity theory of partnerships, it is logical
that a partner has no liability until the partnership
liability is established. There is nothing wrong in
allowing the partners to be sued along with the
partnership so that once the partnership liability is
established, a judgment can be rendered against the
partnership and the partners. On the other hand, there
is nothing wrong with the partnership being sued and,
if its liability is established, a subsequent suit being
filed against the partners on their personal liability for
the partnership’s obligation.
...
Once the liability of the partnership became fixed, the
only issue remaining was whether the Defendants are
partners of [the partnership].
Id. at 183-84 (emphasis added). The Jones situation is nearly identical to this
case: rather than litigate the partners’ liability for the conduct that gave rise to
the debt, the trustee sought to enforce the partnership judgment against them
simply by virtue of their status as partners.9
9
In an effort to contest the relevance of Jones, appellants cite Sunseri v.
Proctor, which required a claimant to sue individual partners within the
limitations period for the underlying wrong. 487 F. Supp. 2d 905, 908 (E.D.
Mich. 2007), aff’d, 286 F. App’x 930 (6th Cir. 2008) (unpublished). The Sunseri
court stated:
Where, as here, a plaintiff obtains a judgment against
the partnership as an entity, but fails to obtain a
binding judgment against a partner’s individual assets,
and consequently cannot enforce that judgment against
the partner, the plaintiff must sue the partner based on
the underlying misconduct. While the plaintiff may use
collateral estoppel to prevent the partner from
relitigating the issue of liability, the plaintiff must still
bring suit within the applicable limitations period for
the underlying wrong.
Id. The Sunseri case involved an attempt to enforce a New York judgment in a
Michigan court and “look[ed] to Michigan’s statutes of limitations regardless of
13
No. 09-20261
Dillard’s debt action to hold Chargois and Ernster personally liable for the
debt of CELLP was not barred by the applicable statute of limitations.
CONCLUSION
For the foregoing reasons, the judgment of the district court is
AFFIRMED.
what state’s partnership law applies to the substantive issues remaining in this
suit.” Id. at 909. Jones, on the other hand, construes §16.004, the applicable
Texas statute of limitations, and the predecessor to TRPA § 3.04. In light of
Jones’s close similarity to this case, we incorporate its reasoning in favor of that
of a nonbinding district court decision from a sister circuit.
Meanwhile, Valley National Bank of Arizona v. A.E. Rouse & Co., cited by
appellants, actually undermines their argument. 121 F.3d 1332 (9th Cir. 1997)
(applying Arizona law). There, the Ninth Circuit recognized the viability of a
debt action against an individual partner where a judgment had already been
entered against the partnership. Id. at 1338.
14