Thomas v. Hughes

Case: 20-50671 Document: 00516223471 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. 20-50671 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 Clement, Haynes, and Wilson, Circuit Judges.
Cory T. Wilson, Circuit Judge:
A federal jury found that Lou Ann Hughes fraudulently transferred
assets, that Hughes and Performance Probiotics, LLC misappropriated trade
secrets, that Hughes was personally liable for the actions of her company
through corporate veil-piercing, and that Hughes breached her fiduciary duty
as an attorney. The jury awarded over $1.4 million in compensatory damages
and $1.2 million in exemplary damages. The district court then entered its
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final judgment, which confirmed the jury’s damages awards, enjoined
Hughes from continuing to misappropriate Pearcy’s trade secrets, and
ordered Hughes to disgorge compensation received from Performance
Probiotics.
On appeal, Hughes challenges the district court’s evidentiary rulings,
final judgment, attorney’s fees award, and denial of post-judgment relief on
various grounds. We slightly MODIFY the district court’s final judgment
to prevent the possibility of double recovery. Otherwise, we AFFIRM.
I.
A.
In 1993, James Pearcy founded Performance Products, Inc. (“PPI”),
which developed and sold probiotic supplements for livestock. In 2006,
Pearcy decided to sell PPI to his attorney, Lou Ann Hughes. The parties
executed an agreement under which Hughes paid Pearcy $400,000 for the
stock of PPI and $50,000 for a non-compete agreement.
Alongside the sale agreement, PPI (now controlled by Hughes) agreed
to pay Pearcy licensing royalties for the use of his proprietary formulations.
Specifically, PPI agreed to pay Pearcy fourteen percent of net sales up to a
total payment of $1,350,000 over five years. The licensing agreement also
provided that at the end of the five-year period in 2011, PPI would have the
option to purchase Pearcy’s formulas for $100,000.
But PPI did not fully pay the royalties owed to Pearcy. As a result, in
July 2007 Pearcy sued both Hughes and PPI in state court in Comal County,
Texas. See Hughes v. Pearcy, No. 03-10-319-CV, 2014 WL 7014353, at *1
(Tex. App.—Austin Dec. 8, 2014, pet. denied) (mem. op.). In February
2010, the Comal County jury returned a verdict in Pearcy’s favor. The jury
found that PPI had breached the licensing agreement, that PPI had
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misappropriated Pearcy’s trade secrets, and that Hughes had breached her
fiduciary duty to Pearcy. The jury awarded Pearcy $714,010 on his claims
against PPI, awarded $1.00 on his claim against Hughes, and found that
Pearcy was entitled to $163,644 for his attorney’s services.
The state trial court confirmed the jury’s verdict and entered a
$995,847.11 judgment against PPI, consisting of the $714,010 damages
award, $163,644 in attorney’s fees, and $118,193.11 in prejudgment interest
(the “Comal County judgment”). Hughes and PPI appealed the Comal
County judgment, posting a $129,816.54 supersedeas bond. The Texas court
of appeals affirmed the judgment in 2014, and the Texas Supreme Court
denied review in 2015. See id. Although Pearcy received the supersedeas
bond, PPI never paid the remaining balance of the judgment. In an effort to
collect, Pearcy set a hearing on his motion to compel post-judgment
discovery for January 27, 2016. One day before the scheduled hearing, PPI
filed for bankruptcy.
Following the parties’ agreement in 2006, Hughes had formed an
entity called Performance Products International, LLC. In February 2010,
six days after the Comal County jury returned its verdict, Hughes filed an
Assumed Name Certificate with the Texas Secretary of State’s office, stating
that Performance Products International, LLC would be conducting business
under the assumed name “Performance.” At the time the state court
entered judgment against PPI, this entity did not have any assets. But in
September 2010, while the Comal County judgment was pending appeal,
Hughes changed the name of Performance Products International, LLC to
Performance Probiotics, LLC. Performance Probiotics then obtained a
license to sell and distribute commercial feed for livestock. In January 2012,
Hughes ceased selling products through PPI and began selling them through
Performance Probiotics instead.
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B.
In September 2016, Pearcy1 and Johnny Thomas, PPI’s Bankruptcy
Trustee, filed this lawsuit in federal court against Hughes, Performance
Probiotics, and another entity Hughes had created, Advanced Probiotics
International, LLC (“API”). In their complaint, the plaintiffs alleged that
Hughes, Performance Probiotics, and/or API had continued to
misappropriate Pearcy’s trade secrets. The plaintiffs also alleged that
Hughes and her LLCs had fraudulently transferred PPI’s assets in violation
of the Texas Uniform Fraudulent Transfer Act (“TUFTA”) and 11 U.S.C.
§§ 542, 544, and 548. The plaintiffs sought to pierce the corporate veil,
alleging that Hughes had used the entities to commit fraud. Finally, Thomas
alleged that Hughes breached her fiduciary duty to PPI.
The case proceeded to a jury trial in October 2019. After Pearcy and
Thomas presented their case, Hughes made an oral motion for judgment as
a matter of law, which the district court denied. Hughes re-urged her initial
motion after presenting her case and it was, again, denied.
The jury returned a verdict in favor of Pearcy and Thomas. It found
that Hughes had fraudulently transferred PPI’s assets to defraud Pearcy in
violation of TUFTA, that Hughes and Performance Probiotics had
misappropriated Pearcy’s trade secrets, that Hughes could be held personally
liable for the actions of her company through veil-piercing, and that Hughes
had breached her fiduciary duty to PPI. The jury awarded Pearcy
1
James Pearcy died in 2017. His wife, Carolyn Pearcy, was substituted as plaintiff
in her capacities as Executor of James’s estate and Trustee of the Pearcy Family Trust and
the Pearcy Marital Trust.
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$1,419,724.37 plus interest2 in actual damages (derived from the amount then
due under the Comal County judgment) and $1.2 million in exemplary
damages.
After the jury verdict, the district court entered a final judgment. In
it, the district court confirmed the jury’s compensatory and punitive
damages awards, ordered Hughes to disgorge $859,490 in compensation
from Performance Probiotics because of her breach of fiduciary duty to PPI,
enjoined Hughes and Performance Probiotics from using Pearcy’s trade
secrets until they had fully satisfied the judgment, and held Hughes and
Performance Probiotics jointly and severally liable for “all relief granted” in
this case and “all amounts due and payable under the [Comal County]
judgment.” The final judgment also specified that the district court would
retain jurisdiction over API in case Hughes transferred any assets to that
entity.
Hughes filed a renewed motion for judgment as a matter of law or,
alternatively, for a new trial. The district court denied that motion and
subsequently awarded Pearcy and Thomas $380,502 in attorney’s fees and
$28,680.74 in expenses. Thereafter, Pearcy and Thomas applied for a
charging order, seeking to charge Hughes’s membership interest in M. G. &
Sons, a single member LLC she owned, and to prevent Hughes and M. G. &
Sons’s from transferring certain assets without court leave. Before any order
issued on Pearcy and Thomas’s application, Hughes timely appealed the
underlying judgment.3
2
The jury awarded interest on the principal amount accruing each day between the
jury’s verdict and the entry of judgment. Thus, by the time the district court entered its
final judgment, the compensatory damages award totaled $1,442,580.06.
3
Following Hughes’s notice of appeal, the district court granted Pearcy and
Thomas’s application for a charging order. Thereafter, Hughes separately appealed that
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II.
Hughes raises nine distinct issues on appeal: (1) whether the district
court properly excluded certain testimony relating to her motivations for
ceasing to operate PPI; (2) whether the evidence was sufficient to sustain the
jury’s verdict on Pearcy’s misappropriation claim; (3) whether the evidence
was sufficient to sustain the jury’s verdict on Thomas’s breach of fiduciary
duty claim; (4) whether the evidence was sufficient to sustain the jury’s
verdict on Pearcy’s and Thomas’s TUFTA claims; (5) whether the evidence
was sufficient to sustain the jury’s decision to pierce the corporate veils of
PPI and Performance Probiotics; (6) whether the district court’s judgment
authorizes impermissible double recovery; (7) whether the district court
erred by retaining jurisdiction over API; (8) whether the district court abused
its discretion by denying Hughes’s motion for a new trial; and (9) whether
the district court abused its discretion in its award of attorney’s fees and costs
to Pearcy and Thomas. We address each issue in turn.4
III.
Hughes first contends that the district court erred by limiting her
testimony about her motivations for ceasing to operate PPI. “We review
evidentiary rulings for abuse of discretion. A district court abuses its
discretion when its ruling is based on an erroneous view of the law or a clearly
erroneous assessment of the evidence.” United States v. Barnes, 979 F.3d
283, 300 (5th Cir. 2020) (internal quotation marks and citations omitted).
order; we address its validity in a companion opinion. See Thomas v. Hughes, No. 20-50827,
--- F.4th ---- (5th Cir. Mar. 3, 2022).
4
Hughes raised issues 2–5 and 7 in her initial and post-trial motions for judgment
as a matter of law under Federal Rules of Civil Procedure 50(a) and 50(b). She raised issue
6 in her Rule 50(b) motion. We address this set of issues under that framework in Part IV
of this opinion.
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Even if the district court abuses its discretion, “[a] reversal will not be
warranted unless the defendant shows ‘that the district court’s ruling caused
[her] substantial prejudice.’” Id. (quoting United States v. El-Mezain, 664
F.3d 467, 494 (5th Cir. 2011)).
Hughes sought to testify that PPI’s Australian and Mexican
distributors had informed her that PPI’s products’ bacteria levels did not
match their labels, and that Canadian authorities had informed her that PPI
had been illegally importing its products into Canada. The district court
excluded this testimony as hearsay. On appeal, Hughes contends that this
was error because the testimony was not offered to prove the truth of the
matter asserted; it was offered to show her motive and intent—specifically,
that she ceased PPI’s operations because of foreign concerns, not to prevent
Pearcy from collecting on the Comal County judgment.
We need not consider the merit of Hughes’s contention on this point
because, in any event, she cannot show that any alleged error was prejudicial.
See United States v. Sanfilippo, 581 F.2d 1152, 1155 (5th Cir. 1978). The
district court permitted Hughes to testify extensively about her reasons for
shutting down PPI. Hughes testified that she “had come to believe that there
had been some events in various foreign countries that put the viability of
[PPI] at risk.” She elaborated that she “had reason to believe that
unregistered products had been sent to Australia,” “came to believe that
there were issues, serious concerns about continuing to sell product [in
Mexico],” and “had concern that [PPI] would never be allowed to sell
[products] in Canada.” Because “the essence of [Hughes’s] desired
evidence [was] before the jury, any harm in the original exclusion was
eliminated.” Id. Therefore, we find no abuse of discretion in the district
court’s exclusion of Hughes’s testimony.
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Hughes also sought to testify regarding Pearcy’s alleged
misrepresentation of “discrete facts” pertaining to PPI’s products and their
labels. The district court excluded this testimony on grounds of collateral
estoppel and res judicata, finding that Pearcy’s “[a]lleged misrepresentations
were a key part of [Hughes’s]” counterclaim for negligent misrepresentation
in the Comal County lawsuit. On appeal, Hughes asserts that this was error
because neither res judicata nor collateral estoppel apply, and because her
beliefs as to what Pearcy “did wrong when he ran the company” were critical
to explaining “her intentions in activating [Performance] Probiotics and
shutting down PPI.”
When addressing “the collateral estoppel effects of a prior state court
determination, we [apply] the state’s law of collateral estoppel.” Hicks v.
Quaker Oats Co., 662 F.2d 1158, 1166 (5th Cir. 1981). “The doctrine of
collateral estoppel or issue preclusion is designed to promote judicial
efficiency, protect parties from multiple lawsuits, and prevent inconsistent
judgments by precluding the relitigation of issues.” Sysco Food Servs., Inc. v.
Trapnell, 890 S.W.2d 796, 801 (Tex. 1994). For the doctrine to apply, a party
“must establish that (1) the facts sought to be litigated in the second action
were fully and fairly litigated in the first action; (2) those facts were essential
to the judgment in the first action; and (3) the parties were cast as adversaries
in the first action.” Id.All three requirements are met here. First, the issue of whether
Pearcy misrepresented facts concerning PPI’s products was fully and fairly
litigated in the Comal County lawsuit. In that action, Hughes asserted a
counterclaim against Pearcy for negligent misrepresentation. After the
Comal County jury found that Pearcy had not made any misrepresentations
to Hughes, the trial court entered a judgment denying Hughes’s
counterclaim. Second, Pearcy’s alleged misrepresentations, or lack thereof,
were obviously essential to the Comal County judgment denying the
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counterclaim. Finally, the parties were cast as adversaries in the Comal
County lawsuit and maintain their respective litigation positions in this case.
We find no error in the district court’s ruling that Hughes was collaterally
estopped from testifying as to any alleged misrepresentation in this case.
IV.
Hughes next contends that the district court erred by denying her
renewed motion for judgment as a matter of law under Federal Rule of Civil
Procedure 50(b). She raises several challenges to the sufficiency of the
evidence adduced at trial. Specifically, she asserts that there was insufficient
evidence to support the jury’s verdict against her for misappropriation of
trade secrets, breach of fiduciary duty, fraudulent transfer, and veil-piercing,
as well as the jury’s award of damages under these theories.
“A motion for judgment as a matter of law . . . in an action tried by a
jury is a challenge to the legal sufficiency of the evidence supporting the
jury’s verdict.” Harrington v. Harris, 118 F.3d 359, 367 (5th Cir. 1997)
(internal quotations and citation omitted). “We review a district court’s
ruling on a motion for judgment as a matter of law de novo.” Nobach v.
Woodland Vill. Nursing Ctr., Inc., 799 F.3d 374, 377 (5th Cir. 2015). “[W]e
use[ ] the same standard to review the verdict that the district court used in
first passing on the motion.” Id. (internal quotation marks and citation
omitted). That standard is “whether ‘a reasonable jury would not have a
legally sufficient evidentiary basis to find for the party on that issue.’” Id. at
377–78 (quoting Fed. R. Civ. P. 50(a)(1)). “A post-judgment motion for
judgment as a matter of law should only be granted when the facts and
inferences point so strongly in favor of the movant that a rational jury could
not reach a contrary verdict.” Tercero v. Tex. Southmost Coll. Dist., 989 F.3d
291, 299 (5th Cir. 2021) (quoting Bryant v. Compass Grp. USA Inc., 413 F.3d
471, 475 (5th Cir. 2005)).
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Special argument-forfeiture rules apply in this context. To preserve
an issue for appeal, the party moving for judgment as a matter of law must
raise the issue in her post-trial motion under Rule 50(b)—and, to properly
raise an issue in a Rule 50(b) motion, the movant must have already raised it
in her Rule 50(a) motion during the trial. OneBeacon Ins. Co. v. T. Wade Welch
& Assocs., 841 F.3d 669, 676, 680 (5th Cir. 2016) (noting that this court
“lack[s] power to address a claim not properly raised in a Rule 50(b)
motion”); see also Arsement v. Spinnaker Expl. Co., LLC, 400 F.3d 238, 247
(5th Cir. 2005).
A. Misappropriation of Trade Secrets
Under Texas law, the misappropriation of a trade secret “is
established by showing: (a) a trade secret existed; (b) the trade secret was
acquired through a breach of a confidential relationship or discovered by
improper means; and (c) use of the trade secret without authorization from
the plaintiff.” Spear Mktg., Inc. v. BancorpSouth Bank, 791 F.3d 586, 600 (5th
Cir. 2015) (quoting Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867, 874 (5th
Cir. 2013)).5 If a plaintiff establishes these elements, then relief “may include
damages, injunctive relief, or both.” IBP, Inc. v. Klumpe, 101 S.W.3d 461, 472
(Tex. App.—Amarillo 2001, pet. denied); accord Mabrey v. SandStream, Inc.,
5
These elements are the basis of a misappropriation claim under Texas common
law. The Texas Uniform Trade Secrets Act (“TUTSA”), enacted on September 1, 2013,
preempts common law claims for misappropriation. Tex. Civ. Prac. & Rem. Code
Ann. § 134A.007(a) (“[T]his chapter displaces conflicting tort, restitutionary, and other
law of this state providing civil remedies for misappropriation of a trade secret.”). But “[a]
misappropriation of a trade secret made before and a continuing misappropriation
beginning before [September 1, 2013] are governed by the law in effect immediately before
[September 1, 2013], and that law is continued in effect for that purpose.” Adoption of
The Uniform Trade Secrets Act, 2013 Tex. Sess. Law Serv. Ch. 10 (S.B. 953) § 3. Because
Pearcy’s claim is based on “a continuing misappropriation” that originated prior to
September 1, 2013, it is not preempted by TUTSA and we thus apply Texas common law.
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124 S.W.3d 302, 310 (Tex. App.—Fort Worth 2003, no pet.). Exemplary
damages are also available “if the claimant proves by clear and convincing
evidence that the harm with respect to which the claimant seeks recovery of
exemplary damages results from: (1) fraud; (2) malice; or (3) gross
negligence.” Tex. Civ. Prac. & Rem. Code Ann. § 41.003(a).
Hughes asserts there was insufficient evidence to establish that Pearcy
had any trade secrets or that Hughes and Performance Probiotics improperly
used any of Pearcy’s trade secrets. But Hughes did not raise these challenges
in her oral Rule 50(a) motion at trial. Instead, Hughes “move[d] for [a]
directed verdict on the misappropriation of trade secrets [claim] on the
ground[] that there [was] no evidence of an appropriate measure of damages
for that cause of action,” an argument she renewed in her Rule 50(b) motion
and likewise urges here. Because Hughes did not challenge the existence of
a trade secret or improper use in her initial Rule 50(a) motion, those issues
were not properly raised in her post-trial Rule 50(b) motion. We therefore
decline to address them on appeal. See OneBeacon Ins. Co., 841 F.3d at 680.6
We discuss her preserved issue regarding the measure of damages next,
though we conclude it lacks merit.
6
Irrespective of forfeiture, Hughes’s assertions fail. First, Hughes is otherwise
barred from challenging the existence of a trade secret because she stipulated at trial that
she would “not argue to the jury that Jay Pearcy did not possess any trade secrets in the
combination or proportions of ingredients in his product formulations.” Regarding
improper use, the parties stipulated that Hughes had breached the licensing agreement by
refusing to pay royalties, and there was testimony that Pearcy’s products form the basis of
the products sold by Hughes. Thus, there was evidence from which a reasonable jury could
have concluded that Hughes improperly used Pearcy’s trade secrets to enrich herself. See
Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867, 877 (5th Cir. 2013).
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1. Compensatory Damages
On the verdict form, the jury was instructed that, if it concluded that
Hughes and Performance Probiotics had misappropriated Pearcy’s trade
secrets, it should consider “[t]he current amount due under the Comal
County judgment” as the measure of actual damages. Accordingly, the jury
awarded Pearcy that amount—$1,419,724.37—in actual damages. On
appeal, Hughes challenges the use of the Comal County judgment as the
measure for Pearcy’s actual damages.
This court “review[s] a challenge to the district court’s jury
instructions ‘under an abuse of discretion standard, affording the trial court
substantial latitude in describing the law to the jurors.’” HTC Corp. v.
Telefonaktiebolaget LM Ericsson, 12 F.4th 476, 483 (5th Cir. 2021) (quoting
Jimenez v. Wood Cnty., 660 F.3d 841, 845 (5th Cir. 2011) (en banc)). “To
show reversible error, the party challenging the instruction ‘must
demonstrate that the charge as a whole creates substantial and ineradicable
doubt whether the jury has been properly guided in its deliberations.’”
Young v. Bd. of Supervisors, 927 F.3d 898, 904 (5th Cir. 2019) (quoting
F.D.I.C. v. Mijalis, 15 F.3d 1314, 1318 (5th Cir. 1994)). We “will not reverse
unless the instructions taken as a whole do not correctly reflect the issues and
law.” United States v. McKinney, 53 F.3d 664, 676 (5th Cir. 1995).
The Texas Supreme Court has held that “[a] ‘flexible and
imaginative’ approach is applied to the calculation of damages in
misappropriation-of-trade-secrets cases.” Sw. Energy Prod. Co. v. Berry-
Helfand, 491 S.W.3d 699, 710 (Tex. 2016) (quoting Univ. Computing Co. v.
Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974)). Under this
approach, damages “can therefore take several forms, including the value of
the plaintiff’s lost profits . . . and a reasonable royalty.” Berry-Helfand, 491
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S.W.3d at 711. “[D]amages may be ascertained with precision” when “the
parties previously agreed on the value” of the relevant trade secrets. Id.
Here, the parties had previously agreed on the value of Pearcy’s trade
secrets when PPI, controlled by Hughes, entered into the licensing
agreement with Pearcy in 2006. They specifically agreed that Pearcy’s trade
secrets were worth up to $1,350,000 in licensing fees plus a $100,000
payment for full ownership. The Comal County jury determined that PPI
had breached this agreement by using Pearcy’s trade secrets without paying
the required royalties and the $100,000 option payment and awarded Pearcy
$714,010—equal to the unpaid royalties plus the $100,000 purchase price.
The Comal County trial court then entered a $995,847.11 judgment in favor
of Pearcy, which included the $714,010 damages figure, attorney’s fees, and
prejudgment interest.
The measure of damages used by the district court here—“[t]he
current amount due under the Comal County judgment”—consisted of that
$995,847.11 judgment plus accrued interest. Hughes asserts that this
measure was improper as a matter of law because the Comal County
judgment included attorney’s fees and prejudgment interest. But as
explained above, that judgment was based on the Comal County jury’s award
of $714,010 in actual damages, which represented the unpaid portion of the
value that the parties had previously assigned to Pearcy’s trade secrets. The
attorney’s fees and prejudgment interest included in the Comal County
judgment simply represented additional losses incurred as a result of PPI’s
breach and misappropriation. If anything, the existence of the prior Comal
County judgment allowed “damages [to] be ascertained with precision”
more exacting here than in the mine run of cases. Berry-Helfand, 491 S.W.3d
at 711. As such, we cannot say that the district court abused its discretion by
instructing the jury to consider the Comal County judgment as the measure
of actual damages for misappropriation.
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2. Exemplary Damages
Hughes also challenges the jury’s award of exemplary damages. The
jury awarded them after separately finding that the harm “caused by Lou Ann
Hughes resulted from malice, fraud, or gross negligence[.]” Denying
Hughes’s Rule 50(b) motion, which challenged the sufficiency of the
evidence in support of exemplary damages as to each possible ground, the
district court upheld the award, concluding “that a reasonable jury could
[find] that Plaintiffs sufficiently proved ‘fraud, malice, or gross negligence’
by Hughes.”
On appeal, Hughes again challenges the sufficiency of the evidence to
support exemplary damages. She contends that Pearcy failed to present
sufficient evidence that she acted with specific intent to cause “an injury
independent of and qualitatively different” from the underlying
misappropriation, a showing which is required to show malice. Hughes also
asserts that Pearcy failed to the establish that she “subjectively knew about
an extreme degree of risk,” a predicate for gross negligence. But, irrespective
of the merits of her arguments on these points, Hughes does not separately
challenge the sufficiency of the evidence regarding fraud, 7 which “is an
independent basis to support [an] award of exemplary damages.” Control
Works, Inc. v. Seeman, No. 01-17-00212-CV, 2018 WL 3150339, at *6 (Tex.
App—Houston [1st Dist.] June 28, 2018, no pet.) (mem. op.); see also Tex.
7
Hughes elsewhere asserts, with regard to Pearcy’s and Thomas’s TUFTA
claims, that the evidence was insufficient to support a finding of actual fraudulent transfer.
But that issue turns on a preponderance of the evidence standard, see Matter of Galaz, 850
F.3d 800, 804 (5th Cir. 2017), whereas the jury’s finding of fraud in the exemplary damages
context had to be supported by clear and convincing evidence. Of course, if the evidence
was insufficient to support actual fraud as to the TUFTA claims, it would also fail to
support exemplary damages. But Hughes nowhere makes the separate argument on appeal
that even if there was a preponderance of evidence showing actual fraud, there was not
clear and convincing evidence to support exemplary damages based on that ground.
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Civ. Prac. & Rem. Code § 41.003(a). Hughes has thus likely forfeited
any argument that the evidence was insufficient to show fraud by clear and
convincing evidence, as necessary to support the jury’s exemplary damages
award. See Rollins v. Home Depot USA, 8 F.4th 393, 397 (5th Cir. 2021) (“A
party forfeits an argument . . . by failing to adequately brief [it] on appeal.”).
Forfeiture aside, there was clear and convincing evidence from which
a reasonable jury could have concluded that Pearcy suffered harm as a result
of Hughes’s actual fraud. As discussed infra in Part IV. C. and D., the record
supports the jury’s finding that Hughes transferred assets “with actual intent
to hinder, delay, or defraud” Pearcy, and that Hughes used entities “as a
means of evading an existing legal obligation for the purpose of perpetrating
and did perpetrate an actual fraud on . . . Pearcy.” That evidence is sufficient
to support the jury’s finding under the clear and convincing standard that the
harm to Pearcy “resulted from . . . fraud.” See Jang Won Cho v. Kun Sik Kim,
572 S.W.3d 783, 810 (Tex. App.—Houston [14th Dist.] 2019, no pet.); Pettit
v. Tabor, No. 06-19-00002-CV, 2020 WL 216025, at *15–16 (Tex. App.—
Texarkana Jan. 15, 2020, pet. denied) (mem. op.). We therefore find no
reversible error in the jury’s award of $1.2 million in exemplary damages.
3. Injunctive Relief
In addition to the jury’s actual and exemplary damages, the district
court entered a permanent injunction barring Hughes and Performance
Probiotics from manufacturing or selling any products incorporating or
derived from Pearcy’s trade secrets until they had satisfied the court’s
judgment. “We review [a] district court’s grant or denial of a permanent
injunction for abuse of discretion.” ICEE Distribs., Inc. v. J&J Snack Foods
Corp., 325 F.3d 586, 594 (5th Cir. 2003). An abuse of discretion occurs where
the trial court “(1) relies on clearly erroneous factual findings . . . [,] (2) relies
on erroneous conclusions of law . . . , or (3) misapplies the factual or legal
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conclusions when fashioning its injunctive relief.” Peaches Entm’t Corp. v.
Entm’t Repertoire Assocs., Inc., 62 F.3d 690, 693 (5th Cir. 1995).
To secure injunctive relief for the misappropriation of trade secrets,
plaintiffs must show that they lack an adequate remedy at law. Pike v. Tex.
EMC Mgmt., LLC, 610 S.W.3d 763, 792–93 (Tex. 2020). “[A]n adequate
remedy at law exists when the situation sought to be enjoined is capable of
being remedied by legally measurable damages.” Dresser-Rand Co. v. Virtual
Automation Inc., 361 F.3d 831, 848 (5th Cir. 2004). On appeal, Hughes
asserts that injunctive relief was improper as a matter of law because the
award of monetary damages served as an adequate remedy.8
While it is true that the jury awarded “legally measurable damages”
to Pearcy for Hughes’s misappropriation of trade secrets, the history of this
case makes clear that such damages, without more, are incapable of
remedying “the situation sought to be enjoined.” Id. The Comal County
jury originally awarded damages against PPI for breach of contract and
misappropriation of trade secrets. But that award did not stop Hughes and
companies she controlled from misappropriating Pearcy’s trade secrets
again. Moreover, the money damages awarded to Pearcy compensate for past
misappropriation, while the injunctive relief was fashioned by the district
court to prevent future misappropriation—until the court’s judgment is
satisfied, neither Hughes nor her companies have any more right to use
Pearcy’s trade secrets than they did before. We agree with the district court
that “the evidence adduced at trial and supported by the jury’s verdict shows
8
At oral argument, the parties expressed that the appeal of the injunctive relief set
forth in the district court’s judgment was likely moot. However, in subsequent
correspondence requested by this court, they clarified that the issue was not moot because
of Hughes’s “concern[] that the injunction is not limited to trade secrets and product
formulas belonging to Performance Probiotics . . . .” Accordingly, we address the district
court’s injunctive relief on the merits.
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that without injunctive relief, [Hughes] could continue harming Plaintiffs,
which would . . . defeat the entire purpose of this long, expansive litigation.”
B. Breach of Fiduciary Duty
In the district court, Thomas asserted that Hughes breached her
fiduciary duty as PPI’s attorney by engaging in unfair self-dealing when she
transferred PPI’s assets to Performance Probiotics, causing PPI to cease
operations while Performance Probiotics continued to generate substantial
profits for Hughes. The jury determined that Hughes breached her fiduciary
duty to PPI, and the district court ordered Hughes to disgorge $859,490 in
compensation from Performance Probiotics. On appeal, Hughes asserts that
she did not breach her fiduciary duty to PPI and that even if she did, the
district court’s fee forfeiture award was improper or otherwise excessive.
“To prevail on a breach-of-fiduciary-duty claim, a plaintiff must prove
(1) the existence of the fiduciary relationship; (2) a breach of that duty by the
attorney defendant; (3) that causes; (4) damages to the plaintiff.” Beck v.
Law Off. Of Edwin J. (Ted) Terry, Jr., P.C., 284 S.W.3d 416, 429 (Tex.
App.—Austin 2009, no pet.). But where, as here, a plaintiff seeks the
equitable remedy of fee forfeiture from an attorney who breaches the duty,
he need not “prove causation or damages if the court finds the attorney’s
conduct was a ‘clear and serious breach of duty’ and that forfeiture of the fee
(or some portion of it) is ‘necessary to satisfy the public’s interest in
protecting the attorney-client relationship.’” Id. (quoting Burrow v. Arce, 997
S.W.2d 229, 246 (Tex. 1999)); accord In re UTSA Apartments 8, L.L.C., 886
F.3d 473, 495 (5th Cir. 2018).
1. Duty
As a threshold matter, Hughes asserts that there was insufficient
evidence that she had an attorney-client relationship with PPI in 2012 such
that she owed PPI any fiduciary duty. But Hughes failed to preserve this issue
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for appeal because she did not raise it in her post-trial Rule 50(b) motion. See
OneBeacon Ins. Co., 841 F.3d at 676, 680. Even apart from forfeiture,
Hughes’s argument fails. Hughes testified at trial that she served as PPI’s
attorney in PPI’s dealings with the U.S. Patent and Trademark Office
(“USPTO”). And the parties stipulated that Hughes was listed on a USPTO
filing as the attorney of record for PPI with respect to its registered
trademark. Hughes contends that she no longer owed PPI any fiduciary duty
in 2012 because the USPTO filing reflected its last entry in 2008. But the
record shows that Hughes’s legal office received correspondence for PPI
from the USPTO as late as April of 2017. This was a sufficient basis for the
jury to conclude that Hughes owed PPI a fiduciary duty at the time of the
alleged breach.
2. Breach
“Under Texas law, where a fiduciary engages in a transaction with a
party to whom the fiduciary owes duties, a presumption of unfairness arises,
and the burden is placed on the fiduciary to establish that the transaction was
fair.” Navigant Consulting, Inc. v. Williams, 508 F.3d 277, 295 (5th Cir. 2007)
(citing Miller v. Miller, 700 S.W.2d 941, 947 (Tex. App.—Dallas 1985, writ
ref’d n.r.e.)). To determine whether a transaction involving a fiduciary was
fair, courts consider “(1) whether there was full disclosure regarding the
transaction, (2) whether the consideration (if any) was adequate, and
(3) whether the beneficiary had the benefit of independent advice.” UTSA
Apartments, 886 F.3d at 492 (quoting Est. of Townes v. Townes, 867 S.W.2d
414, 417 (Tex. App.—Houston [14th Dist.] 1993, writ denied)). We have
found, “especially in the context of self-dealing transactions where a
fiduciary derives personal profit through dealings with the principal or its
property, [that] ‘the form of the transaction will give way to the substance of
what actually has been brought about.’” UTSA Apartments, 886 F.3d at 493
(quoting Navigant, 508 F.3d at 296).
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At trial, Hughes confirmed that she was the only person involved in
forming Performance Probiotics, that she ceased working for PPI when she
began working for Performance Probiotics, and that all of PPI’s employees
transferred to Performance Probiotics. There was evidence that
Performance Probiotics used the same product names and advertising as PPI,
and that Performance Probiotics used trademarks registered by PPI. There
was also testimony that Performance Probiotics sold the same products as
PPI, and that Performance Probiotics’s products were derived from Pearcy’s
trade secrets, indicating that Hughes transferred those trade secrets to
Performance Probiotics.
In short, there was sufficient evidence from which a rational jury could
have concluded that Hughes engaged in a self-dealing transaction with PPI,
meaning that the presumption of unfairness attached. See Navigant, 508 F.3d
at 295. Although Hughes disputes this evidence, she relies almost entirely
on her own testimony, which the jury was entitled to discredit.
And Hughes makes no effort on appeal to argue that the transaction at
issue was fair. Indeed, that would likely be futile, as neither Performance
Probiotics nor Hughes compensated PPI for taking its intangible assets.
Instead, Hughes asserts that her acts were outside the scope of her attorney-
client relationship with PPI. She relies on the well-understood rule that “a
lawyer’s fiduciary duties to a client . . . ‘extend[] only to dealings within the
scope of the underlying relationship of the parties.’” Joe v. Two Thirty Nine
Joint Venture, 145 S.W.3d 150, 159 (Tex. 2004) (quoting Rankin v. Naftalis,
557 S.W.2d 940, 944 (Tex. 1977)).
Hughes overstates the import of this rule, which merely sets forth that
attorneys cannot be held liable for failing to provide services beyond those
they were hired to provide. In cases like this one, the rule does not limit the
more general principle that attorneys must deal with their clients in good faith
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and avoid unfair self-dealing. See Goffney v. Rabson, 56 S.W.3d 186, 193 (Tex.
App.—Houston [14th Dist.] 2001, no pet.). Because the evidence supported
that Hughes engaged in unfair self-dealing by transferring PPI’s intangible
assets to Performance Probiotics, it was reasonable for the jury to conclude
that Hughes breached her fiduciary duty to PPI.
3. Fee Forfeiture
This court reviews a district court’s award of equitable relief for abuse
of discretion. Bear Ranch, L.L.C. v. Heartbrand Beef, Inc., 885 F.3d 794, 805
(5th Cir. 2018); accord Meadows v. Hartford Life Ins. Co., 492 F.3d 634, 638
(5th Cir. 2007). “A district court abuses its discretion if it bases its decision
on an error of law or a clearly erroneous assessment of the evidence.” United
States v. Mann, 161 F.3d 840, 861 (5th Cir. 1998).
In Burrow v. Arce, the Texas Supreme Court carefully outlined the
considerations that govern a court’s equitable award of fee forfeiture for an
attorney’s breach of fiduciary duty. 997 S.W.2d at 237–46. The court noted
that although fee forfeiture serves to compensate an injured client for his
attorney’s disloyalty, the “central purpose of the equitable remedy of
forfeiture is to protect relationships of trust by discouraging agents’
disloyalty.” Id. at 238. Because the main aim of the remedy is deterrence, it
is irrelevant whether the attorney’s breach caused the client any damages.
Id. at 239–40.
At the same time, Burrow cautions that fee forfeiture is not automatic.
Id. at 241. Rather, “[t]he remedy is restricted to ‘clear and serious’ violations
of duty.” Id. To determine whether a breach of duty justifies fee forfeiture,
a court must consider the following factors: (1) “the gravity and timing of
the violation,” (2) “its wilfulness,” (3) “its effect on the value of the
lawyer’s work for the client,” (4) “any other threatened or actual harm to
the client,” (5) “the adequacy of other remedies,” and (6) “the public
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interest in maintaining the integrity of attorney-client relationships.” Id. at
243–44 (internal quotation marks and citation omitted).
The district court weighed the Burrow factors and ordered that
Hughes forfeit all compensation she received from Performance Probiotics
and pay it to Thomas, on behalf of PPI. On appeal, Hughes contends that the
district court erred in calculating the fee forfeiture award because the breach
of duty upon which the award was based arises from the fiduciary relationship
between Hughes and PPI, not Hughes and Performance Probiotics.
Under Texas law, “courts may disgorge all ill-gotten profits from a
fiduciary when a fiduciary agent usurps an opportunity properly belonging to
a principal, or competes with a principal.” ERI Consulting Eng’rs, Inc. v.
Swinnea, 318 S.W.3d 867, 873 (Tex. 2010) (emphasis added). However,
several courts, including this one in an unpublished opinion, have found that
the fee forfeiture remedy does not extend to fees received from third parties.
See Liberty Mut. Ins. Co. v. Gardere & Wynne, L.L.P, 82 F. App’x 116, 121 (5th
Cir. 2003) (holding that a client was not entitled to disgorgement of fees the
defendant law firm had earned by disloyally representing a third-party client);
Elizondo v. Krist, 338 S.W.3d 17, 25 (Tex. App.—Houston [14th Dist.] 2010)
(“[P]laintiffs should not be allowed to recover fees paid by a third party.”),
aff’d, 415 S.W.3d 259 (Tex. 2013); Swank v. Cunningham, 258 S.W.3d 647,
673–74 (Tex. App.—Eastland 2008, pet. denied) (finding that “[e]quity does
not support such a ‘windfall’ result”). To the extent these courts articulated
a rationale for restricting the forfeiture remedy, it was that the limitation was
necessary to prevent a “windfall” to the plaintiffs. E.g., Swank, 258 S.W.3d
at 673; see also Gardere & Wynne, 82 F. App’x at 121 (emphasizing that
permitting forfeiture of third-party gains would upset the “remedial” aspects
of Burrow’s scheme).
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Hughes’s argument nonetheless fails for two related reasons. First,
unlike in Gardere & Wynne, Elizondo, and Swank, the entity that paid the
disgorged fees here, Performance Probiotics, was not an independent third
party. Hughes controlled Performance Probiotics and effectuated the
transfer of PPI’s assets to Performance Probiotics. Beyond that, there is no
“windfall” given the record in this case. Hughes unfairly transferred PPI’s
assets to Performance Probiotics, in breach of her fiduciary duty to PPI, and
then used those assets to generate the fees at issue. That is, even though
Hughes was paid by Performance Probiotics, she was effectively paying
herself with funds that were rightfully PPI’s. We find no abuse of discretion
in the district court’s award of fee forfeiture in this context as it accords with
the general rule that disloyal agents must disgorge their ill-gotten gains. See
Swinnea, 318 S.W.3d at 873.
C. Fraudulent Transfer
Pearcy’s and Thomas’s TUFTA claims are premised on a theory of
actual fraud. “[T]he elements of an actual fraudulent transfer under
TUFTA are: (1) a creditor; (2) a debtor; (3) the debtor transferred assets
shortly before or after the creditor’s claim arose; (4) with actual intent to
hinder, delay, or defraud any of the debtor’s creditors.” In re Life Partners
Holdings, Inc., 926 F.3d 103, 117 (5th Cir. 2019); see Tex. Bus. & Com.
Code Ann. § 24.005(a)(1).
Hughes first asserts that there was insufficient evidence to establish
that she transferred anything from PPI. TUFTA defines “transfer” as
“every mode, direct or indirect, absolute or conditional, voluntary or
involuntary, of disposing of or parting with an asset or an interest in an asset,
and includes payment of money, release, lease, and creation of a lien or other
encumbrance.” Tex. Bus. & Com. Code Ann. § 24.002(12). Hughes
maintains there was nothing to suggest that PPI disposed of any assets as
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required by TUFTA. But there was evidence that Performance Probiotics
used PPI’s intangible assets as PPI ceased operations. A jury could logically
conclude from this that the requisite “parting” of assets occurred. We
conclude, as we did above with respect to Thomas’s breach of fiduciary duty
claim, that there was sufficient evidence for the jury to conclude that Hughes
caused PPI to transfer its intangible assets to Performance Probiotics.
Hughes also asserts that there was insufficient evidence to support a
finding of actual fraudulent intent. TUFTA permits plaintiffs to “rely on
circumstantial evidence to establish the [defendant’s] fraudulent intent.”
Roland v. United States, 838 F.2d 1400, 1402–03 (5th Cir. 1988). To this end,
the statute provides a non-exclusive list of eleven so-called “badges of fraud”
that the finder of fact may consider:
(1) the transfer or obligation was to an insider; (2) the debtor
retained possession or control of the property transferred after
the transfer; (3) the transfer or obligation was concealed;
(4) before the transfer was made or obligation was incurred, the
debtor had been sued or threatened with suit; (5) the transfer
was of substantially all the debtor’s assets; (6) the debtor
absconded; (7) the debtor removed or concealed assets; (8) the
value of the consideration received by the debtor was
reasonably equivalent to the value of the asset transferred or
the amount of the obligation incurred; (9) the debtor was
insolvent or became insolvent shortly after the transfer was
made or the obligation was incurred; (10) the transfer occurred
shortly before or shortly after a substantial debt was incurred;
and (11) the debtor transferred the essential assets of the
business to a lienor who transferred the assets to an insider of
the debtor.
Tex. Bus. & Com. Code Ann. § 24.005(b). This court has held that
“[w]hen several of these indicia of fraud are found, they can be a proper basis
for an inference of fraud.” Roland, 838 F.2d at 1403; see also Janvey v. Golf
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Channel, Inc., 487 S.W.3d 560, 566–67 (Tex. 2016) (“Evidence of a single
‘badge of fraud’ does not conclusively demonstrate intent, but a confluence
of several presents a strong case of fraud.”).
Upon reviewing the record, we find at least five of the “badges of
fraud” present, weighing in favor of an inference of Hughes’s actual
fraudulent intent. First, Hughes was plainly an “insider” because she
controlled PPI and Performance Probiotics. See Tex. Bus. & Com.
Code Ann. § 24.002(7)(B)(iii) (defining the term “insider” to include “a
person in control of the debtor”). Second, although PPI, the actual debtor
on the Comal County judgment, did not retain control of the property
Hughes transferred to Performance Probiotics, Hughes did. Because Hughes
controlled both PPI and Performance Probiotics, she continued to control
PPI’s assets following the transfer. This retention of control suggests
fraudulent intent.
Next, not only did Pearcy file suit against PPI before the transfer in
2012, but the evidence showed that Hughes began taking steps to operate
through Performance Probiotics just days after the Comal County jury
returned its verdict. Likewise, the jury could reasonably conclude that
Hughes transferred substantially all of PPI’s assets given that PPI completely
ceased operations following the transfer, subsequently filed for bankruptcy,
and reported relatively few assets on its bankruptcy petition. Finally, PPI was
paid nothing for the intangible assets that were transferred to Performance
Probiotics.
Under our precedent, the presence of (at least) these five badges of
fraud is a sufficient basis for the jury to conclude that Hughes transferred
PPI’s assets with fraudulent intent. Cf. Spring Street Partners-IV, LP v. Lam,
730 F.3d 427, 438 (5th Cir. 2013) (concluding that the district court
appropriately determined that transfer had been made with actual fraudulent
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intent where three badges of fraud were present). Because there was
sufficient evidence of both a transfer and fraudulent intent, the district court
did not err in upholding the jury’s verdict with respect to Pearcy’s and
Thomas’s TUFTA claims.
D. Veil Piercing
Under Texas law, an obligee generally may not pierce an entity’s
corporate veil unless it demonstrates that the entity was “used for the
purpose of perpetrating and did perpetrate an actual fraud on the obligee
primarily for the direct personal benefit of the [entity’s] holder, beneficial
owner, subscriber, or affiliate.” Tex. Bus. Org. Code Ann.
§ 21.223(b); see also id. § 21.224 (stating § 21.223 preempts common law veil
piercing). This rule applies to limited liability companies and corporations
alike. U.S. KingKing, LLC v. Precision Energy Servs., Inc., 555 S.W. 3d 200,
212–13 (Tex. App.—Houston [1st Dist.] 2018, no pet.).
This court has interpreted § 21.223 to mean that a party may pierce
an entity’s corporate veil if it establishes that the entity’s owner “perpetrated
an actual fraud for his direct personal benefit.” In re Ritz, 832 F.3d 560, 566
(5th Cir. 2016) (citing SSP Partners v. Gladstrong Invs. (USA) Corp., 275
S.W.3d 444, 454 (Tex. 2009)); accord Belliveau v. Barco, Inc., 987 F.3d 122,
129 (5th Cir. 2021). Further, this court has held that the “actual fraud”
requirement is satisfied if the obligee establishes “that a transfer is fraudulent
under the actual fraud prong of TUFTA.” In re Ritz, 832 F.3d at 567.
Because we have already determined that Hughes fraudulently transferred
PPI’s assets, we need only consider the second requirement—i.e., whether
such transfer was “for [Hughes’s] direct personal benefit.”
This requirement is met where the “evidence show[s] that funds
derived from the corporation’s allegedly fraudulent conduct were pocketed
by or diverted to the individual defendant.” Hong v. Havey, 551 S.W.3d 875,
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885 (Tex. App.—Houston [14th Dist.] 2018, no pet.). Hughes contends that
the second prong is not satisfied where, as here, an individual purportedly
perpetrates a fraud solely to be able to continue to operate a business and
continue to receive a salary. However, the cases she cites are inapposite.
In Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd., a
sponsorship-procurement company wrongfully failed to remit sponsorship
funds to its client. 237 S.W.3d 379, 383 (Tex. App.—Houston [14th Dist.]
2007, no pet.). Although the firm had engaged in fraudulent conduct, the
court concluded that its owner could not be held personally liable because
there was no evidence that he used the misappropriated funds for personal
purposes, received any sort of indirect benefit from the misappropriation, or
even received a salary from his sponsorship agency. Id. at 388. By contrast,
in this case there is ample evidence that Hughes benefitted financially from
operating Performance Probiotics, as she received hundreds of thousands of
dollars in compensation—funds incidentally, that PPI could have used to
satisfy the Comal County judgment had PPI retained its assets and continued
to operate.
In Viajes Gerpa, S.A. v. Fazeli, a group of travel agencies entered into
a settlement agreement with a group of ticket fulfillment websites, under
which the websites were required to pay the agencies a percentage of their
net cash flow for a specified period. 522 S.W.3d 524, 527–28 (Tex. App.—
Houston [14th Dist.] 2016, pet. denied). One website failed to make its
payments, and three years after the entry of the settlement, the website’s
owner sold the company’s assets to a new entity in which his mother was a
principal. Id. at 528–29, 529 n.7. The Viajes Gerpa court concluded that,
even assuming the owner’s conduct amounted to fraud, there was
insufficient evidence that the fraud had personally benefitted him. Although
the transfer allowed him to continue operating and controlling the ticket
fulfillment website, the court determined that, because the transfer occurred
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three years after the settlement was entered, there was too great a temporal
gap for the two events to be related. Id. at 534–35. Again, our case is
distinguishable because unlike Viajes Gerpa, the evidence here indicates that
Hughes began taking steps to operate through Performance Probiotics just
six days after the Comal County jury returned its adverse verdict.
Conversely, we find Tryco Enterprises, Inc. v. Robinson to be
instructive. 390 S.W.3d 497 (Tex. App.—Houston [1st Dist.] 2012, pet.
dism’d). In Tryco, the court found a direct personal benefit where the
defendants, after the plaintiff had obtained a judgment against a company
they controlled, transferred that company’s assets and employees to a new
company they also controlled that operated a virtually identical business,
leaving the old company unable to satisfy the plaintiff’s judgment. Id. at 501–
04, 510–11. As in Tryco, the evidence in this case indicates that Hughes took
the same approach, transferring the assets and employees of one company
she controlled (PPI) to another company she controlled (Performance
Probiotics) so that she could continue to operate the business without having
to satisfy the Comal County judgment. This was sufficient for the jury to find
that Hughes perpetrated the fraudulent transfer for her direct personal
benefit, thus allowing Pearcy and Thomas to pierce the corporate veil.
E. Double Recovery
Under Texas’s “one satisfaction rule, a plaintiff is entitled to only one
recovery for any damages suffered.” Crown Life Ins. Co. v. Casteel, 22 S.W.3d
378, 390 (Tex. 2000). “[T]he rule is intended to prevent a plaintiff’s double
recovery based on a single injury” and applies whenever the “plaintiff has
suffered a single, indivisible injury.” Sky View at Las Palmas, LLC v.
Mendenz, 555 S.W.3d 101, 113 (Tex. 2018).
Hughes asserts that the district court’s judgment contravenes the
one-satisfaction rule because it permits Pearcy to recover twice on his
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misappropriation-of-trade-secrets claim. The jury awarded Pearcy “[t]he
current amount due under the Comal County judgment” as compensatory
damages for misappropriation. The district court then confirmed that award
in its judgment. However, the court went on to state later in the judgment
that: “Lou Ann Hughes and Performance Probiotics, LLC are jointly and
severally liable for: a) all relief granted herein against Lou Ann Hughes and
Performance Probiotics, LLC; and b) all amounts due and payable under the
[Comal County] judgment . . . .” (Emphasis added.).
We agree with Hughes that, read literally, the district court’s
summation of the defendants’ liability for the relief awarded using the
conjunctive “and” between “a) all relief granted herein . . . ,” and
“b) . . . the [Comal County] judgment” raises the possibility of double
recovery. Therefore, we modify the district court’s judgment to clarify that
if Hughes satisfies “[t]he current amount due under the Comal County
judgment”—i.e., $1,442,580.06 plus post-judgment interest—no further
compensatory damages for misappropriation of trade secrets are owed. Just to
be clear, this clarification does not otherwise disturb the other categories of
relief embodied in the district court’s judgment.
F. Jurisdiction Over API
The district court also noted in its judgment that no relief had been
granted against API. However, it nonetheless retained jurisdiction over API
so it could grant any appropriate relief should PPI, Performance Probiotics,
or Hughes transfer assets into the entity. Hughes asserts that the exercise of
jurisdiction over API was improper because there was no evidence that it
“did anything—let alone something actionable.”
The Supreme Court has held that a district court has “jurisdiction in
subsequent proceedings for the exercise of [its] inherent power to enforce its
judgments.” Peacock v. Thomas, 516 U.S. 349, 356 (1996) (noting that
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“[w]ithout jurisdiction to enforce a judgment entered by a federal court, ‘the
judicial power would be incomplete and entirely inadequate’”) (quoting
Riggs v. Johnson Cnty., 73 U.S. (6 Wall.) 166, 187 (1867)); see also Kokkonen v.
Guardian Life Ins. Co., 511 U.S. 375, 380 (1994) (explaining a federal court
has ancillary jurisdiction “to function successfully, that is, to manage its
proceedings, vindicate its authority, and effectuate its decrees”). This
ancillary enforcement jurisdiction extends to a “broad range of
supplementary proceedings involving third parties,” but does not permit “a
subsequent lawsuit to impose an obligation to pay an existing federal
judgment on a person not already liable for that judgment.” Peacock, 516 U.S.
at 356–57.
Under Peacock, “a district court has enforcement jurisdiction over a
judgment creditor’s fraudulent conveyance claims against transferees who
were not parties to the underlying action,” so long as the creditor limits
himself to collecting the judgment debtor’s assets, rather than attempting to
impose liability on the transferees for the original judgment. Epperson v. Ent.
Express, Inc., 242 F.3d 100, 106 (2d Cir. 2001); accord Ellis v. All Steel Const.,
Inc., 389 F.3d 1031, 1034 (10th Cir. 2004); U.S.I. Props. Corp. v. M.D. Constr.
Co., 230 F.3d 489, 498–500 (1st Cir. 2000); Thomas, Head & Greisen Emps.
Tr. v. Buster, 95 F.3d 1449, 1454 & n.7 (9th Cir. 1996). Here, the district court
did not retain jurisdiction over API to impose liability on API for the original
judgment. Rather, the court retained jurisdiction so that it could counter any
improper transfers by PPI, Performance Probiotics, or Hughes to API. We
find no error in the district court’s retention of jurisdiction over API as it
comports with Peacock.
V.
Hughes next contends that the district court erred by denying her
motion for a new trial. “[W]here a jury award is reviewed indirectly through
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the conduit of the trial court’s response to a motion for new trial . . . , it is the
propriety of the judge’s action rather than the jury’s decision that is
reviewed.” Stokes v. Georgia-Pac. Corp., 894 F.2d 764, 769 (5th Cir. 1990).
“Because the district court has a wide range for discretion in acting on such
motions, our standard of review is not simply right or wrong but abuse of
discretion.” Sam’s Style Shop v. Cosmos Broad. Corp., 694 F.2d 998, 1006
(5th Cir. 1982).
We have held that, following a jury verdict, a district court does not
abuse its discretion in denying a motion for a new trial “unless there is a
complete absence of evidence to support the verdict.” Id. It should be clear
by this point that that is not the case here. Because there was sufficient
evidence to support the jury’s verdict, we affirm the district court’s denial of
a new trial.
VI.
Finally, Hughes challenges the district court’s award of attorney’s
fees and expenses. “This court reviews awards or denials of attorney’s fees
for abuse of discretion; factual findings supporting a fee award are reviewed
for clear error, and legal conclusions underlying a fee award are reviewed de
novo.” Janvey v. Dillon Gage, Inc., 856 F.3d 377, 392 (5th Cir. 2017). Texas
law provides a substantially similar standard of review. Id. (citing Shaw v.
Cty. of Dall., 251 S.W.3d 165, 171 (Tex. App.—Dallas 2008, pet. denied)); see
also Yamin v. Carroll Wayne Conn, L.P., 574 S.W.3d 50, 69 (Tex. App.—
Houston [14th Dist.] 2018, pet. denied).
Under Texas Business and Commerce Code § 24.013, courts
presiding over TUFTA cases are empowered to “award costs and reasonable
attorney’s fees as are equitable and just.” On appeal, Hughes concedes that
if Pearcy and Thomas prevail on their TUFTA claims, they are entitled to
attorney’s fees and costs under § 24.013. However, Hughes maintains that
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Pearcy and Thomas failed properly to segregate recoverable fees, stemming
from their attorneys’ work on their TUFTA claims, from unrecoverable fees,
incurred as a result of their other claims.9
Under Texas law, “if any attorney’s fees relate solely to a claim for
which such fees are unrecoverable, a claimant must segregate recoverable
from unrecoverable fees.” Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d
299, 313 (Tex. 2006). However, segregation is not necessary “when the
causes of action involved in the suit are dependent upon the same set of facts
or circumstances and thus are ‘[intertwined] to the point of being
inseparable.’” Id. at 311 (quoting Stewart Title Guar. Co. v. Sterling, 822
S.W.2d 1, 11–12 (Tex. 1991)). This exception is met only where the relevant
“legal services advance both recoverable and unrecoverable claims.” A.G.
Edwards & Sons, Inc. v. Beyer, 235 S.W.3d 704, 710 (Tex. 2007).
Here, one of Pearcy and Thomas’s attorneys submitted a detailed
report of his firm’s time entries in this case, and averred that the fees could
not be segregated because “the legal services provided . . . were necessary for
all of the claims.” The district court reviewed the report and concluded that
the requested fees were inseparable, save for a small amount related to claims
Pearcy and Thomas had abandoned at trial. The district court reasoned that
because all the claims in the lawsuit hinged on whether Hughes had
fraudulently transferred PPI’s intellectual property, all of the evidence that
Pearcy and Thomas adduced regarding their non-TUFTA claims was
duplicative of evidence offered to support their TUFTA claim. The district
9
Hughes also contends that certain portions of the awarded fees and expenses are
unreasonable. But we need not address this argument as Hughes failed to raise it before
the district court. See Rollins, 8 F.4th at 397 (“A party forfeits an argument by failing to
raise it in the first instance in the district court—thus raising it for the first time on
appeal . . . .”).
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court similarly concluded that the efforts of Pearcy and Thomas’s attorneys
in attempting to collect the Comal County judgment prior to PPI’s
bankruptcy, opposing Hughes’s motion to dismiss, and opposing Hughes’s
motion for summary judgment all advanced both recoverable and
unrecoverable claims such that segregation of the resulting fees was not
possible.
The district court did not clearly err in its assessment of the efforts of
Pearcy and Thomas’s attorneys. It is clear from the record that the evidence
relating to the misappropriation and breach of fiduciary duty claims
substantially overlaps with the evidence required to show that Hughes
violated TUFTA. Chiefly, all the claims relied on evidence that Hughes had
transferred Pearcy’s trade secrets from PPI to Performance Probiotics.
Accordingly, we discern no abuse of discretion and we affirm the district
court’s award of attorney’s fees and expenses.
VII.
To sum up: The district court did not err by limiting Hughes’s
testimony as it did. The evidence was sufficient for the jury to conclude
(1) that Hughes and Performance Probiotics misappropriated Pearcy’s trade
secrets; (2) that Hughes breached her fiduciary duty to PPI; (3) that Hughes
fraudulently transferred assets in violation of TUFTA; and (4) to support the
jury’s decision to pierce the corporate veils of PPI and Performance
Probiotics.
Likewise, the district court did not err by retaining jurisdiction over
API or abuse its discretion either in denying Hughes’s motion for a new trial
or in awarding Pearcy and Thomas attorney’s fees and expenses.
For clarity, because the district court’s judgment could be read to
allow for a duplicative recovery, we modify the judgment affirmatively to
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state that the plaintiffs may not recover the amount of the Comal County
judgment twice. Otherwise, the judgment of the district court is
AFFIRMED AS MODIFIED.
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