Opinion
No. 01-04-01111-CV
Opinion issued May 10, 2007.
On Appeal from the 164th District Court Harris County, Texas Trial Court Cause No. 2004-37741.
Panel consists of Justices TAFT, KEYES, and HANKS.
OPINION
In this action to enforce a New York judgment, EnviroPower, L.L.C., appellant, complains of the trial court's orders denying its motion for new trial, motion to vacate, and motion to stay enforcement of the judgment. In three issues, EnviroPower contends that (1) a foreign default judgment based on "death penalty" sanctions is "penal" in nature and excepted from enforcement in Texas under the full faith and credit clause; (2) it is entitled to a stay of enforcement because the New York judgment against it is subject to modification on appeal by the New York appellate court; and (3) the trial court erred in refusing to stay enforcement of the New York judgment and in setting the bond amount at $200,000.
In this case of first impression, we affirm.
Background
Bear, Stearns Co., Inc., appellee, sued EnviroPower in New York state court for breach of contract and quantum meruit alleging that EnviroPower failed to pay Bear, Stearns for services performed and expenses incurred. The New York court, sua sponte, found that, during discovery, EnviroPower intentionally withheld documents, and it struck EnviroPower's answer. After an evidentiary hearing, the New York court entered a total judgment for Bear, Stearns in the amount of $1,309,880, which included the appropriate interest, costs, and disbursements. Bear, Stearns domesticated its foreign judgment in the 164th District Court of Harris County, Texas. See Tex. Civ. Prac. Rem. Code Ann. §§ 35.003, 35.004, and 35.005 (Vernon 1997). EnviroPower filed a Motion to Vacate Foreign Judgment, Motion for New Trial, and Motion to Stay Enforcement of Judgment in Response to "Judgment Creditor's Action for Enforcement of Foreign Judgment." After an evidentiary hearing and additional briefing regarding the definition of "net worth," the trial court denied the motions and ordered EnviroPower to provide Bear, Stearns security in the amount of $200,000 in connection with the underlying New York judgment.
Stay of Enforcement
In issue two, EnviroPower argues that it is entitled to a stay of enforcement while the New York judgment against it is subject to modification on appeal by the New York appellate court. After EnviroPower filed its briefing in this case, the New York Court of Appeals, sua sponte, dismissed EnviroPower's appeal "upon the ground that no substantial constitutional question is directly involved." No further appeal of the judgment is pending in New York. Accordingly, the issue of a stay is moot and need not be addressed. See Tex. Civ. Prac. Rem. Code Ann. § 35.006(a) (Vernon Supp. 2006).
Bear, Stearns argues that, "because the New York Court of Appeals disposed of all issues made the basis of this appeal," the entire appeal before us should likewise be dismissed. However, the New York Court of Appeals' disposition does not affect EnviroPower's argument in issues one and three that (1) "death penalty" sanctions are penal and thus not subject to full faith and credit and (2) the trial court erred in setting the bond amount at $200,000. We address these remaining issues below.
The Enforcement of a Foreign Judgment
In issue one, EnviroPower argues that the trial court erred in denying its motions to vacate and for a new trial because a foreign default judgment based on "death penalty" sanctions is "penal" in nature and excepted from enforcement in Texas under the full faith and credit clause. We disagree.
Standard of Review
A court's ruling on a motion to vacate, like a ruling on a motion for new trial, is reviewed under the abuse of discretion standard. Champion Int'l Corp. v. Twelfth Court of Appeals, 762 S.W.2d 898, 899 (Tex. 1988) (trial court has wide discretion in denying motion for new trial; its action will not be disturbed on appeal absent showing of abuse of discretion). Although the determination of whether EnviroPower established an exception to full faith and credit generally involves a factual inquiry, not the resolution of a question of law, the trial court has no discretion in applying the law to the established facts. See Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992); Reading Bates Const. Co. v. Baker Energy Res. Corp., 976 S.W.2d 702, 713 (Tex.App. — Houston [1st Dist.] 1998, pet. denied). Texas law requires a trial court to give full faith and credit to a foreign judgment of a sister state unless an exception is established. Walker, 827 S.W.2d at 840. Therefore, we will review the record to determine whether the trial court misapplied the law to the established facts in concluding that EnviroPower had not established an exception to full faith and credit.
Full Faith and Credit
Under the "full faith and credit" clause of the United States Constitution, a state must give the same force and effect to a judgment of a sister state that it would give to its own judgments. See U.S. Const. art. IV, § 1. When a judgment creditor files an authenticated copy of a foreign judgment, it satisfies its burden to present a prima facie case for enforcement of the judgment. Reading Bates Constr. Co. v. Baker Energy Res. Corp., 976 S.W.2d 702, 712 (Tex.App.-Houston [1st Dist.] 1998, pet. denied). This is true even if the foreign judgment is taken by default. Cash Register Sales and Services of Houston, Inc. v. Copelco Capital, Inc., 62 S.W.3d 278, 280-81 (Tex.App. — Houston [1st Dist.] 2001, no pet.). The burden then shifts to the judgment debtor to prove why the sister state's judgment should not be given full faith and credit. Id.
To overcome this burden, the judgment debtor must collaterally attack the foreign judgment by establishing one of the following recognized exceptions to the mandates of the full faith and credit clause: (1) the judgment is interlocutory, (2) the judgment is subject to modification under the law of the rendering state, (3) the rendering state lacked jurisdiction, (4) the judgment was procured by fraud or is penal in nature, or (5) limitations has expired under Texas Civil Practice and Remedies Code Section 16.066. See Russo v. Dear, 105 S.W.3d 43, 46 (Tex.App.-Dallas 2003, pet. denied); Reading Bates Contr. Co., 976 S.W.2d at 712. The judgment debtor may overcome the presumption of the validity of the foreign judgment only with clear and convincing evidence. Russo, 105 S.W.3d. at 46. In a collateral attack, no defense that goes to the merits of the original controversy shall be recognized. Id.
In this case, when it filed an authenticated copy of the New York judgment, Bear, Stearns presented a prima facie case for its enforcement in Texas. The burden then shifted to EnviroPower to prove by clear and convincing evidence why it should not be given full faith and credit.
Penal in Nature
Finally, EnviroPower argues that, because they are penal in nature, death penalty sanctions are not enforceable in a foreign jurisdiction. We find the United States Supreme Court's opinion in Huntington v. Attrill, 146 U.S. 657, 13 S. Ct. 224 (1892) to be instructive when considering the penal classification of death penalty sanctions. Huntington defines the limits of penal statutes not entitled to sister state enforcement. The Supreme Court explained:
The question whether a statute of one state, which in some aspects may be called penal, is a penal law, in the international sense, so that it cannot be enforced in the courts of another state, depends upon the question whether its purpose is to punish an offense against the public justice of the state, or to afford a private remedy to a person injured by the wrongful act.
146 U.S. at 674, 13 S. Ct. at 230; Williams v. State of Washington, 581 S.W.2d 494, 495 (Tex.Civ.App.-Dallas 1979, writ ref'd n.r.e.). In Huntington, the Court instructed that, in making this determination, we should also consider whether the wrong to be discouraged by the statute is a wrong to the public or a wrong to the individual. The Court held:
[t]he test whether a law is penal, in the strict and primary sense, is whether the wrong sought to be redressed is a wrong to the public or a wrong to the individual, according to the familiar classification of Blackstone: "Wrongs are divisible into two sorts of species: private wrongs and public wrongs. The former are an infringement or privation of the private or civil rights belonging to individuals, considered as individuals, and are thereupon frequently termed `civil injuries;' the latter are a breach and violation of public rights and duties, which affect the whole community, considered as a community, and are distinguished by the harsher appellation of `crimes and misdemeanors.'"
Huntington, 146 U.S. at 668-69, 13 S. Ct. at 228 (quoting 3 Bl. Com. 2). The Court went on to say that criminal or quasi criminal statutes were the only types of penal statutes that fall under the exception to the full faith and credit doctrine. It is in this context that the "death penalty" sanctions must be evaluated. The central consideration is whether the judgment relates to punishment for, or deterrence of, a wrong against the state or society, as opposed to a wrong exclusively against the opposing party to the litigation.
Death penalty sanctions serve as a remedy for parties harmed by another party's wrongful actions during litigation. As such, they are designed, under the court's rules of procedure, as punishment for and deterrence of a wrong to the litigants and not society as a whole. The courts have long recognized that discovery sanctions — particularly the rendition of a default judgment following the striking of pleadings — are designed to punish the alleged wrongdoer as well as deter parties from abusing discovery procedures during litigation. See TransAmerican Natural Gas Corp. v. Powell, 811 S.W.2d 913, 918 (Tex. 1991) (legitimate purpose of sanctions are "punishment and deterrence"); Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241-42 (Tex. 1985) (purpose of sanction is to "deter"). Rule 37 of the Federal Rules of Civil Procedure also permits the striking of pleadings and other sanctions resulting from civil discovery violations. In 535 Broadway Associates v. Commercial Corporation of America, 159 B.R. 403 (S.D.N.Y. 1993), the court held:
Sanctions imposed under Rule 37 have immediate effect of ensuring compliance with court orders in the particular case. The rule also serves to "penalize those whose conduct . . . warrant such sanctions," by ensuring that the recalcitrant party will not enjoy the fruits of its own noncompliance. Finally, the rule has the statutory effect of "deterring those who might be tempted to such conduct in the absence of such deterrent."
Id. at 406-07. "Rule 37 Sanctions must be applied diligently both `to penalize those whose conduct may be deemed to warrant such a sanction, [and] to deter those who might be tempted to such conduct in the absence of such deterrent.'" Roadway Express, Inc. v. Piper, 447 U.S. 752, 763-64, 100 S. Ct. 2455, 2462-63 (1980) (citing Nat'l Hockey League v. Metro. Hockey Club, 427 U.S. 639, 643, 96 S. Ct. 2778, 2781 (1976)).
We agree with the United States Supreme Court, which, in 1892, warned that "there is danger of being misled by the different shapes of meaning allowed to the word `penal' in our language." Id., 146 U.S. at 666, 13 S. Ct. at 227. Accordingly, we conclude that death penalty sanctions are not excepted from enforcement in Texas under the Full Faith and Credit Clause, and we hold that the trial court did not misapply the law to the facts in concluding that EnviroPower had not established an exception to full faith and credit.
EnviroPower also argues that, because the New York judgment was not rendered on the merits but as the result of death penalty sanctions, enforcement of the judgment in Texas would not advance the purpose of the Full Faith and Credit Clause — to preserve and permit enforcement of a sister state's legal adjudication of the merits of a dispute. However, contrary to EnviroPower's arguments, judgments not rendered on the merits are entitled to full faith and credit. See, e.g., Copelco Capital, Inc., 62 S.W.3d at 280-81 (holding that default judgment was subject to full faith and credit enforcement in Texas). Furthermore, this argument is not a recognized exception to the mandates of the full faith and credit clause.
We overrule issue one.
Bond Amount
In issue three, EnviroPower argues that the trial court erred in refusing to stay enforcement of the New York judgment and setting the bond amount at $200,000. Specifically, EnviroPower contends it was entitled to a stay without being required to file a supersedeas bond.
After an evidentiary hearing, the trial court denied EnviroPower's motion to vacate foreign judgment, motion for new trial, and motion to stay enforcement of judgment and made the following findings:
(1) The underlying New York judgment is entitled to full faith and credit.
(2) EnviroPower, LLC ("Judgment Debtor") has timely filed a notice of appeal from the New York judgment.
(3) Net Worth has not been defined in the supersedeas bond statute.
(4) One definition of Net Worth is assets minus liabilities.
(5) Market Value means the amount that would be paid in cash by a willing buyer who desires to buy, but is not required to buy, to a willing seller who desires to sell, but is under no necessity of selling.
(6) The evidence adduced at the hearing does not reflect the fair value of the primary assets of the Judgment Debtor, which are the federal air permits.
(7) Judgment Debtor's assets minus liabilities is negative $12,000,000.00.
(8) A buyer stands willing to purchase Judgment Debtor for $10,000,000.00.
(9) The evidence adduced at the hearing establishes that business valuation experts do not rely exclusively on assets minus liabilities in determining the value of businesses.
(10) Judgment Debtor's current net worth for purposes of setting a supersedeas bond is $8,000,000.00.
(11) Judgment Debtor is likely to suffer substantial economic harm if required to post security in the full amount required by the supersedeas statute.
(12) The Court determines that a supersedeas bond in the amount of $200,000.00 will not cause Judgment Debtor substantial economic harm.
Standard of Review
We review the trial court's rulings concerning the amount and type of bond required and the sufficiency of the sureties under an abuse of discretion standard. Tex. R. App. P. 24.4; see also Miller v. Kennedy Minshew, Prof'l Corp., 80 S.W.3d 161, 165 (Tex.App.-Fort Worth 2002, no pet.). The test for whether a trial court abused its discretion is whether the trial court acted arbitrarily or unreasonably in light of all the circumstances of the case. McDaniel v. Yarbrough, 898 S.W.2d 251, 253 (Tex. 1995); Lewis v. Western Waste Indus., 950 S.W.2d 407, 410 (Tex.App.-Houston [1st Dist] 1997, no writ).
Ruling on Motion to Stay
To stay the enforcement of foreign judgment, a judgment debtor must (1) show that an appeal from the foreign judgment is pending or will be taken and (2) provide security for the judgment required by the state in which it was rendered before a stay of enforcement of that judgment is granted. Tex. Civ. Prac. Rem. Code Ann. § 35.006(a). EnviroPower concedes that it never provided security as required under New York law. Accordingly, we hold that the trial court did not abuse its discretion in denying EnviroPower a stay of enforcement under section 35.006(a).
Setting of Supersedeas Bond
A judgment debtor may show a ground on which the enforcement of the judgment would be stayed, and the court may require the same security for suspending the enforcement that is required in accordance with section 52.006. Tex. Civ. Prac. Rem. Code Ann. § 35.006(b) (Vernon Supp. 2006). Section 52.006 articulates the requirements for setting the amount of a supersedeas bond for a foreign judgment as follows:
(b) Notwithstanding any other law or rule of court, when a judgment is for money, the amount of security must not exceed the lesser of:
(1) 50 percent of the judgment debtor's net worth; or
(2) $25 million.
(c) On a showing by the judgment debtor that the judgment debtor is likely to suffer substantial economic harm if required to post security in an amount required under Subsection (a) or (b), the trial court shall lower the amount of the security to an amount that will not cause the judgment debtor substantial economic harm.
Tex. Civ. Prac. Rem. Code Ann. § 52.006(b) and (c), (emphasis added). The Texas Rules of Appellate Procedure, applicable to the security required for appeals, also addresses the security calculation, but with a slight variation. Rule 24.2(a) states that the amount of a security bond cannot exceed 50 percent of the judgment debtor's current net worth or $25 million. Tex. R. App. P. 24.2(a)(1).
Neither statute defines "net worth," and EnviroPower argues that we should look to the appellate review guidelines in Rule 24.4 for guidance in interpreting the "net worth" language of section 52.006. Tex. R. App. P. 24.4 (appellate court cannot modify security amount to exceed Rule 24.2(a)(1)). EnviroPower contends that, although section 52.006 does not contain the clause "current net worth," the phrase is necessarily inherent in the code provision because, for bond purposes, a judgment debtor's net worth at any other time than "currently" is irrelevant. Thus, EnviroPower asserts that its potential future sale for $10 million does not support the trial court's finding that the company's net worth is $8 million. EnviroPower argues that its net worth is negative $12 million, and as a consequence, under section 52.006(b) it was not required to post security in any amount. We disagree.
The trial court heard testimony from two witnesses regarding the issue of EnviroPower's net worth. Deborah Dawson, the chief financial officer of EnviroPower, testified that EnviroPower was formed for the purpose of identifying plant locations that were feasible to build power plants, and it has obtained air permits in Kentucky and Illinois. Dawson explained that, under generally accepted accounting principles, EnviroPower's net worth is negative $12,000,000. However, she conceded that, when determining the value of a project, she looks at factors other than book value. She considers future revenues and streams of revenue to determine the value of a company. The initial value of EnviroPower was between $20 and $40 million. More recently, she reported to potential investors that the company was worth $10 million. Dawson testified that Khanjee is to pay $10 million for EnviroPower in addition to another $8 million to El Paso as "a return of their lending to us."
The record is silent as to the specifics of the loan arrangement with El Paso.
Nick D'Ambrosio, a senior manager of an international accounting firm, testified that, in addition to holding a CPA license, he is also a certified valuation analyst, which relates to the valuation of businesses. D'Ambrosio explained that valuing a company requires looking at "a historic book value, which is the definition as used by Ms. Dawson, and the difference between a fair-market net worth, where you take the assets and the liabilities and you revalue them at the now, current, fair-market value."
Because the supersedeas bond statute does not define "net worth," the trial court used EnviroPower's market value to determine EnviroPower's net worth. See Tex. Civ. Prac. Rem. Code Ann. § 52.006(b). The trial court recognized that EnviroPower's assets minus liabilities totaled a negative $12 million, but instead found that the evidence adduced at the hearing did not accurately reflect the fair value of EnviroPower's primary assets, which are federal air permits. The trial court further found that EnviroPower's current net worth was $8 million because a buyer stood willing to buy EnviroPower for that amount.
Considering the pending sale of EnviroPower, the trial court ruled that EnviroPower's net worth is $8 million. However, acting within its discretion, the trial court ruled that, if required to provide security for the full amount, EnviroPower would suffer substantial economic harm. The court therefore lowered the security amount to $200,000.
We review the trial court's interpretation of the applicable statutes de novo. See Bragg v. Edwards Aquifer Auth., 71 S.W.3d 729, 734 (Tex. 2002). The overriding objective of statutory construction is to determine and give effect to the Legislature's intent. See Cont'l Cas. Co. v. Downs, 81 S.W.3d 803, 805 (Tex. 2002). In order to ascertain legislative intent, we first look to the plain and common meaning of the words used by the Legislature. Tex. Gov't Code Ann. § 311.011 (Vernon 1998 Supp. 2006); St. Luke's Episcopal Hosp. v. Agbor, 952 S.W.2d 503, 505 (Tex. 1997).
"Net worth" is generally defined as the excess of total assets over total liabilities. See, e.g., Black's Law Dictionary 1639 (8th ed. 2004); Webster's Third New International Dictionary 1519 (1993 ed.); Investopedia (2000 ed.). Many courts have also accepted this definition. For example, in holding that the unambiguous meaning of the term "net worth" in section 52.006 means the difference between total assets and total liabilities, the Fourteenth Court of Appeals made the following observation:
The Legislature could have required the trial court to determine the Security Amount based on 50 percent of a judgment debtor's value, using whatever measure of value the trial court found to be most appropriate. However, the Legislature did not do so; instead, it required that the trial court base this determination on the judgment debtor's "net worth."
Ramco Oil Gas, Ltd. v. Anglo Dutch (Tenge) L.L.C., 171 S.W.3d 905, 915 (Tex.App.-Houston [14th Dist.] 2005, no pet.). Similarly, the United States Court of Appeals for the Seventh Circuit held that the plain meaning of net worth, in accordance with the generally accepted accounting principles ("GAAP"), is the difference between total assets and total liabilities. Continental Web Press, Inc. v. NLRB, 767 F.2d 321, 323 (7th Cir. 1985), disapproved of on other grounds by Comm'r. v. Jean, 496 U.S. 154, 160-66, 110 S. Ct. 2316, 2319-23 (1990). The court went on to note that, because Congress did not define the statutory term "net worth," it is fair to assume that, "if it had thought about the question, it would have wanted the courts to refer to generally accepted accounting principles." Id.
Bear, Stearns argues, however, that we should embrace the market value definition of "net worth" used by the trial court, arguing that a market value net worth is the most accurate way to determine a company's true net worth. A company's market value reflects the overall value of the company's stock, and this sum may be higher or lower than the company's net worth. Investopedia (2000 ed.). An asset's fair market value is usually the best evidence of its true value. Zeptner v. Zeptner, 111 S.W.3d 727, 741 (Tex.App.-Fort Worth 2003, no pet.); Beavers v. Beavers, 675 S.W.2d 296, 299 (Tex.App.-Dallas 1984, no writ). "Fair market value" has consistently been defined as "the price the property will bring when offered for sale by one who desires to sell, but is not obliged to sell, and is bought by one who desires to buy, but is under no necessity of buying." City of Pearland v. Alexander, 483 S.W.2d 244, 247 (Tex. 1972); see Ricks v. Ricks, 169 S.W.3d 523, 527 (Tex.App. — Dallas 2005, no pet.); Nelson v. Najm, 127 S.W.3d 170, 177 (Tex.App. — Houston [1st Dist.] 2003, pet. denied). Market value also encompasses the amount that a buyer is willing to pay for a company. In this case, Khanjee is willing to pay $10 million for EnviroPower even while assuming "certain liabilities."
Furthermore, the legislative history of section 52.006 of the Texas Civil Practice and Remedies Code reveals that, by not defining the term "net worth," the Texas Legislature intended to give trial courts the discretion to weigh all of the evidence, and not just a company's accounting records, in determining the appropriate amount of a supersedeas bond. See House Res. Bill Org., Bill Analysis, H.B. 4, 78th Leg., R.S., p. 46 (2003) ("There is no easy way to define `net worth,' and it is important to give judges discretion to determine this on a case-by-case basis. If a plaintiff feels that a defendant is manipulating its assets to reduce the bond amount, the plaintiff can ask the judge to address this."). Thus we hold that, for supersedeas purposes, a company's net worth should be determined after evaluating all of the relevant evidence and should not be restricted to the narrow definition of the excess of assets over liabilities. As both the Legislature and Supreme Court have recognized, a company's book value net worth — assets minus liabilities — can be manipulated, making it an unreliable means of determining a company's true net worth. See id.; Wal-Mart Stores, Inc. v. Alexander, 868 S.W.2d 322, 330-31 (Tex. 1993) (Gonzalez, J., concurring) (punitive damages).
Here, the trial court weighed all of the pleadings and evidence presented by the parties, which included testimony that EnviroPower was in negotiations with at least three other willing buyers, all of whom offered to assume its liabilities and pay a range of $1 to $10 million for the company. EnviroPower eventually entered an active agreement with Khanjee, whereby Khanjee would pay $10 million for the company and assume "certain liabilities." By using only its book value to determine its net worth, we would enable EnviroPower to potentially postpone this active agreement with Khanjee to avoid satisfying the judgment against it. We, therefore, hold that the trial court was within its discretion in finding EnviroPower's current net worth to be $8 million. We further hold that the trial court did not abuse its discretion setting the bond amount at $200,000.
Conclusion
We affirm the trial court's judgment.