Companies concerned about being sued in one jurisdiction and having the judgment enforced in another should pay attention to a recent Texas appellate decision making it easier to enforce out-of-state judgments in Texas courts. With more businesses finding themselves doing business in more jurisdictions, both in the United States and internationally, and courts having become more willing to exercise jurisdiction based on Internet contacts, this issue has become increasingly important.
It’s often tempting to ignore a lawsuit in another jurisdiction and count on your attorneys to make it unenforceable in places where you do have assets. For instance, Texas has previously recognized a number of circumstances when its courts will refuse to enforce a judgment entered in another state. In EnviroPower, LLC v. Bear Stearns & Co, Inc., 2007 WL 1412849 (Tex. App. – Houston [1st Dist.] 2007, n.p.h.), the court made it clear that one of the ways to avoid enforcement of an out-of-state judgment – claiming the judgment is “penal” in nature – may not work very well in Texas. If your company has assets in Texas, you should be aware that a judgment entered in another jurisdiction will now be easier to get enforced in a Texas court. The decision also highlights the dangers of discovery misconduct and establishes that the consequences of such misconduct may follow you from state to state, or at least to Texas.
The case arose out of a contract dispute between Bear Stearns and EnviroPower. Bear Stearns filed suit in New York state court for breach of contract and quantum meruit, claiming that EnviroPower failed to pay it for services performed and expenses incurred. EnviroPower apparently did not play nicely when it came to responding to discovery. In fact, the New York court found that EnviroPower intentionally withheld documents, and as a sanction, the court struck EnviroPower’s answer. The New York court then held an evidentiary hearing and entered a judgment awarding Bear Stearns $1.3 million in damages.
EnviroPower had assets in Texas, so Bear Stearns filed its New York judgment in the Harris County, Texas district court. EnviroPower filed a motion to vacate the judgment, which was denied. The Houston First District Court of Appeals rejected EnviroPower’s claim that the judgment was not enforceable. Under the Full Faith And Credit Clause of the federal constitution, a state must give the same force and effect to a judgment of a sister state that it would give its own judgments. Under Texas law, when a judgment creditor files an authenticated copy of a foreign judgment, this satisfies its burden of presenting a prima facie case for enforcement of the judgment, even where the judgment is taken by default. Texas courts recognize exceptions to this rule, however, when a judgment is interlocutory, when it is subject to further modification, when the rendering state lacked jurisdiction, when the judgment was procured by fraud or is penal in nature, or when limitations has expired under Texas Civil Practice and Remedies Code section 16.066.
EnviroPower argued that the New York judgment was not enforceable because it was based on “death penalty” discovery sanctions, which had the effect of allowing the plaintiff to basically take a default. Specifically, EnviroPower claimed that by striking its answer as a discovery sanction, the sanction for discovery misconduct was penal in nature and not enforceable in a foreign jurisdiction. Generally, the question of whether another state’s actions are penal in nature turns on whether the purpose was 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. The Texas court noted that death penalty sanctions serve as a remedy for parties harmed by another party’s wrongful actions during litigation and as a deterrent to others who might abuse discovery procedures during litigation. Such sanctions are not designed as punishment for and deterrence of a wrong to society as a whole. While death penalty sanctions are obviously a “penalty” for the litigants involved, they are not “penal” sanctions for purposes of the Full Faith and Credit Clause. The decision in Enviropower may also have consequences in international commercial law situations, particularly international contract law disputes. In the future, litigants trying to avoid an out-or-state or international judgment will not be able to avoid the consequences of their discovery misconduct by claiming that a foreign judgment based on discovery sanctions is unenforceable.