Bollore S.A. v. Import Warehouse, Inc.

• Decision Date: 28 April 2006
• Docket Number: No. 04-11514.,04-11514.
• Citation: 448 F.3d 317
• Parties: BOLLORÉ S.A., North Atlantic Trading Company, North Atlantic Operating Company, Plaintiffs-Appellees, v. IMPORT WAREHOUSE, INC., et al., Defendants, v. Najat Mackie, Freetown Mini Mart, Inc., Movants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

448 F.3d 317

BOLLORÉ S.A., North Atlantic Trading Company, North Atlantic Operating Company, Plaintiffs-Appellees, v. IMPORT WAREHOUSE, INC., et al., Defendants, v. Najat Mackie, Freetown Mini Mart, Inc., Movants-Appellants.

No. 04-11514.

United States Court of Appeals, Fifth Circuit.

April 28, 2006.

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Marcella Ballard (argued), Proskauer Rose, New York City, Lisa H. Meyerhoff, Baker & McKenzie, Houston, TX, for Plaintiffs-Appellees.

Philip Harry Kotsis (argued), Saleh & Associates, Dearborn, MI, for Movants-Appellants.

Appeal from the United States District Court for the Northern District of Texas.

Before KING, BARKSDALE and PRADO, Circuit Judges.

KING, Circuit Judge:

In this appeal, Appellants Najat Mackie and Freetown Mini Mart, Inc., challenge the district court's order piercing Freetown Mini Mart's corporate veil and adding them both as judgment debtors in a turnover proceeding pursuant to TEX. CIV. PRAC. & REM. CODE § 31.002. For the following reasons, we VACATE the district court's orders as they apply to Najat Mackie and Freetown Mini Mart, Inc.

I. FACTUAL AND PROCEDURAL BACKGROUND

This appeal arises against the backdrop of an elaborate international scheme involving Ali Mackie,¹ one member of a Michigan family that engaged in the manufacture, distribution, and sale of counterfeit Zig-Zag cigarette papers primarily in the states of Michigan, Texas, and California. In March 1999, Bolloré S.A., North Atlantic Trading Company, and North Atlantic Operating Company (collectively, "Appellees"), as the holders and exclusive licensees of the Zig-Zag trademarks, filed a lawsuit against various members of the Mackie family (the "Mackie Defendants") in the Northern District of Texas, alleging that the Mackie Defendants and their co-defendants had violated federal copyright and trademark laws.² The district court issued a preliminary injunction in July 1999, which temporarily suspended the counterfeiting operation.

In 2001, as a result of raids pursuant to an ex parte seizure order issued by a California federal court, Appellees discovered new evidence of continuing counterfeiting activity and filed a contempt motion against the Mackie Defendants in the Northern District of Texas. In July 2002, after a contempt hearing in the district court and the entry of a contempt order, Appellees received a final contempt judgment against the Mackie Defendants, including Ali Mackie, for $11 million ("the Final Judgment").³ The judgment was placed in escrow pursuant to a settlement agreement.

In February 2004, after Appellees became aware that the Mackie Defendants had not stopped their counterfeiting activities as required by the settlement agreement, Appellees brought another contempt action against the Mackie Defendants and began to execute on the Final Judgment. Even though he had wired large amounts of money overseas in connection with the counterfeiting scheme, by 2004 Ali Mackie had no assets with which to satisfy the judgment against him. While preparing to execute on the Final Judgment, in July 2004, Appellees took depositions of the Mackie Defendants and their families, including Ali Mackie and his mother, Najat Mackie. Among other things, Appellees learned for the first time that Ali Mackie worked and performed managerial duties for his mother's gas station in Detroit, Freetown Mini Mart, Inc. ("Freetown"), in return for free room, board, and a leased car from his mother. The record reflects that, at all times relevant to these proceedings, Najat Mackie was Freetown's sole shareholder and resided in Michigan, and Freetown, a corner gas station and convenience store, conducted business only in Michigan. Najat Mackie owned no land and entered into no contracts in the state of Texas.

In an effort to collect on the Final Judgment against Ali Mackie, Appellees filed in the United States District Court for the Northern District of Texas an "Application for an Order Setting Hearing Regarding Turnover Relief Against Ali Mackie and Freetown Mini Mart, Inc.," ("Turnover Application") pursuant to TEX. CIV. PRAC. & REM. CODE § 31.002 ("the Texas Turnover Statute" or "the turnover statute"), on November 2, 2004. Specifically, they argued in the Turnover Application that Freetown should be held liable for the Final Judgment against Ali Mackie because Freetown was the alter ego of Ali Mackie.⁴ On November 4, 2004, Appellees personally served Ali Mackie and Najat Mackie in Michigan with subpoenas duces tecum ordering them to appear and produce documents in a turnover relief hearing in the Northern District of Texas involving the Final Judgment against Ali. Although Najat Mackie and Freetown ("Appellants") did not appear at the hearing on November 10, they were represented by counsel, who made an oral motion to dismiss Appellees' Turnover Application, which the court denied. Appellants' counsel also requested that the court adjourn to allow Appellants time to appear personally before the court. The court granted the motion and adjourned until November 18.

Appellants also failed to appear on November 18, but they were again represented by counsel who filed written motions to quash the subpoenas that had been served on Najat Mackie and Ali Mackie and a motion to dismiss the Turnover Application for lack of personal jurisdiction. After oral argument, the district court denied Appellants' motions, stating, "When the Mackies have shown up for a hearing, they have lied on each occasion, and I have found them in contempt of court for that. I do have jurisdiction over them, and I will enter the orders that Plaintiffs request." Although Appellees' Turnover Application requested the turnover only of Freetown's assets, the district court sua sponte ordered Najat Mackie's assets turned over as well. To reach this outcome, the district court first had to reverse pierce Freetown's corporate veil after finding that Freetown was Ali Mackie's alter ego, and then pierce Freetown's veil again after finding that Freetown was also Najat Mackie's alter ego.

The district court did so by entering three orders, dated November 18, 2004. First, the court entered an order (1) denying Appellants' motion to dismiss for lack of personal jurisdiction and (2) denying the motions to quash the subpoenas served on Ali Mackie and Najat Mackie ("Order Denying Motion to Dismiss and Motion to Quash"). Second, it entered an order (1) piercing Freetown's corporate veil, finding that Freetown was the alter ego of Ali Mackie and holding Freetown and Najat Mackie liable for the $11 million Final Judgment against Ali Mackie, (2) "adding" both Najat Mackie and Freetown to the contempt order and to the Final Judgment, (3) awarding Appellees costs and attorney's fees, and (4) ordering Appellants' and Ali Mackie's assets frozen and turned over pursuant to the Texas Turnover Statute ("Turnover Order"). Third, the court entered an order appointing a receiver for Ali Mackie and for Appellants ("Order Appointing Receiver").

Appellants timely appealed all three of the district court's orders, asserting that (1) they did not have minimum contacts with Texas such that personal jurisdiction was proper in the district court; (2) the Texas Turnover Statute is an inappropriate vehicle through which to adjudicate the substantive rights of non-debtor third parties; (3) the district court's piercing of the corporate veil and finding of alter ego was erroneous; and (4) the district court erred when it denied their motion to quash the subpoena served on Najat Mackie.

II. DISCUSSION

A. Standard of Review

We review a district court's turnover judgment for abuse of discretion. Beaumont Bank v. Buller, 806 S.W.2d 223, 226 (Tex.1991). A court abuses its discretion when it acts "in an unreasonable or arbitrary manner . . . without reference to any guiding rules and principles." Id. (internal quotations and citation omitted). In making this determination, we review errors of law de novo. O'Sullivan v. Countrywide Home Loans, Inc., 319 F.3d 732, 737 (5th Cir.2003).

We review a district court's decision to pierce the corporate veil for clear error. Patin v. Thoroughbred Power Boats, Inc., 294 F.3d 640, 647 (5th Cir. 2002); Zahra Spiritual Trust v. United States, 910 F.2d 240, 242 (5th Cir.1990).

B. Analysis

In entering the three orders at issue in this case, the district court erred to the extent that those orders apply to Appellants because (1) a court may not use a proceeding under the Texas Turnover Statute as a vehicle to adjudicate the substantive rights of non-judgment third parties; and (2) Appellees did not make the required showing under Texas law to establish that Freetown was Ali Mackie's alter ego.⁵

1. The Use of the Texas Turnover Statute to Pierce the Corporate Veil

The Texas Turnover Statute is a procedural mechanism that gives Texas courts the power to satisfy a judgment by reaching the assets of a judgment debtor that cannot be attached or levied by ordinary legal process.⁶ In re Hamel, 180 S.W.3d 226, 228-29 (Tex.App.—San Antonio 2005). Texas courts construing the turnover statute have expressly and consistently held that it may be used to reach only the assets of parties to the judgment, not the assets of non-judgment third parties. See, e.g., Beaumont Bank, 806 S.W.2d at 227; Bay City Plastics, Inc. v. McEntire, 106 S.W.3d 321, 324 (Tex. App.—Houston 2003); United Bank Metro v. Plains Overseas Grp., 670 S.W.2d 281 283 (Tex.App.—Houston 1983). Moreover, the turnover statute is a purely procedural mechanism, and it is black-letter Texas law that proceedings pursuant to the turnover statute may not be used to determine the substantive property rights of the judgment debtors or of third parties. Maiz v. Virani, 311 F.3d 334, 343-45 (5th Cir.2002) (holding that a district court may not use a turnover proceeding to adjudicate whether a corporation is an individual judgment debtor's alter ego); Resolution Trust Corp. v. Smith, 53 F.3d 72,...