Thomas v. Hughes, 20-50671

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Writing for the CourtCory T. Wilson, Circuit Judge
Decision Date03 March 2022
PartiesJohnny 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, v. Lou Ann Hughes; Advanced Probiotics, L.L.C.; Performance Probiotics, L.L.C., Defendants-Appellants.
Docket Number20-50671

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,
v.

Lou Ann Hughes; Advanced Probiotics, L.L.C.; Performance Probiotics, L.L.C., Defendants-Appellants.

No. 20-50671

United States Court of Appeals, Fifth Circuit

March 3, 2022


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, Pearcy[1] 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

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$1, 419, 724.37 plus interest[2] 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]

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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).

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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...

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