Eagle Ford Shale Dispute Paves The Way For Supreme Court of Texas Review Of Supersedeas Bond Requirements

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In the case of a Texas court judgment that awards damages to a plaintiff, a critical question that arises for defense counsel is, "What steps must be taken to prevent execution on the judgment during the pendency of an appeal?" The answer lies in obtaining and posting, in a timely manner, a supersedeas bond that satisfies the requirements of Texas law. But in cases that involve multiple defendants jointly found to be liable for the plaintiff's damages, the supersedeas bond rules have been unclear to practitioners.

A recent opinion from the San Antonio Court of Appeals is likely to provide the impetus necessary to have the Supreme Court of Texas take up the important issue of whether the statutory cap on a supersedeas bond applies per judgment or per judgment debtor. As the amounts in controversy in commercial suits in Texas – especially suits involving oil and gas-related assets – continue to grow, the need for certainty regarding a judgment debtor's bond obligations becomes that much more critical. The high-stakes nature of inconsistent rulings easily can be gleaned from the language of the cap imposed by Section 52.006(b) of the Texas Civil Practice and Remedies Code:

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.

Tex. Civ. Prac. & Rem. Code § 52.006(b).

In Huff Energy Fund, L.P. v. Longview Energy Co., slip op., No. 04-12-00630-CV (Tex. App.—San Antonio Feb. 12, 2014, orig. proceeding), a dispute arising out of entitlement to production revenues from a large amount of acreage in the Eagle Ford shale, the San Antonio Court of Appeals held that the language of Section 52.006 reflected the Legislature's intent to have the supersedeas cap apply on a per judgment basis, without regard to the number of judgment debtors in play. In so ruling, the court created a split among the courts of appeals, as the Tyler Court of Appeals, in O'Quinn v. Wood, No. 12-08-00011-CV, 2009 WL 2367133, at *6 (Tex. App.—Tyler June 10, 2009, orig. proceeding), concluded that "the statutory cap imposed by subsection 52.006(b) applies per judgment debtor instead of per judgment." (quoted in Huff Energy, slip op., at 8 n.3).

In Huff Energy, the trial court entered judgment on a jury verdict awarding the plaintiff $95.5 million against five jointly and severally liable defendants. The defendants jointly posted a $25 million supersedeas bond, but, subsequently, the trial court ordered each defendant to post a bond in the amount of the lesser of $25 million or 50% of its current net worth. The defendants then filed a motion to the court of appeals seeking review of the trial court's order.

Majority Opinion

In granting the defendants' motion, the court of appeals was not concerned by Section 52.006's reference to "the judgment debtor," noting that the Legislature regularly has indicated that the singular includes the plural (and vice versa). Instead, the court focused on the word "security," as used in various sections of Chapter 52. "Security" is defined in Section 52.001 as a bond or deposit posted "by a judgment debtor to suspend execution of the judgment during appeal of the judgment." Section 52.006(a) provides that the amount of security must equal, among other things, the sum of the compensatory damages awarded "in the judgment" and costs awarded "in the judgment." And, Section 52.006(b) speaks of a cap on the amount of security "when a judgment is for money."

The court of appeals concluded that there was legal significance to be given to Chapter 52's consistent linking of the "security" to "the judgment," particularly in view of the general rule in Texas that there can only be one final judgment in a case. Tex. R. Civ. P. 301.

Because the statute links the security that must be posted to a single judgment, we believe the cap on the amount of security that must be posted to suspend a single final judgment applies without regard to the number of judgment debtors. Therefore, we conclude that, under the plain language of the statute, the cap is applied per judgment and not per judgment debtor.

Huff Energy, slip op., at 7-8.

The court also looked behind the statute's language, and concluded that the purpose of the Legislature's enactment of Section 52.006 in 2003 as part of comprehensive tort reform measures was to "reflect a new balance between the judgment creditor's right in the judgment and the dissipation of the judgment debtor's assets during the appeal against the judgment debtor's right to meaningful and easier access to appellate review." Id. at 8 (quoting In re Nalle Plastics Family Ltd. P'ship, 406 S.W.3d 168, 170 (Tex. 2013)). Concluding that Section 52.006 "reflected a policy shift … toward the goal of protecting judgment debtors' ability to appeal," the court expressed its belief that the "new balance" sought by the Legislature is struck by capping the supersedeas bond on a per judgment basis when a single final judgment is entered against multiple judgment debtors jointly and severally. Id. at 8-9 (quoting Shook v. Walden, 304 S.W.3d 910, 918-919 (Tex. App.—Austin 2010, no pet.)).

Dissenting Opinion

The court's opinion draw a sharp dissent, which questioned the majority's interpretations of the language of Chapter 52 and of the legislative history to the 2003 amendments. With respect to the statutory language, the dissent took the majority to task for reaching a decision that, effectively and without any justification, re-writes the net worth factor/element of the statutory cap analysis: "The cap is clearly determined by a single judgment debtor's net worth, not by the value of the judgment or the judgment debtors 'collectively' or 'in the aggregate.'" Huff Energy, dissent, at 4. Additionally, the dissent accused the majority of taking liberties by choosing to focus on the definition of "security" in Section 52.001 (which has not been changed since 1989) to arrive at its ultimate legal conclusion while disregarding the plain language of the definition – "security," as used in Chapter 52 means a bond or deposit posed by "a judgment debtor," not a group of judgment debtors. Dissent, at 5 (emphasis in original). And, the dissent rejected the appellants' reliance on statutes from other states imposing a $25 million per judgment cap, as those statutes used explicit language linking the cap to the judgment, whereas no such language exists in Section 52.006(b). Dissent, at 2 n.1, 5-6.

With respect to the majority's interpretation of Section 52.006's legislative history, the dissent noted that the Legislature's 2003 amendments did many things to create a "new balance" between judgment creditor's and judgment debtor's rights, but making the bond cap applicable on a per judgment basis was not one of them. The Legislature lowered the security required when a judgment is for money, eliminated provisions that had required judgment debtors to supersede punitive damages, lowered prejudgment and post-judgment interest rates, and, through Section 52.006(e), provided the judgment debtor with added protections against interference with the use, transfer or conveyance of assets in the normal course of its business. See Dissent, at 3, 4, 6. Finally, the dissent noted that the Legislature imposed the $25 million cap in 2003 (on a per judgment debtor basis) with presumed knowledge of – and the intent to respond to – an earlier court opinion, Fortune v. McElhenney, 645 S.W.2d 934 (Tex. App.—Austin 1983, no writ), that made each surety to a joint bond liable for the entire amount (which often equaled the amount of the judgment) if the judgment was affirmed with respect to any appellant. Dissent, at 7.

Analysis

The court of appeals' decision in Huff Energy certainly is welcome news for defendants in high stakes litigation in which multiple defendants (many times affiliated entities) face the prospect of joint and several liability. But it is difficult to see how the majority's analysis could withstand scrutiny before the Supreme Court of Texas.

The dissent identified numerous flaws in the majority's interpretation of the text of Chapter 52 and the legislative history surrounding the 2003 tort-reform amendments. Yet there is another basis for concern about the correctness of the majority's analysis. In multi-defendant cases where the judgment amount is modest (far less than the $95.5 million award in Huff Energy) and the "lesser" cap number is 50% of the judgment debtor's net worth (rather than $25 million, as in Huff Energy), applying the supersedeas cap on a per-judgment basis is likely to produce an absurd result.

Consider a $10 million judgment against three judgment debtors, with no corporate affiliation and with net worths of $1 million, $2 million, and $3 million, respectively. Applying Section 52.006(b), the cap on a supersedeas bond would not be $25 million; rather, the cap would have to equal one-half of the judgment debtor's net worth. If the Huff Energy majority is correct, and the cap is determined on a per-judgment basis, how would the cap amount be calculated in this scenario, in which there are three different defendants with three different net worths? Which judgment debtor's net worth would be used, and, importantly, what criteria would be used by a court to make such a determination?

The Huff Energy opinion, which is premised on accepting an argument that $25 million is the maximum amount of security required by law, does not address this enigma. The court's broad, bright-line ruling leaves no room for argument that the cap applies only in the case of large judgments against defendants with respective net worths in excess of $25 million. Nor does it explain how to deal with a scenario like the hypothetical presented here.

The only plausible conclusion is that the cap set out in Section 52.006(b) must apply on a per-debtor basis, and not on a per-judgment basis. Each judgment debtor should be responsible to post a supersedeas bond equal to one-half of its net worth. To hold otherwise would be to nullify or re-write the "net worth" concept in Section 52.006(b)(1), and would disrupt the balance to be achieved between the rights of the judgment creditor to the judgment and the rights of the judgment debtor against dissipation of its assets pending appellate review.

This important issue almost assuredly will reach the Supreme Court of Texas. Ultimately, however, the proper avenue for recourse is to the Legislature, which should alter the language of Section 52.006(b) if, indeed, it desires to make the cap apply on a per-judgment, rather than a per-judgment debtor, basis.

 Jonathan Marsh
 Houston
 +1 713 276 7362
 jmarsh@kslaw.com

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Topics:  Appeals, Bonds, Oil & Gas, Shale Gas

Published In: Civil Procedure Updates, Civil Remedies Updates, Energy & Utilities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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