Fifth Circuit Rules In Favor Of Due Process In Two Recent Opinions

Due process is an important protection against arbitrary government action. However, it is often given reduced priority in post-judgment collection matters. Once judgment is recovered against a debtor, remedies seeking to attach the debtor’s assets are deemed to require less process than was given to recover the original judgment. Regardless of whether this rationale is valid as applied to the judgment debtor, it does not apply to proceedings against third parties. As a result it is heartening to see two recent Fifth Circuit decisions which reversed lower court actions based upon failure to follow basic procedural rules.

No Turnover Actions Against Third Parties

Bollore, S.A., et al vs. Import Warehouse, Inc., et al, 2006 U.S. Lexis App. 10591 (5th Cir. 4/28/06) concerned an attempt to use a turnover order to reach the assets of a corporation which was not a judgment debtor.

Ali Mackie was the individual behind a scheme to sell counterfeit cigarette rolling papers. Despite having an $11 million judgment rendered against him, Mr. Mackie apparently continued his counterfeiting ways. This angered the plaintiffs to the point where they wanted to collect upon their judgment. The plaintiffs filed an Application for Order Setting Hearing Regarding Turnover Relief Against Ali Mackie and Freetown Mini Mart, Inc. The Application sought to reach the assets of Freetown Mini Mart, Inc. by claiming that it was the alter ego of Ali Mackie. Ali Mackie did not own an interest in Freetown Mini Mart, Inc. However, his mother, Najat Mackie, did. The plaintiffs served Ali Mackie and his mother Najat Mackie with subpoenas in Michigan compelling them to attend the hearing in Texas and produce documents.

Neither of the Mackies appeared in response to the subpoenas. However, their lawyer filed motions to quash the subpoenas and dismiss the motion for lack of personal jurisdiction. The District Court was not amused and denied the motions. He stated, “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.” The court went on to do more than that, ordering not only that Freetown Mini Mart’s assets be turned over, but that Najat Mackie turn over her assets as well. Apparently the court decided that Freetown was the alter ego of both Ali and Najat so that the assets of Najat and Freetown could be reached by Ali’s creditors. As a result, the court found that Freetown and Najat were also liable on the $11 million judgment, ordered their assets frozen and ordered a receiver for their assets.

Najat and Freetown were not happy about being “added” to an $11 million judgment and having their assets frozen, so they appealed. The Fifth Circuit did not have much trouble determining that they got a raw deal. The court held that (1) a turnover order may not be used to adjudicate the rights of non-judgment debtors and (2) the plaintiffs never established their case for alter ego. The court also noted that it was wrong to enter judgment against parties who had never been served with a summons. However, since this was not identified as an issue or briefed, it did not furnish an independent ground for relief. It has long been the law that a turnover action may not be used to determine the rights of someone who is not a judgment debtor. Therefore, this result was not very surprising. The court also held that the mere fact that Ali exercised managerial control over a corporation owned by his mother did not state a case for alter ego or reverse veil piercing.

Nothing here is surprising. The only surprise here is that it took an appeal to the Fifth Circuit to undo this mess. A turnover action is not a silver bullet which allows the judgment creditor to recover whatever he wants against whomever he wants without the necessity of following the laws of procedure or evidence. This case points out a weakness in the appellate system. A party who files a frivolous appeal may be subject to sanctions. On the other hand, a party who obtains a frivolous judgment has no such risk. The appellants in this case were forced to incur substantial expense in order to undo relief which should never have been granted. However, they do not seem to have any remedy for their harm aside from ultimate vindication.

No Indefinite TROs Against Non-Parties In the War Against Terror

One result of the war against terror has been new remedies to undermine the financial backing of the bad guys. However, the Fifth Circuit’s recent opinion in USA vs. Holy Land Foundation, 445 F.3d 771 (5th Cir. 2006) was not about a conflict between good guys and bad guys. Rather, it was about whether the United States could obtain an indefinite, ex parte TRO to freeze the assets of a foundation alleged to have aided terrorism in order to keep those assets from being reached by a judgment creditor who was a victim of terrorism.

The Ungars were victims of a terrorist attack. Their estate sued Hamas and not surprisingly got a default judgment. They then got a court order determining that property held by Holy Land Foundation belonged to Hamas. They obtained writs of execution in New York, South Carolina and Washington state.

Meanwhile, the United States brought a criminal proceeding against Holy Land Foundation. When they learned about the Ungar estate's actions, they went in to U.S. District Court in Dallas and got an ex parte TRO under the criminal forfeiture statute freezing the assets of the Holy Land Foundation. The TRO application stated that it was intended to stop the Ungars from executing. However, the Ungars were not made parties and the TRO was issued for an indefinite period.

The Ungar estate appealed the TRO. They claimed that the District Court in Dallas lacked jurisdiction over the bank accounts because the funds were in custodia legis. The Fifth Circuit examined the laws of New York, South Carolina and Washington state and concluded that the writs of execution were not sufficient to place funds in custodia legis. Of particular interest is the analysis with regard to Washington state. There, the Fifth Circuit held that a writ of garnishment would have placed the funds in the custody of the court, but that a writ of execution did not. This sounds just like Texas law and is an important distinction to note.

Then the USA claimed that under the criminal forfeiture statute only the criminal defendant had standing to challenge the injunction. Fifth Circuit discussed standing rules and said no.

Then the USA claimed that their super terrorism laws exempted them from complying with Rule 65 in obtaining an injunction. The Fifth Circuit had previously ruled that Rule 65 did apply. However, this opinion was reversed on other grounds and had been criticized. However, the Fifth Circuit ruled that it was still good law. You can't get an indefinite ex parte injunction against a third party.

It is kind of sad when the good guys feel that due process does not apply to them. Due process should be one of the things which distinguishes us from the bad guys. To contradict Machiavelli, the ends do not justify the means.