Interview by and article from Art Young
I sat down recently to discuss with James Holmes, a Dallas business lawyer and oil and gas professional, the background for and the development of his new article: Superseding Money Judgments in Texas: Four Proposed Reforms to Help the Business Litigant and to Further Improve the Texas Civil Justice System in the 51st Volume (Number 1, Article 3) of the St. Mary’s Law Journal.
I must comment at the outset that Holmes’s passion for this “procedural law” subject matter was palpable – and somewhat captivating. He clearly wants to reach a Texas business audience with his ideas. He wants to impress upon that audience the litigation risks facing their business activities in Texas and how his “supersedeas reforms” can help them.
After practicing law in Texas for nearly three decades, Holmes’s reform ideas appear to grow from his educational roots as a young Texan.
Holmes’s early lesson on reforming “procedural laws” –
“I remember studying antitrust law at U.T. Law School in the early 90s. My professor was the distinguished Lino Graglia, who actively questioned why business defendants should suffer antitrust liability. One spring afternoon, Professor Graglia was leaned back in his chair in his office, listening to my question: ‘Professor Graglia, if American antitrust plaintiffs have been defanged since Robert Bork’s landmark late 70s reform book The Antitrust Paradox, then why do business owners as antitrust defendants continue to pay millions in trial courts to settle weak antitrust cases against their companies? Why don’t they simply fight at the trial-court level, build a record for an appeal, and win on appeal – using one of Bork’s many arguments against antitrust laws?’”
Holmes continues, “My question had touched a nerve. Professor Graglia leaned forward, placed both hands firmly on his desk, and began to quiver with anger. His answer: ‘I have counseled many American business owners to do precisely what you say. Most of them have told me that they would rather pay millions to settle a case than to endure the expense, distractions, and emotional involvement of months of pre-trial discovery – and weeks or months of trial! They settle the lawsuits simply to avoid the litigation process!’”
Holmes concludes, “That dialogue with Professor Graglia, followed by my own decades in business litigation, convinced me that procedural reforms are a more effective way to unburden American businesses with litigation than changing the substantive law.”
Procedural laws address the process for discovering facts in a case, presenting those facts to judges or juries for a decision, and appealing trial-court decisions and results to appellate courts. Substantive laws, on the other hand, address which side is right and which side is wrong in a given legal dispute.
Holmes gives background for the Professor Graglia anecdote: he explains that American antitrust laws once were a common means by which businesspeople would sue each other in courthouses. This was back in the 1950s through mid-1980s. Antitrust plaintiffs – using antitrust substantive law – would claim that “anticompetitive practices” by defendants had harmed them and the “marketplace”; defendants would deny any liability for such practices. The cases would potentially last for many years. Then, Robert Bork’s The Antitrust Paradox and other academic writings substantially weakened antitrust substantive laws for plaintiffs, empowering defendants in these courthouse battles.
But reforming antitrust substantive law with Bork’s book was not enough – procedural laws, unchanged by the book, allowed antitrust plaintiffs to beset American businesses for many subsequent years.
Present-day business litigation –
“Litigation is a basic legal right guaranteeing every corporation its decade in court.” David Porter, Executive Vice President of Microsoft.
The business fights, and their attendant costs, have continued since the 1980s – the laws used in the fights, however, moved away from antitrust. From the late 1980s until present, businesspeople have fought mostly over state substantive law like fraud, deceptive practices, fiduciary duties, partnership responsibilities, and various “business torts.”
“In the past two decades, these state substantive laws have suffered the same demise, or serious curtailment, that antitrust substantive laws suffered previously,” Holmes explains. “Strong, critically-thinking courts like the Texas Supreme Court began asking whether the state substantive laws were truly benefitting marketplace participants and the marketplace itself, or whether they were base weapons for allowing a plaintiff to exact millions in settlement from a defendant.”
Seemingly, today Texas business owners should be better off – now that substantive-law changes have lessened their potential lawsuit liabilities. But it can be very difficult to apply the new, appellate court-made substantive law at the trial court level.
Procedural laws get in the way.
Holmes continues, “Too often plaintiffs can convince a trial judge that they can go all the way through trial on legal claims that almost certainly will be reversed on appeal. The business owner defendants, as a result, must suffer the expense, distractions, and emotional involvement of trial-court litigation – simply to obtain their ‘day in appellate court’ following trial. This trial-court waste – caused by procedural laws – was at the root of Professor Graglia’s anger when I asked my question in his office. But until we greatly alter the adversarial civil justice system we developed from England, we probably are stuck with this trial-court waste. It is inherent in our procedural laws.”
Superseding a judgment to stop collections can be the most dangerous “procedural law” for Texas business owners –
Making matters worse, a business owner defendant probably will have to “supersede the trial court judgment.” In order to appeal the case effectively and stop the plaintiff’s judgment collections during the appeal, a business owner must put cash into the court’s registry for the judgment amount or must put a “supersedeas bond” payable to the plaintiff for the judgment amount.
Business owners accomplish nothing if plaintiffs sell off their assets before the appeal is complete.
“These ‘supersedeas laws’ supposedly protect the plaintiff during the appeal: if the defendant loses the appeal, the cash deposit or bond ensures that the post-appeal victorious plaintiff can collect on its judgment,” Holmes notes. “But in actual practice, the cash deposit or bond usually lead only to economic waste for defendants and, oddly enough, for plaintiffs. There are several far superior ways to protect the interests of both defendants and plaintiffs. We must develop a better procedural law for superseding money judgments. I’ve re-written a Texas statute accordingly, and I’m urging the Texas Legislature to adopt my new statute in the next legislative session.”
Holmes elaborates: “As a life-long Texan, as a Texas business owner, and as a business attorney for several decades, I want to unburden businesses from most litigation they face today. I want Texas businesses to benefit from our appellate courts’ careful enforcement of Texas substantive law. And, I want rational procedures for protecting for plaintiffs while defendants’ appeals run their course.”
Holmes has focused on procedural laws – specifically the “supersedeas laws” – as his preferred method for reforming present-day Texas business litigation. “Given that we’re unlikely to depart from the adversarial civil justice system we developed from England, at the very least we can remedy the most economically wasteful procedure in that system: the enforcement of, or superseding of, money judgments following trial.”
Holmes returns to his U.T. Law anecdote: “Professor Graglia was angry that pre-trial litigation and trial were causing American businesses to settle weak antitrust lawsuits rather than to fight them on appeal. I’m the same, but a little different: I’m angry that post-trial judgment enforcement and the lack of supersedeas options can cause Texas businesses to settle weak lawsuits based on Texas substantive laws – when those very businesses could vanquish on appeal most or all of the lawsuits that beset them.”
Holmes’s article on “supersedeas reform” for his legislative initiative –
To bring his ideas to the Texas business community, Holmes has devoted substantial time over the past few years on his article: Superseding Money Judgments in Texas: Four Proposed Reforms to Help the Business Litigant and to Further Improve the Texas Civil Justice System in the 51st Volume (Number 1, Article 3) of the St. Mary’s Law Journal. The article can be downloaded for free on-line.
I have read the article and am intrigued and impressed. Although I am not an attorney, I can see readily that Holmes has written the article for non-lawyers and, specifically, for the Texas business community. Clearly he wants business owners’ attention on his reform ideas.
Holmes explains: “Law Review articles are notorious for being pithy, complex, and heavily footnoted. Oftentimes, they must be this way. I aimed for something different here, though. I aimed for a sort of balance. I want to change Texas law in a significant way. Therefore, I couldn’t sacrifice the quality or quantity of my legal research and analysis. I couldn’t write just an executive summary. So the legal and academic reader will find much of the typical law-review density and complexity in my article’s footnotes.”
“But the article’s main body is stream-lined. There, I purposely used easily accessible language for business readers, not just for legal readers. I strive to hold business owners’ attention so that they will come to my conclusions or will give me helpful feedback on those conclusions. I wrote the article’s main body to be a page-turner. Business readers will find it interesting.”
The article begins by highlighting the dangerous problems surrounding judgment enforcement and supersedeas for most Texas businesses. “Everything is bigger in Texas,” Holmes observes, “so in our great and prosperous State, a ‘smaller’ business or businessperson is one having a valuation of $100 million or less. This is my target audience. Those ‘smaller’ businesses and businesspersons in Texas run a substantial risk of tremendous economic waste and value destruction if they suffer liability in Texas lawsuits. We’ve got to address that risk for those businesses and businesspersons having valuations at or under $100 million. We’ve got to fix that risk for the Texas economy, which depends heavily upon businesses and businesspersons having valuations at or under $100 million.”
From Holmes’s article: “Trial court proceedings may produce onerous money judgments that do not comport with business-world realities or that otherwise contain reversible error; consequently, the judgments demand appellate review.” But when a business owner cannot part from $25 million or money equaling half of his net worth for many years, the owner may suffer from judgment collection before or during his appeal.
Holmes argues that existing supersedeas laws protect huge corporations – which can remove $25 million from their operations for many years to appeal a judgment – but those laws fail the majority of Texas businesses, the “smaller” ones that employ most Texans.
Texas law should recognize that a judgment liability creates a balance-sheet liability under GAAP –
“What flabbergasts me and all of the CPAs I’ve worked with is that Texas doesn’t recognize a money judgment as a ‘balance sheet liability.’” Holmes comments. “Generally Accepted Accounting Principles demand that a business list a money judgment liability as one of the liabilities lessening asset values on its balance sheet – right alongside ‘accounts payable,’ ‘notes payable’ and the like. Following GAAP, Johnson & Johnson and ExxonMobil, for instance, each reporting quarter list the various adverse judgments against their companies as balance-sheet liabilities. But ‘smaller’ Texas businesses can’t do so under existing Texas supersedeas laws. Therefore, they cannot lessen their ‘net worth’ (that is, their assets minus liabilities) by an adverse money judgment. The worst and realest liability they face remains ‘off’ their balance sheet! Amazing.”
Holmes’s amazement crescendos in this passage from the article:
“Texas supersedeas law on judgment liabilities is a work in situational irony—a fire station burning to the ground. The trial court, which has effectuated the liability (by rendering judgment following trial, summary judgment, or default judgment), has the power to deem the liability ‘contingent’—thereby characterizing it as less inevitable and ascertainable than other liabilities facing the judgment debtor [i.e., the business owner]. As a legally contingent liability, the judgment liability does not lessen net worth; it is not a recognized liability under Texas law. . . . Having kept the judgment liability off the balance sheet, the same trial court becomes the very instrument for removing the contingent nature of the so-called contingent judgment: the trial court can allow the judgment to destroy the debtor’s overall net worth by making the judgment liability as real, impactful, and deleterious as any liability could possibly be.”
Holmes firmly believes that not lessening net worth by a judgment liability presents a tremendous problem for Texas businesses facing large money judgments. They cannot “cap” the cash deposit or supersedeas bond that they must provide by a lowered one-half of their net worth. They cannot “cap” their supersedeas obligation by using the most dangerous liability they face in the determination of one-half of their net worth.
Holmes gives an example: “Suppose a Texas rancher, real estate owner, or oilman got sued and after trial owed a $30 million judgment. This happens all the time in Texas litigation. That business owner would want to appeal that judgment, hoping for full or partial relief from it. He would have to post a cash deposit or a bond at the least of (a) the judgment amount, (b) $25 million, or (c) half of his net worth – and in this example, his net worth is $6 million. With the $30 million judgment, the lowest is (c) half of his net worth, here meaning $3 million. But the rancher, real estate owner, or oilman cannot squeeze $3 million from his net worth of $6 million. Like most successful Texans, he owns mostly real-estate assets and relatively little cash or cash equivalents. He cannot fire sale is assets to raise $3 million in cash, and banks won’t take his assets – which are mostly real-estate assets – as collateral for either a loan or a letter of credit to back a bond. Because he cannot post the $3 million in a cash deposit or bond, his opponent (the plaintiff) can begin selling off his assets, worth $6 million or more, while he appeals the $30 million judgment. This is a terrible, but all too common scenario for Texas business owners.”
Here is where following GAAP would help. If a business owner can lessen his (or his company’s) net worth by the judgment amount, as Johnson & Johnson and ExxonMobil do in their public reporting, then the business owner’s one-half of net worth decreases substantially, as does his supersedeas obligation.
Holmes drives home the point in his example: “Following GAAP, Texas supersedeas law could allow the rancher, real estate owner, or oilman to lessen his $6 million net worth by $30 million. He would have zero net worth or, more accurately, negative net worth. GAAP fully contemplates the possibility of zero or negative net worth. The rancher, real estate owner, or oilman would have to post no cash deposit or supersedeas bond in this example.”
“But, changing the facts, if the judgment were for $3 million instead of $30 million, the rancher, real estate owner, or oilman would have to post security of $1.5 million. Here’s the math: $6 million net worth, less $3 million judgment liability – which makes for a revised $3 million in net worth – divided by two.”
Conclusions and sincere convictions –
Holmes concludes: “I am fully aware that recognizing judgments as balance-sheet liabilities – as GAAP tells us to do – might result in zero or negative net worths and, consequently, might result in no supersedeas obligations for business defendants in Texas lawsuits. I like that. First, GAAP contemplates precisely that scenario, and Texas supersedeas law is supposed to follow GAAP. Second, as I write in the article, ‘good policy flows from the possibility that judgment debtors [business owners] could have negative net worth as a result of their business and judgment debts. . . . A plaintiff with the possibility of becoming a judgment creditor will have to consider the scenarios that could result from its litigation efforts: a judgment liability on the defendant that preserves some net worth, thereby obligating the defendant to provide some judgment security, versus a judgment liability on the defendant that wipes out its net worth, thereby relieving the defendant of any supersedeas obligation. The decision before the plaintiff could create disincentives towards overloading the litigation process—and particularly the jury charge — with excessive damages theories and claims for recovery, such as ambitious, creative, and speculative compensatory damages.’”
Holmes has several other supersedeas reforms beyond recognizing money judgments as balance-sheet liabilities. Generally speaking, his reforms seek to help the “smaller” business owner – again, those having valuations at or under $100 million. And, his reforms seek to help the so-called “land rich, cash poor” businesses, as many successful Texans tend to have.
Whatever the reaction may be from the legal community – and Holmes believes his article and ideas will be well-received – there is no doubting the intensity and sincerity of his initiative. I leave the reader with this message from the heart of Holmes’s article, and probably from the heart of Holmes himself:
“Texans do not give up fighting once they perceive that they have suffered an injustice. They fight hard; when necessary, they fight to the bitter end. Accordingly, business litigants in the Texas civil justice system that face sizeable judgments will pursue appeals—in search of full or partial relief—despite their inability to readily supersede a money judgment. . . . [F]ighting on two fronts—to win the merits on appeal, and to preserve a life’s work from [judgment] collections—leads to tremendous strife, economic waste, opportunity cost, and satellite litigation. The fighting only wastes time and resources; it benefits absolutely no one—other than plaintiff’s attorneys aggressively applying financial pressure on a business litigant to force a settlement before an appellate court has an opportunity to review the case’s merits.”
Readers can purchase Holmes’s supersedeas article in hard-copy format by emailing [email protected] and specifically requesting the article.