In a state court collection case filed in Houston, Harris County, Texas, Lee sued Ali's company for money due, and obtained a judgment against the company. Lee then served discovery upon the company and Ali personally, to find out if assets were transferred from the company to Ali while the company was insolvent.
After receiving no response despite personal service on both the company and Ali, Lee filed a motion to compel discovery with the Harris County Court. On May 11, 2016, the Harris County Court issued a conditional order requiring that Ali personally either comply with the discovery request within 14 days or be held jointly and severally liable along with the company for $6,000.00 in sanctions.
Ali then filed personal chapter 7 bankruptcy and tried to discharge the sanctions. Lee filed an adversary proceeding, asking the bankruptcy court to find that the sanctions were nondischargeable in bankruptcy under 11 USC Sec. 523(a)(6) as a "willful and malicious injury."
Ali alleged that the Harris County Court lacked personal jurisdiction to enter a sanctions order against her because she was never individually subpoenaed as required to establish personal jurisdiction under the Texas Rule of Civil Procedure 205.1. In resonse the court stated in its opinion:
This argument is a misstatement of Texas law. Under the Texas Rule of Civil Procedure, A party may compel discovery from a nonparty—that is, a person who is not a party or subject to a party's control—only by obtaining a court order under Rules 196.7, 202, or 204, or by serving a subpoena compelling: (a) an oral deposition; (b) a deposition on written questions; (c) a request for production of documents or tangible things, pursuant to Rule 199.2(b)(5) or Rule 200.1(b), served with a notice of deposition on oral examination or written questions; and (d) a request for production of documents and tangible things under this rule. TEX. R. CIV. P. 205.1. Rule 205.1 only applies to nonparties. Id. As a shareholder, owner, and president of (the company), Ali falls within (the company's) control.
Having found personal jurisdiction against the owner of the business, the bankruptcy court found that the sanctions order was not discharged in the chapter 7 bankruptcy case:
The Bankruptcy Code specifically excepts certain items from a debtor’s discharge, including debts owed “for willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). The Fifth Circuit has held that state court sanctions for abuse of discovery fall within the “willful and malicious injury” discharge exception listed in 11 U.S.C. § 523(a)(6) because they consist of violations of court orders and impose delay and extra costs on opposing parties. (citations omitted).
This case is a lesson to small business owners, not to ignore post-judgment discovery after a court judgment has been taken against their small business. If the business owner ignores such orders, they may find themselves personally liable for the resulting court-ordered sanctions. Lee v Ali, Case No. 17-03231, U.S. Bankruptcy Court, SD Texas 2018.