Court Opinion

ID: 148930
Source: CourtListenerOpinion
Date Created: 2010-06-18 17:16:57+00
Date Added: 2024-06-11T09:42:11.043597
License: Public Domain

Case: 09-50455     Document: 00511146289          Page: 1    Date Filed: 06/18/2010

            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                     Fifth Circuit

                                                  FILED
                                                                            June 18, 2010

                                       No. 09-50455                         Lyle W. Cayce
                                                                                 Clerk

CITY OF EL PASO, TEXAS,

                                                   Plaintiff - Appellee
v.

EL PASO ENTERTAINMENT, INC., A Texas Corporation, doing business as
Foxy’s Nightclub, doing business as Foxy’s; JEDJO, INC., A Texas
Corporation, doing business as The Lamplighter, doing business as
Lamplighter Lounge; CR&R, INC., A Texas Corporation; EL TAPATIO, INC.,
A Texas Corporation; Y&F, INC., A Texas Corporation; UNKNOWN JOHN
DOE RELATED BUSINESS ENTITIES WHICH OPERATE AND/OR OWN
THE BUSINESSES KNOWN AS FOXY’S NIGHTCLUB AND
LAMPLIGHTER LOUNGE,

                                                   Defendants - Appellants

                   Appeal from the United States District Court
                        for the Western District of Texas
                           USDC No. 3:07-CV-00380-KC

Before BARKSDALE, DENNIS, and OWEN, Circuit Judges.
PER CURIAM:*
        At issue is the continued vitality of a 1995 agreed judgment and
permanent injunction, entered into by the City of El Paso, Texas, and two

        *
         Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
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sexually-oriented businesses (SOBs), Foxy’s Nightclub and Lamplighter Lounge,
operated by Appellants El Paso Entertainment, Inc., and JEDJO, Inc.,
respectively. In 2007, the City filed a declaratory judgment action on whether
that agreed judgment precludes enforcement of a 2007 zoning ordinance against
the two SOBs. The district court held the 1995 agreed judgment is no longer in
effect, allowing the City to enforce that ordinance.     AFFIRMED in PART;
VACATED in PART; and REMANDED.
                                       I.
      In 1994, El Paso Entertainment sued the City in federal district court,
challenging the constitutionality of a zoning ordinance regulating SOBs. The
district court granted El Paso Entertainment’s motion for partial summary
judgment and allowed the proceedings to continue on the issue of damages.
Before that issue could be resolved, the City and El Paso Entertainment entered
into the 1995 agreed judgment, precluding the City from enforcing any SOB
ordinances against either Foxy’s Nightclub or Lamplighter Lounge for as long
“as the businesses remain[ed] in operation at their current locations by their
current owners and operators”. (Emphasis added.) (The 1995 agreed judgment
also required the City to pay El Paso Entertainment $15,000 in damages.)
      When the 1995 agreed judgment was entered, El Paso Entertainment
operated Foxy’s Nightclub and subleased the physical property on which it is
located from CR&R, Inc. Similarly, in 1995, JEDJO operated Lamplighter
Lounge and leased the property from CR&R, Inc. At that time, Mark Diedrich
was the sole shareholder of both El Paso Entertainment and JEDJO. Shortly
after entry of the 1995 agreed judgment, however, Diedrich sold all of his shares
in El Paso Entertainment and JEDJO to Dean Reiber.
      In 2007, the City enacted a new licensing and regulatory ordinance,
Ordinance 016624, which imposed licensing requirements and conduct
regulations on SOBs.     That year, the City filed this separate declaratory

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judgment action in the same federal district court in which the 1994 action was
filed. This separate action sought a declaration that the 1995 agreed judgment
did not bar enforcement of the 2007 ordinance against Foxy’s Nightclub and
Lamplighter Lounge. The City amended its complaint to obtain a declaratory
judgment that the 1995 agreed judgment is no longer in effect because Diedrich’s
sale to Reiber in 1996 of all of the shares in El Paso Entertainment and JEDJO
constituted a change in the businesses’ “current owners and operators”.
      The parties, inter alia, filed cross-motions for summary judgment. The
district court denied Appellants’ motion and granted the City’s. In denying
Appellants’ motion, the court held that laches, raised by Appellants, was
inapplicable. In granting summary judgment to the City, the court declared the
1995 agreed judgment no longer in effect because the stock sale in 1996 resulted
in a change in ownership. City of El Paso, Tex. v. El Paso Entm’t, Inc., No. 07-
CV-00380-KC (W.D. Tex. 11 May 2009) (order granting summary judgment).
      In reaching its change-of-ownership ruling, the district court applied the
definitions of “owner” and “operator” contained in § 20.08.080 of the El Paso
Municipal Code.     That section, which governs zoning ordinances, defines
“operator” as “[t]he manager or other natural person principally in charge of an
adult business regulated in this section” and “owner or owners” of a corporation
as “all officers, directors and persons holding ten percent (10%) of the
outstanding shares”. Because the owner of all of the shares of both corporations
changed, the district court concluded that a change in ownership had occurred
and, as a result, the 1995 agreed judgment was no longer in effect. City of El
Paso, Tex., No. 07-CV-00380-KC (W.D. Tex. 11 May 2009) (order granting
summary judgment).
                                        II.
      Concerning the summary judgment, Appellants present three issues. They
claim the district court: lacked subject matter jurisdiction, asserting that, under

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Federal Rule of Civil Procedure 60(b), an action to modify a judgment must be
brought in the same proceeding as the original judgment; erred in ruling against
laches; and, incorrectly interpreted the 1995 agreed judgment to conclude that
a change in ownership resulted from the stock sale.
                                        A.
      Prior to ruling on summary judgment, the district court held subject
matter jurisdiction exists. City of El Paso, Tex. v. El Paso Entm’t, Inc., 535 F.
Supp. 2d 813, 820 (W.D. Tex. 2008). No authority need be cited for this issue
being one of de novo review.
      The City filed this action under the Declaratory Judgment Act, 28 U.S.C.
§ 2201. That Act, however, does not confer federal jurisdiction; rather, the
parties must provide an independent basis for jurisdiction. E.g., Comstock Oil
& Gas Inc. v. Ala. & Coushatta Indian Tribes of Tex., 261 F.3d 567, 573 n.5 (5th
Cir. 2001).
      Along that line, a federal court has ancillary jurisdiction to interpret a
prior federal court order where the effect of such an interpretation would, inter
alia, nullify or prevent future enforcement of the original federal judgment.
Peacock v. Thomas, 516 U.S. 349, 357 (1996) (holding the exercise of ancillary
jurisdiction has been limited to “attempts to execute, or to guarantee eventual
executability of, a federal judgment”); Royal Ins. Co. of Am. v. Quinn-L Capital
Corp., 960 F.2d 1286, 1292 (5th Cir. 1992) (“It is well settled that a federal
district court can exercise ancillary jurisdiction over a second action in order to
secure or preserve the fruits and advantages of a judgment or decree rendered
by that court in a prior action. Such jurisdiction is appropriate where the effect
of an action filed in state court would effectively nullify the judgment of a prior
federal action.”) (quotation marks, alteration, and citations omitted); Peter Bay
Homeowners Ass’n, Inc. v. Stillman, 294 F.3d 524, 533 (3d Cir. 2002) (“Clearly,
the District Court had [ancillary] jurisdiction to interpret the meaning and scope

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of the various obligations imposed by the previous 1975 District Court upon the
Peter Bay properties.”). The City’s action invoked the ancillary jurisdiction of
the district court, vesting it with jurisdiction.
      Appellants, however, claim subject matter jurisdiction is lacking, asserting
that, under Rule 60(b), this action must be pursued in the same action that
produced the 1995 agreed judgment. Rule 60(b) articulates the grounds upon
which a party may obtain relief from a final judgment, order, or proceeding. The
Rule does not restrict the ability of the City to pursue the instant action. A party
may file an independent declaratory judgment action to determine the rights of
the parties pursuant to a prior federal court order. See Royal Ins. Co. of Am.,
960 F.2d at 1292. Such an action does not fall within Rule 60(b) because it is not
an action to modify, vacate, or otherwise seek relief from a federal court order.
      For this reason, Appellants’ reliance on Cook v. Birmingham News, 618
F.2d 1149 (5th Cir. 1980), is misplaced.      In Cook, plaintiff filed a motion to
reconsider the entry of a consent decree three years after the judgment was
entered. Our court stated: “[I]f [Rule] 60 is inapplicable, we know of no legal
doctrine or rule of civil procedure that even arguably could have empowered a
district court to hear, three years after entry of a consent decree that acts as a
final judgment, a motion to reconsider the decree”. Id. at 1152.
      The present action is distinct, however; the City is not seeking relief from
the 1995 agreed judgment through a motion to reconsider in the original
proceeding.   Instead, the instant action is to declare the rights of the parties
pursuant to the 1995 agreed judgment.         By its very nature, a declaratory
judgment seeks to determine the rights of the parties as they currently exist; it
does not involve the modification or vacation of a prior judgment. See 28 U.S.C.
§ 2201(a) (authorizing a federal court with proper jurisdiction to “declare the
rights and other legal relations of any interested party seeking such declaration,
whether or not further relief is or could be sought”). The City is seeking a

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declaration that the 1995 agreed judgment—by its own terms and without action
by the court—has ceased to be in effect because of the change in stock ownership.
In short, the City was not required to employ Rule 60(b). (We do not address
whether the City could have pursued a Rule 60(b) motion in the original
proceeding to obtain relief from the 1995 agreed judgment.)
      Accordingly, subject matter jurisdiction existed for the district court to
render declaratory relief.
                                        B.
      Appellants present two challenges to the summary judgment for the City,
which held the 1995 judgment was no longer in effect. A summary judgment is
reviewed de novo, applying the same standards as the district court. E.g.,
Keelan v. Majesco Software, Inc., 407 F.3d 332, 338 (5th Cir. 2005). Summary
judgment is proper when “there is no genuine issue as to any material fact and
. . . the movant is entitled to judgment as a matter of law”. F ED. R. C IV. P.
56(c)(2); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-33 (1986). A genuine
issue of material fact exists “if the evidence is such that a reasonable jury could
return a verdict for the nonmoving party”. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 248 (1986). When reviewing a summary judgment, all evidence is
viewed in the light most favorable to the non-movant and all reasonable
inferences are drawn in favor of the non-movant. E.g., Raby v. Livingston, 600
F.3d 552, 557 (5th Cir. 2010) (citing Paz v. Brush Engineered Materials, Inc., 555
F.3d 383, 391 (5th Cir. 2009)).
                                        1.
      Appellants claim the district court erred in ruling against laches. They
assert that, because of laches, the City is barred from contending that the stock
sale caused a change in ownership under the 1995 agreed judgment.          In that
regard, Appellants maintain the City had actual knowledge of the stock sale in

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1996 between Diedrich and Reiber, but unreasonably delayed in attempting to
enforce the 2007 ordinance.
       Laches is an affirmative defense; therefore, the party asserting it has the
burden of proving its essential elements. City of Fort Worth v. Johnson, 388
S.W.2d 400, 403 (Tex. 1964). Texas courts have recognized that “[t]he defense
of laches is akin to that of estoppel”. Id. Accordingly, Appellants must prove:
“(1) unreasonable delay by one having legal or equitable rights in asserting
them, and (2) a good faith change of position by another to his detriment because
of the delay”. Id.
       The City maintains that laches is inapplicable to a governmental entity.
The Texas Supreme Court has “long held that a city cannot be estopped from
exercising its governmental functions”. City of White Settlement v. Super Wash,
Inc., 198 S.W.3d 770, 773 (Tex. 2006).       One important reason for this rule “is
that barring estoppel helps preserve separation of powers; legislative prerogative
would be undermined if a government agent could—through mistake, neglect,
or an intentional act—effectively repeal a law by ignoring, misrepresenting, or
misinterpreting a duly enacted statute or regulation”.         Id. (citing Office of
Personnel Mgmt. v. Richmond, 496 U.S. 414, 428 (1990)).
       A narrow exception exists, however, “where justice requires [the
application of equitable estoppel], and there is no interference with the exercise
of [the City’s] governmental functions”. City of Hutchins v. Prasifka, 450 S.W.2d
829, 836 (Tex. 1970). In such instances, the doctrine of estoppel “is applied with
caution and only in exceptional cases where the circumstances clearly demand
its application to prevent manifest injustice”. Id. In Texas, “[t]he court, not the
jury, determines whether the exception applies”. Super Wash, 198 S.W.3d at
774.
       The Texas Supreme Court clarified recently that the exception is limited
to instances where “city officials may have affirmatively misled the parties

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seeking to estop the city and . . . the misleading statements resulted in the
permanent loss of their claims against the cities”. Id. at 775. In short, the
defense may be allowed where justice requires estoppel and the party asserting
the defense would otherwise be without a remedy. Id.
      Even assuming that this action is the type where laches may be asserted
against a city, Appellants have failed to sustain their burden of proof on the
essential elements of the defense. As the district court ruled, Appellants have
failed to introduce any evidence of undue prejudice or detrimental reliance.
Appellants merely assert that they remodeled their facilities and made
significant investments in reliance on the 1995 agreed judgment’s continuing
force. But they have not introduced any evidence of such improvements, let
alone any evidence linking the improvements to the City’s delay in attempting
to enforce the zoning ordinances or contending that there was a “change of
ownership”.
      Along that line, the only proof in the record supporting laches is the delay
between the City’s alleged receipt in 2003 of the Appellants’ application for a
mixed-beverage license to the Texas Alcoholic Beverage Control—which
Appellants assert placed the City on notice of the change in ownership—and the
City’s filing this declaratory judgment action in 2007. In sum, the record is
devoid of proof that the City’s delay in filing the instant action caused Appellants
to change their position in good faith. Johnson, 388 S.W.2d at 404. Therefore,
summary judgment was proper against Appellants’ laches claim.
                                         2.
      Finally, Appellants claim the district court erred by applying the
definitions of “owner” and “operator” of a corporation, contained in § 20.08.080
of the El Paso Municipal Code, to interpret the 1995 agreed judgment. In that
regard, interpretation of a consent decree is a question of law. United States v.
Chromalloy Am. Corp., 158 F.3d 345, 350 (5th Cir. 1998); see also Dean v. City

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of Shreveport, 438 F.3d 448, 460 (5th Cir. 2006) (noting that consent decrees,
which function like enforceable judicial orders, are construed under general
principles of contract interpretation). This court has recognized that “[c]ourts
should not impose their own terms within a consent decree and should read
consent decree terms by their plain meaning[s]”. United States v. Alcoa, Inc.,
533 F.3d 278, 286 (5th Cir. 2008).
      Accordingly, we look first to the “four corners” of the agreed judgment and
examine extrinsic evidence only if the agreed judgment is ambiguous. Dean, 438
F.3d at 460. A judgment is “ambiguous when it is reasonably susceptible to
more than one meaning, in light of surrounding circumstances and established
rules of construction”. Id. at 460-61.
      The relevant provision of the 1995 agreed judgment states:
      The clubs known as Foxy’s Nightclub and Lamplighter Lounge shall
      be recognized as legal, non-conforming uses and shall be
      permanently grandfathered as such, for such period of time as the
      businesses remain in operation at their current locations by their
      current owners and operators. . . . The parties recognize that the
      property located at 1111 Saddlebronc is currently leased by CR&R,
      Inc., and the property located at 9857 Montana Avenue is owned by
      CR&R, Inc., a Texas Corporation, and that this injunction applies
      to that business as the real party in interest in this lawsuit and the
      third-party beneficiary of this settlement agreement. Thus, the
      phrase “remain in operation” as set forth above means that CR&R,
      Inc., will continuously maintain its ownership or leasehold interest
      in the subject properties and that the businesses shall remain open
      for business as adult businesses subject to the provisions of Chapter
      20.62 [of the Zoning Ordinances] allowing for temporary closure for
      a short period of time.

      The parties agree that the businesses in question may be considered
      a non-conforming use of the property in question as contemplated
      by Chapter 20.62 of the Zoning Ordinances with the exception that
      20.62.020(F) or any successor provision, shall not apply to these
      businesses. A copy of the applicable section of Chapter 20.62 is
      attached hereto and incorporated by reference herein as Exhibit A.

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      The parties agree that all other provisions of the City Code which
      regulate health and safety requirements including but not limited
      to the Fire Code, Building Codes, parking regulations and general
      provisions of the Health Code, will remain applicable to the
      businesses in question.

(Emphasis added.)
      The district court held that the terms “owners” and “operators” are
unambiguous and clearly defined within the 1995 agreed judgment. In so doing,
it reasoned that Chapter 20.62 of the El Paso Municipal Code was explicitly
incorporated into the 1995 agreed judgment and that subsection (F) explicitly
references § 20.08.020, which contains the definitions of “owner” and “operator”.
Accordingly, the district court applied the definition of “owner” contained in
§ 20.08.020: “all officers, directors and persons holding ten percent (10%) of the
outstanding shares of a corporation”.        Based on that definition, the court
concluded that a change in ownership occurred in 1996 when Reiber acquired all
of the stock in El Paso Entertainment and JEDJO.
      The phrase “owners and operators” in the 1995 agreed judgment is,
however, ambiguous. First, the agreed judgment does not define either “owners”
or “operators”. Although the agreed judgment does incorporate portions of
§ 20.62, a zoning ordinance, it does so by disavowing its applicability. Indeed,
the 1995 agreed judgment states that subsection § 20.62.020(F) will not be
applied to the SOBs. Consequently, the 1995 agreed judgment did not explicitly
incorporate the definitions of “owner” and “operator” contained in § 20.08.020.
      Moreover, each side presents a reasonable interpretation of the terms.
Appellants assert that the terms “owners and operators” refer to the
corporations, El Paso Entertainment and JEDJO, that own and operate the
SOBs. This interpretation has support in Texas law, which generally disfavors
looking behind the corporation to its individual shareholders. Needless to say,
a corporation maintains an identity distinct from its shareholders. See T EX. B US.

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C ORP. C ODE § 2.21 (2003) (limiting the method by which any shareholder can be
held responsible for the acts of a corporation); T EX. B US. O RG. C ODE § 2.101(1)
(2007) (granting corporations the power to sue and be sued in the corporate
name, own property, enter into contracts, and conduct business); Hoffman v.
Dandurand, 180 S.W.3d 340, 347 (Tex. App.–Dallas 2005) (“Generally, a
corporation is a separate legal entity that insulates its owners or shareholders
from personal liability.”).
      Conversely, the City asserts that the definitions of “owner” and “operator”
contained in the zoning ordinance in Chapter 20.62 of the Muncipal Code should
govern because the original action challenged the application of the zoning
ordinance and was contemplated by the parties when the settlement agreement
was formed. In sum, the plausibility of each party’s interpretation highlights the
ambiguity in the phrase “owners and operators”.
      As discussed, because the meaning of the terms “owners and operators” is
ambiguous, we may look to extrinsic evidence.         The district court, in the
alternative, relied again on § 20.08.020 as extrinsic evidence of the meaning of
these terms. But it is evident from the record that the parties did not fully
develop the record because each side believed the terms were unambiguous for
a different reason. Therefore, this matter is best resolved on remand by a full
hearing to allow the parties to present extrinsic evidence and otherwise develop
their positions. See Dean, 438 F.3d at 461 (finding terms in a consent decree
ambiguous and remanding the case to the district court to develop the record
with extrinsic evidence).
                                       III.
      For the foregoing reasons, the summary judgment ruling against
Appellants’ laches claim is AFFIRMED; the summary judgment ruling that the
1995 agreed judgment is no longer in affect, based on the “owner and operator”

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ruling, is VACATED; and this matter is REMANDED to district court for further
proceedings consistent with this opinion.

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PRISCILLA R. OWEN, Circuit Judge, dissenting.
      Because I would affirm the district court’s judgment, I respectfully dissent.
      The Agreed Judgment excepts only the applicability of § 20.62.020(F) of
the El Paso Municipal Code. The Agreed Judgment states twice that all other
health and safety provisions of the El Paso Municipal Code remain in effect. At
the time the Agreed Judgment was entered, § 20.08.080 of that Code defined
(and has continued to define) who is considered an owner or operator of “an adult
bookstore, adult motion picture theater or nude live entertainment club.” The
Agreed Judgment reflects that the 1995 dispute that led to its entry “involve[d]
a dispute over application of certain provisions of the El Paso Municipal Code
which regulate the operation of Adult Businesses within the City limits.” The
parties to the Judgment agreed that the non-conforming use of the properties at
issue as adult businesses could continue “for such period of time as the
businesses remain in operation at their current locations by their current owners
and operators.” I see no ambiguity in the Agreed Judgment. Section 20.08.080
of the Code applied, and it defined who are deemed owners or operators of an
adult business.       The owners and operators, as those terms are defined in
§ 20.08.080, changed, and therefore the Agreed Judgment, by its terms, ceased
to “grandfather” the adult businesses.
      I agree with the majority opinion’s disposition of the other issues in this
case. I note only that there is no evidence that city officials “affirmatively
misled”1 any of the Appellants, and this is an additional basis on which to
conclude that the City is not estopped in this case.

      1
          See City of White Settlement v. Super Wash, 198 S.W.3d 770, 775 (Tex. 2006).

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