Bay City Plastics, Inc. v. McEntire

106 S.W.3d 321, 2003 Tex. App. LEXIS 3769, 2003 WL 1995646

• Court: Court of Appeals of Texas
• Decided: May 1, 2003
• Docket: 01-01-00687-CV
• Status: Published

Opinion

OPINION ON REHEARING

SHERRY RADACK, Chief Justice.

Appellant’s motion for rehearing is denied. However, we withdraw our opinion dated December 19, 2002 and issue this opinion in its place. The trial court issued a turnover order against judgment debtors FIMCO, Inc. and Freeport Iron and Met al, Inc. (Freeport), and third parties, Bay City Plastics, Inc. and Brazoria County Disposal Corporation (BCDC). Tex Civ. PRAC. & Rem Code Ann. § 81.002(b) (Vernon Supp.2003). Bay City Plastics and BCDC, along with FIMCO, Freeport, and the trustees of James Lyster’s testamentary trust and 1987 Family Trust (collectively “appellants”), challenge the grant of the turnover order. Appellants bring six issues for our review, 1 which can be reduced to four issues that control the disposition of this case: (1) whether the trial court erred in entering a turnover order against third parties, Bay City Plastics and BCDC; (2) whether the trial court erred in applying the turnover statute to assets held by third parties; (3) whether the trial court erred in appointing a receiver to receive and administer assets held by Bay City Plastics and BCDC; and (4) whether the trial court erred in awarding attorney’s fees to appellees Hulen and Sally McEn-tire based, in part, on the turnover order against Bay City Plastics and BCDC.

We reverse and remand.

FACTS

The McEntires were awarded a judgment totaling $1,200,000 against Freeport and FIMCO based on claims of breach of contract and fraud. James Lyster, who died during the pendency of the ease, was found to be the alter ego of Freeport and FIMCO. The McEntires filed a motion for a turnover order against the trustees of Lyster’s testamentary trust, the trustees of Lyster’s family trust, Betty D. Lyster, in her capacity as independent executrix of Lyster’s estate, Bay City Plastics, and BCDC. The McEntires alleged to the trial court that Lyster was the alter ego of third parties, Bay City Plastics and BCDC, and that the judgment debtor corporations, Freeport and FIMCO, had fraudulently transferred assets to Bay City Plastics and BCDC to preclude the McEntires from recovering on the judgment.

The trial court signed a turnover order against Freeport, FIMCO, Bay City Plastics, and BCDC. The court held that it did not have jurisdiction to make a finding of alter ego, or fraudulent conveyance, and could only order property turned over that was owned by the judgment debtors. The trial court found that the judgment debtors had “equitable ownership” in some of the property held by Bay City Plastics and BCDC, and that the judgment debtors still owned property that was transferred to Bay City Plastics and BCDC in “sham transactions.” The turnover order listed the property owned by the judgment debtors and ordered Freeport, FIMCO, Bay City Plastics, and BCDC to comply in turning the property over to the McEn-tires. FIMCO and Freeport, as judgment debtors, were also ordered to pay $114,080.00 in attorney’s fees to the McEn-tires.

Application of the Turnover Statute to Third Parties

In their first issue, appellants argue that the trial court erred in ordering third parties, Bay City Plastics and BCDC, to turn over assets because Civil Practice and Remedies Code section 31.002, the turnover statute, authorizes such orders against judgment debtors only.

The turnover statute provides in relevant part that, “[t]he court may: (1) order the judgment debtor to turn over non-exempt property that is in the debt- or’s possession or is subject to the debtor’s control_” Tex. Civ. Prac. & Rem Code Ann. § 31.002(b) (Vernon Supp.2003). The statute allows courts to force judgment debtors to turn over property to judgment creditors that cannot readily be attached or levied by ordinary legal process. Tex. Civ. Prac. & Rem Code Ann. § 31.002(a) (Vernon Supp.2003). We review the trial court’s application of the turnover statute under an abuse-of-discretion standard. Beaumont Bank, N.A. v. Butter, 806 S.W.2d 223, 226 (Tex.1991).

In 1983, this Court held that relief under the turnover statute cannot be had against one who is not a judgment debtor. United Bank Metro v. Plains Overseas Group, 670 S.W.2d 281, 283 (Tex.App.-Houston [1st Dist.] 1983, no writ). In 1985, the San Antonio Court of Appeals held that third parties could be ordered to turn over property under the turnover statute if it was shown that the property was owned by the judgment debtor, and was subject to the judgment debtor’s control. Norsul Oil & Mining Ltd. v. Commercial Equip. Leasing Co., 703 S.W.2d 345, 349 (Tex.App.-San Antonio 1985, no writ). In 1989, our Court recognized the exception to the general rule outlined in Norsul, but we declined to apply the exception in that case because the third party involved did not possess the property. Detox Indus., Inc. v. Gullett, 770 S.W.2d 954, 958 (Tex.App.-Houston [1st Dist.] 1989, no writ).

In 1991, the Texas Supreme Court addressed the issue and stated that “Texas courts do not apply the turnover statute to non-judgment debtors.” Buller, 806 S.W.2d at 226. During the same year, however, the Texas Supreme Court seemed to indicate that a turnover order could be issued against one who was not a judgment debtor. See Schultz v. Fifth Judicial Dist. Court of Appeals at Dallas, 810 S.W.2d 738, 740 (Tex.1991). In Schultz, the court stated the following with respect to turnover orders:

It may be against one or more parties other than the judgment debtor. Upon proof of the necessary facts, it authorizes the trial court to order affirmative action by the judgment debtor and others ... Such an order acts as a mandatory injunction against the judgment debtor and, if there are such parties, against the receiver and any third parties interested in the property rights being adjudicated.

Id. In 1996, in Ex parte Swate, Justices Gonzalez and Owen, in a concurring opinion, clarified the position of the court on that issue by stating the following:

A turnover statute is not a substitute for established remedies allowing a creditor to reach property owned by the judgment debtor claimed to be in the possession of a stranger to the lawsuit. A creditor may seek garnishment against third parties or join them in a suit against the debtor, and if successful, obtain a turnover order against the third party. However, a creditor may not seek a turnover order against third parties without other initial proceedings.

922 S.W.2d 122, 126 (Tex.1996) (Gonzalez, J. joined by Owen, J., concurring).

Since Ex Parte Swate, the Austin Court of Appeals in Parks v. Parker recognized that Texas courts of appeals were split on the issue of whether a turnover order could be issued against a third party, and cited Butter for the proposition that the turnover statute “authorizes the issuance of an order against only the judgment debtor.” 957 S.W.2d 666, 668 (Tex.App.-Austin, 1997, no pet.). The Austin court, in making their blanket rule, did not discuss the Texas Supreme Court’s statements on the issue in Schultz and Swate.

In this case, we will apply the general rule stated in Butter that the turnover statute should not apply to non-judgment debtors. We hold that any exception to the general rule does not apply in this case because the record does not indicate that separate proceedings were initiated against Bay City Plastics or BCDC. See Swate, 922 S.W.2d at 126 (Gonzalez, J. joined by Owen, J., concurring) (“a creditor may not seek a turnover order against third parties without other initial proceedings.”). Accordingly, we hold that the trial court abused its discretion in issuing a turnover order against Bay City Plastics and BCDC.

We sustain appellants’ first issue.

Application of the Turnover Statute to Assets Held by Third Parties

In issues two through five, appellants argue that the trial court erred in applying the turnover statute “in a manner making it applicable to assets in the possession of the third party non-judgment debtors.” Appellants contend- that the trial court should not have made findings that the judgment debtors had an “equitable ownership” in property held by Bay City Plastics and BCDC, or that the judgment debtors still owned property that was previously transferred in “sham transactions.”

Property owned by judgment debtors is not out of the reach of the turnover statute merely because it is held by third parties. See Tex. Civ. Prac. & Rem Code Ann. § 31.002(b)(1) (Vernon Supp.2003) (court may order judgment debtor to turn over property in debtor’s possession or subject to his control); Parks, 957 S.W.2d at 668 (“judgment debtor can also be ordered to turn over property, no matter who possesses it, if the property is subject to his control.”).

This Court has previously held that the turnover statute is not a device through which we can determine ownership of property. Cravens, Dargan & Co. v. Peyton L. Travers Co., Inc., 770 S.W.2d 573, 576-77 (Tex.App.-Houston [1st Dist.] 1989, writ denied). In Cravens, the judgment debtor had given a $25,000.00 cashier’s check to the Texas State Board of Insurance. Id. at 574. The trial court had denied the creditor’s request for turnover relief, and on appeal, the creditor asked this Court to order the Board to turn over the $25,000 cashier’s check. Id. We held that, because the turnover statute is not a device through which the ownership of property could be determined, the trial court did not err in refusing to order turnover relief. Id. at 577.

Although the turnover statute cannot ordinarily be used to adjudicate the ownership of property in a manner that would be binding upon third parties, we disagree with appellants’ argument that the trial court was prohibited in this case from determining what property was owned by the judgment debtor to facilitate the issuance of its turnover order. The turnover statute allows a trial court to order a judgment debtor to turn over property that is owned by the judgment debtor if it is subject to the judgment debtor’s control. Tex. Civ. Prac. & Rem Code Ann. § 31.002 (Vernon Supp.2003). The trial court, then, is permitted to determine what property meets those statutory requirements. See generally Schultz, 810 S.W.2d at 740 (holding that trial court may issue turnover order against judgment debtor where “factual showing” is made that the judgment debtor (1) has nonexempt property, and (2) that property not readily subject to ordinary execution).

Any findings made by the trial court to facilitate the issuance of the turnover order will bind the judgment debtors only, and not third parties that the turnover order has not issued against. Against those to whom the turnover order has issued, the order will be enforceable by contempt. Tex. Civ. Prac. & Rem Code Ann. § 31.002(c) (Vernon Supp.2003).

We overrule appellants’ issues two through five.

Attorney’s Fees and Appointment of Receivers

In issue six, appellants argue that it was error for the trial court to appoint a receiver to receive and administer assets held by Bay City Plastics and BCDC. Likewise, appellants argue it was error for the trial court to award attorney’s fees to the McEntires based, in part, on a turnover order against Bay City Plastics and BCDC. We have already held that it was error for the trial court to issue a turnover order against Bay City Plastics and BCDC, and, accordingly, we hold that the trial court erred in appointing a receiver to receive and administer assets held by those two companies, and in awarding attorney’s fees to the McEntires based, in part, on the erroneous turnover order.

We sustain appellants’ sixth issue.

Conclusion

We reverse the trial court’s turnover order and remand this case to the trial court.

Appellant’s requested EN BANC consideration. EN BANC consideration is denied as moot.

1 . Turnover orders may be challenged on appeal. See Schultz v. Fifth Judicial Dist. Court of Appeals at Dallas, 810 S.W.2d 738, 740 (Tex.1991).