bay-city-plastics-brazoria-county-disposal-corp-the-trustees-of-the ( 2002 )

Opinion issued December 19, 2002

In The

Court of Appeals

For The

First District of Texas

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  NO. 01-01-00687-CV

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BAY CITY PLASTICS, INC.; BRAZORIA COUNTY DISPOSAL CORPORATION; FIMCO, INC.; FREEPORT IRON & METAL, INC.; THE TRUSTEES OF THE LYSTER 1987 FAMILY TRUST; AND TRUSTEES OF THE TESTAMENTARY TRUST UNDER THE WILL OF JAMES R. LYSTER, Appellants

V.

HULEN DWAIN MCENTIRE AND SALLY MCENTIRE, Appellees

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On Appeal from the 239th District Court

Brazoria County, Texas

Trial Court Cause No. 93G0850

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O P I N I O N

          In this case we decide whether a turnover order can be issued against third parties. We hold that it cannot. The trial court signed a turnover order against judgment debtors FIMCO, Inc. and Freeport Iron and Metal, Inc. (Freeport) and third parties Bay City Plastics, Inc. and Brazoria County Disposal Corporation (BCDC). Tex. Civ. Prac. & Rem Code Ann. § 31.002(b) (Vernon Supp. 2002). 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, 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 McEntire 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 case, 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 McEntires. FIMCO and Freeport, as judgment debtors, were also ordered to pay $114,080.00 in attorney’s fees to the McEntires.

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 only against judgment debtors. The 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 debtor’s possession or is subject to the debtor’s control . . . .” Tex. Civ. Prac. & Rem Code Ann. § 31.002(b) (Vernon Supp. 2002).

          The turnover 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. 2002). The turnover statute is purely procedural in nature. Cravens, Dargan & Co. v. Peyton L. Travers Co., 770 S.W.2d 573, 576 (Tex. App.—Houston [1st Dist.] 1989, writ denied). We review the trial court’s application of the turnover statute under an abuse-of-discretion standard. Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223, 226 (Tex. 1991).

          In 1991, the Texas Supreme Court stated that “Texas courts do not apply the turnover statute to non-judgment debtors.” Id. (citing Cravens, 770 S.W.2d at 576). Nevertheless, some courts of appeal have held that a court can issue a turnover order against a third party when there are findings that the judgment debtor owns the property and the property is in the judgment debtor’s possession or subject to his control. See Dale v. Fin. Am. Corp., 929 S.W.2d 495, 498 (Tex. App.—Fort Worth 1996, writ denied); Int’l Paper Co. v. Garza, 872 S.W.2d 18, 19 (Tex. App.—Corpus Christi 1994, no writ); Norsul Oil & Mining Ltd. v. Commercial Equip. Leasing Co., 703 S.W.2d 345, 349 (Tex. App.—San Antonio 1985, no writ) (decided before Buller).

          Other courts of appeals, including this Court, have held that a trial court cannot order a third party to turn over property. See Parks v. Parker, 957 S.W.2d 666, 668 (Tex. App.—Houston [14th Dist.] 1997, no pet.); Cravens, 770 S.W.2d at 576; United Bank Metro v. Plains Overseas Group, Inc., 670 S.W.2d 281, 283 (Tex. App.—Houston [1st Dist.] 1983, no writ); see also Cross, Kieschnick & Co. v. Johnston, 892 S.W.2d 435, 439 (Tex. App.—San Antonio 1994, no writ) (citing Cravens in support of proposition that turnover statute is purely procedural in nature and not to be used to determine substantive rights of the parties, and holding that trial court “erred by applying supplemented turnover statute to non-judgment debtors.”).

          A trial court cannot order a third party to turn over property because it is improper to use a procedural statute to adjudicate the substantive rights of a third party. See, e.g., United Bank Metro, 670 S.W.2d at 283 (explaining that if parties are allowed to use turnover statute to obtain property of nonjudgment debtors based on alter-ego theory, they would be allowed, in effect, to “skip the trial on the merits in this case with respect to the alter ego issue and declare itself the winner.”).

          Here, the trial court’s turnover order against third parties Bay City Plastics and BCDC was an adjudication of the substantive rights of those companies, and was not permissible under the turnover statute. See Cravens, 770 S.W.2d at 576. 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. 2002) (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.”). But the turnover statute cannot be used to determine the rights of third parties. See Cravens, 770 S.W.2d at 576 (holding that turnover statute could not be used to reach funds deposited with a state agency when right to funds would be contested); United Bank Metro, 670 S.W.2d at 284.

          The Fifth Circuit has considered whether the substantive rights of third parties could be adjudicated by a turnover order. Resolution Trust Corp. v. Smith, 53 F.3d 72, 79-80 (5th Cir. 1995). The Resolution Trust Corporation was trying to collect a judgment it had obtained against Mr. and Mrs. Smith. Id. at 74. The Smiths pledged their stock, a substantial portion of their assets, to their attorney for legal services. Id. The federal district court held that the transfer of the stock was void and ordered that the stock be turned over to a receiver. Id. The Fifth Circuit held that the trial court did not err in ordering the Smiths to turn over their interest in the stock because there was “no dispute” that the Smiths still had ownership rights in the stock, but it was error for the trial court to void the pledge agreement between the Smiths and their attorney because the substantive rights of the attorney, a nonjudgment debtor, were adjudicated by that order. Id. at 78. While we are not bound by the Fifth Circuit’s decision, we find its rationale to be persuasive. See Hayes v. Pin Oak Petroleum, Inc., 798 S.W.2d 668, 672 n.5 (Tex. App.—Austin 1990, writ denied) (noting that decisions of federal courts of appeals are not binding on Texas state courts).

          Here, the trial court applied the turnover statute to property held by third parties in which the third parties claimed ownership. For example, the trial court found that FIMCO’s sale of assets to BCDC, which totaled approximately $364,000 worth of inventory and equipment, was a sham transaction and was thus subject to the court’s turnover order. The trial court’s turnover order also included assets Bay City Plastics claimed to own, such as buildings, real property, and equipment. Accordingly, because the ownership of the property was in dispute, and because the turnover statute cannot be used to adjudicate the substantive rights of third parties, we hold that the trial court erred in applying the turnover statute to that property.

          We sustain appellants’ issues two through five.

Attorney’s Fees and Appointment of Receivers

          In issue six, appellants argue that because a turnover order cannot be issued against third parties, or applied to property held by third parties who claim ownership in the property, 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 agree.

          We sustain appellants’ sixth issue.Conclusion

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

                                                                        Sherry Radack

                                                                        Justice

Panel consists of Justices Nuchia, Jennings, and Radack.

Publish. Tex. R. App. P. 47.4.