Maiz v. Virani

REVISED NOVEMBER 18, 2002
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
______________________________
No. 01-10292
______________________________
JOSE MAIZ; ALFONSO ALDAPE LOPEZ, MARGARET GRIFFITHS DE ALDAPE,
ALFONSO ALDAPE GRIFFITHS; ALEJANDRA ALDAPE GRIFFITHS, et. al.,
Plaintiffs - Appellees
RICHARD M. HULL, RECEIVER,
Appellee
VERSUS
AMIR VIRANI, et al.,
Defendants
SANIG INVESTMENTS LIMITED AND TRES VIDAS INVESTMENTS LIMITED,
Appellants
___________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
___________________________________________________
October 23, 2002
Before JONES, WIENER, and PARKER, Circuit Judges.
ROBERT M. PARKER, Circuit Judge:
1
This case requires us to consider whether a federal district
court can utilize the Texas turnover statute to adjudicate the
property rights of a non-judgment debtor corporation not properly
before the court so long as the district court makes a factual
finding that the corporation is subject to the judgment debtor’s
control. We find that the Texas turnover statute cannot be
utilized to adjudicate the substantive property rights of the two
non-judgment debtor corporations in this case without a prior
judicial determination which pierces their corporate veils.
Therefore, we reverse and remand.
I. FACTS AND PROCEDURAL HISTORY
In 1997, the plaintiffs-appellees (“judgment creditors”) sued
several defendants including Ignacio Santos (“Santos”) in federal
district court in Atlanta, Georgia. They asserted claims for
fraud, breach of fiduciary duty, and RICO violations which all
related to various real estate investments they had made in the
Atlanta area. After a trial by jury, Plaintiffs received a
judgment against Santos and the other defendants for approximately
$19 million on December 22, 1999. However, the Atlanta district
court did not issue a judgment against the appellants, Sanig
Investments Limited (“Sanig”) and Tres Vidas Investments Limited
(“Tres Vidas”).1 Although Sanig was originally a defendant in the
1
Sanig and Tres Vidas are corporations. Sanig is a Bahamian
corporation formed in 1981. Tres Vidas is a British Virgin island
corporation formed in 1995. Although the record is less than clear
2
Atlanta action, it was released from the case at the summary
judgment stage. The judgment against the Atlanta defendants has
subsequently been affirmed by the Eleventh Circuit.
On January 5, 2000, the plaintiffs-appellees registered their
judgment in the Northern District of Texas, Dallas Division,
pursuant to 28 U.S.C. § 1963 and filed a “turnover action” pursuant
to the Texas Turnover Statute, Tex. Civ. Prac. & Rem. Code §
31.002, to aid in the enforcement of their judgment. The turnover
action was clearly instituted against the judgment debtors from the
Atlanta case which included Santos in his individual capacity.
On September 7, 2000, the Dallas district court judge issued
a turnover order against Santos, Sanig, and Tres Vidas. The
district court made a factual finding that Santos effectively owns
and controls assets that are titled to Sanig Investments and Tres
Vidas. The Sept. 7 turnover order and ensuing implementing orders
gave the Receiver the authority to take possession of and sell
assets titled to Sanig and Tres Vidas in addition to the assets
owned by Santos.2 On October 20, 2000, the district court held
on this point, we have been informed by appellants’ counsel that
Sanig and Tres Vidas stock was issued and is held by a trust,
(hereinafter referred to as “Citibank trust”). The trust documents
are not in the record. However, it is undisputed that the two
corporations are held in the Citibank trust and are at least
indirectly controlled by the Citibank trust. Subsequent parts of
the opinion will demonstrate why the fact that Sanig and Tres Vidas
are corporate entities is important to resolving the case.
2
The specific assets belonging to Sanig and Tres Vidas which
have been taken over by the Receiver include the following. With
3
Santos in contempt for failing to comply with the turnover order.
A bench warrant was issued for his arrest on October 30, 2000. As
of today, he is a fugitive from that warrant.
On February 14, 2001, Sanig and Tres Vidas petitioned for a
writ of mandamus. They requested a stay of all proceedings and
issuance of orders in the district court. On February 20, 2001,
a separate panel denied the writ and motion for stay pending
appeal. on February 22, 2001, the district court entered final
judgment.
At this point, two appeals ensued. First, Santos, in his
individual capacity, appealed the turnover order.3 Second, Sanig
and Tres Vidas separately appealed the turnover order to the extent
that it allowed the Receiver to take possession of and sell their
corporate assets. This is the appeal currently before us.
II. STANDARD OF REVIEW
respect to Sanig: (1) a condominium in Dallas, Texas; (2) a
condominium in South Padre Island, Texas; (3) Citibank Accounts in
New York and the Bahamas; and (4) Sanig’s interest in various
partnerships (many of which appear to be located outside of Texas).
The Receiver has already sold Sanig’s real property. With respect
to Tres Vidas: (1) 50% of the shares of Sanvir Development; (2) 50%
of the shares of Signa Development; (3) 50% of the shares of
Liberty Custom Homes; and (4) an interest in Highland Park Village,
an entity which owns and manages land development projects in the
Atlanta area. The combined value of the assets held by Sanig and
Tres Vidas is in the tens of millions of dollars.
3
On July 19, 2001, another panel comprised of Circuit Judges’
Smith, Benavides, and Dennis issued an unpublished, per curiam
opinion affirming the district court’s turnover order. The panel
rejected Santos’ argument that the district court improperly
adjudicated the substantive property rights of third parties.
4
The issues raised concerning standing, whether appellants were
properly before the district court, and the timeliness of the
notice of appeal filing are issues of law and will be reviewed de
novo. Texas Office of Public Utility, 183 F.3d 393, 419 n.34 (5th
Cir. 1999)(standing defense, like all constitutional questions, is
reviewed de novo). We review the turnover order for abuse of
discretion (i.e., whether the trial court acted unreasonably,
arbitrarily, or without reference to guiding rules or principles
under the turnover statute). Beaumont Bank, N.A. v. Buller, 806
S.W.2d 223, 226 (Tex. 1991). In doing so, we note that a trial
court’s failure to properly analyze the law or apply it to the
facts is an abuse of discretion. Walker v. Packer, 827 S.W.2d 833,
840 (Tex. 1992). However, a trial court’s issuance of a turnover
order, even if predicated on an erroneous conclusion of law, will
not be reversed for abuse of discretion if the judgment is
sustainable for any reason. Beaumont Bank, 806 S.W.2d at 226.
III. ANALYSIS
The crux of the case is whether the Texas turnover statute can
be used to strip a non-judgment debtor corporation of its assets,
based upon a factual finding that a judgment debtor controls the
corporation, without a prior separate proceeding which pierces the
non-judgment debtor’s corporate veil. However, due to the
procedural complexity of the case, several other issues need to be
addressed. First, do Sanig and Tres Vidas have standing to appeal
5
the district court’s turnover order? Second, did Tres Vidas file
a timely notice of appeal? Third, were Sanig and Tres Vidas
properly before the district court?
A. Standing
Appellants posited in their writ of mandamus that they would
be unable to directly appeal the turnover orders because they were
not parties to the case. Now, they argue that they do have
standing to appeal these orders. The judgment creditors contend
that appellants should be judicially estopped from taking a
position contrary to the one they took in their mandamus petition.
See Ergo Science, Inc. v. Martin, 73 F.3d 595, 598 (5th Cir. 1996)
(judicial estoppel doctrine prevents a party from asserting a
position in a legal proceeding that is contrary to a position
previously taken in the same or some earlier proceeding).
Furthermore, they argue that appellants do not have standing to
pursue this appeal should we conclude appellants were not parties
to the turnover proceedings at the district court level. See EEOC
v. Louisiana Office of Community Services, 47 F.3d 1438, 1442 (5th
Cir. 1995) (“A person who is not a party to the proceedings below
generally cannot appeal the court’s judgment”). We reject the
judgment creditors’ contentions.
1. Non-Party Appeal
Although Sanig and Tres Vidas argued in their mandamus
petition that they could not directly appeal these orders, the fact
6
is they were wrong. It is true that a non-party generally cannot
appeal the district court’s judgment below. However, we have also
noted that exceptions to this rule may be warranted in certain
situations. See Louisiana Office of Community Services, 47 F.3d at
1442 (citing EEOC v. West La. Health Services, Inc., 959 F.2d 1277
(5th Cir. 1992) (non-party appeal allowed where EEOC had not
pursued appeal in its representative capacity)).
The instant case presents such an exception. Although Sanig
and Tres Vidas were not parties to the case, they contend that the
district court’s turnover order has divested them of property which
they own that is worth tens of millions of dollars. Clearly, they
allege an actual injury and thus have a personal stake in this
appeal. This is sufficient to provide them with standing under
Article III. Lewis v. Al Knutson, 699 F.2d 230, 236 (5th Cir.
1983). Moreover, it is sufficient to grant them an exception to
the general rule that a non-party should not be allowed to appeal
the district court’s judgment.
2. Judicial Estoppel
Although we have applied the doctrine of judicial estoppel in
this Circuit in order to protect the integrity of the judicial
process, equity requires that we exercise our discretion to apply
this doctrine only when it is necessary to protect the integrity of
the judicial process. Ergo Science, 73 F.3d at 598.
Appellants’ arguments are somewhat contradictory. However,
7
due to the factual complexities of the case and the ambiguities in
the law on this point, we do not view these contradictions as
striking a blow at the integrity of the judicial process. As we
see it, the equities weigh in favor of hearing this appeal.
Therefore, we will not use the judicial estoppel doctrine to
prevent the appeal from going forward. Sanig and Tres Vidas have
standing to appeal.
B. Tres Vidas’ Notice of Appeal
The district court entered final judgment in this case on
February 22, 2001. Sanig and Tres Vidas appealed the judgment to
the Fifth Circuit on the same day. Appellees’ counsel contended at
oral argument that Tres Vidas’ appeal was untimely as the final
order concerning Tres Vidas was issued in October 2000. We agree
that the October 2000 implementing order was the last order
addressing Tres Vidas’ interest. However, we reject appellees’
“timeliness” argument for three reasons.
First, in October 2000, Tres Vidas was not a party to the
case. We have, however, determined that Tres Vidas has standing to
appeal. On that basis, we place Tres Vidas in the same position as
a party-appellant with regard to its appeal. Second, even holding
Tres Vidas to the same timeliness standard as a typical party
appellant, appellees’ timeliness argument is unpersuasive in this
instance because Tres Vidas could not have known that the October
20, 2000 implementing order was to be the last order affecting its
8
interest given the many implementing orders the district court
issued to supplement the original turnover order. Third, because
there is no dispute that Sanig’s appeal was timely filed and Tres
Vidas’ appeal was filed within 14 days of Sanig’s, Tres Vidas’
appeal qualifies as timely filed under the “multiple appeal” rule
set forth in FED. R. APP. P. 4(a)(3).4 Cyrak v. Lemon, 919 F.2d 320,
323-24 (5th Cir. 1990).
C. Were Sanig and Tres Vidas properly before the district court?
Sanig and Tres Vidas argue that they were never properly
before the district court. They contend that they were never
served with process and did not enter a general appearance. Thus,
they reason that the district court failed to acquire in personam
jurisdiction over them. Because the district court had no
jurisdiction over them, they argue that we should void the turnover
orders which allow the Receiver to seize their corporate assets.
As a corollary to this argument, they suggest that their Fourteenth
Amendment due process rights were violated because their assets
were taken over by the Receiver and sold without proper notice and
4
Although it is uncontested, we raise sua sponte whether we
can exercise jurisdiction over these appeals in the first place.
See United States v. West, 240 F.3d 456, 458 (5th Cir. 2001). The
appellants and the appellees have not specifically addressed
whether the orders appealed from can constitute “final decisions”
for purposes of 28 U.S.C. § 1291. However, to the extent that
these orders are properly characterized as interlocutory in nature,
we assert jurisdiction over the appeals under the collateral order
doctrine. See SEC v. Forex Asset Management LLC, 242 F.3d 325, 330
(5th Cir. 2001).
9
a hearing.
Before diving into Sanig’s arguments on these points, we note
the overall failure of the judgment creditors to utilize the
traditional “service of process” procedure to properly bring Sanig
and Tres Vidas before the district court. It is a fundamental rule
of civil procedure that “[b]efore a federal court may exercise
jurisdiction over a defendant, the procedural requirement of
service of summons must be satisfied.” Omni Capital International,
Ltd., et. al., v. Rudolf Wolf & Co., Ltd. , et. al., 484 U.S. 97,
104 (1987). However, our review of the record indicates that
process was not served on either Sanig or Tres Vidas pursuant to
Rule 4 of the Federal Rules of Civil Procedure.
The judgment creditors contend that service was made on the
Sanig’s attorney of record by facsimile. This argument is
unavailing. Putting to one side the issue of whether the attorney
allegedly served by fax was appellants’ attorney of record, there
is no evidence that the alleged attorney had the actual authority
to accept service of process. Therefore, the alleged service was
not valid. U.S. v. $184,505.01, 72 F.3d 1160, 1164, n. 10 (3rd
Cir. 1995, cert. denied by McGlory v. U.S., 519 U.S. 807 (1996))
(validity of service of process upon the attorney depends upon the
actual authority of the attorney to receive process on behalf of
the individual).
Despite their failure to serve process, the judgment creditors
10
argue that Sanig and Tres Vidas made a general appearance and
therefore the district court had jurisdiction over them. A party
makes a general appearance whenever it invokes the judgment of the
court on any question other than jurisdiction. We have previously
stated that, “[i]n determining whether conduct is sufficient to be
considered a general appearance, the focus is on affirmative action
that impliedly recognizes the court’s jurisdiction over the
parties.” Jones v. Sheehan, Young, & Culp, P.C., 82 F.3d 1334,
1340-41 (5th Cir. 1996). Consequently, our task is to identify
the conduct alleged to have constituted a general appearance and
determine whether it demonstrates the requisite “affirmative
action.”
In the instant case, attorney J. Allen Smith signed three
court documents relating to the Receivership estate which list
Sanig below the signature line. Attorney Smith signed one document
in which Tres Vidas is listed below the signature line. The
documents are entitled: (1) Order Approving Agreed Receivership
Business Plan and Expanded Authority of Receiver, filed July 5,
2000 (Sanig and Tres Vidas listed below attorney signature line);
(2) Motion for Agreed Restatement of the Receivership Order (Sanig
listed below attorney signature line); and (3) Agreed Order for
Restatement of the Receivership Order, filed July 31, 2000 (Sanig
listed below attorney signature line).
The judgment creditors contend that attorney Smith signed
11
these court documents on behalf of Sanig and Tres Vidas. By
signing these documents, they reason that Sanig and Tres Vidas
impliedly recognized the district court’s jurisdiction over them.
We disagree for several reasons.5
First, the documents in question were actually prepared by the
Receiver, not Sanig and Tres Vidas. Although this point may not be
persuasive standing alone, it certainly indicates that neither
Sanig nor Tres Vidas initiated any movement to spell out the scope
of the Receiver’s authority. Second, we note that Sanig and Tres
Vidas did not appear by themselves underneath the attorney
signature line. Several other entities appeared as well underneath
the attorney signature line. This fact makes it less likely that
Sanig and Tres Vidas truly intended to submit themselves to the
jurisdiction of the court and makes it more likely that the signing
5
Texas law presumes that an attorney has the authority to
sign pleadings on behalf of the client. Grey v. First National
Bank in Dallas, 393 F.2d 371, 384 n.17 (5th Cir. 1968). However,
an attorney does not have the authority to act on behalf of the
purported client if the purported client did not hire the attorney
to represent him. See Developmental Disabilities Advocacy Center,
Inc. v. Melton, 521 F. Supp. 365, 372 (D. N.H. 1981)(citing Pueblo
of Santa Rosa v. Fall, 273 U.S. 315 (1927) (“it is hornbook law
that no person has the right to appear as attorney for another
without first receiving authority from the purported client”). In
our view, it is questionable whether the general presumption should
be applied in this case because of the dearth of evidence
concerning whether appellants hired attorney Smith to act as their
representative counsel. Nevertheless, based on our determination
that the signing of the three documents does not constitute a
general appearance, we need not decide this issue. Consequently,
we assume arguendo that Smith represented appellants and had the
authority to sign documents on their behalf.
12
was an oversight. Finally, and of most importance, there is simply
no indication that appellants requested relief from the district
court or intended to have any direct involvement in the
Receivership proceedings. For example, Exhibit 1 to the “Agreed
Order for Restatement of the Receivership Order” describes the
assets which the Receiver would take under his control. Neither
Sanig nor Tres Vidas is listed as a receivership entity. Moreover,
none of their assets are listed as receivership assets. Because
acquiescence to the terms of the receivership orders had no bearing
on Sanig and Tres Vidas, we fail to see how their conduct rises to
the “affirmative action” level required by our case law.
In Jones, 82 F.3d at 1340-41, we determined that the filing
of a motion to strike an intervention was an affirmative act
recognizing the court’s jurisdiction. We also cited approvingly to
a Texas appellate case which determined that the filing of a motion
to compel arbitration and stay litigation was an affirmative act.
Id. at 341; see Fridl v. Cook, 908 S.W.2d 507, 515 (Tex. App. - El
Paso 1995, writ dismissed w.o.j).
Jones and Fridl, however, are distinguishable from the
instant case. In those cases, the parties in question filed their
own motions which specifically requested a ruling from the trial
court. The motion, if granted, provided them with a benefit.
Here, neither Sanig nor Tres Vidas requested a ruling which would
provide them with any benefit, or relief. Therefore, there was no
13
“affirmative act” which impliedly recognized the court’s
jurisdiction.6
D. Turnover Statute
Sanig and Tres Vidas argue that we should void the turnover
orders as applied to them because of the lack of jurisdiction.
However, the judgment creditors and the Receiver contend that the
turnover orders can still be upheld even if Sanig and Tres Vidas
were not properly before the district court. They argue that while
appellants held title to the corporate assets, the district court
made a factual finding that Santos actually controlled the trust
which held the corporation and, therefore, Santos had control over
corporate assets. Consequently, they claim that the district court
had the authority to issue the turnover orders pursuant to the
terms of the turnover statute.
It is undisputed that the district court had jurisdiction over
Santos in his individual capacity. Therefore, we must address
whether the district court’s factual determination that Santos
actually controlled the corporations’ assets is sufficient to
justify the enforcement of the turnover orders against Sanig and
Tres Vidas. In order to answer this question, we look to the
6
Our precedent which holds that waiver of personal
jurisdiction occurs upon the defendant’s filing of an answer is
congruent with our decision in this case. It is congruent because
a defendant’s denial in their answer can properly be viewed as an
affirmative request for relief, i.e, dismissal of the plaintiff’s
claims at some later date, which explicitly invokes the judgment of
the court.
14
turnover statute language, Texas case law, and our precedent.
1. Statute
Tex. Civ. Prac. & Rem. Code Ann. Sec. 31.002 (Vernon Supp.
2002) is commonly referred to as the Texas turnover statute. The
turnover statute is a procedural mechanism by which judgment
creditors can reach assets of a judgment debtor that are otherwise
difficult to attach or levy on by ordinary legal process. Beaumont
Bank v. Buller, 806 S.W.2d 223, 224 (Tex. 1991). In pertinent
part, Section 31.002 states:
(a) A judgment creditor is entitled to aid
from a court of appropriate jurisdiction
through injunction or other means in order to
reach property to obtain satisfaction on the
judgment if the judgment debtor owns property,
including present or future rights to
property, that:
(1) cannot readily be attached or levied on by
ordinary legal process; and
(2) is not exempt from attachment, execution,
or seizure for the satisfaction of
liabilities.
(b) The court may:
(1) order the judgment debtor to turn over
nonexempt property that is in the debtor’s
possession or subject to the debtor’s control,
. . .
The judgment creditors argue that, under § 31.002(b)(1), the
turnover order as applied to appellants is permissible because the
district court specifically found that the Sanig assets were under
15
the control of Santos.7 In essence, they contend that turnover
orders can be properly enforced against corporations which are non-
judgment debtors even though the assets to be taken over by the
Receiver are indisputably assets to which title is held by the
corporation. We disagree.
The judgment creditors’ argument misses the mark because it
overlooks the threshold requirement set forth in § 31.002(a) that
the judgment debtor actually own the property at issue. As we see
it, subsection (b)(1)’s requirement that turnover property be in
the debtor’s possession or control must be read in para materia
with subsection (a) to mean that a court may order turnover of non-
exempt property that is in the debtor’s possession or subject to
the debtor’s control only when the judgment debtor owns (has title
to) the property in the first place. Because Santos does not own
7
The district court determined that the Sanig assets were
subject to the control of Santos for several reasons. First,
Santos testified by deposition that he is the settlor of the
Citibank trust which controls Sanig, he controls the trust, he can
change the rules of the trust, and can change the beneficiaries of
the trust. Second, Santos also testified by deposition that
Sanig’s business is “Nothing, it’s just a trust. It’s a – they
call it shell company just to have assets, but it has no operation,
no day-to-day transaction. It’s really to protect estates or money
for families. I mean, that’s really what it is.” Third, Santos’
filing of his inventory of assets stated that he has a beneficial
interest in the Citibank trust, which indirectly owns Sanig
Investments, Ltd. through a nominee shareholder. Fourth, Sanig’s
1998 income tax return lists Santos as the 25% foreign shareholder.
(Presumably this indicates that he is the nominee shareholder).
Fifth, Santos signed a promissory note as a Sanig representative,
and requested the payee on the note to wire transfer the funds from
the note to Citibank in New York.
16
the property at issue, his alleged possession or control of the
property would not be enough to allow turnover of the Sanig and
Tres Vidas assets unless there had been a prior legal adjudication
which pierced the two corporations’ corporate veils.
2. Texas Cases
The Texas Supreme Court has stated that “Texas courts do not
apply the turnover statute to non-judgment debtors.” Beaumont
Bank, 806 S.W.2d at 227. Applying this rule, the Beaumont Bank
court held that the turnover statute could not be used to reach a
judgment debtor in her individual capacity when the judgment only
imposed liability on that individual in her capacity as
representative of an estate. Id. The Beaumont Bank court cited to
three Texas appellate court cases to support its holding.8 Id. In
Schultz v. Fifth Judicial District Court of Appeals, 810 S.W.2d
738, 740 (Tex. 1991), however, the Texas Supreme Court also noted
that in limited circumstances a court may use the turnover statute
to reach assets owned and subject to the control of a judgment
debtor even if those assets are held by a third party. (“Such an
order [turnover order] acts as a mandatory injunction against the
judgment debtor and, if there are such parties, against the
8
See Cravens, Dargan & Co. v. Peyton L. Travers Co., 770
S.W.2d 573, 576-77 (Tex. App. - Houston [1st Dist.] 1989, writ
denied); Detox Industries, Inc., v. Gullett, 770 S.W.2d 954, 956
(Tex. App. - Houston [1st Dist.] 1989, no writ); United Bank Metro
v. Plains Overseas Group, Inc., 670 S.W.2d 281, 284 (Tex. App. -
Houston [1st Dist.] 1983, no writ).
17
receiver and any third parties interested in the property rights
being adjudicated”).
The uncertainty as to how aggressive trial courts can be in
enforcing turnover orders which affect the rights of non-judgment
debtors is reflected in the conflicting decisions of the lower
Texas appellate courts.9 Because the Texas Supreme Court has not
9
Compare Dale v. Finance America Corp., 929 S.W.2d 495 (Tex.
App. - Fort Worth 1996, writ denied) (turnover order properly
ordered as to community property held in trust that bore non-
judgment debtor spouse’s name because trust was subject to judgment
debtor’s control); Plaza Court, Ltd. v. West, 879 S.W.2d 271, 277
(Tex. App. - Houston [14th Dist.] 1994, no writ) (turnover statute
would support a proceeding against an entity who is not a judgment
debtor if the trial court makes a factual finding that the property
on which execution is sought is subject to the possession or
control of the judgment debtor, even if retained by a third party);
International Paper v. Garza, 872 S.W.2d 18, 19 (Tex. App. - Corpus
Christi 1994, no writ) (“under certain circumstances an action
under the turnover statute may be brought against parties other
than the judgment debtor in order to assist the judgment creditor
in subjecting the judgment debtor’s non-exempt property to
satisfaction of the underlying judgment”); Norsul Oil and Mining
Limited v. Commercial Equipment Leasing Co., 703 S.W.2d 345, 349
(Tex. App. - San Antonio 1985, no writ) (oil and mining company
ordered to turnover 220,000 shares of company stock because trial
court found that the shares were actually owned by the judgment
debtor); with Cross, Kieschnick & Co. v. Johnston, 892 S.W.2d 435,
439 (Tex. App. - San Antonio 1994, no writ) (reversing judgment
rendered against partners when underlying judgment involved
corporation, holding that it was improper as matter of law to issue
order against non-judgment debtor); Republic Ins. Co. v. Millard,
825 S.W.2d 780, 783 (Tex. App. - Houston [14th Dist.] 1992, orig.
proceeding) (issuing mandamus on grounds that trial court abused
its discretion by including debtor's insurance company in turnover
order when creditors sought title to debtor's cause of action
against insured); Cravens, Dargan & Co. v. Peyton L. Travers Co.,
770 S.W.2d 573, 576-77 (Tex. App. - Houston [1st Dist.] 1989, writ
denied) (finding that turnover statute could not be used as
procedural tool against State Board of Insurance to reach debtor's
financial-responsibility deposit with that agency); United Bank
Metro v. Plains Overseas Group, Inc., 670 S.W.2d 281, 284 (Tex.
18
definitively resolved this uncertainty, our prior interpretation of
Texas law on this point is especially important.
3. Fifth Circuit Case Law
Resolution Trust Corp. v. Smith, 53 F.3d 72 (5th Cir. 1995) is
the primary Fifth Circuit case which interprets the turnover
statute as it relates to third parties. In RTC, the judgment
creditor’s conservator asked the district court to void a stock
pledge from the judgment debtor, the Smiths, to the Smiths’ non-
judgment debtor attorney, Fuqua, and order turnover of the stock to
the court. Id. at 74. The district court did both things. Id. at
76. We upheld the portion of the turnover order which ordered the
Smiths to turn over their interest in the stock to the district
court. However, we reversed the portion of the turnover order
voiding the pledge to Fuqua. Id. at 80.
We upheld the turnover order as it concerned the Smiths’
interest in the stock because, under the terms of the stock pledge
agreement which gave Fuqua his security interest, the Smiths
App. - Houston [1st Dist.] 1983, no writ) (determining that
creditor who obtained judgment against individual was not entitled
to turnover order against corporation until creditor successfully
pierced corporate veil in separate proceeding); Steenland v. Texas
Commerce Bank Nat'l Ass'n, 648 S.W.2d 387, 390-91 (Tex. App. -
Tyler 1983, writ ref'd n.r.e.) (concluding that turnover statute
does not authorize appointment of receiver to sell homestead to
obtain its non-exempt excess value until substantive issues are
established in separate proceeding brought for that purpose).
19
continued to own the stock. Id. at 78. The only limitation on the
Smiths’ ownership was that they had to get Fuqua’s consent to sell
the stock. Id. Because the Smiths continued to own the stock, we
determined that “the district court did not err in using the
turnover statute to order the Smiths to turn over whatever interest
they had in the stock to the district court.” Id.
The district court’s voiding of the stock pledge to Fuqua was
a different story. Relying upon Beaumont Bank, Republic Insurance,
Cravens, and United Bank Metro, we reasoned that the voiding of the
stock pledge itself on fraudulent transfer grounds went beyond
determining whether certain assets were under the control of the
judgment debtor and, instead, effectively adjudicated the
substantive property rights of a third party. Id. at 79-80.
Although we recognized the highly suspect nature of the stock
pledge, we concluded that the turnover proceeding was not the
proper judicial mechanism for determining that the stock pledge was
a fraudulent transfer and therefore void. Id. at 80. We also
noted that it was particularly inappropriate to use the turnover
proceeding to adjudicate the substantive property rights of a third
party not even before the court. In pertinent part, we stated:
A proceeding to determine whether a
transaction is fraudulent or otherwise to
determine property rights of the parties is
improper under the turnover statute, for the
statute "does not allow for a determination of
the substantive rights of involved parties."
Republic Ins., 825 S.W.2d at 783; see also
20
United Bank Metro, 670 S.W.2d at 284. It is
even more clear that a party not even before
the court cannot have its rights determined
via the turnover proceeding. Thus, in this
case, the district court erred in using the
turnover proceeding to determine that the
stock pledge was a fraudulent transfer and was
therefore void. The validity of the pledge
agreement must be challenged in a further
proceeding. And the sale of the Park Club
stock must await a determination satisfactory
to the district court of the validity of
Fuqua's interest. Id. at 80.
4. Application
We are persuaded that the Resolution Trust Corporation
rationale controls the resolution of the instant case. Here, the
judgment creditors presented evidence that Sanig is a sham
corporation which does not operate any real business, but operates
strictly to shield assets from potential creditors. In essence,
they contend that Sanig and Tres Vidas’ corporate forms are being
used by Santos to perpetrate a fraud upon potential creditors.
Therefore, the district court appropriately determined that Santos
had control over appellants’ assets and ordered the receiver to
take possession of those assets.
As we were in the Resolution Trust Corporation stock pledge
situation, we are sympathetic to this type of argument. However,
we cannot escape the fact that Sanig is an actual corporation.
Sanig and Tres Vidas are distinct legal entities that have
substantive property rights in the assets in which they hold title.
Thus, the district court does not have the authority to adjudicate
21
these substantive rights under the turnover statute. Resolution
Trust Corp., 53 F.3d at 77 (“the turnover statute is purely
procedural in nature; the statute does not provide for the
determination of the substantive rights of the parties”) (quoting
Cross, Kieschnick & Co., 892 S.W.2d at 439).
In the case at bar, the district court did not pierce the
corporate veils of Sanig and Tres Vidas. Instead, the district
court predicated the turnover order as it applied to Sanig and Tres
Vidas upon a factual finding that Santos owns and controls the
Citibank trust, and therefore owns and controls the two
corporations’ assets. In our view, this was error. Under Texas
law, appellants’ property should not have been subjected to
turnover because appellants had never been found to be the alter
egos of Santos through a “piercing the veil” judicial process. See
United Bank Metro, 670 S.W.2d at 283 (non-judgment debtor
corporations should not be treated as judgment debtors based upon
evidence that they are alter egos of judgment debtors without a
prior trial on the merits which adjudicates the alter ego issue).10
10
We also note that Sanig and Tres Vidas not being properly
before the district court raises troubling due process concerns.
See e.g., Ex Parte Swate, 922 S.W.2d 122, 125 (Gonzalez, J.,
concurring) (“Whether a turnover order is enforceable by a contempt
order directed to a stranger to the lawsuit is a serious matter
that goes to the very heart of due process.”); Resolution Trust
Corp., 53 F.3d at 80 (“It is even more clear that a party not even
before the court cannot have its rights determined via the turnover
proceeding”). These concerns further bolster our decision in this
case.
22
The judgment creditors rely on three Texas appellate court
cases to support their contention that the district court’s
turnover order was valid: (1) Norsul Oil and Mining Limited v.
Commercial Equipment Leasing Co., 703 S.W.2d 345 (Tex. App. - San
Antonio 1985, no writ); (2) Dale v. Finance America Corp., 929
S.W.2d 495 (Tex. App. - Fort Worth 1996, writ denied); and (3)
Plaza Court, Ltd. v. West, 879 S.W.2d 271 (Tex. App. - Houston
[14th Dist.] 1994, no writ). We address each case in turn.
Norsul Oil is identical to our Resolution Trust Corporation
decision which affirmed the turnover of the Smiths’ interest in the
pledged stock. In Norsul Oil, 703 S.W.2d at 346, the trial court
ordered the non-judgment debtor corporation to turn over stock
shares in its possession to the court. The San Antonio Court of
Appeals affirmed the turnover order because the trial court
properly found, based on evidence that the shares of stock listed
the judgment debtor as the record owner, that the stock was indeed
owned by the judgment debtor. Id. at 347, 349.
Here, the district court could properly have ordered any stock
shares owned by Santos in Sanig or Tres Vidas to be turned over to
the Receiver. However, the district court did not do this.
Instead, it ordered the Receiver to take possession of and sell the
two corporations’ assets. Norsul Oil and the aforementioned
portion of Resolution Trust Court are thus distinguishable from the
case before us.
23
In Dale v. Finance America Corp., 929 S.W.2d at 498, the Fort
Worth Court of Appeals interpreted Texas law as allowing a turnover
order to be issued against a non-judgment debtor if the property is
owned by a judgment debtor and subject to the debtor’s possession
or control. The Dale trial court ordered the judgment debtor,
(“husband Dale”) to turn over stock he owned in various
corporations, money that he owned, and an animal sabre collection
he owned. The trial court also ordered a trustee to turn over
community property assets held in a trust bearing the name of
husband Dale’s wife. Id. at 497-98.
The appellate court upheld the turnover order. It reasoned
that the community property contained in the trust bearing the
wife’s name was subject to husband Dale’s control because the wife
testified that husband Dale helped her file the petitions to the
trustees for distribution and the trust funneled money to husband
Dale’s various companies. Id. at 499.
Upon close observation, Dale is distinguishable from the
instant case. Under Texas law, the trustee, not the trust itself,
holds legal title to trust property. See Ridgell v. Ridgell, 960
S.W.2d 144, 147 (Tex. App. - Corpus Christi 1997, no writ)(noting
that the trustee is vested with legal title to trust property).
Consequently, the Dale court was perhaps justified in looking to
whether the judgment debtor actually controlled the trust property.
In Dale, however, no corporation existed between the trustee and
24
the community property. Here, two corporations which are separate
juridical persons under Texas law own the assets in question and,
thus, stand between the trustee and the property. Consequently, we
cannot disregard the important fiction created by the appellants’
corporate forms without a formal piercing of the corporate veil.11
In Plaza Court, 879 S.W.2d at 276-77, the Houston appellate
court held that the turnover statute can be used to seize the
corporate assets of a non-judgment debtor if either the trial court
makes a factual determination that the judgment debtors own at
least a controlling majority of the stock or the judgment creditors
have previously succeeded in piercing the corporate veil. We see
several flaws in the holding.
First, the Houston appellate court based its determination
that the turnover statute can be used to strip a non-judgment
debtor corporation of its assets as long as the trial court makes
a factual finding that the judgment debtor owned a controlling
interest in the corporation on the Norsul Oil case. However,
11
We consistently use the term “piercing the corporate veil”
throughout this opinion. In the typical corporate veil piercing
scenario, the corporate veil is pierced so that individual
shareholders may be held liable for corporate acts. See Menetti v.
Chavers, 974 S.W.2d 168, 173 (Tex. App. - San Antonio 1998, no
writ). Here, the purpose of piercing appellants’ corporate veils
would be to hold the corporations liable for the acts of the
individual shareholders. Therefore, this case presents a “reverse
corporate veil piercing” situation. This slight variation is of no
consequence, however, because the end result under both views is
the same - two separate entities merge into one for liability
purposes.
25
Norsul Oil does not support such a broad rule. As we have pointed
out, Norsul Oil merely stated that the turnover court could order
a third party non-judgment debtor to turn over stock owned by the
judgment debtor, it did not state that the turnover court could
seize corporate assets owned by the non-judgment debtor corporation
based upon a factual finding that the judgment debtor is a majority
stockholder. Second, the legal principle running through Texas law
which allows non-judgment debtor corporate assets to be taken
though turnover order only if the corporate veil is pierced will be
useless if the turnover statute can be used in this way.
Therefore, we do not consider the case to be persuasive authority
and decline to follow it.12
IV. CONCLUSION
Sanig and Tres Vidas, both non-judgment debtors, were never
properly before the district court. Nevertheless, the district
court proceeded to use the turnover statute to adjudicate their
substantive property rights even though their corporate veils had
not been pierced in a separate judicial proceeding. This was an
abuse of discretion because it violates Texas law. Therefore, we
overturn the turnover orders to the extent they allowed the
12
Even assuming arguendo that the Plaza Court holding is
someday accepted by the Texas Supreme Court, the only evidence in
the instant case concerning ownership of corporate stock is that
Santos is a 25% foreign shareholder in Sanig. Therefore, we have
doubts as to whether the evidence supports the district court’s
finding under the Plaza Court view as well.
26
Receiver to take possession of and sell Sanig and Tres Vidas
assets. We reverse and remand for proceedings consistent with this
opinion.13
13
On remand, the district court can properly order both Sanig
and Tres Vidas to turnover share certificates owned by Santos.
27
EDITH H. JONES, Dissenting:
I agree completely with Judge Parker’s careful exposition
of the Texas turnover statute and his conclusion that it does not
apply in this case. Unfortunately, I do not agree with the
majority’s judgment, because I believe that a proper reading of the
record demonstrates that Sanig and Tres Vidas subjected themselves
to the jurisdiction of the district court and therefore to its
ultimate orders. On this narrow but critical basis, I respectfully
dissent.
The majority correctly note that if the receiver had
formally served Sanig or Tres Vidas with process, there would be no
doubt of their submission to the district court’s jurisdiction.
Further, a party may make a general appearance whenever it invokes
the judgment of the court on questions other than jurisdiction and
in such instances, “the focus is on affirmative action that
impliedly recognizes the court’s jurisdiction over the parties.”
Jones v. Sheehan, Young & Culp, P.C., 82 F.3d 1334, 1340-41 (5th
Cir. 1996); see also Cactus Pipe & Supply v. M/V Montmartre, 756
F.2d 1103, 1108 (5th Cir. 1985) (“[a]n appearance may also arise by
implication ‘from a defendant’s seeking, taking or agreeing to some
step or proceeding in the cause beneficial to himself’ . . .”
(citation omitted)).
We differ in our interpretation of counsel’s actions in
representing Sanig and Tres Vidas before the district court. The
majority, in my view, misunderstand the significance of the
attorney’s signature on the three essential court documents that
constituted the receivership: the Order Approving Receivership
Business Plan and Expanded Authority of Receiver, entered July 5,
2000; the Motion for Agreed Restatement of the Receivership Order;
and the Agreed Order for Restatement of the Receivership Order,
entered July 31, 2000. Sanig is a party to each of these
documents, as it was included among several entities represented on
those documents by the law firm of Settle & Pou, P.C., through
attorneys J. Allen Smith and Michael Byrd. Tres Vidas is included
within this signature block only on the July 6th agreed order.
These typed signature blocks, one of which was specifically
interlineated before signature, were signed deliberately and
knowledgeably by counsel representing Sanig and Tres Vidas.
Moreover, in the July 5 order, the court found “that
parties-in-interest received adequate notice of the Application [by
the receiver for approval of the business plan and expansion of his
authority], and that the agreements of such parties to the orders
herein are evidenced by their execution of the Receiver’s Business
Plan.” The business plan itself says that the agreements outlined
therein were approved by “all requisite principals.” Appellants’
counsel knew what they were doing.
That the inclusion of Sanig and Tres Vidas was no fluke,
as the majority imply, is emphasized by their organizational ties
29
with Santos, the principal malefactor. Sanig seems to be a “front”
for Santos, suggesting at a minimum that Sanig had an interest in
negotiating with the receiver over the extent of its assets’
commitment to the receivership. Tres Vidas had the same type of
interest, as it was a co-owner with Santos of three of Santos’s
fellow judgment debtors, Sanvir, Signa & Atlanta Associates (the
last through its 50% ownership of Signa). Even if Sanig and Tres
Vidas were wholly independent of Santos, a conclusion made doubtful
by the surrounding circumstances, their assets were deeply involved
in the receivership from its inception.
The majority also appear to have overlooked that in these
agreed orders, the receiver took control of assets owned by Sanig
and Tres Vidas and gained broad authority to manage and dispose of
those assets for the benefit of the receivership. I must
respectfully disagree with the majority’s statement that none of
Sanig’s or Tres Vidas’s assets are listed as receivership assets.
In fact, Tres Vidas is a 50% owner of two of the
receivership entities, Sanvir and Signa, and a part owner of
Highland Park Village partnership. These are designated as
“receivership assets” in the restated receivership order. Among
other things, the order gives the receiver the right to “deal with
these assets as if he were the owner thereof.” In addition, Signa
(50% owned by Tres Vidas) owned all the stock of Atlanta
Associates, another receivership asset, which in turn co-owned
30
various real estate partnership interests with Sanig and other
related interests. Replacing Sanvir, the receiver also became the
managing partner of six partnerships, three of which were owned in
part by Sanig (Newnan Crossing Partnership; Twin Lakes Partnership;
Forest Chase Partnership), and he became the receiver for Highland
Park Village partnership and The Lakes Partnership, in which Sanig
and/or Tres Vidas held interests.
This is not even an exhaustive list of the assets’
interrelated ownership and control among Santos, Sanig and Tres
Vidas. As part owners of all these entities, Sanig and Tres Vidas
were committing substantial discretion to the authority of the
receiver. Expressly or by implication, they authorized the
receiver to resolve title disputes concerning the assets and to
litigate over the extent of Santos’s ownership rights.
Unlike the majority, I believe that when Sanig and Tres
Vidas allowed their attorney’s signature to be affixed to the
receivership documents, they went in for a penny, in for a pound,
subjecting themselves to the broad authority of the receiver under
the ultimate supervision of the district court. That is to say, by
voluntarily surrendering nearly all of their assets to the
receivership, they agreed to the court’s jurisdiction to determine
ownership of those assets. It is hard to see what more could be
done to constitute “affirmative action” by these entities in
recognition of the court’s jurisdiction.
31
For these reasons, I disagree with the majority’s
conclusion that “acquiescence to the terms of the receivership
orders had no bearing on Sanig and Tres Vidas.” To the contrary,
for all that can be told from the briefs and receivership orders,
there is very little of the interests of Sanig and Tres Vidas that
did not come under the purview of the receiver. When they thus
became parties to the receivership, they had actual notice of and
opportunity to participate in the receivership proceedings that
would determine ownership of their assets. They chose not to
defend themselves. I would hold that the trial court correctly
entered judgment against them. I therefore respectfully dissent.
32