Bay City Plastics, Inc. v. McEntire

• Decision Date: 01 May 2003
• Docket Number: No. 01-01-00687-CV.,01-01-00687-CV.
• Citation: 106 S.W.3d 321
• Parties: 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.
• Court: Texas Court of Appeals

106 S.W.3d 321

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.

No. 01-01-00687-CV.

Court of Appeals of Texas, Houston (1st Dist.).

May 1, 2003.

Frank L. Mauro, Lake Jackson, Hugh L. McKenney, McKenney & Associates, P.C., Houston, for Appellant.

C. Wayne Holder, C. Wayne Holder & Associates, Freeport, Jeffrey D. Kyle, Christian, Smith & Jewell, LLP, Houston, W. Edwin Denman, Wommack, Denman, Mauro & Hathway, P.C., Lake Jackson, for Appellees.

Panel consists of Chief Justice RADACK and Justices NUCHIA and JENNINGS.

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 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.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 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 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 debtor'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. Buller, 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 Buller 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 Buller 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...