Nat'l City Bank v. Texas Capital Bank, N.A.

• Court: Texas Court of Appeals
• Citation: Nat'l City Bank v. Texas Capital Bank, N.A., 353 S.W.3d 581 (Tex. App. 2011)
• Decision Date: 23 November 2011
• Docket Number: No. 05–10–00028–CV.,05–10–00028–CV.
• Parties: NATIONAL CITY BANK, A Subsidiary of National City Bank Corporation, a Delaware Corporation, Appellant, v. TEXAS CAPITAL BANK, N.A., A National Banking Association, Appellee.

353 S.W.3d 581

NATIONAL CITY BANK, A Subsidiary of National City Bank Corporation, a Delaware Corporation, Appellant,

v.TEXAS CAPITAL BANK, N.A., A National Banking Association, Appellee.

No. 05–10–00028–CV.

Court of Appeals of Texas, Dallas.

Nov. 23, 2011.

Sean M. Whyte, Charles Christopher Groves, Andrew Omprakash Wirmani, David Lawrence Horan, Jones Day, Dallas, TX, for Appellant.

David M. O'Dens, Settle Pou, Dallas, TX, Stephen Way Shellenberger, Law Office of Stephen Way Shellenberger, P.C., Richardson, TX, for Appellee.

Before Justices MOSELEY, MARTIN RICHTER, and LANG–MIERS.

OPINION

Opinion By Justice MOSELEY.

This is an appeal from a summary judgment in a garnishment action. After the garnishee, appellant National City Bank (“National City”), was served with the writ of garnishment, it liquidated the debtor's investment account and applied the proceeds (approximately $1.2 million) to pay the debtor's obligation to National City (approximately $1.1 million), and paid the remainder of the proceeds (almost $90,000) to the debtor. National City does not dispute it should have paid the remainder to the garnishor, appellee Texas Capital Bank (“Texas Capital”). However, Texas Capital asserted the writ of garnishment placed it in a priority position ahead of National City with respect to the investment account, and thus that it was entitled to collect the full amount of its judgment against the debtor (over $500,000) from National City. The trial court agreed, granting Texas Capital's cross-motion for summary judgment and denying National City's cross-motion.

National City appeals. In a single issue, it contends the trial court erred by granting summary judgment for Texas Capital because National City's interest in the Debtor's account was superior to the writ of garnishment and therefore, National City properly used funds in the account to pay a matured debt to itself before paying remainder on the writ. For the reasons discussed herein, we agree with National City. Therefore, we modify the trial court's judgment to: (1) deny Texas Capital's motion for summary judgment; (2) grant National City's cross-motion for summary judgment; and (3) award judgment for the difference paid to the Debtor after service of the writ. We affirm the trial court's judgment as modified.

Background

In 2005, Keith D. McKenzie (“Debtor”) signed a promissory note establishing a $1,200,000 revolving line of credit with National City. In connection with this credit, Debtor signed a security agreement and pledged certain assets in an investment-portfolio account at National City as collateral for the line of credit. A later security agreement extended National City's security interest to all assets held in the investment account.¹ By the time this dispute arose, almost all of the line of credit had been utilized by Debtor.

Texas Capital obtained a default judgment against Debtor for over $500,000 on September 17, 2008. Texas Capital then filed this garnishment proceeding against National City and Debtor; it served both with the writ of garnishment through the secretary of state on October 31, 2008.² On that date, Debtor's investment account at National City held assets valued at over $1,267,000, and he owed over $1,174,000 on the line of credit.

On November 7, 2008, Debtor instructed National City to liquidate the investment account and pay off the line of credit. National City did so on November 13, 2008. At Debtor's request, National City transferred the remaining balance of approximately $89,000 to Debtor. National City filed an amended answer to the writ of garnishment setting out these facts. Texas Capital challenged the answer through a controverting affidavit or traverse. See Tex.R. Civ. P. 673.

Both parties moved for summary judgment and the trial court granted Texas Capital's motion, denied National City's motion, and rendered judgment for Texas Capital against National City for the full amount of the judgment against Debtor. The trial court also denied National City's motion for new trial and to reconsider the summary judgment.

Standard of Review

“When both sides move for summary judgment and the trial court grants one motion and denies the other, we review the summary judgment evidence presented by both sides and determine all questions presented.” Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex.2009). We render the judgment the trial court should have rendered. Id.

Applicable Law

A garnishment proceeding involves at least three parties: (1) the plaintiff (also known as the garnishor or creditor); (2) the defendant or debtor; and (3) the garnishee. The garnishee is a third party who owes a debt to or holds property of the debtor. The plaintiff or garnishor is a creditor of the debtor and requests the court to issue the writ of garnishment to the garnishee. Garnishment is a statutory proceeding whereby property of the debtor that is in possession of the garnishee is applied to the payment of the debt owed by the debtor to the garnishor. See Tex. Civ. Prac. & Rem.Code Ann. §§ 63.001–.008 (West 2008); Tex.R. Civ. P. 657–79; Thompson v. Harco Nat. Ins. Co., 997 S.W.2d 607, 611 (Tex.App.-Dallas 1998, pet. denied), overruled in part on other grounds by John v. Marshall Health Servs., Inc., 58 S.W.3d 738, 741 (Tex.2001) (per curiam).

The garnishor is subrogated to the rights of the debtor against the garnishee and may enforce, against the garnishee, any rights the debtor could have enforced had he sued the garnishee directly. See Thompson, 997 S.W.2d at 611 (citing Beggs v. Fite, 130 Tex. 46, 106 S.W.2d 1039, 1042 (1937)). The garnishor, however, cannot acquire any greater rights against the garnishee than the debtor, himself, possesses. See id. (citing Phoenix Ins. Co. v. Willis, 70 Tex. 12, 6 S.W. 825, 830 (1888)).

Where, as here, the garnishee's answer is controverted the case is then tried as other cases and a judgment will be issued according to the results of the trial. See Tex.R. Civ. P. 668, 674. The primary issue in a garnishment suit is whether the garnishee is indebted to, or has in its possession effects belonging to the debtor. See Buckeye Ret. Co. v. Bank of Am., N.A., 239 S.W.3d 394, 399 (Tex.App.-Dallas 2007, no pet.); Putman & Putman, Inc. v. Capitol Warehouse, Inc., 775 S.W.2d 460, 463 (Tex.App.-Austin 1989, writ denied). The burden is on the garnishor to establish the amount of the debt owed to the debtor or the value of the property held by the garnishee. “If the garnishor's proof fails, he can of course recover nothing.” Putman, 775 S.W.2d at 463 (citations omitted).

Garnishment proceedings often involve competing claims to property that must be resolved by applying rules of lien priority. The general rule is that in a contest over rights or interests in property, the party that is first in time is first in right. See AMC Mortg. Services, Inc. v. Watts, 260 S.W.3d 582, 585 (Tex.App.-Dallas 2008, no pet.); World Help v. Leisure Lifestyles, Inc., 977 S.W.2d 662, 668 (Tex.App.-Fort Worth 1998, pet. denied). Rights under a writ of garnishment are determined by priority in time, which itself is determined by service of the writ. Small Bus. Inv. Co. v. Champion Int'l Corp., 619 S.W.2d 28, 30 (Tex.Civ.App.-Houston [1st Dist.] 1981, no writ). Service of the writ on the garnishee fixes a lien on the debtor's property or debts due him, “ subject to prior valid rights and liens against such property or debt.” Hubbell, Slack & Co. v. Farmers' Union Cotton Co., 196 S.W. 681, 684 (Tex.Civ.App.-Beaumont 1917, writ ref'd) (quoting Cyclopedia of Law and Procedure) (emphasis added); United States v. Standard Brass & Mfg. Co., 266 S.W.2d 407, 408 (Tex.Civ.App.-Beaumont 1954, no writ). In garnishment proceedings, allowable claims that are prior in time are prior in right of payment. See Frankfurt's Tex. Inv. Corp. v. Trinity Sav. & Loan Ass'n, 414 S.W.2d 190, 192 (Tex.Civ.App.-Dallas 1967, writ ref'd n.r.e.).

Discussion

National City's amended answer asserted a superior interest in the account assets pursuant to the note and security agreement with Debtor. ³ Texas Capital controverted the amended answer, alleging that after National City was served with the writ, it was not entitled to offset Debtor's account and was not entitled to release funds to him. Texas Capital prayed for judgment against National City for the full amount of the judgment against Debtor. Thus, issue was joined as to the competing claims to the assets in Debtor's account.

National City admits that the payment of the $89,000 to Debtor was void under section 63.003 and has offered to make Texas Capital whole as to that amount. We must determine whether the trial court erred by granting summary judgment in favor of Texas Capital for more than that payment.

National City's claim to the assets in the investment account is based on the note and security agreements with Debtor. Texas Capital's claim is based on service of the writ of garnishment on National City. The summary judgment evidence establishes that National City's security interest in the assets arose prior to service of the writ of garnishment. The summary judgment evidence also shows the debt to National City was in default as a result of the default judgment against Debtor.⁴

National City had a prior security interest to Texas Capital's garnishment lien. Texas Capital presented no evidence or legal theory that would give it a greater right to the investment account than Debtor had. Because Debtor's right to the investment account was fully subject to National City's security interest, neither Debtor nor Texas Capital had any right to the account assets until National City's debt was paid.

The parties argue extensively about whether the National City had a right of setoff and whether the debt had matured at the time the writ was served. But the issue is not whether National City had a right of setoff but whether it had a prior lien position—and it is...