Court Opinion

ID: 7121
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:25:05+00
Date Added: 2024-06-11T14:56:21.570145
License: Public Domain

IN THE UNITED STATES COURT OF APPEALS

                       FOR THE FIFTH CIRCUIT

                   ____________________________

                           No. 94-20087
                           No. 94-20405
                   ____________________________

          RESOLUTION TRUST CORPORATION as
          Conservator for Heritage Federal
          Savings Bank,

                               Plaintiff-Appellee,

          v.

          DALTON SMITH, ET AL.,

                               Defendants-Appellants.

*************************************************************

                   ____________________________

                           No. 94-20339
                           No. 94-20221
                   ____________________________

          RESOLUTION TRUST CORPORATION as
          Conservator for Heritage Federal
          Savings Bank,

                               Plaintiff-Appellee,

          v.

          DALTON SMITH, and PATRICIA
          SMITH,

                               Defendants-Appellants.

*************************************************************
                     ____________________________

                             No. 94-20387
                     ____________________________

            IN RE:

            RICHARD FUQUA,

                                Petitioner

_________________________________________________________________

          Appeals from the United States District Court
   for the Southern District of Texas and Petition for Writ of
                             Mandamus
_________________________________________________________________
                           May 11, 1995

Before KING, EMILIO M. GARZA, and DeMOSS, Circuit Judges.

KING, Circuit Judge:

     These consolidated appeals stem from the efforts of the

Resolution Trust Corporation, acting in its capacity as

conservator of Heritage Bank, to collect a judgment from Dalton

and Patricia Smith.    Shortly after the Resolution Trust

Corporation registered the judgment and noticed the Smiths'

depositions in aid of judgment, the Smiths pledged stock which

constituted a substantial portion of their assets to their

attorney, Richard Fuqua, to secure past and future legal

services.    The Resolution Trust Corporation then asked the

district court to use the Texas Turnover Statute to void the

transfer of the stock to Fuqua as a fraudulent transfer and to

command the turnover of the stock.    After a series of hearings

and orders (several of which are part of this consolidated

                                  2
appeal), Fuqua surrendered the stock certificate to the court.

The Smiths appeal, arguing that the district court's proceedings

and rulings violated their due process rights and did not comport

with the law interpreting the Texas Turnover Statute.    Similarly,

Fuqua requests that we issue a writ of mandamus compelling the

district court to return the stock certificate to him.    Although

we reject the Smiths' contentions, we find that the district

court erred in adjudicating Fuqua's rights to the stock in the

turnover proceeding, and accordingly, we reverse the district

court's order that declared Fuqua's security interest void.

                         I.   BACKGROUND

     In February of 1991, the Resolution Trust Corporation, in

its capacity as conservator for Heritage Federal Savings Bank,

obtained a judgment of $1,292,524.07 plus interest and attorney's

fees against Dalton and Patricia Smith in the Eastern District of

Virginia (the "Virginia judgment").   The judgment was affirmed by

the Fourth Circuit in December of that same year.    A little less

than two years later, on September 10, 1993, the RTC filed a

registration of the judgment in the Southern District of Texas,

and the RTC began collection proceedings.1    In early October of

1993, the RTC noticed both of the Smiths's depositions in aid of

judgment to take place on November 8, 1993.

     1
        In the intervening two years, other litigation involving
the RTC and the Smiths continued. See Park Club, Inc. v.
Resolution Trust Corp., 967 F.2d 1053 (5th Cir. 1992).

                                3
     Meanwhile, according to Fuqua, in late October of 1993,

Dalton Smith sought Fuqua's representation in relation to a

possible bankruptcy.   Fuqua testified that he informed Smith that

he was unwilling to represent Smith unless he was "collateralized

to be assured of payment."   Accordingly, on November 4, 1993,

four days before the scheduled depositions, Smith entered into a

stock pledge agreement with Fuqua, granting Fuqua a security

interest in all of the Smiths' stock in Park Club, Inc. in

exchange for past and future legal services.    That same day,

Fuqua perfected his security interest in the stock when Smith

delivered the certificate for the stock to Fuqua.

     The next day, November 5, 1993, the Smiths responded to the

RTC's deposition notice with a motion for a protective order.

The Smiths did not appear for the November 8 depositions.    Also

on November 5, 1993, the RTC requested a writ of execution, and

in their letter requesting the writ, the RTC informed the clerk

that the judgment could be satisfied in full through the levy and

execution of the Park Club stock certificates.    The clerk for the

district court issued the writ that same day.

     On November 16, 1993, the writ was served on Smith by the

United States Marshal.   Smith, however, did not turn over the

stock certificate; rather, Smith informed the Marshal that he did

not have the stock certificate.   Three days later, the RTC filed

an "Emergency Motion for Turnover," requesting that the district

court order Smith to turn over "all stock certificates" for Park

Club and other corporations.

                                  4
     The district court held a hearing on the RTC's turnover

motion on December 10, 1993.   At that hearing, the Smiths'

counsel informed the district court and the RTC that:

     Mr. Smith, as a result of obligations he owes to
     another attorney, . . . has pledged . . . the Park Club
     stock to that attorney for substantial attorney's fees
     that he has incurred in connection with other
     representation.
          It is my understanding that there is a perfected
     security interest under the UCC and possession of the
     stock certificates themselves in the hands of the other
     attorney.

Upon this revelation, the district court determined that "the

thing to do is to set another hearing, get the lawyer in here,

get some testimony and find out whether it was a fraudulent

transfer or not, and based upon that and some other factors make

a decision."   The district court scheduled the hearing for

January 14, 1994.

     At that hearing, the district court heard the testimony of

Smith and Fuqua, and on January 21, 1994, the district court

granted the RTC's turnover request as to some assets, but the

court did not rule on the Park Club stock.   The Smiths objected

to the district court's order; nevertheless, on January 24, the

district court reaffirmed its ruling.   The next day, the Smiths

turned over most of the items in the order, but because the

Smiths did not turn over all of the items included in the order,

on January 26, the RTC initiated contempt proceedings against the

Smiths.   On January 31, 1994, the Smiths appealed the district

court's January 21 and 24 orders.

                                 5
     On February 10, 1994, Patricia Smith was deposed in aid of

judgment, but, asserting her spousal and self-incrimination

privileges, she refused to answer most of the questions

propounded by the RTC.

     On March 15, 1994, the district court entered a memorandum

opinion and an order on the Park Club stock.   In its opinion, the

district court, inter alia, rejected the Smiths' claim that "the

Court has no jurisdiction to void the fraudulent transfer to

Fuqua and order the turnover of the Park Club, Inc. stock."

Instead, the district court noted that a court may order the

turnover of property subject to the debtor's possession and

control and that "Smith remains the record owner of the Park

Club, Inc. stock that was pledged to Fuqua.    Smith's control over

the stock was evident from the testimony . . . ."    Thus, the

district court concluded that "Smith's pledge of the Park Club,

Inc. stock to Michael [sic] Fuqua is void" and ordered that "the

Park Club, Inc. stock be turned over to the Receiver."

Additionally, the district court awarded the RTC attorney's fees.

     On the same day that its memorandum opinion was entered, the

district court also denied Patricia Smith's assertions of

privilege and ordered her to answer the RTC's questions.

Additionally, the district court ordered the Smiths to show cause

why they should not be held in contempt for their failure to

comply with the January 21 and 24 turnover orders.    Eight days

later, on March 23, 1994, the Smiths appealed the district

court's March 15 order commanding the turnover of the Park Club

                                6
stock and the district court's March 16 order compelling Patricia

Smith to answer the RTC's questions at deposition.

     On April 15, 1994, the district court amended its March 15

order, once again noting that the "pledge of Park Club, Inc.

stock to Richard Fuqua by Dalton Smith is void" and commanding

the turnover of the Park Club stock.   Additionally, the district

court reaffirmed its award of attorney's fees to the RTC.   One

week later, the Smiths appealed the April 15 amended order.

     By April 26, the Park Club stock still had not been turned

over, and after a hearing, the district court ordered Fuqua to

show cause why he should not be required to turn over the Park

Club stock.   A hearing on the show cause order was held on May 6,

1994, and Fuqua was ordered to turn over the Park Club stock.

Fuqua complied with the district court's order, and ten days

later, the district court entered another order directing the

United States Marshal to execute and sell the Park Club stock on

June 7, 1994.   The Smiths also appealed that order, and Fuqua

sought a writ of mandamus seeking the return of the Park Club

stock.   Subsequently, we granted a stay of the sale of the stock,

and we consolidated the various appeals and the mandamus request.

                          II.   DISCUSSION

A.   Jurisdiction

     Initially, the Smiths contend that their January 31, 1994

appeal of the district court's January 21 and January 24 orders

divested the district court of jurisdiction over matters

                                  7
involving the turnover of assets.     These appeals, the Smiths

contend, left this court with "the exclusive jurisdiction to

decide whether the RTC was entitled to any turnover relief

regarding the assets discussed at the January 14, 1994 summary

hearing and whether the breadth and scope of the command to

turnover all `other corporate documents' was enforceable."     We

disagree.

     As the Smiths contend, we have noted that "notice of appeal

typically divests the district court of jurisdiction."     Alberti

v. Klevenhagen, 46 F.3d 1347, 1358 (5th Cir. 1995); accord

Farmhand, Inc. v. Anel Eng'g Indus., 693 F.2d 1140, 1145 (5th

Cir. 1982).   This does not describe the full situation, however,

as we also have stated that notwithstanding an appeal a "district

court maintains jurisdiction as to matters not involved in the

appeal."    Farmhand, 693 F.2d at 1145; accord Alberti, 46 F.3d at

1358.   Additionally, "[t]he district court maintains jurisdiction

for other matters, such as ordering stays or modifying injunctive

relief."    Farmhand, 693 F.2d at 1145-46; accord Alberti, 46 F.3d

at 1358.    Finally, as we recently reemphasized, a district court

has continuing jurisdiction in support of its judgment, and

"`[u]ntil the judgment has been properly stayed or superseded,

the district court may enforce it through contempt sanctions.'"

Alberti, 46 F.3d at 1358 (quoting United States v. Revie, 834
F.2d 1198, 1205 (5th Cir. 1987), cert. denied, 487 U.S. 1205

(1988)).

                                  8
     In the instant case, the Smiths argue that their January 31

appeal nullified the district court's ability to issue subsequent

orders.   This is not the case.   The district court's subsequent

orders were either not part of the initial appeal or orders

enforcing its judgment.   Accordingly, these orders were well

within the district court's jurisdiction.   The orders issued

after the Smiths' various other appeals were of a similar

posture, and accordingly, we find that the district court

retained jurisdiction to enter the subsequent orders in support

of its prior determinations.2

     2
        A different and more difficult question arises as to this
court's jurisdiction over the initial appeals. As the Seventh
Circuit noted, in a similar case:

     The final-decision rule (28 U.S.C. § 1291) postpones
     appeal to the final judgment -- but what about orders
     issued after the final judgment? There is no problem
     when the post-judgment order concludes a discrete,
     collateral proceeding, such as a proceeding to award
     attorney's fees for services rendered before the entry
     of the final judgment. The fee award is the final
     order in the collateral proceeding and is therefore
     appealable. But what of a proceeding to execute or
     otherwise enforce a judgment? That proceeding ends
     when the defendant's assets are seized and sold to pay
     the judgment -- when in short the judgment is finally
     executed. But the execution is not an order. If
     execution is resisted, a series of orders may have to
     be issued before it is finally accomplished. Which of
     those orders are appealable?

Resolution Trust Corp. v. Ruggiero, 994 F.2d 1221, 1224 (7th
Cir. 1993). We have not answered this difficult question in this
circuit, and we do not reach it in this case. In the instant
case, the district court's last order commanding the turnover is
clearly appealable. Section 1292(a)(2) grants appellate courts
jurisdiction of orders "appointing receivers . . . or to take
steps to accomplish the purposes thereof, such as directing sales
or other disposals of property." 28 U.S.C. 1292(a)(2); see also
Swint v. Chambers County Comm'n, 115 S. Ct. 1203, 1208-1212
(1995) (discussing appellate court jurisdiction).

                                  9
B.   Application of the Texas Turnover Statute.

     The heart of these consolidated appeals is the district

court's application of the Texas Turnover Statute.3    As the Texas

Supreme Court has described, that statute is "the procedural

device by which judgment creditors may reach assets of a debtor

that are otherwise difficult to attach or levy on by ordinary

legal process."    Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223,

224 (Tex. 1991).    Further, the Texas Supreme Court has noted

that "[t]he purpose of the turnover proceeding is merely to

ascertain whether or not an asset is in the possession of the

judgment debtor or subject to the debtor's control."    Id. at 227;

accord Republic Ins. Co. v. Millard, 825 S.W.2d 780, 783 (Tex.

App. 1992, no writ).   Through the turnover statute, a court may

use an "injunction or other means in order to reach property to

obtain satisfaction of a judgment, including present or future

rights to property."    First City Nat'l Bank v. Phelan, 718 S.W.2d
402, 405 (Tex. App. 1986, writ ref'd n.r.e.).

     3
         In part, the statute provides that:

     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.

Tex. Civ. Prac. & Rem. Code Ann. § 31.002(a).

                                 10
     The effect of the statute is not unlimited, however, for

"the turnover statute is purely procedural in nature; the statute

does not provide for the determination of the substantive rights

of the parties."    Cross, Kieschnick & Co. v. Johnston, 892 S.W.2d
435, 439 (Tex. App. 1994, no writ); accord Republic Ins. Co., 825
S.W.2d at 783; Cravens, Dargan & Co. v. Peyton L. Travers Co.,

770 S.W.2d 573, 576 (Tex. App. 1989, writ denied).   Additionally,

"Texas courts do not apply the turnover statute to non-judgment

debtors."    Beaumont Bank, 806 S.W.2d at 227; accord Cross,

Kieschnick & Co., 892 S.W.2d at 439; Republic Ins. Co., 825
S.W.2d at 783; United Bank Metro v. Plains Overseas Group, 670
S.W.2d 281, 283 (Tex. App. 1983, writ ref'd n.r.e.).

     1.     Application to the Smiths

     Initially, the Smiths allege that the district court erred

in granting the transfer motion, because, according to the

Smiths, "the RTC did not show that other legal process could not

be readily used to collect the Virginia judgment."   This

contention is unfounded.

     Texas courts have noted that "[t]he Turnover Statute only

requires that non-exempt property cannot be readily attached."

Childre v. Great Southwest Life Ins. Co., 700 S.W.2d 284, 288

(Tex. App. 1985, no writ).    Neither the statute nor the case law

provides a corresponding requirement that the judgment creditor

demonstrate that other methods of collecting the judgment have

failed.   See Hennigan v. Hennigan, 666 S.W.2d 322, 323 (Tex. App.

                                 11
1984, writ ref'd n.r.e.) (rejecting the argument that the former

version of the turnover statute requires a judgment creditor to

"`first exhaust his legal remedies of attachment, execution,

garnishment, etc., prior to seeking relief'").     In the instant

case, the district court determined that the Smiths' interest in

the various assets could not be readily attached, and we find no

error in that conclusion.

     Next, the Smiths' allege a variety of errors surrounding the

district court's determination of their rights in the Park Club

stock.   These claims are also without merit.    As noted above, the

Texas Turnover Statute cannot be used to determine a party's

substantive rights.    See Cross, Kieschnick & Co., 892 S.W.2d at

439; Republic Ins. Co., 825 S.W.2d at 783; Cravens, Dargan & Co.,
770 S.W.2d at 576.    In the instant case, however, the district

court did not violate the law surrounding the turnover statute as

far as the Smiths' interest in the stock was concerned.

     The turnover statute allows the court to reach the assets

owned and subject to the control of a judgment debtor, even if

those assets are in the hands of a third party.      Norsul Oil &

Mining v. Commercial Equipment Leasing Co., 703 S.W.2d 345, 349

(Tex. App. 1985, no writ); see also Beaumont Bank, 806 S.W.2d at

227 (noting that the turnover statute's purpose is to determine

whether an "asset is in the possession of the judgment debtor or

subject to the debtor's control"      (emphasis added)).

     Texas courts have applied the turnover statute to a wide

variety of property, including property which the judgment debtor

                                 12
did not own outright.     See, e.g.,   Daniels v. Pecan Valley Ranch,

831 S.W.2d 372, 375 (Tex. App. 1992, writ denied) (finding that

the turnover statute may be used to reach payments from an

annuity), cert. denied, 113 S. Ct. 2944 (1993); Ross v. 3D Tower

Ltd., 824 S.W.2d 270, 272 (Tex. App. 1992, writ denied) (applying

the statute to "attorney's accounts receivable of present,

future, or unearned fees"); Cain v. Cain, 746 S.W.2d 861, 863

(Tex. App. 1988, writ denied) (noting that the turnover statute

could be used to reach military retirement pay); First City Nat'l

Bank, 718 F.2d at 405-06 (upholding the use of the turnover

statute to reach future payments from a testamentary trust);

Matrix, Inc. V. Provident American Ins. Co., 658 S.W.2d 665, 668

(Tex. App. 1983, no writ) (finding that the turnover statute

could be used to reach a promissory note).     All of those cases

comply with the Texas Supreme Court's observation that, in a

turnover proceeding, a court properly may "order the debtor to

turn over as much of the [property] as is in the possession or

control of the debtor."     Beaumont Bank, 806 S.W.2d at 227.   Thus,

in the instant case, the turnover proceeding was a proper vehicle

to reach the assets in the possession or control of the Smiths.

     There is no dispute that, although their interest was

encumbered by the pledge agreement to Fuqua, the Smiths continued

to own the Park Club stock.    Under the pledge agreement between

Smith and Fuqua, Smith retained full voting rights attributable

to the stock and Smith's only limitation in his ability to

dispose of the stock was the requirement of Fuqua's written

                                  13
consent to a sale.    In light of the pledge agreement and Fuqua's

testimony, the district court determined that Smith retained

control of the Park Club stock, and we find no error in this

conclusion.   It is clear 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 Park Club stock to the district

court.

     The Smiths also argue that ordering the turnover of the Park

Club stock violates the open courts doctrine.       Specifically, the

Smiths contend that because Park Club owns a judgment against the

RTC, obtained by Smith and Park Club in separate litigation, turn

over of the Smiths' interest in the Park Club stock will

eliminate their ability to collect that judgment.       This argument

is insupportable.    The open courts doctrine, embodied in the

Texas Constitution, "provides a litigant a specific guaranty of a

right of access to the courts."     Criswell v. Ginsberg & Foreman,

843 S.W.2d 304, 306 (Tex. App. 1992, no writ).       Under this

doctrine, there is authority that a cause of action is not

amenable to a turnover order.     Id.    That, however, is not the

situation in the instant case.    Here, the turnover order is

applied only to stock; no cause of action waiting for

adjudication is implicated.    The judgment owned by Park Club is

merely an asset of the company which should be reflected in the

value of its stock.

     The Smiths raise two other issues in their appeal, both of

which can be disposed of easily.       In response to the district

                                  14
court's order, Patricia Smith testified on April 11, 1994.       The

Smiths contend that the court erred in ordering the testimony

over Patricia Smith's asserted spousal and Fifth Amendment

privileges.   Specifically, the Smiths argue that "[t]he district

court's adoption of the RTC's aggressive pressure on Patricia

Smith demonstrates that constitutional and statutory rights and

fundamental fairness were inferior to the RTC's improper motive

to gain control over the Park Club, Inc. stock."    It is unclear

precisely what the Smiths complain about, but we will not reverse

a district court's evidentiary rulings unless they are erroneous

and substantial prejudice results.    The burden of proving

substantial prejudice lies with the party asserting error.       FDIC

v. Mijalis, 15 F.3d 1314, 1318-19 (5th Cir. 1994).    Patricia

Smith has already testified, and the Smiths fail to allege

prejudice resulting from the court's decision requiring Patricia

Smith to testify.   Accordingly, we reject the Smiths' claim of

error.

     The Smiths also argue that the district court erred in

awarding attorney's fees in conjunction with the turnover because

the turnover order itself was improper.    Since we find that the

district court did not err in its turnover order as it applied to

the Smiths, we reject this contention.

     2.   Application to Fuqua

                                 15
     The district court's order voiding the pledge to Fuqua,

however, presents a different situation.   After the December 10,

1993 hearing, when the pledge agreement was revealed, the RTC

altered its motion for turnover and requested that the district

court "declare that the pledge of the Park Club, Inc. stock to

Fuqua [is] void."   As noted above, after a hearing in which Fuqua

testified, the district court accepted the RTC's invitation and

declared that, "Smith's pledge of Park Club, Inc. stock to

[Richard] Fuqua is void."   This was error.4

     There is little doubt that the Texas turnover statute cannot

be used to litigate the property rights of third parties.     See,

e.g.,    Republic Ins. Co., 825 S.W.2d at 783.   Applying this rule,

the Texas Supreme Court recently stated that the turnover statute

could not be used to reach a judgment debtor in her individual

capacity when a judgment imposed liability on that individual in

her capacity as representative of an estate.     Beaumont Bank, 806

     4
        We are sympathetic to the district court's position in
this case, since it appears that the court was led down the
primrose path by the RTC. As noted above, in proceedings before
the district court, the RTC vigorously argued that the district
court should declare the stock pledge void. At oral argument
before this court, however, the RTC took a different tack,
stating that "to the extent that the judge voided the . . .
obvious fraudulent transfer, she just didn't have the
jurisdiction to do it." We recognize that the Smiths' pledge of
the Park Club stock to Fuqua may have been, at a minimum, highly
suspect. Regardless of the propriety of that transaction,
however, we cannot condone the tack taken by counsel for the RTC
with the district court. Many of the problems of this appeal
(and a great deal of public and private expense) could have been
avoided had the RTC done a more careful job in the district
court.
16
S.W.2d at 227.   Similarly, a Texas appellate court concluded that

it was improper to use the turnover statute to reach the assets

of corporations which were allegedly alter-egos of the judgment

debtors without a separate proceeding that pierced the corporate

veil.   United Bank Metro, 670 S.W.2d at 284 (cited with approval

in Beaumont Bank, 806 S.W.2d at 227); see also Cravens, Dargan &

Co., 770 S.W.2d at 576 (holding that the turnover statute could

not be used to reach funds deposited with state agency when the

rights to the funds would be contested because the turnover

statute could not be used "to determine the ownership of the

deposited funds").   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 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.

                                17
     Fuqua's petition for a writ of mandamus is denied as moot

insofar as it seeks an order rescinding the district court's

determination that the pledge was void.      Fuqua's petition also

seeks the return of the certificate evidencing the Park Club

stock.   We are not persuaded that leaving the certificate in the

registry of the district court until the validity of Fuqua's

interest in the stock is determined will impair whatever interest

Fuqua has in the stock.   Accordingly, we deny Fuqua's petition to

the extent that it seeks the return of the certificate evidencing

the Park Club stock.

                          IV.   CONCLUSION

     For the foregoing reasons, we REVERSE the district court's

orders insofar as they voided the pledge agreement and ordered

the sale of the Park Club stock.      We AFFIRM the district court's

orders in all other respects, including the orders compelling the

Smiths to turnover their interest in the Park Club stock and

other assets.   We DENY Fuqua's petition for a writ of mandamus.

Each party shall bear its own costs.

                                 18