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