Summary
requiring movant to file an application for fees and costs if a reasonable fee could not be resolved by agreement between the parties
Summary of this case from Carmack v. Park Cities Healthcare, LLCOpinion
No. 3-01-MC-082-L
February 27, 2002
FINDINGS AND RECOMMENDATION OF TILE UNITED STATES MAGISTRATE JUDGE
Plaintiff World Fuel Services Corporation has filed separate applications for turnover relief and a charging order against Defendant Donald F. Moorehead, Jr. For the reasons stated herein, the application for turnover relief should be granted and the application for a charging order should be denied.
I.
This is an ancillary proceeding to enforce a money judgment entered against defendant in the United States District Court for the Southern District of Florida. World Fuel Services Corp. v. Moorehead, No. 01-1803-CIV. On July 16, 2001, plaintiff obtained a judgment in the principal sum of $4,978,953, together with pre-judgment interest of $121,027.24, attorney' s fees, and court costs. Plaintiff registered the judgment in the Northern District of Texas on September 19, 2001. To date, defendant has made three payments totaling $700,000, leaving a balance of approximately $4,399,980. The judgment is final, subsisting, and remains unsatisfied.
The statute governing registration of foreign judgments provides, in relevant part:
A judgment in an action for the recovery of money or property entered in any court of appeals, district court, bankruptcy court, or in the Court of International Trade may be registered by filing a certified copy of the judgment in any other district . . . when the judgment has become final by appeal or expiration of the time for appeal or when ordered by the court that entered the judgment for good cause shown . . . A judgment so registered shall have the same effect as a judgment of the district court of the district where registered and may be enforced in a like manner . . .28 U.S.C. § 1963.
During the past six months, plaintiff has conducted extensive discovery in an attempt to locate assets to satisfy the judgment. For the most part, defendant has cooperated with plaintiff's discovery efforts. Defendant, his wife, and administrative assistant all were deposed and have produced "hundreds of pages" of documents concerning the value, location, and status of his assets. However, plaintiff has learned that many of these assets have been transferred, pledged, swapped, or otherwise encumbered. On October 15, 2001, the United States Marshal served a writ of execution but was unable to locate any property subject to execution.
Frustrated by its inability to collect this judgment by traditional means, plaintiff seeks an order requiring defendant to turn over his non-exempt assets to the marshal or a court-appointed receiver. Among the assets identified by plaintiff are stocks, bonds, debentures, options, accounts receivable, and other property interests that have been pledged to various third parties. Plaintiff also seeks a charging order against defendant's interest in two limited partnerships and a limited liability company. The parties have fully briefed the issues and were given an opportunity to present additional evidence and argument at a hearing on February 1, 2002. This matter is now ripe for determination.
II.
A federal court may enforce a money judgment "in accordance with the practice and procedure of the state in which the district court is held." FED. R. Civ. P. 69(a). Under the Texas turnover statute, a judgment creditor is entitled to aid from a court in order to reach property to satisfy a judgment. See TEX. CIV. PRAC. REM. CODE ANN. § 31.002, et seq. (Vernon 1997 Supp. 2001). In order to obtain a relief under this statute, the judgment creditor must show that: (1) the debtor owns property; (2) that cannot be readily attached or levied on by ordinary legal process; and (3) is not exempt from attachment, execution, or seizure. Id. § 31.002(a). See also Admiral Insurance Co. v. Baker, 1998 WL 790815 at 2 (N.D. Tex. Sept. 28, 1998) (Kaplan, M.J.), citing Criswell v. Ginsberg Foreman, 843 S.W.2d 304, 306 (Tex.App.-Dallas 1992, no writ). Once these requirements are met, the court may issue an injunction, appoint a receiver, or order the debtor to turn over non-exempt property for execution. TEX. CIV. PRAC. REM. CODE ANN. § 31.002(b); see also Admiral Insurance Co., 1998 WL 790815 at 2. The trial court has wide discretion in determining whether and in what form turnover relief should be ordered. See Admiral Insurance, 1998 WL 790815 at 2, citing Brink v. Ayre, 855 S.W.2d 44, 46 (Tex.App.-Houston [14th Dist.] 1993, no writ); Buttles v. Navarro, 766 S.W.2d 893, 894 (Tex.App.-San Antonio 1989, no writ).
The Texas turnover statute is purely procedural in nature and does not provide for the determination of substantive rights. Resolution Trust Corp. v. Smith, 53 F.3d 72, 77 (5th Cir. 1995), citing Cross, Kieschnick Co. v. Johnston, 892 S.W.2d 435, 439 (Tex.App.-San Antonio 1994, no writ). "[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." Smith, 53 F.3d at 77, quoting Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223, 227 (Tex. 1991). However, the court may reach assets in the hands of third parties if the debtor retains control of those assets. Santibanez v. Wier McMahon Co., 105 F.3d 234, 239 (5th Cir. 1997), citing Norsul Oil Mining Ltd. v. Commercial Equipment Leasing Co., 703 S.W.2d 345, 349 (Tex.App.-San Antonio 1985, no writ). But see Parks v. Parker, 957 S.W.2d 666, 668 (Tex.App.-Austin 1997, no writ) (declining to follow line of cases authorizing turnover relief to reach property owned by debtor but held by third party).
III.
The parties largely agree on the assets at issue in this turnover proceeding. of these assets, the following have been pledged to third parties:
Asset Secured Party
1. 7 million shares of preferred CIB Bank stock in EarthCare Company
2. 1, 072, 000 shares of common CIB Bank stock in EarthCare Company
3. 12% Debenture to secure CIB Bank $7.5 million loan to EarthCare
4. Brokerage Account with First Southwest Founders Equity Group
5. 2, 750 shares of common stock Bank of America in Texas Air Center, Inc.
6. 35% limited partnership interest Bank of America in V.I. Disposal Corporation
7. $600,000 receivable from Thomas Hughes Eagle Point Golf Club, Inc.
8. 8% Subordinated Note #4 from Bank of America Founders Equity Group, Inc.
9. 8% Subordinated Note #6 from Bank of America Founders Equity Group, Inc.
10. $176,000 receivable from Thomas Hughes Felipe Gonzales
11. Receivable from SWV CIB Bank
12. 49% limited partnership interest Unknown in Moorehead Property Company, Ltd.
13. Limited partnership interest in Bank of America Sagemark Capital, L.P.
14. Membership interest in Founders G. Moorehead and Cash Management V. LLC Mark Smith
According to defendant, the following assets have been transferred, assigned, or otherwise disposed of:
Asset Disposition
1. 190 shares of common stock Transferred to Norma Stachura in Highland Holdings, Inc.
2. $384,597 receivable from Debt forgiven E.A. Houston
3. $49,500 receivable from No longer owned by debtor Dale Moorehead
4. $282,932 receivable from Sold to Thomas Hughes Paradise Waste
The following unencumbered assets are still owned by defendant:
1. Contract rights in EarthCare Option Agreement
2. 37, 500 shares of common stock in Earthwise Technologies, Inc.
3. $40,000 receivable from T. Burrell
4. $329,760 receivable from Cardinal Waste
5. $35,000 receivable from Arturo Davila
6. F2 Entertainment Debenture $50,000
7. $616,000 receivable from Highway Holdings, Inc.
8. $250,000 receivable from Info Highway
9. $10 million receivable from Robert Smith
10. $141,000 receivable from J. Tucker and J. Pfeffer
11. Partnership interest in Elk Dance, Colorado, LLC
12. Stock in General Waste Corporation
13. Royalty interest in South Carolina landfill
( See Def. App., Exh. 1; Plf. Am. App., Exh. A).
Defendant concedes that none of these assets are exempt from attachment, execution, or seizure. Instead, he challenges the two other predicates for turnover relief by arguing that: (1) the pledged assets are not in his possession or control; and (2) plaintiff has not shown that the assets cannot be readily attached or levied on by ordinary legal process. The Court will address each argument in turn.
A.
Defendant correctly notes that the Texas turnover statute does not authorize a court "to issue orders against those who . . . are not judgment debtors or under the judgment debtor's control." See Buller, 806 S.W.2d at 226. However, the mere fact that assets have been pledged to third parties does not necessarily mean that they are not owned by or subject to the control of the debtor. Smith, 53 F.3d at 78; Norsul Oil Mining, 703 S.W.2d at 349. Texas courts have applied the turnover statute to a wide variety of property, including property which the judgment debtor did not own outright. See, e.g. Daniels v. Pecan Valley Ranch, 831 S.W.2d 372, 377 (Tex.App.-San Antonio 1992, writ denied), cert. denied, 113 S.Ct. 2944 (1993) (payment from annuity); Ross v. 3D Tower Ltd., 824 S.W.2d 270, 272 (Tex.App.-Houston [14th Dist.] 1992, writ denied) (accounts receivable); Cain v. Cain, 746 S.W.2d 861, 863 (Tex.App.-El Paso 1988, writ denied) (military retirement benefits); First City National Bank v. Phelan, 718 S.W.2d 402, 405-06 (Tex.App.-Beaumont 1986, writ ref'd n.r.e.) (future payments from testamentary trust); Matrix, Inc. v. Provident American Insurance Co., 658 S.W.2d 665, 668 (Tex.App.-Dallas 1983, no writ) (promissory note).
With respect to the EarthCare and Texas Air Center stock pledged to CIB Bank and Bank of America, defendant admits that he still retains voting rights attributable to the stock. The pledge agreements themselves make clear that defendant is the lawful owner of the stock and prohibit him only from selling, transferring, assigning, or encumbering the collateral without the permission of the bank. (Def. App., Exhs. 2, 4, 10). Consequently, defendant's interest in this property can be the subject of a turnover order. As the Fifth Circuit stated in Smith:
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 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.Smith, 53 F.3d at 78 (emphases added).
Similarly, the pledge agreements that encumber defendant's other assets do not prevent the Court from granting turnover relief. ( See Def. App., Exhs. 7, 9, 10, 11). There is no question that defendant retains at least some interest in the EarthCare Debenture, the Founders Equity brokerage account, V.I. Disposal Corporation, Moorehead Property Company, Sagemark Capital, Founders Cash Management V, Eagle Point Golf Club, and various other receivables. As such, these assets remain subject to defendant's control. See Bullock v. Foster Cathead Co., 631 S.W.2d 208, 210 (Tex.App.-Corpus Christi 1982, no writ) (noting that general title in pledged property remains with pledgor, "notwithstanding an apparent transfer of legal title to the [pledgee]"). Turnover relief is proper to the extent of defendant's interest in these assets.
Defendant raises a number of constitutional concerns regarding any turnover order issued against a third party who is not before the Court, has no notice of this proceeding, and may not be subject to personal jurisdiction. Indeed, "[a] turnover order that issues against a non-party for property not subject to the control of the judgment debtor completely bypasses our system of affording due process." Ex parte Swate, 922 S.W.2d 122, 125 (Tex. 1996) (Gonzalez, J., concurring). However, the turnover relief granted in this case is not so broad. The Court has not ordered any non-party to turn over money or property owed to defendant under threat of imprisonment. Rather, the Court has appointed a receiver to take possession of defendant's interest in such property and "to collect, sell, or otherwise liquidate those . . . interests after giving proper notice to third parties who also may have an interest in the property." FINDINGS REC. OF MAG. JUDGE, 2/26/02 at 12 (emphasis added). To the extent that defendant even has standing to assert the due process rights of third parties, the turnover order adequately addresses those concerns.
B.
Defendant further argues that plaintiff has not shown that these assets cannot be readily attached or levied on by ordinary legal process. In support of this argument, defendant points out that he has paid $700,000 on the judgment, fully cooperated with plaintiff's post-judgment discovery efforts, and has not tried to conceal any assets. While this may be true, it does not deprive plaintiff of the ancillary remedy of turnover relief. Plaintiff tried to collect the judgment through a writ of execution, but the writ was returned nulla bona. Despite defendant's superficial gestures of cooperation and full disclosure, the evidence shows that he has systematically liquidated, transferred, and encumbered assets in the six-month period after the judgment was entered. The following transactions are illustrative:1. Defendant pledged 7 million shares of preferred stock in EarthCare Company to CIB Bank on September 21, 2001 (Def. App., Exh. 1);
2. Defendant pledged a $600,000 receivable from Eagle Point Golf Club, Inc. to Thomas Hughes on October 9, 2001 ( Id., Exh. 11);
3. Defendant canceled a $384,597 promissory note from E.A. Houston and forgave the debt;
4. Defendant transferred 190 shares of common stock in Highland Holdings, Inc. to his administrative assistant, Norma Stachura, in December 2001; and
5. Defendant assigned a $282,932 promissory note from Paradise Waste to Thomas Hughes on November 15, 2001.
Moreover, defendant's financial condition has dramatically deteriorated over the past six months. His financial statement dated June 1, 2001 shows a net worth of more than $34 million. (Px. 1). Now defendant maintains that he does not have sufficient unencumbered assets to pay the judgment. This evidence convincingly establishes that plaintiff cannot collect the judgment by traditional legal process.
C.
The Court now must determine in what form turnover relief should be ordered. The Texas turnover statute specifically authorizes the court to issue an injunction, appoint a receiver, or order the debtor to turnover non-exempt property for execution. TEX. CIV. PRAC. REM. CODE ANN. § 31.002(b)(1)-(3); see also Admiral Insurance Co., 1998 WL 790815 at 2. In view of the anticipated difficulties in accounting, valuing, and selling defendant's interest in the assets pledged to third parties, the Court finds that the appointment of a receiver is warranted.
1.
The appointment of a receiver in a diversity case is a procedural matter governed by federal law and federal equitable principles. National Partnership lnvestment Corp. v. National Housing Development Corp., 153 F.3d 1289, 1291-92 (11th Cir. 1998). Under Rule 66 of the Federal Rules of Civil Procedure, the appointment of a receiver can be sought "by anyone showing an interest in certain property or a relation to the party in control or ownership thereof such as to justify conservation of the property by a court officer." Santibanez, 105 F.3d at 241, citing 7 MOORE'S FEDERAL PRACTICE ¶ 66.05[1] at 66.21 (2d ed. 1993). Receivers may be appointed "to preserve property pending final determination of its distribution in supplementary proceedings in aid of execution." Id. In addition:
[R]eceivership may be an appropriate remedy for a judgment creditor who seeks to set aside allegedly fraudulent conveyances by the judgment debtor, or who has had execution issued and returned unsatisfied, or who proceeds through supplementary proceedings pursuant to Rule 69, or who seeks to subject equitable assets to the payment of his judgment, or who otherwise is attempting to have the debtor's property preserved from dissipation until his claim can be satisfied.Id., quoting 12 C. WRIGHT A. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2983 at 21-22 (2d ed. 1997). Among the factors that courts have considered as indicating the need for a receivership are: (1) the validity of the claim of the party seeking a receiver; (2) the probability that fraudulent conduct has occurred or will occur to frustrate that claim; (3) imminent danger that property will be concealed, lost, or diminished in value; (4) inadequacy of legal remedies; (5) lack of a less drastic equitable remedy; and (6) the likelihood that appointing a receiver will do more harm than good. Id., citing Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316-17 (8th Cir. 1993).
2.
After carefully reviewing the evidence, the Court finds that all these factors militate in favor of appointing a receiver. There is no question that plaintiff has a valid claim against defendant — in fact, the claim has been reduced to a $5.1 million judgment. At the time this judgment was entered, defendant reported a net worth of more than $34 million. Today, he either lacks the financial resources to pay the judgment or refuses to do so. Most of his assets are pledged or otherwise encumbered, with many of these transactions occurring after the judgment was entered. Defendant also has engaged in debt swaps and other actions in an apparent attempt to avoid seizure of his assets. Although defendant maintains that "these assets have been pledged pursuant to arms-length business transactions," the timing of these transactions at least suggests the possibility of a fraudulent transfer. As defendant continues to liquidate, transfer, and encumber assets, there is an imminent danger that property will be concealed, lost, or diminish in value. The Court has already determined that plaintiff cannot collect the judgment by ordinary legal process. Nor has defendant shown that the appointment of a receiver will "do more harm than good."
The Court notes that three of the transactions — the two pledges to Thomas Hughes and the sale of 190 shares of stock in Highland Holdings, Inc. to Norma Stachura — involved close friends or business associates of defendant. Moreover, the Highland Holdings stock was transferred to Stachura for $1.00.
For these reasons, the Court concludes that a receivership is warranted. However, the Court declines to appoint Richard M. Hull, the receiver candidate recommended by plaintiff. Although Hull is imminently qualified to serve in that capacity, he was affihated with the law firm of Gardere Wynne from 1996-2000. The Gardere firm currently serves as local counsel for plaintiff in this case. Consequently, Hull's impartiality may reasonably be questioned. See Government of the Virgin Islands v. Lansdale, 172 F. Supp.2d 636, 654 (D.V.I. 2001), quoting BLACK'S LAW DICTIONARY 1268 (6th ed. 1990) (receiver is a neutral party "appointed by the court to receive and preserve the property or fund in litigation . . ."). Instead, the Court appoints the following disinterested person to serve as a receiver:
Charles B. Hendricks, Esq. Cavazos, Hendricks, Poirot Dewey, P.C. 900 Jackson Street, Suite 570 Dallas, Texas 75202 Phone: (214) 748-8171 Fax: (214) 748-6750
The receiver should be authorized to: (1) take possession and control of all defendant's non-exempt assets and property interests; (2) collect, sell, or otherwise liquidate those assets and property interests after giving proper notice to third parties who also may have an interest in the property; and (3) pay the proceeds to plaintiff to the extent required to satisfy the judgment. This appointment will take effect after this recommendation is approved by the district judge and upon the filing of the Receiver's Oath and a cash bond in the amount of $1,000, which the Court finds to be an adequate and reasonable bond under the circumstances. Plaintiff should be ordered to advance the costs of this receivership, with such costs taxed against defendant.
Defendant should be ordered to turn over to the receiver all of his right, title, and interest in non-exempt property, together with all documents and records evidencing or relating to such property, including without limitation all original stock certificates, pledge agreements, security agreements, and promissory notes.
Until such time as this property is turned over to the receiver, defendant and all persons acting in concert with him, together with all persons having actual knowledge of this order, should be restrained and enjoined from transferring, concealing, or otherwise disposing of defendant's interest in any property.
IV.
By separate application, plaintiff seeks a charging order against defendant's interest in Moorehead Property Company, Ltd., Sagemark Capital, LP, and Founders Cash Management V. LLC. Section 7.03(a) of the Texas Revised Limited Partnership Act provides, in relevant part:
On application to a court of competent jurisdiction by a judgment creditor of a partner or of any other owner of a partnership interest, the court may charge the partnership interest of the partner or other owner with payment of the unsatisfied amount of the judgment, with interest, may then or later appoint a receiver of the debtor partner's share of the partnership's profits and of any other money payable or that becomes payable to the debtor partner with respect to the partnership, and may make all other orders, directions, and inquiries that the circumstances of the case require.
TEX. REV. CIV. STAT. ANN. art. 6132a-1, § 7.03(a) (Vernon Supp. 2001). A similar provision is applicable to Texas limited liability companies. See id. art. 1528n, § 4.06(A). Since the Court has decided to appoint a receiver to collect, sell, and liquidate all of defendant's non-exempt assets in satisfaction of the judgment — including his interest in any limited partnerships and limited liability companies — a charging order is not necessary. Accordingly, plaintiff's application should be denied.
V.
Finally, plaintiff requests reasonable costs and attorney's fees. See TEX. CIV. PRAC. REM. CODE ANN. § 31.002(e). The Court has discretion whether to award attorney's fees in a turnover proceeding. Thomas v. Thomas, 917 S.W.2d 425, 436 (Tex.App.-Waco 1996, no writ). A number of factors inform that discretion, including: (1) the nature and complexity of the case; (2) the amount in controversy; (3) the amount of time and effort required; and (4) the expertise of counsel. See id. at 437; Murrco Agency, Inc. v. Ryan, 800 S.W.2d 600, 607 (Tex.App.-Dallas 1990, no writ).
The Court determines that plaintiff should be awarded costs and attorney's fees in this case. The parties should be directed to confer in an attempt to agree on a reasonable fee. If this issue cannot be resolved by agreement, plaintiff may file an application for fees and costs within 14 days after this recommendation is approved by the district judge. See FED. R. CIV. P. 54(d).
RECOMMENDATION
Plaintiff's application for turnover relief and the appointment of a receiver should be granted in conformity with the recommendations set forth herein. Plaintiff's application for a charging order should be denied as unnecessary.