To the Victor Belong the Spoils? Turnover Receivership as a Post-Judgment Remedy

To the Victor

Belong the Spoils? Turnover Receivership as a Post

To the victor belong the spoils, so the saying goes. Though under Texas civil law system, that is not always the case. In many cases, if a litigant is forced to take a case to judgment, the battle may be won, but the war to recover assets has just begun. Texas is a notorious “debtor haven” and has been since before its birth as a state. 1 Texas has a number of statutes that effectively protect debtors, and there remains a judicial culture that sympathizes with debtors.

A prudent litigant should obtain collection advice well before judgment. Depending on the situation, claimants may be able to lock down an adversary’s assets through pre-judgment remedies and attach real property or freeze bank accounts. In addition, claimants can conduct discovery in the case-in-chief useful to collection, such as banking habits, the identity of key vendors, lenders, accountants, etc. However, in some cases, it is simply not possible to lock down assets or obtain valuable financial information pre-judgment — and the chase for assets begins post-judgment.

Immediately upon obtaining a judgment, there are several post-judgment remedies available to the judgment creditor, including garnishment of bank accounts, turnover relief, and perhaps the most powerful tool, turnover receivership. 2 This article deals solely with turnover receivership.

Judgment Remedy

Brief History In 1979, the Texas Legislature enacted a statute, commonly known as the “Turnover Statute,” which is a procedural device intended to help a judgment creditor collect its judgment. 3 The Turnover Statute provided creditors with a procedure to collect intangibles, such as accounts receivables and the debtor’s interest in claims, which were easily concealed prior to the enactment of this statute. Among the procedural devices offered by the Turnover Statute, perhaps the most powerful tool was the authority granted to the court to appoint a receiver.

What is a turnover receivership? The Turnover Statute authorizes a court to appoint a receiver to take possession of the debtor’s non-exempt property, sell it, and pay the proceeds to the judgment creditor. 4 This type of receivership is for liquidation and should not be confused with a receiver appointed under Chapter 64 of the Texas Civil Practices and Remedies Code. 5 A Chapter 64 receiver is appointed to manage or preserve a business or operation before judgment.

To collect, the turnover receiver’s powers are defined by the order of appointment. Almost always, these orders are drafted by the creditor’s attorney, or a receiver. In some jurisdictions, there are established receivership orders, as some judges prefer their own specific order. To save an extra hearing, or written submission, it is a good idea to contact the court clerk for advice, and if possible, to find a recent receivership order the judge has signed. In Houston state courts, there are hearings on receivership applications almost every week. Justice of the peace courts, however, are less predictable.

The typical receivership order empowers the receiver to take any of the following actions to collect: Levy on bank accounts: Receivers can monitor and levy on the debtor’s bank account(s) at will. Receivers can request balance information and freeze any account by simply delivering notice to the bank, 6 and they may do so at multiple banks, if needed. By contrast, a judgment creditor must file a lawsuit to garnish a bank account and serve each bank with a writ, via constable, to freeze any accounts. 7 Receivers also have more discovery powers to identify the judgment debtor’s bank, including requests for information under the Texas Finance Code 8 and subpoena powers. Overall, receivers have more power and flexibility than judgment creditors to discover bank accounts, and freeze them, to more effectively and efficiently put pressure on most debtors.

Obtain information from third parties: Receivers can demand documents from third parties, such as customers, vendors, landlords, and lenders, to obtain valuable information such as current banking information, based on payment records.

Levy on accounts receivable: Receivers may contact customers and demand monies owed to the debtor be paid to the receiver. This gives the receiver immense power over almost any operating business. File a lawsuit: To collect on claims held by the debtor, receivers can file a lawsuit in the shoes of the debtor.

Search the debtor’s office: Receivers ‘‘ To the victor belong the spoils, so the saying goes. Though under Texas civil law system, that is not always the case.”

may enter the premises of a debtor’s business and search for valuable information, especially to find out where the debtor keeps money, including bank information or online depositories such as Paypal, etc.

Capture the mail: To gather valuable information, receivers may capture the debtor’s mail.

Who may serve as receiver? The Turnover Statute is silent with regard to who may serve as turnover receiver. However, Texas courts have looked to Chapter 64 for guidance as to receivership qualification. Chapter 64 requires that a receiver be a citizen and qualified voter in Texas at the time of appointment and not be a party or person interested in the matter. 9 In Houston, the county courts have a roster similar to mediator lists of receivers who the judges appoint on a rotating basis. District court judges may also have preferred receivers. The local justice of the peace courts do not have

standardized procedures for appointing receivers. Regardless of the court’s practice, counsel may, and should, recommend that the judge appoint a particular receiver. It is obviously important to have a competent and motivated receiver appointed for effective collection.

How much does a receiver cost? The order appointing the receiver must proscribe the receiver’s fee and expenses. Typically, receivership orders provide a 25% contingency fee to the receiver, which is taxed as costs of court, and is added on top of the judgment debt owed. In practice, the receiver will take 25% of all proceeds collected, which will be taxed as court costs against the judgment debtor, until the total balance of the judgment debt is paid. The judgment creditor is entitled to recover attorney’s fees incurred to obtain the appointment of the receiver. 10 The judgment creditor should expect to pay the receiver’s bond, which is usually nominal.

How do you get a receiver appointed? To have a receiver appointed, the judgment creditor has the burden to satisfy the elements established by the Turnover Statute, which requires a factual showing that (1) the judgment remains unsatisfied, and (2) the judgment debtor owns non-exempt assets. 11 The elements to obtain a turnover order are the same as the elements to have a turnover receiver appointed. It is worth noting that in 2017, the Texas Legislature eased the burden of proof for judgment creditors; previously, evidence was required that the non-exempt assets owned by the judgment debtor were “not readily leviable by ordinary process.” 12 Now, regardless of the date when judgment was rendered, judgment creditors need only show evidence of non-exempt assets. Even if the elements are shown, the trial court has discretion whether to appoint a receiver. 13 The Turnover Statute does not specify, or restrict, the manner in which evidence may be received, nor does it require that such evidence be in a particular form, that it be at any level of particular specificity, or that it reach any level of particular quantum before the court may grant relief. 14 In other words, the judgment creditor must present some evidence to the court with its application for turnover receiver, whether affidavit, verification, or evidence already on the record, to prove its elements. 15 Notice of the hearing or written submission date, and opportunity for the judgment debtor to be heard, are not required under the Turnover Statute. 16

What is the practice in Houston? Receivership is parochial, or governed by the customs of each jurisdiction. In Houston, it is customary that the judgment creditor set its application for turnover receiver for oral hearing and provide notice to the judgment debtor of the hearing. As is typically the case, justice of the peace court is a bit of a wildcard. Other Texas state courts may grant receivership applications on ex parte hearings, or by written submission. Moreover, it is not uncommon for some judges to require judgment creditors to have exhausted other remedies, including a writ of execution and writ of garnishment, providing yet another reason to check the judge’s docket for recently granted receivership applications, or speak with the judge’s clerk.

A judgment creditor has some options as to the court in which it files its receivership application because, in addition to the trial court that rendered the judgment, the creditor may bring an independent proceeding in any court of appropriate jurisdiction. 17

Is the receiver permitted to collect or take property from third parties? Unless the receiver files another lawsuit against the third party, the general rule is that there is no turnover of property held by a third party, who is a stranger to the underlying judgment. However, there are some limited exceptions to this rule, which vary depending on the jurisdiction. The most obvious exception is money or property held by a bank. Another example is when a receiver obtains the shares in a corporation owned by the judgment debtor, the receiver can sell the corporation’s property, as long as the creditors of the corporation are not prejudiced. 18 In addition, there are Texas cases that hold that turnover may be had against property in the hands of third parties if the judgment debtor controls the property. 19

Shawn M. Grady is a collections attorney for suppliers, construction contractors, carriers, healthcare providers, lenders, and other businesses. He is Board Certified in Creditors’ Rights Law by the American Board of Certification (ABC).

Endno tes 1. See Shawn M. Grady, Wanted Dead or Alive: Debtors and Desperados, HOUS. LAW. July/Aug. 2016, at 14. 2. See Childre v. Great Sw. Life Ins. Co., 700 S.W.2d 284, 286-87 (Tex. App.—Dallas 1985, no writ). 3. See Mike Bernstein, Nuts and Bolts of Turnover Receivership, State Bar of Texas CLE: Collections and Creditors’ Rights 1 (2019). 4. See TEX. CIV. PRAC. & REM. CODE § 31.002(b)(3). 5. See TEX. CIV. PRAC. & REM. CODE § 64.001 et seq. 6. Se e TEX. CIV. PRAC. & REM. CODE § 31.002(g); see also TEX. FIN. CODE § 59.008. 7. See TEX. CIV. PRAC. & REM. CODE § 63.001–63.008; see also TEX. R. CIV. P. 657–679 (providing procedures governing garnishments). 8. Se e also TEX. FIN. CODE § 59.006. 9. See TEX. CIV. PRAC. & REM. CODE § 64.021. 10. Se e TEX. CIV. PRAC. & REM. CODE § 31.002(e). 11. See Hamilton Metals, Inc. v. Glob. Metal Servs., Ltd., No. 14-17-00670-CV, 2019 WL 3792733, at *3–4 (Tex. App.—Houston [14th Dist. August 13, 2019, no pet.). 12. See id. at *3 (citing Act of May 24, 2017, 85th Leg., R.S., ch. 996, § 2, 2017 Tex. Sess. Law Serv. 4026, 4026). 13.See TEX. CIV. PRAC. & REM. CODE § 31.002(b). 14. Se e Tanner v. McCarthy, 274 S.W.3d 311, 322 (Tex. App.—Houston [1st Dist.] 2008, no pet.). 15. The Fourteenth Court of Appeals of Texas recently held that an application, which included a verification by the judgment creditor’s counsel that the CEO of the judgment creditor had good faith reason to believe that the judgment debtor owned non-exempt assets that fell within the general categories, was not legally sufficient evidence to satisfy the Turnover Statute. See Hamilton Metals, Inc., 2019 WL 3792733, at *5–6. 16. Se e Ross v. 3D Tower, Ltd., 824 S.W.2d 270 (Tex. App.—Houston [14th Dist.] 1992, writ denied); see also Cantu v. Seeman, No. 01-09-00545-CV, 2012 WL 1564536, at *4 (Tex. App.—Houston [14th Dist.] May 3, 2012, pet. denied) (mem. op.). 17. Se e TEX. CIV. PRAC. & REM. CODE § 31.002(a) and (d). 18. See Newman v. Troy, 926 S.W.2d 629 (Tex. App.—Austin 1996, writ denied). It should be noted that LLCs are not treated the same as corporations, as it relates to turnover of property. 19. See Bernstein, supra note 3, at 10–16 (discussing various Texas cases involving this issue).