Cadleway Properties, Inc. v. Andrews (In Re Andrews) , 239 F.3d 708 ( 2001 )

Revised February 7, 2001
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 99-40532
In The Matter Of: JOE ALVIN ANDREWS, SR.,
Debtor.
___________________
CADLEWAY PROPERTIES, INC.,
Appellant,
versus
JOE ALVIN ANDREWS, SR.,
Appellee.
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99-40832
In The Matter Of: JOE ALVIN ANDREWS, SR.,
Debtor.
____________________
CADLEWAY PROPERTIES, INC.,
Appellant,
versus
JOE ALVIN ANDREWS, SR.; WHATABURGER OF ALICE, INC.;
M. LOUISE ANDREWS; JOE ALVIN ANDREWS, JR.; KATHY A. REESE;
MICHAEL BOUDLOCHE, Trustee,
Appellees.
*****************************************************************
99-40837
In The Matter Of: JOE ALVIN ANDREWS,
Debtor.
___________________
CADLEWAY PROPERTIES, INC.,
Appellant,
versus
JOE ALVIN ANDREWS; WHATABURGER OF ALICE, INC.;
M. LOUISE ANDREWS; JOE ALVIN ANDREWS, JR.; KATHY A. REESE;
MICHAEL BOUDLOCHE, Trustee,
Appellees.
Appeals from the United States District Court
for the Southern District of Texas
January 19, 2001
Before JOLLY, HIGGINBOTHAM, and EMILIO M. GARZA, Circuit Judges.
PER CURIAM:
This case presents the question of whether a judgment debtor,
forced to turn over his pending bankruptcy court claims to a
sheriff for execution, retains any right to payment from the
bankruptcy debtor sufficient to grant him standing to appeal
adverse rulings on those claims. We hold that he does.
I
Cadleway Properties, Inc. (“Cadle”) won a judgment of
approximately $1 million against the debtor Joe Alvin Andrews, Sr.
When Andrews filed for bankruptcy, Cadle filed a claim in
bankruptcy court based on its $1 million judgment against Andrews.
It also filed a damages claim against the defendants (including
Andrews) for conspiring to take all of Andrews’s non-exempt assets
out of Andrews’s name and render Andrews judgment proof with
2
respect to the $1 million claim. Cadle objected to Andrews’s
discharge.
The bankruptcy court denied Cadle’s objection to the discharge
and ruled that the trustee and not Cadle was the owner of the
separate damages claim. Then, on April 1, 1998, Andrews, the
trustee, and the other defendants filed a joint motion to
compromise all claims, including the damages claim Cadle had
brought. Cadle objected to the compromise claiming that the
trustee could not settle what he did not own.
Meanwhile, David Lobingier brought a turnover proceeding in a
Texas state trial court against Cadle. Cadle had refused to pay
Lobingier the outstanding balances on Lobingier’s judgments against
Cadle.1 In the turnover proceeding, Lobingier sought title to
Cadle’s judgment against Andrews. On May 28, 1998, the state
district court issued a turnover judgment after a trial at which
Cadle participated. The judgment turned over Cadle’s claims in the
Andrews bankruptcy to the Tarrant County Sheriff for sale, the
1
Lobingier obtained three judgments against Cadle, all
apparently arising out of a libel/slander lawsuit. Cadle claims
that the turnover order applies to the satisfaction of only one of
these judgments, and that the judgment has been independently
satisfied. We do not address these claims. Determining whether a
turnover judgment has been satisfied is the responsibility of the
Texas courts, not the federal courts. Since the turnover order has
not been vacated by the state courts, we do not question its
validity.
3
proceeds of which would go to Lobingier.2 Cadle never appealed the
turnover order.
In bankruptcy court, a hearing on the proposed compromise was
held on August 17, 1998. On September 22, 1998, Bankruptcy Judge
Leal entered an order approving the compromise, which would pay
$425,000 to the bankruptcy estate. On November 12, 1998, he
entered a take-nothing judgment as to the separate damages claim.
Andrews received a discharge.
Cadle appealed three decisions to the district court: the
denial of its objection to the discharge action, the order
approving the compromise of the damage claim, and the take-nothing
judgment. The defendants, including Andrews and the trustee, moved
to dismiss the appeal for lack of standing, arguing that the May
1998 turnover order immediately divested Cadle of any ownership
interest in its judgment against Andrews and any other related
claims. The district court granted the motion to dismiss, and
Cadle appealed.
II
The question in this appeal is thus whether Cadle has standing
to appeal the decisions of the bankruptcy court that he attempts to
challenge.3 Under the bankruptcy code, three types of entities
have standing to challenge a debtor’s discharge: trustees,
2
No such sale was ever conducted, however, apparently because
Cadle threatened to sue the Sheriff if he conducted the sale.
3
Cadle’s standing is a question of jurisdiction that we
review de novo.
4
creditors, and United States trustees.4 A “creditor” is defined as
an “entity that has a claim against the debtor that arose at the
time of or before the order for relief concerning the debtor.”5 In
turn, a “claim” is defined in relevant part as “right to payment,
whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured, or unsecured.”6 This
“broadest possible definition” of the term “claim” captures “all
legal obligations of the debtor, no matter how remote or
contingent.”7
Cadle thus has standing as a “creditor” if it has a “claim.”
In other words, Cadle has standing if it has a right to payment
from the debtor Andrews. The $1 million judgment that Cadle won
4
11 U.S.C.A. § 727(c)(1) (2000).
5
11 U.S.C.A. § 101(10)(A).
6
11 U.S.C.A. § 101(5)(A).
7
H.R. Rep. No. 95-595, 95th Cong., 2d Sess., reprinted in
1978 U.S.C.C.A.N. 5963, 6266; see also Lemelle v. Universal Mfg.
Corp., 18 F.3d 1268, 1275 (5th Cir. 1994). Courts have
consistently interpreted the bankruptcy code’s definition of claim
broadly, including even potential claims based on injuries that
have not yet occurred. See, e.g., In re Wheeler, 137 F.3d 299,
300-01 (5th Cir. 1998); In re Jensen, 995 F.2d 925, 928-30 (9th
Cir. 1993); Epstein v. Official Committee of Unsecured Creditors,
58 F.3d 1573, 1577 (11th Cir. 1995). The Third Circuit has taken
a narrower view of “claim,” see In re M. Frenville Co., 744 F.2d
332 (3d Cir. 1984), but this approach has been universally
rejected. See, e.g., Jensen, 995 F.2d at 930 (describing Frenville
as “widely criticized”); Epstein, 58 F.3d at 1576 n.2 (rejecting
Frenville).
5
against Andrews is a enforceable right to payment: it is a legal
claim that has been reduced to judgment. Cadle also made a damages
claim that also was a right to payment, although unliquidated,
contingent, and disputed. This case therefore boils down to
whether Cadle retained a right to payment from Andrews, even if
contingent or disputed, after the turnover order was issued; if so,
Cadle had a claim against Andrews and has standing to appeal the
bankruptcy court’s extinguishment of that claim.
Answering this question requires an interpretation of the
turnover order.8 The turnover order states:
IT IS THEREFORE, ORDERED, ADJUDGED AND DECREED that by
and through this order all of [Cadle’s] right, title and
interest to the Andrews Claim are hereby turned over to
the Tarrant County Sheriff.
The order defines the “Andrews Claim” to include, inter alia,
“[a]ll rights, claims, and/or causes of action belonging to [Cadle]
. . . arising in any manner or in any time in [the Andrews]
bankruptcy proceeding.” On its face, then, the order “turn[s]
over” to the Sheriff the $1 million claim against the Andrews
8
While “federal law determines when [a] claim arises for
bankruptcy purposes,” In re Hassanally, 208 B.R. 46, 50 (9th Cir.
BAP 1997), determining the existence of a claim “requires an
analysis of the interests created by non-bankruptcy substantive
law,” Lemelle v. Universal Mfg. Corp., 18 F.3d 1268, 1274 (5th Cir.
1994). The appellees argue that it is an impermissible collateral
attack for Cadle to argue that the district court did not have the
authority to divest Cadle of its ownership of the Andrews Claims by
the turnover order. See Rooker v. Fidelity Trust Co., 263 U.S. 413(1923). This argument is irrelevant to our decision, because we
interpret the turnover order without questioning the authority of
the state court to enter it.
6
bankruptcy estate and Cadle’s damages claim against Andrews, the
trustee, and the other defendants.
Appellees argue that this should be the end of our inquiry.
Since the claims are no longer Cadle’s, they contend, Cadle has no
standing to appeal the bankruptcy court’s rulings. This argument
ignores the fact that “turn over” has a precise definition,
provided by Texas statute,9 that delimits what is transferred to
the Sheriff by a turnover order. To rely solely on the language in
the order that “all of [Cadle’s] right, title and interest to the
Andrews Claim [was] turned over” only begs the question of what it
means to “turn over” one’s right, title, and interest.
The turnover statute provides the court with three options
once it determines a turnover order is appropriate:
(b) The court may:
(1) order the judgment debtor to turn over
nonexempt property that is in the debtor’s
possession or is subject to the debtor’s
control, together with all documents or
records related to the property, to a
designated sheriff or constable for execution;
(2) otherwise apply the property to the
satisfaction of the judgment; or
(3) appoint a receiver with the authority to take
possession of the nonexempt property, sell it,
and pay the proceeds to the judgment creditor
to the extent required to satisfy the
judgment.10
9
Tex. Civ. Prac. & Rem. Code § 31.002 (2000).
10
Tex. Civ. Prac. & Rem. Code § 31.002(b).
7
Part (b)(1) describes what the state court did in this case.11 It
allows turnover to the Sheriff “for execution.”
“Execution,” like “turn over,” is a term defined by Texas law.
Rules 621 through 656 of the Texas Rules of Civil Procedure define
execution. Execution is a process for enforcing a judgment.12 An
execution for sale of personal property requires a sheriff or
constable (“officer”) to levy upon the property and must provide
for public notice of the sale.13 If the property sold does not
satisfy the execution, the officer may take further action to
satisfy the deficiency.14 Excess proceeds from the sale presumably
are returned to the judgment debtor.15 The judgment debtor may
replevy the seized property by delivery to the officer of a bond
for the value of the property,16 and after replevy may dispose of
11
The state court clearly did not act pursuant to part (b)(3).
Part (b)(2) is addressed below.
12
Tex. R. Civ. P. 621.
13
Tex. R. Civ. P. 631 (execution for sale). See also Tex. R.
Civ. P. 637 (requirement of levy of execution); Tex. R. Civ. P. 650
(requirement of public notice of sale).
14
Tex. R. Civ. P. 651.
15
The rules on execution do not make this explicit. Tex. Civ.
Prac. & Rem. Code § 31.002(b)(3), which creates a process parallel
to execution that uses a receiver rather than the sheriff, makes
this clear. Obviously, a judgment debtor cannot be compelled to pay
through execution sale more than the debtor owes to the judgment
creditor.
16
Tex. R. Civ. P. 644.
8
the property if he pays the officer the value of the property or
forfeits the bond.17
Thus, the judgment debtor is legally compelled to provide the
property to the sheriff for purposes of an execution sale.18 A
turnover order does not transfer title; it places an obligation on
the judgment debtor to deliver the property to the sheriff. It
creates a burden of production, not a conveyance.19 Ownership is
transferred when the property is sold.
All this establishes that even after turnover, the judgment
debtor retains an ownership interest in the levied property until
it is sold. Until the turned-over property is sold, Cadle has a
right to collect the $1 million judgment from Andrews.20 Cadle also
17
Tex. R. Civ. P. 645-46.
18
Bear Stearns & Co., Inc. v. Amad, 919 F.2d 920, 921 (5th
Cir. 1990) (holding that the turnover statute “require[s] the
burden of production of property which is subject to execution to
be placed with the debtor.”), quoting House Comm. on Judicial
Affairs, Bill Analysis, Tex. H.B. 1260, 66th Leg. (1979); see also
Ex Parte Johnson, 654 S.W.2d 415, 418 (Tex. 1983) (quoting the same
passage from the legislative history).
19
Turnover orders frequently require the judgment debtor to
turn over only indicia of ownership, not the property itself. See,
e.g., Reeves v. FSLIC, 732 S.W.2d 380, 382 (Tex. App.—Dallas 1987)
(“[T]he trial court did not go so far as to compel [the judgment
debtor] to make a conveyance. It merely compelled him to surrender
any indicia of ownership.”); Lozano, 975 S.W.2d at 68.
20
Although the turnover order may have restricted Cadle’s
ability to pursue collection of his judgment, this does not
eliminate the fact that Cadle has a claim. In an analogous
context, the Ninth Circuit held that a person’s cause of action
under the ADA against the debtor was a bankruptcy claim, even
though the person had not yet received a right-to-sue letter
9
has a right to payment for his damages claim, contingent upon the
success of that claim.21 A claim for damages that has not been
reduced to judgment is still a “claim” under the bankruptcy act.22
Although the extent of Cadle’s right to payment is contingent on
whether Cadle replevies the judgment,23 whether the sheriff sells
the judgment (if not replevied),24 and how much the judgment sells
allowing her to prosecute the ADA claim. See O’Loghlin v. County
of Orange, 229 F.3d 871, 874 (9th Cir. 2000).
21
We assume here that Cadle is the owner of the damages claim
because ownership of the damages claim is one of the issues on
appeal from the bankruptcy court. The district court did not reach
this issue because of its holding on the issue of standing.
22
See 11 U.S.C.A. § 101(5)(A).
23
Cadle’s right to payment is undisputable if Cadle replevies.
Prior to sale, Cadle may replevy the property by delivering a bond.
This contrasts with In re Vahlsing, 829 F.2d 565 (5th Cir. 1987),
upon which the appellees rely. It held that a creditor has no
standing to pursue adversary claims in bankruptcy when the
creditor’s only basis for doing so was her ownership of a claim
that was earlier dismissed in state court. Dismissal of a claim
precludes any possibility of collecting any money.
24
Even without replevin, Cadle, as a judgment debtor to
Lobingier, has an interest in the collection of the $1 million
judgment (and the damages claim) if the Andrews claims are not
sold. Even if the Tarrant County Sheriff has the right to apply
any payments Andrews make toward Cadle’s debt to Lobingier, Cadle
still has an interest in (1) receiving payment on the judgment
before it is sold and (2) avoiding a deficiency judgment if the
turned-over property is not sold. Thus, Cadle has an interest and
a right to demand payment from Andrews, even if the money goes to
Lobingier, since by extracting payment Cadle reduces his liability.
We have held that a person with a right to sue has a bankruptcy
claim, even if someone else is entitled to the judgment proceeds.
See In re Davis, 194 F.3d 570, 575-77 (5th Cir. 1999) (holding that
administratrix authorized to bring wrongful death suit for the
benefit of decedent’s family had standing to bring a
nondischargeability complaint in bankruptcy).
10
for (if sold),25 even contingent right to payment is a claim under
the bankruptcy code.26
Appellees argue that our reliance on the rules of execution
must be wrong because the turnover statute was intended to provide
a remedy to creditors in addition to execution.27 They correctly
quote Bear Stearns & Co., Inc. v. Amad28 as saying that the turnover
statute creates “an additional and cumulative method to aid in the
collection of [ ] judgment.”29 But they overlook the court’s
explanation of how the statute does this. As noted above, the
turnover statute “require[s] the burden of production of property
which is subject to execution to be placed with the debtor.”30
25
Cadle also has an interest in receiving excess proceeds from
the execution sale, but this is a right to payment from the
sheriff, not from Andrews.
26
11 U.S.C.A. § 101(5)(A).
27
Appellees also contend that, because turnover is different
from execution, the rules governing writs of execution do not apply
to turnover orders. This is nonsense. Turnover orders, like other
final judgments, are enforced by execution. See Tex. R. Civ. P.
622. Texas courts repeatedly refer to the enforcement of turnover
by execution. See Ex Parte Johnson, 654 S.W.2d 415, 418 (Tex. 1983)
(quoting House Comm. on Judicial Affairs, Bill Analysis, Tex. H.B.
1260, 66th Leg. (1979)); Lozano v. Lozano, 975 S.W.2d 63, 68 (Tex.
App.—Houston 1998) (same); Anderson v. Lykes, 761 S.W.2d 831, 833-
34 (Tex. App.—Dallas 1988).
28
919 F.2d 920 (5th Cir. 1990).
29
Id. at 921.
30
Id., quoting House Comm. on Judicial Affairs, Bill Analysis,
Tex. H.B. 1260, 66th Leg. (1979). See also Johnson, 654 S.W.2d at
418 (quoting the same passage from the legislative history).
11
This shifting of the burden of production is the additional remedy
turnover provides. Also, the argument that our holding renders the
turnover statute redundant also ignores parts (b)(2) and (b)(3) of
the turnover statute, which allow for execution-like sales without
requiring the use of a sheriff or constable.
Appellees contend in the alternative that Section
31.002(b)(2), which states that the court may “otherwise apply the
property to the satisfaction of the judgment,” allows the court to
turn over all of Cadle’s interest in its claims. We disagree. Ex
Parte Johnson31 observes that the right to replevy and the
requirements of notice before sale in the execution rules protect
the judgment debtor from premature sale of property due to an
erroneous turnover order or creditor malfeasance.32 Texas courts
have held that a turnover order under Section 31.002(b)(2) must
provide the debtor with some protection from error or malfeasance.33
Consistent with these holdings, we hold that the turnover statute
31
654 S.W.2d 415, 418 (Tex. 1983).
32
See id. at 418; see also Lozano, 975 S.W.2d at 68-69.
Johnson predated the 1989 recodification of the turnover statute at
Tex. Civ. Prac. & Rem. Code § 31.002. Its holding was reaffirmed in
Lozano, 975 S.W.2d at 69 n.8, and Copher v. First State Bank, 852
S.W.2d 738, 739 (Tex. App.—Fort Worth 1993), which held that the
recodification did not effect a substantive change in the law.
33
See Johnson, 654 S.W.2d at 418 (refusing to allow direct
transfer of title from judgment debtor to judgement creditor);
Lozano, 975 S.W.2d at 68-69 (same).
12
as deployed here did not authorize a complete divestiture of the
judgment debtor’s interest in the property.
III
We therefore REVERSE the order of the district court
dismissing Cadle’s three appeals from the bankruptcy court for lack
of standing. We REMAND to the district court to consider the
merits of Cadle’s appeals.
13