Scott Van Dyke and Anglo-Dutch Energy, LLC v. Littlemill Limited, Prosperity Settlement Funding, Inc., Robert M. Press, and Anzar Settlement Funding Corp. , 579 S.W.3d 639 ( 2019 )

Affirmed and Opinion filed May 23, 2019.
In The
Fourteenth Court of Appeals
NO. 14-18-00237-CV
SCOTT VAN DYKE AND ANGLO-DUTCH ENERGY, LLC, Appellants
V.
LITTLEMILL LIMITED, PROSPERITY SETTLEMENT FUNDING, INC.,
ROBERT M. PRESS, AND ANZAR SETTLEMENT FUNDING CORP.,
Appellees
On Appeal from the 61st District Court
Harris County, Texas
Trial Court Cause No. 2004-20712
OPINION
This is an appeal of a release and turnover order. Appellants contend that the
trial court erred in releasing and turning over to appellees all funds remaining in
the court registry after the judgment in the underlying case was satisfied.
Appellants argue that they are third-party secured creditors whose rights to the
funds are superior to those of appellees, who are judgment creditors. Because we
hold that the trial court erred by adjudicating appellants’ substantive property
rights in a turnover proceeding, we reverse the trial court’s order and remand for
further proceedings.
I. FACTUAL AND PROCEDURAL BACKGROUND
The history of the litigation among the parties is lengthy and complex. We
recount only the facts relevant to the current dispute over the funds remaining in
the court registry after the underlying judgment was satisfied.
A. The Parties’ Disputes Leading to the Underlying Judgment
Appellant Scott Van Dyke is an owner and president of appellant Anglo-
Dutch Energy, LLC. Van Dyke is also the majority owner of Anglo-Dutch
Petroleum International, Inc. (ADPI) and Anglo-Dutch (Tenge), LLC (ADT), the
entities involved in the underlying lawsuit.
In 2000, ADPI and ADT sued Halliburton Energy Services, Inc. and another
company. To finance the litigation and stay in business, ADPI and ADT entered
into contracts with others to invest in the Halliburton lawsuit, including appellees
Littlemill Limited, Prosperity Settlement Funding, Inc., Robert M. Press, and
Anzar Settlement Funding Corp. (collectively, the Investors). ADPI and ADT later
settled with Halliburton for $51 million but failed to comply with the payment
obligations of their contracts with the Investors. The Investors sued ADPI and
ADT and eventually obtained judgments against them.1
In the interim, ADPI and ADT sued Greenberg Peden, P.C. and Gerald
Swonke, their legal counsel in the Halliburton lawsuit, in the 61st District Court.
Swonke countersued. In 2007, the court rendered a judgment awarding Swonke
roughly $1.7 million.
1
Appellee Littlemill obtained its judgment and turnover order in a suit filed in the 152nd
District Court, and the other appellees obtained their judgments and turnover orders in a suit filed
in the 127th District Court.
2
ADPI and ADT attempted to supersede the judgment in favor of Swonke
without posting a supersedeas bond by claiming that they had a negative net worth.
In response, Swonke filed a motion contesting the affidavits supporting ADPI and
ADT’s negative net worth claims. In 2007, the 61st District Court rendered an
order granting Swonke’s motion (the 2007 Order). The 2007 Order contained
numerous fact findings, including findings that the affidavits were not credible;
that ADPI, ADT, Van Dyke, and ADE were alter egos of each other; and that
ADPI made almost $20 million in fraudulent transfers to Van Dyke and ADE
“with the actual intent to hinder, delay, or defraud” Swonke. ADPI and ADT did
not appeal the 2007 Order or its findings.
ADPI and ADT eventually were able to deposit cash in lieu of a bond into
the court registry after Van Dyke loaned ADPI $1,086,239.73 specifically for the
purpose of posting a bond in the case against Swonke. The loan agreement
between ADPI and Van Dyke was titled “Promissory Note, Security Agreement &
Collateral Chattel Mortgage.” The money was deposited in the court registry into
account no. 63901. Later, in a nearly identical loan agreement, ADE loaned ADPI
$763,346.56 for the purpose of increasing the amount of the cash bond. That
money was deposited in the court registry into a separate account no. 64056.
The judgment in favor of Swonke was affirmed on appeal, but the Supreme
Court of Texas reversed and remanded the case to the trial court for further
proceedings. See Anglo-Dutch Petroleum International, Inc. v. Greenberg Peden,
352 S.W.3d 445, 453 (Tex. 2011).
B. The Competing Claims for the Supersedeas Funds
While the lawsuit was on remand, Van Dyke, ADE, and the Investors
intervened, each seeking to obtain some or all of the funds remaining in the court
registry. The Investors alleged that they were entitled to collect on the unsatisfied
3
judgments they had obtained in their lawsuits against ADPI and ADT. Van Dyke
and ADE alleged that they held security interests in the funds based on their loan
agreements with ADPI.
In June 2012, the Investors obtained turnover orders against the supersedeas
funds deposited in the court registry in ADPI and ADT’s lawsuit against Swonke.2
Two years later, in May 2014, Van Dyke and ADE each filed Uniform
Commercial Code (UCC) Financing Statements to perfect the claimed security
interests reflected in their loan agreements with ADPI. Both sides filed motions
requesting disbursement of the supersedeas funds, but the court declined to
entertain any requests until after the underlying case was fully concluded.
On remand, a new final judgment was rendered in favor of Swonke but for a
lesser amount. The lawsuit was fully concluded after the judgment was affirmed on
appeal and the Supreme Court of Texas denied further review. See Anglo-Dutch
Petroleum Int’l, Inc. v. Greenberg Peden, P.C., 522 S.W.3d 471 (Tex. App.—
Houston [14th Dist.] 2016, pet. denied). In February 2018, the trial court released
$832,616.78 plus accrued interest to satisfy the judgment in favor of Swonke. As
of that date, the funds remaining in the court registry totaled $1,268,584.03.
Van Dyke, ADE, and the Investors entered into a Rule 11 agreement to
submit their competing claims for the remaining funds to the court on motions to
be filed and served by specific dates, followed by a hearing before the court. Both
sides filed substantive motions, responses, and replies supported by numerous
exhibits.
The Investors sought the release of the funds on common law and statutory
2
Investor Littlemill obtained a turnover order for $173,750.62 of the supersedeas fund in
the court registry that were “(i) ordered released to ADPI or ADT, (ii) available for release or
disbursement to ADPI or ADT or (iii) otherwise released or disbursed to ADPI or ADT.” The
other investors obtained a similarly worded turnover order for $992,813.62.
4
grounds, arguing that the trial court had discretion to release the funds in the court
registry based on the Investors’ unsatisfied judgments, their turnover orders, the
appellate rules, and the fraud findings against ADPI and ADT in the 2007 Order.
The Investors also argued that the trial court had the power to help the Investors
satisfy their judgments by signing its own turnover order. The Investors maintained
that ADPI and ADT, as the depositors of the funds into the court registry, owned
“an unadjudicated claim of an equitable interest in the return of those funds” that
was subject to turnover.
Van Dyke and ADE also sought release of the funds and turnover relief. Van
Dyke moved to disburse and turn over to him the $403,252.55 then remaining in
account no. 63901 after Swonke’s judgment was satisfied. Van Dyke argued that
he was not a judgment debtor; he had prior and superior rights to the funds than the
judgment debtors because he loaned ADPI the funds for the discrete purpose of
posting the funds in lieu of a supersedeas bond; and his interest in the funds was
secured by a promissory note, security agreement, and assignment and pledge of
the funds. Van Dyke also argued that the Investors’ motions must be denied
because it was improper to use a turnover order to determine the parties’
substantive rights. ADE made similar arguments in its motion to disburse and turn
over the $865,331.48 then remaining in account no. 64056 based on its loan
agreement with ADPI.
After hearing the parties’ arguments, the trial court rendered an “Order
Releasing Supersedeas Deposits from the Court’s Registry and Turnover Order”
(the Release and Turnover Order). The court found that the Investors’ motion “is
meritorious on the common-law and statutory grounds set forth therein and
therefore should be granted in its entirety.” In the Release and Turnover Order, the
court made additional findings, including:
5
 As of March 1, 2018, $403,252.55 remains in Harris County District
Clerk CRS Account No. 63901, and $865,331.48 remains in Harris
County District Clerk CRS Account No. 64056. These funds no
longer constitute supersedeas funds because the judgments for which
they were deposited to supersede have been paid in full;
 ADPI and ADT own “present or future rights to property” comprised
of an unadjudicated claim of an equitable interest in the above-
referenced funds still on deposit in the registry of the court as a matter
of law;
 Intervenors [Van Dyke and ADE] did not deposit any funds into this
Court’s registry at any time as a matter of fact and law;
 Intervenors [Van Dyke and ADE] do not own any rights, title or
interests in or to any funds deposited into this Court’s registry as a
matter of fact and law;
 The above-referenced funds cannot readily be attached or levied on by
ordinary legal process; [and]
 The above-referenced funds are not exempt under any statute or other
law from attachment, execution or seizure for the satisfaction of
liabilities[.]
Because the remaining funds were insufficient to fully satisfy the amounts ADPI
and ADT owed to the Investors, the court ordered the court clerk to “immediately
pay” the Investors amounts roughly proportionate to the amount of their
judgments. This appeal followed.
II. ANALYSIS
In a single issue, Van Dyke and ADE contend that the trial court erred in
ordering the almost $1.3 million remaining in the court registry to be paid to the
Investors rather than to them. In the alternative, Van Dyke and ADE argue that
turnover proceedings are procedural in nature and may not be used to determine
the substantive rights of parties and non-judgment debtors without a trial.
6
In response, the Investors contend, as they did in the trial court, that the
court had common law discretion and statutory discretion under the turnover
statute to order disbursement of the funds to them. The Investors also argue that the
trial court had no obligation to conduct a trial or other proceeding before awarding
the funds to them; moreover, Van Dyke and ADE agreed to the resolution of their
competing claims via a motion practice mirroring summary judgment and thus are
not entitled to a “do-over.”
The parties’ briefs raise numerous issues concerning the possible grounds
for the trial court’s determination that only the Investors were entitled to the
remaining funds in the court registry. For example, the parties dispute whether the
trial court could take notice of its findings in the 2007 Order during the
supersedeas proceeding that ADE, ADPI, and ADT were alter egos of Van Dyke
(and each other) to invalidate the loan agreements on the theory that alter egos
cannot enter into contracts with each other because a valid contract requires at least
two parties.3 The parties also dispute the interpretation and legal effect of the
property rights, if any, created by security agreements and assignments contained
in the loan agreements. Among other things, Van Dyke and ADE contend that their
security interests extend to the full amount of the money loaned for “the Bond”
plus all accrued interest and all other awards identified in the documents, while the
Investors contend that the interests granted are limited to only those monies that
are “collected” by ADPI. The parties also dispute when each other’s interests
“attached” for purposes of determining priority in time and whether the collateral
3
While we do not express any opinion concerning the parties’ merits arguments, we note
that the supreme court has held that “an alter ego finding in a post-judgment net worth
proceeding may not be used to enforce the judgment against the unnamed alter ego or any other
nonjudgment debtor, but only to determine the judgment debtor’s net worth for the purposes of
Rule 24 [of the Texas Rules of Appellate Procedure].” In re Smith, 192 S.W.3d 564, 568–69
(Tex. 2006).
7
described in Van Dyke and ADE’s 2014 financing statements should be classified
as “monies” or “general intangibles” for purposes of determining whether Van
Dyke and ADE could perfect a security interest in the funds under the UCC.
We do not address the merits of these arguments, however, because we
conclude that, based on the recent Supreme Court of Texas opinion in Alexander
Dubose Jefferson & Townsend LLP v. Chevron Phillips Chemical Co., the trial
court was not authorized to determine the competing ownership claims of either
the parties or the third-party intervenors in a turnover proceeding. See 540 S.W.3d
577, 585 (Tex. 2018) (per curiam). We also conclude that, consistent with the
appellate opinion on remand in that case, as well as prior precedent, competing
ownership claims must be determined in separate, initial proceedings. See, e.g.,
Alexander Dubose Jefferson & Townsend LLP v. Chevron Phillips Chem. Co., ___
S.W.3d ___, No. 09-14-00313-CV, 2019 WL 1181730 (Tex. App.—Beaumont
Mar. 14, 2019, no pet. h.); Woody K. Lesikar Special Tr. v. Moon, No. 14-10-
00119-CV, 2011 WL 3447491 (Tex. App.—Houston [14th Dist.] Aug. 9, 2011,
pet. denied) (mem. op); Lozano v. Lozano, 975 S.W.2d 63 (Tex. App.–Houston
[14th Dist.] 1998, pet. denied); Republic Ins. Co. v. Millard, 825 S.W.2d 780 (Tex.
App.—Houston [14th Dist.] 1992, no writ). We therefore sustain Van Dyke and
ADE’s first issue as to their alternative argument that a remand for further
proceedings is required.
A. The Turnover Statute
Texas Civil Practice and Remedies Code section 31.002, commonly referred
to as the “turnover statute,” is a procedural device that permits a trial court to order
the judgment debtor to turn over nonexempt property that is in the judgment
debtor’s possession or control, including present or future rights to property. See
Tex. Civ. Prac. & Rem. Code § 31.002; Alexander Dubose, 540 S.W.3d at 581;
8
Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223, 224 (Tex. 1991). The turnover
statute’s purpose is merely to ascertain whether or not an asset is in the possession
of the judgment debtor or subject to the debtor’s control. Buller, 806 S.W.2d at
227. It is not to be used to determine parties’ and non-judgment debtors’
substantive rights or property rights. Alexander Dubose, 540 S.W.3d at 583;
Lozano, 975 S.W.2d at 68.
The turnover statute provides in part:
(a) 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 is
not exempt from attachment, execution, or seizure for the satisfaction
of liabilities.
(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.
(c) The court may enforce the order by contempt proceedings or by
other appropriate means in the event of refusal or disobedience.
(d) The judgment creditor may move for the court’s assistance under
this section in the same proceeding in which the judgment is rendered
or in an independent proceeding.
See Tex. Civ. Prac. & Rem. Code § 31.002(a)–(d).
We review the trial court’s order or judgment in a turnover proceeding for
abuse of discretion. See Buller, 806 S.W.2d at 226. A trial court abuses its
9
discretion when it acts in an unreasonable or arbitrary manner, without reference to
any guiding rules and principles. Id. A trial court has no discretion in determining
what the law is or applying the law to the facts. See Huie v. DeShazo, 922 S.W.2d
920, 927 (Tex. 1996); Marrs v. Marrs, 401 S.W.3d 122, 124 (Tex. App.—Houston
[14th Dist.] 2011, no pet.). Consequently, a trial court’s erroneous legal
conclusion, even in an unsettled area of law, is an abuse of discretion. See Marrs,
401 S.W.3d at 124.
B. The Supreme Court of Texas’s Opinion in Alexander Dubose
In Alexander Dubose, the issue before the supreme court was whether a
post-judgment turnover order that affected the rights of an intervening non-
judgment debtor was a final judgment for purposes of appeal. See 540 S.W.3d at
578. In that case, a law firm intervened in a turnover proceeding seeking a
declaration that based on the law firm’s fee agreement with the judgment debtor,
the law firm owned a portion of the funds the judgment creditor sought from the
judgment debtor. Id. at 579. The law firm also argued that its contractual claim had
priority over the judgment creditor’s claims. Id. The trial court signed a turnover
order that awarded the portion of the funds not in dispute to the judgment creditor
and ordered the disputed funds deposited into the court registry without prejudice
to the parties’ rights to assert claims to those funds. Id. at 579. After further
proceedings, the trial court signed a release order denying the law firm’s claims
and awarding the disputed funds to the judgment creditor. See id. The law firm
appealed the release order, but the Beaumont Court of Appeals dismissed the
appeal for want of jurisdiction on the grounds that the law firm should have
appealed the turnover order rather than the subsequent release order because the
turnover order was the final, appealable judgment. Id. at 580.
On review, the supreme court considered whether the law firm’s failure to
10
timely appeal the turnover order deprived the court of appeals of jurisdiction. Id. at
578. The supreme court began by considering whether the court of appeals erred
by concluding that the turnover order was appealable because it indicated that the
trial court had determined that the judgment debtor owned the disputed funds. See
id. at 582. Contrary to the court of appeals, the supreme court determined that
neither the trial court’s oral statements nor the turnover order finally disposed of
the competing claims. Id. at 582–83. The supreme court also found it worth noting
that, in addition, “there was never a separate, initial proceeding adjudicating [the
law firm’s] claims.” Id. at 583.
The supreme court criticized the court of appeals’ conclusion that the
turnover order reflected a determination of the parties’ substantive ownership
rights because it ran counter to longstanding precedent that “regards turnover
proceedings as being limited to their purely procedural nature and, thus, bars use of
the turnover statute to determine parties’ and non-judgment debtors’ substantive
rights.” See id. at 583 (citing Buller, 806 S.W.2d at 227). The supreme court also
disapproved of the case law relied on by the court of appeals and the judgment
creditor for the proposition that “a non-judgment debtor cannot complain that their
substantive rights were decided in a turnover proceeding if they intervened.” Id. at
585–86. As the supreme court explained: “[T]he turnover statute has no provision
conferring authority on trial courts to decide the substantive rights of the parties
properly before it in a turnover proceeding, let alone the rights of strangers to the
underlying judgment.” Id. at 585.
The supreme court acknowledged that conflicting opinions issued in 1991
have since “caused much confusion” about the permissible scope of turnover
proceedings regarding “(1) how to resolve competing substantive claims to
property sought in a turnover application if the turnover proceeding[] is truly a
11
purely procedural mechanism, and (2) the extent to which a turnover order can
affect the rights of non-judgment debtors.” Id. at 584. However, because neither
the turnover order nor any other judgment reflected a decision on the law firm’s
substantive claims, the supreme court found it unnecessary to “delineate the
appropriate mechanism for resolving competing substantive claims to property
sought in a turnover application.” Id. at 586.
The supreme court then determined that the turnover order did not function
as a mandatory injunction and thus was not a final, appealable order. See id. at 583,
586–88. The supreme court held that the release order, not the earlier turnover
order, was the first determination of the parties’ competing substantive ownership
rights. Id. at 588. Because the law firm timely appealed from the release order, the
supreme court remanded the case to the court of appeals to address the appeal on
the merits. See id. at 588–89.
C. The Court of Appeals’ Opinion on Remand in Alexander Dubose
On remand, the law firm appealed the trial court’s judgment as contained in
the release order. Alexander Dubose, 2019 WL 1181730, at *1. The law firm
claimed ownership rights to a portion of the disputed funds based on its fee
agreement as well as a contractual security interest and attorney’s lien that were
superior to the judgment creditor’s lien. See id. Additionally, the law firm argued
that its property rights as a non-judgment debtor were at issue. Id. at *3. To
determine the appeal, the court of appeals first had to address the issue the supreme
court declined to reach on review: whether and to what extent the trial court could
adjudicate such competing claims in a turnover proceeding. See id. at *1; see also
Alexander Dubose, 540 S.W.3d at 584–85. Based on the record before it, the court
of appeals held that the trial court abused its discretion when it entered the release
order requiring payment of the disputed funds to the judgment creditor without
12
first adjudicating the claims of ownership by the non-judgment debtor in a
separate, initial proceeding. See Alexander Dubose, 2019 WL 1181730, at *8.
To reach its conclusion, the court of appeals first examined the split of
authority among the courts concerning whether substantive claims can be
adjudicated in turnover proceedings. See id. at *4. The court of appeals determined
that a majority of cases have held that turnover proceedings cannot be used to
determine the parties’ substantive rights or be applied to non-judgment debtors. Id.
at *4–5 (collecting cases). The court of appeals also determined that a minority of
cases have allowed for substantive determinations and reaching beyond the
judgment debtor if the trial court made “particular findings.” Id. at *5 (collecting
cases). As the court of appeals found, most of these cases require “at a minimum, a
finding by the trial court that the true judgment debtors are owners of the property
at issue.” Id. The court of appeals distinguished its case from the minority line of
cases because the trial court never made a fact finding that the judgment debtor
owned the disputed funds. Id.
Next, the court of appeals addressed whether the law firm’s post-judgment
intervention enabled the trial court to determine the law firm’s substantive claims.
Id. The court of appeals rejected the judgment creditor’s position that because the
law firm “inject[ed] itself into the proceedings” by intervening it could not
complain about the trial court’s substantive determination. Id. The court of appeals
also cited the supreme court’s rejection of this argument on review. Id. at *6 (citing
Alexander Dubose, 540 S.W.3d at 585). As the court of appeals reasoned:
If we were to agree with [the judgment creditor’s] assertion, we would
be determining [the law firm’s] only options were: (1) forfeit any
interest it had in the funds by failing to intervene; or (2) intervene and
attempt to protect their interest but forfeit any right to complain
regarding a trial court’s abuse of discretion. We do not believe
protecting one’s interest in property post-judgment by intervening in a
13
turnover proceeding forfeits one’s right to complain about a trial
court’s rulings on appeal, especially when a trial court “expand[s] the
scope of the turnover statute beyond its purpose as a purely procedural
device to assist judgment creditors in post-judgment collections.” See
Republic Ins. Co., 825 S.W.2d at 782. If we were to conclude
otherwise, a non-party to the underlying litigation holding a property
interest that is under threat in a post-judgment enforcement
proceeding would, in effect, be left without a remedy.
Id.
Ultimately, the court of appeals aligned itself with the majority of cases
holding that a trial court cannot determine substantive claims in a turnover
proceeding and concluded that “a trial court must hold separate, initial proceedings
adjudicating competing claims of ownership before and apart from the issuance of
a turnover order.” Id. As the court of appeals explained:
We believe this solution affords due process to non-parties who
intervene post-judgment to protect their property interests, while
precluding the trial court from expanding the turnover procedure
beyond its purely procedural nature. By conducting initial, separate
proceedings on claims of competing ownership, a trial court’s
resolution will be distinct from the turnover proceeding. This is
consistent with the turnover statute and long-standing precedent
holding the parties’ and non-judgment debtors’ substantive rights
cannot be adjudicated in a turnover proceeding.
Id. (citation omitted).
The court of appeals also concluded that its holding comports with the
language of section 31.002: “By statute, a judgment creditor is entitled to aid if the
judgment debtor owns property; then, the trial court may reach property the
judgment debtor possesses or controls.” Id. (citing Tex. Civ. Prac. & Rem.
Code § 31.002(a), (b); Buller, 806 S.W.2d at 227; Parks v. Parker, 957 S.W.2d
666, 670 (Tex. App.—Austin 1997, no pet.)). The court of appeals reasoned that
without holding an initial, separate proceeding to determine competing claims of
14
ownership, a judgment creditor seeking turnover could not meet the first element
the statute requires, which is to show that “the judgment debtor owns [the]
property, including present or future rights to property.” Id. at *7 (alterations in
original) (quoting Tex. Civ. Prac. & Rem. Code § 31.002(a)).
Accordingly, the court of appeals held that in light of the competing
ownership claims to the funds, the trial court abused its discretion when it entered
the release order requiring payment of the disputed funds in the court’s registry to
the judgment creditor without first adjudicating the claims of ownership by the
non-judgment debtor in a separate, initial proceeding. Id. at *7–8. The court of
appeals reversed the trial court’s release order and remanded the case for further
proceedings. Id. at *8.
D. The Trial Court Erred in Determining Substantive Rights in the
Turnover Proceeding
In this case, Van Dyke and ADE claim property rights based on security
agreements and assignments contained in their loan agreements with ADPI, while
the Investors claim rights as judgment creditors of ADPI and ADT. These
claimants are neither parties to the underlying judgment nor judgment debtors. Yet,
the trial court finally adjudicated the parties’ rights in the turnover proceeding,
finding that ADPI and ADT own an “unadjudicated claim of an equitable interest”
in the remaining funds, Van Dyke and ADE “do not own any rights, title or
interests in or to any funds,” and the Investors were entitled to all of the funds
based on “the common-law and statutory grounds set forth” in the Investors’
motion.
In light of the supreme court’s recent emphasis on the continued vitality of
prior precedent holding that turnover proceedings are purely a procedural device
that do not authorize trial courts to determine parties’ and non-judgment debtors’
15
substantive rights, we conclude that the trial court abused its discretion by reaching
the merits of the competing claims in the turnover proceeding. See, e.g., Alexander
Dubose, 540 S.W.3d at 584–85; Buller, 806 S.W.2d at 227; Alexander Dubose,
2019 WL 1181730, at *6–7; see also Elgohary v. Herrera Partners, L.P., No. 01-
13-00193-CV, 2014 WL 2538556, at *3 (Tex. App.—Houston [1st Dist.] June 5,
2014, no pet.) (mem. op.) (stating that “the turnover statute does not authorize a
court to issue orders against those who are not judgment debtors or under the
judgment debtor’s control”); Moon, 2011 WL 3447491, at *6 (holding that the trial
court abused its discretion by making a substantive determination that the
appellant’s reimbursement claim was without merit in a turnover proceeding);
Lozano, 975 S.W.2d at 68 (“Texas courts do not apply the turnover statute to non-
judgment debtors. Nor can the turnover statute be used to determine a party’s
substantive rights or property rights of third parties.” (citation omitted)); Republic
Ins. Co., 825 S.W.2d at 783 (explaining that the turnover statute “does not allow
for a determination of the substantive rights of involved parties”).
The Investors dismiss the supreme court’s opinion in Alexander Dubose as
inapplicable, however, arguing that Van Dyke and ADE agreed to resolve the
parties’ competing claims by motion practice and are not entitled to a “do-over”
now that the trial court ruled against them. The Investors point out that Van Dyke
and ADE signed a Rule 11 agreement governing how the competing claims would
be submitted to the trial court, filed separate motions arguing that the trial court
should disburse the funds to them, and even stated in one filing that “this Court has
discretion to enter a judgment for ADE and Van Dyke.” According to the
Investors, Van Dyke and ADE cannot encourage trial courts to proceed in certain
ways or agree to trial court procedures and then complain on appeal that the trial
court erred by proceeding as encouraged or agreed. But the Investors do not
16
explain how the parties’ agreement could confer authority on the trial court to
determine rights it is otherwise precluded from determining in a turnover
proceeding merely because Van Dyke and ADE intervened to protect their
substantive rights to the disputed funds. Cf. Alexander Dubose, 540 S.W.3d at 585
(rejecting the argument that a non-party’s intervention in a turnover proceeding to
protect its interests authorizes a court to adjudicate third-party rights).
The Investors next contend that the trial court’s order can be affirmed on the
common law grounds cited in the Release and Turnover Order based on Burns v.
Bishop, 48 S.W.3d 459 (Tex. App.—Houston [14th Dist.] 2001, no pet.). In Burns,
the depositor of supersedeas funds and two judgment creditors each sought
turnover of the funds remaining in the court registry. Id. at 462–63. A partnership
intervened in the proceeding to claim an interest in the funds based on a
promissory note and assignment from the depositor. See id. at 463. This court
affirmed the trial court’s judgment awarding the remaining funds to the judgment
creditors, noting that “[f]unds on deposit in the registry of a trial court are always
subject to the control and order of the trial court, and the court enjoys great latitude
in dealing with them.” Id. at 467. The Investors maintain that just as in Burns, the
trial court did not abuse its discretion in disbursing the funds to the Investors to
partially satisfy their judgments and turnover orders. Moreover, the Investors
contend that because the relief the trial court granted in Burns was based on the
common law rather than the turnover statute, Alexander Dubose does not apply to
or permit a “do-over” in a new common law proceeding. We conclude that Burns
is not dispositive as the Investors suggest.
In Burns, John Burns made a series of deposits of cash in lieu of a bond into
the court registry in connection with an appeal and settlement of a lawsuit. Id. at
462. Burns borrowed the money for his initial deposit from a family limited
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partnership and assigned to the partnership “all my cash refund up to and including
the principal amount of $117,274.41 plus accrued interest.” Id. After the case was
concluded and the supersedeas funds were paid out, Burns and two judgment
creditors claimed rights in the remaining funds. Id. at 462–63. The partnership later
intervened in the proceeding to request that the trial court award it the money on
deposit. Id. at 463. The trial court found that Burns had a claim to the funds in the
registry against which his creditors could collect, and the partnership’s assigned
claim of any refund due Burns was inferior to the judgment creditors’ claims to the
funds in the registry. Id. Because the judgment creditors’ claims exceeded the
amount remaining after the superseded judgment was satisfied, the trial court
divided the bulk of the funds to the judgment creditors roughly in proportion to the
amount of their claims. Id.
On appeal, this court affirmed, explaining that once the superseded judgment
was satisfied, Burns had the only claim to the funds in the registry until the
judgment creditors asserted their superior claim to Burns’s interest. See id. at 466–
67. In contrast, the partnership’s only claim to the funds was based on the
contingency that the money would be refunded to Burns, and it was further limited
to the $117,274.41 principal plus interest on that amount. Id. at 467. Because
Burns did not receive a refund, the assignment transferred nothing to the
partnership. Id. Even if there had been a refund, the court explained, the
partnership failed to advance a viable legal theory supported by evidence to
recover the specific portion of the funds comprising the principal and interest the
assignment covered. See id. at 467–68. The partnership did not did seek to recover
against Burns, was not awarded the money, and did not appeal. Id. at 467.
Significantly, the court noted that had the partnership possessed a claim to the
unrefunded deposit, the result may well have been different. See id.
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Unlike the partnership in Burns, Van Dyke and ADE claim property
interests in the remainder of the funds deposited into the court registry based on
rights created by both assignments and security agreements contained in their loan
agreements with ADPI, and they have presented legal arguments and evidence in
support of their claims which the Investors hotly contest. More importantly, in both
the trial court and on appeal, Van Dyke and ADE have challenged the trial court’s
authority to determine the parties’ substantive rights in a turnover proceeding—an
issue not raised or discussed in Burns.
While the Investors rely on the trial court’s discretion as exercised in Burns,
Alexander Dubose and the precedent discussed above make clear that a trial court
has no discretion to determine the substantive rights of parties and non-judgment
debtors in a turnover proceeding. See, e.g., Alexander Dubose, 540 S.W.3d at 583;
Buller, 806 S.W.2d at 227; see also Ex parte Swate, 922 S.W.2d 122, 125–26 (Tex.
1996) (Gonzalez, J., concurring) (arguing that “[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” absent “other initial
proceedings”); Elgohary, 2014 WL 2538556, at *4 (“[A]s a purely procedural
mechanism to aid in collecting judgments, a turnover order cannot be used as a
shortcut to avoid judicial proceedings necessary to provide third parties due
process in adjudicating their substantive rights.”). The Investors cite no case
holding that a trial court may exercise its discretion over funds in the court registry
in a manner that allows it to circumvent the limited procedural nature of a turnover
proceeding and disregard third parties’ due process rights. On this record, we
conclude that the trial court abused its discretion when it rendered the Release and
Turnover Order.
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E. Remand for Separate, Initial Proceedings is Required
Having concluded that the trial court abused its discretion, we hold that a
remand for separate, initial proceedings is required in this case. See, e.g.,
Alexander Dubose, 2019 WL 1181730, at *6–7 (concluding that a trial court must
hold separate, initial proceedings adjudicating competing claims of ownership
before and apart from the issuance of a turnover order); Moon, 2011 WL 3447491,
at *6 (recognizing that the turnover statute does not allow for a determination of
the parties’ substantive rights and that the trial court had no discretion to “skip the
trial on the merits and declare a party the winner”) (quotations and alterations in
original omitted); Elgohary, 2014 WL 2538556, at *4 (holding that creditor
“cannot use the turnover statute to determine ownership of disputed funds or
litigate issues of alter-ego”); United Bank Metro v. Plains Overseas Grp., Inc., 670
S.W.2d 281, 284 (Tex. App.—Houston [1st Dist.] 1983, no writ) (holding that
creditor who obtained judgment against individual was not entitled to turnover
order against corporation alleged to be individual’s alter ego until creditor
successfully pierced corporate veil “in a separate trial”); see also Resolution Trust
Corp. v. Smith, 53 F.3d 72, 80 (5th Cir. 1995) (holding that trial court erred in
determining that stock pledge was a fraudulent transfer and thus void in a Texas
turnover proceeding because the validity of the pledge agreement “must be
challenged in a further proceeding.”).
As discussed above, the court of appeals on remand in Alexander Dubose
found that a minority of Texas cases have permitted substantive determinations in
turnover proceedings if supporting fact findings are made. See Alexander Dubose,
2019 WL 1181730, at *5. The court of appeals distinguished the case before it
from the minority line of cases because no fact findings were made in that case. Id.
In the case before us, the trial court made fact findings concerning the ownership
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rights and interests of both the parties and the non-party intervenors. Nevertheless,
we decline to follow the minority line of cases because it is contrary to the
precedent holding that turnover proceedings cannot be used to determine parties’
substantive rights or be applied to non-judgment debtors. See Alexander Dubose,
540 S.W.3d at 583–84. This precedent applies even as to third parties that
intervene in the turnover proceeding to protect their property rights. See id. at 585.4
To conclude otherwise would improperly “enlarge[] the turnover statute’s scope
beyond the procedural vehicle” our legislature contemplated merely because the
trial court made fact findings it was not authorized to make. See Republic Ins. Co.,
825 S.W.2d at 783.
Because the trial court lacked authority to adjudicate the competing
ownership claims to the funds remaining in the court registry in a turnover
proceeding, the trial court abused its discretion in ordering the turnover of those
finds in the absence of separate, initial proceedings to adjudicate the claims of the
parties and the intervening non-judgment debtors. See Alexander Dubose, 2019
WL 1181730, at *7. Accordingly, we do not reach the merits of Van Dyke and
ADE’s issues.
III. CONCLUSION
We sustain Van Dyke and ADE’s sole issue on their alternative ground that
turnover proceedings may not be used to determine the substantive rights of parties
and hold that the trial court erred in adjudicating the competing ownership claims
to the funds remaining in the court registry in a turnover proceeding without
separate, initial proceedings to resolve the claims of the parties and non-party
intervenors. We reverse the trial court’s Release and Turnover Order and remand
4
Notably, Van Dyke and ADE point out that that the Investors have previously filed
separate lawsuits raising alter ego and other claims against Van Dyke the Anglo-Dutch entities.
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the case to the trial court for further proceedings.
/s/ Ken Wise
Justice
Panel consists of Justices Wise, Zimmerer, and Spain.
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