Chapter 31 Receiverships
The Most Powerful Tool in Civil Litigation?
By Paul R. Wilson
There was a time when individuals and small corporations were able to avoid paying judgments because the types of assets they owned were difficult to find, levy, and sell. Such hard to reach assets included stock in small corporations, contract rights, account receivables, and promissory notes and other negotiable instruments. Recognizing the inequity of this situation, in 1979 the Texas Legislature enacted what is commonly known as the Turnover Statute, Texas Civil Practice and Remedies Code Chapter 31(all statutory cites are to this chapter unless otherwise noted). The statute gave courts the authority to order judgment debtors to turn over property, documents of title and ownership, and financial and other records. It also authorized the courts to issue injunctions to prevent judgment debtors from wasting and/or secreting assets. The statute allowed courts to place the burden of production of non-exempt assets on judgment debtors and relieved judgment creditors of the burden of chasing down such assets. Most importantly, the statute gave courts the authority to appoint receivers to exercise control over non-exempt assets of debtors, including the power to take over a judgment debtor’s business and to run the business and/or liquidate the assets of the business. Thus, if a judgment debtor refused to cooperate the Court would, henceforth, have the power to cut off such belligerence by appointing a receiver and, in effect, placing the receiver in the debtor’s shoes to act for the debtor.
It is fair to say it was not fully understood or appreciated just how powerful a tool had been placed in the hands of the courts at the time the statute was enacted. Turn the annals of time four decades later and you see lawyers and firms that do little else besides turnover and receivership work for our state courts. Forty years of case law interpreting the Turnover Statute has clarified the role of Chapter 31 receivers and enlightened all on just how powerful a role receivers can play when exercising all of the powers a court of law is able to grant. More so, a few amendments to the Turnover Statute have cut off some of the dilatory efforts to avoid court-ordered turnovers and receiverships.
The import of judgment enforcement has become more pronounced over the last twenty years or so as the percentage of judgment awards not covered by insurance has increased. It is a fact of life judgment debtors are much more willing to approve payment of a judgment from insurance funds than to dole out their own money or assets to pay the same judgment. Thus, the need to force judgment debtors to pay judgments has increased and, with it, the number of Chapter 31 receivership appointments.
A Chapter 31 receivership is not to be confused with a Chapter 64 receivership. A Chapter 64 receivership is usually ordered to preserve the assets and the ongoing operations of a business for the benefit of the owners, creditors, and/or interested parties. It is most often invoked when partners and/or shareholders of small corporations/entities become so adversarial that day-to-day operational decisions cannot be made or a party in control of daily operations fails to operate the business for the benefit of all ownership interests or is shown to be hiding and/or secreting assets from other partners/owners. In contrast, a Chapter 31 receiver is appointed for the purpose of taking possession of non-exempt property, selling it, and paying the proceeds to the judgment creditor. § 31.002 (b) (3).
Once a turnover order is signed, all of a judgment debtor’s nonexempt property becomes property in custodia legis ( “in the custody of the law”), meaning it is in the constructive possession of the court. An appointed receiver takes constructive possession of a judgment debtor’s nonexempt property and is considered to be in exclusive possession and custody of such property.Peter E. Pratt, Jr., Turnover Receiverships “101″, P. 6. Once a receiver is appointed, he can sell nonexempt property. Once appointed, any transfer of property by another party is void, whether by the judgment debtor or even a lienholder foreclosing on property. Id. Now that is power! Lienholders have to get the Court’s approval to foreclose and such is not automatically granted; particularly when a judgment debtor has a lot of equity in the asset upon which foreclosure is sought and the asset can be sold for substantially more than the amount of the lien. Id. at p. 8.
Powers granted by an order of receivership often include: diverting all mail to the receiver; withdrawing money from bank accounts or taking control over the accounts and using them; the right to order any and all records from anyone the judgment debtor is authorized to order same from including the IRS, credit card companies, banks and brokerage houses, leases from landlords, account information of third party vendors and of creditors; having safe deposits and safes opened and taking control of the contents; selling nonexempt real estate; collecting rents; taking over all rights a debtor has as a shareholder, including voting rights and, if a majority shareholder, actual control of the corporation/entity; conducting private sales of personal property; going into businesses to seize cash, checks, money orders, records (including corporate/entity records), computers, furniture, inventory, equipment; selling phone numbers, assumed names, web addresses, and other good will of the judgment debtor’s business; collecting on account receivables directly from debtors of the judgment debtor; taking control of litigation and levying upon judgments owed to a judgment debtor; making demand for the return of charitable contributions donated by a debtor after a turnover order issues; levying upon expense reimbursement checks owed by employers. In summary, the power a court can grant to a receiver appears to be as wide as needed to take control of nonexempt assets. Creativity appears to be regularly tolerated if not, in fact, encouraged in fashioning solutions to discover, gain control over, and liquidate such nonexempt assets.
In order to obtain a turnover one must show the moving party is a judgment creditor seeking such relief from a court of appropriate jurisdiction and such relief is sought to reach property to obtain satisfaction of a judgment. Further, the judgment debtor must own property that cannot be attached or levied on by ordinary legal process and is not exempt. § 31.002 (a). Making a record that Debtor has a checking account on which he draws down funds appears to be sufficient proof to support such an order. Once this is proven, the court may issue a turnover order as to all of a debtor’s nonexempt property without limiting the order to specific property proved up as being subject to turnover. § 31.002 (h). Dare I say it again? That is power.
One of the common mistakes attorneys make when defending judgment debtors against turnover/receivership motions and orders is defending on the grounds the Chapter 64 bond requirements have not been met by a receiver. A Chapter 64 receiver must post a bond set by the Court– not usually a nominal amount – and the bond must be approved by the Clerk in conformity with T.R.Civ.P. 695a. In a Chapter 64 situation the bond is to protect others against the receiver’s malfeasance or worse. Not so with Chapter 31 receiverships.
Whether a Chapter 31 Receiver is required to post any bond and the amount of that bond is discretionary with the Court and is not subject to approval by the Clerk under rule 695a. If ordered, the bond is for the purpose of indemnifying the receiver against possible claims. If a bond is set it should not be in a large amount; otherwise, it subverts the Act’s purpose to make it economically feasible for a judgment creditor to use the turnover/receivership remedies to collect a judgment. Childre v. Great Southwest Life Ins. Co., 700 S.W.2d, 284, 285 (Tex.App.–Dallas 1985, no writ) Schulz v. Cadle Co., 825 S.W.151, 154-155; Texas Post-Judgment Turnover and Receivership Statutes, 45 Tex.Bar.J., 417 (Apr. 1982).
Another misunderstood concept is the role of a receiver. A receiver is not the agent of the judgment creditor or any other party but, instead, is an officer and agent of the court. Pratt at P. 42. As such, a receiver has a form of judicial immunity known as “derived judicial immunity”. This immunity is absolute where it concerns any acts performed within the scope of the receiver’s jurisdiction. This immunity covers all of a receiver’s acts, both good and bad. Pratt at P. 42-43. Since nearly all Chapter 31 Receivers appointed are attorneys, this should allow qualified attorneys to consider such work without fear of having malpractice premiums rise substantially due to such work.
The use of Chapter 31 receiverships is widely used in certain jurisdictions, particularly in the Harris County and Dallas County courts. It is this author’s observation such receivership appointments are most often made in the collection of judgments against businessmen and for-profit corporations/entities. Given the growth in commerce and, as a result, the increase in commercial/business litigation and judgments, the use of receiverships is becoming commonplace in post-judgment enforcement proceedings. Judges are bound to enforce their judgments and, more so, want judgment debtors to honor and abide by their decisions and to pay judgments against them. However, it is this class of debtors that is most prone to try to avoid paying judgments. Fortunately, the courts now have the tools in the Turnover Statute, particularly the receivership remedies, to take control of nonexempt assets so they may be levied upon and sold to satisfy a judgment.