Opinion
Civ. No. 3:98-CV-1174-D.
May 18, 2000.
MEMORANDUM OPINION
Plaintiffs apply to the court pursuant to Fed.R.Civ.P. 69 and Tex. Civ. Prac. Rem. Code Ann. § 31.002 (West Supp. 2000) — the Texas turnover statute — to compel defendants to turn over a residence in satisfaction of a criminal judgment of restitution imposed by this court in United States v. Raneri, Criminal No. 3:94-CR-428-D. Alternatively, plaintiffs ask the court to impose a constructive trust on the residence. Following a bench trial, and for the reasons that follow, the court dismisses the turnover action as beyond the court's authority, because to grant turnover relief the court must resolve the substantive issue whether a homestead allegedly owned by a non-judgment debtor is exempt from execution. The court dismisses plaintiffs' alternative claim for imposition of a constructive trust as time-barred.
As permitted by Rule 52(a), the court sets out its findings of fact and conclusions of law in this memorandum opinion.
I
Defendant Peter F. Raneri ("Peter") and others (collectively, the "Criminal Defendants") participated in a scheme to defraud tax authorities of diesel fuel excise taxes by collecting the taxes from fuel purchasers and failing to remit them. In furtherance of their criminal conduct, the Criminal Defendants used a company, Hebco, to purchase diesel fuel from Fina Oil and Chemical Company ("Fina"). Fina required that Hebco secure its fuel purchases with letters of credit ("LCs"). Ross Brupbacher ("Brupbacher"), Anthony Moroux ("Moroux"), and Peter F. Nicolosi ("Nicolosi") supplied the required LCs. In late 1989 or early 1990, Hebco failed to pay Fina for fuel that it had purchased. Based on Hebco's default, Fina called the LCs, causing Brupbacher, Moroux, and Nicolosi to incur monetary losses.
Hebco wired to the Cayman Islands the funds that it owed Fina. Shortly thereafter, the funds were wired to Europe, where the Criminal Defendants had traveled for the purpose of engaging in additional criminal conduct. In Europe, one of the Criminal Defendants and Peter arranged for substantial sums to be wired through a straw man account, set up in the name of the uncle of Peter's wife, to a title company in Dallas. Peter's wife, codefendant Gabrielle Raneri ("Gabrielle"), used this money to construct a $391,632.56 residence at 400 Creekside Court, Irving, Dallas County, Texas (the "House"). The House is not security for any debt, and there are no deeds of trust filed of record to secure any lien on the House.
In April 1990 Peter and Gabrielle entered into a Postnuptial Agreement that provided that the House was Gabrielle's separate property. In May 1990 Gabrielle signed the relevant contracts to initiate construction of the House, and it was completed in late 1990. Peter and Gabrielle have resided together in the House with their child (later, two children) since the time it was built. Until recently, Gabrielle has not worked outside the home at any time during her 1985 marriage to Peter. It is undisputed that Gabrielle paid nothing toward the purchase price of the House. She maintains that the House is a gift from Peter. Plaintiffs allege that she obtained the House in a fraudulent transaction, using the proceeds of criminal activities.
Peter pleaded guilty for his role in the criminal scheme. In the court's sentence, reflected in a judgment filed January 15, 1997, the court awarded Brupbacher restitution in the amount of $191,500, Nicolosi restitution in the amount of $25,000, and the Moroux Estate restitution in the amount of $87,500. The court ordered Peter to make monthly restitution payments of $7,650. Peter has made payments of only $500 per month. Consequently, as of February 29, 2000 he still owes $184,567.89 to Brupbacher, $24,095.00 to Nicolosi, and $84,332.61 to the Moroux Estate.
Brupbacher, Julia D. Moroux, as trustee of the ADM Qualified Trust, successor-in-interest to the Estate of Anthony Moroux, and Nicolosi filed the instant application against Peter for turnover pursuant to Rule 69 and § 31.002, and, alternatively, for imposition of a constructive trust. They later added Gabrielle as a defendant.
II
Plaintiffs first apply for a turnover order under § 31.002.
A
Section 31.002 "affords a judgment creditor aid from a court of appropriate jurisdiction to obtain satisfaction of a judgment if the judgment debtor owns property that cannot be readily attached or levied on by ordinary legal process, and is not exempt from attachment, execution or seizure." Sivley v. Sivley, 972 S.W.2d 850, 860 (Tex.App. 1998, no writ). To establish a right to turnover, the judgment creditor must prove three elements: "First, the judgment debtor owns the property. Second, the property must be property a creditor cannot readily attach or levy on by ordinary legal process. Third, the property must not be exempt from attachment, execution, or seizure for the satisfaction of liabilities." Sunbelt Savings, FSB v. Beadle, 1994 WL 679370, at *1 (Tex.App. Dec. 5, 1994, no writ) (unpublished opinion).
"[T]he turnover statute is purely procedural in nature; the statute does not provide for the determination of substantive rights of the parties." Resolution Trust Corp. v. Smith, 53 F.3d 72, 77 (5th Cir. 1995) (quoting Cross, Kieschnick Co. v. Johnston, 892 S.W.2d 435, 439 (Tex.App. 1994, no writ)); see Republic Ins. Co. v. Millard, 825 S.W.2d 780, 783 (Tex.App. 1992, orig. proceeding) ("The statute does not allow for a determination of the substantive rights of involved parties."); Cravens, Dargan Co. v. Peyton L. Travers Co., 770 S.W.2d 573, 576 (Tex.App. 1989, writ denied) ("[T]he procedural nature of the turnover statute is well settled."). "[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." Resolution Trust Corp., 53 F.3d at 77 (quoting Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223, 227 (Tex. 1991)); accord Republic Ins., 825 S.W.2d at 783 (citing Beaumont Bank, 806 S.W.2d at 227).
To establish their right to relief, plaintiffs must prove that Peter has an ownership interest in the House. See § 31.002(a) ("A judgment creditor is entitled to aid from a court . . . to obtain satisfaction on the judgment if the judgment debtor owns property[.]"); Dale v. Finance Am. Corp., 929 S.W.2d 495, 498 (Tex.App. 1996, writ denied) (stating inter alia that only property owned by judgment debtor is subject to turnover order). The court must also resolve whether the House was acquired with the proceeds of criminal activities and therefore is not exempt because it is not protected from execution by Texas homestead law. See Pace v. McEwen, 617 S.W.2d 816, 818 (Tex.Civ.App. 1981, no writ) (holding that evidence supported implied finding that residence had been acquired with funds fraudulently obtained from decedent and therefore was not exempt, as judgment debtor's homestead, from turnover in satisfaction of debt). These are substantive issues that the court cannot decide in the context of a turnover action.
In Resolution Trust Corp. the Fifth Circuit reversed a district court order, entered pursuant to the Texas turnover statute, that voided a pledge agreement and ordered the sale of corporate stock. Resolution Trust Corp., 53 F.3d at 80. The Resolution Trust Corporation ("RTC") owned an uncollected judgment against a husband and wife. Id. at 75. The husband ("Smith") pledged corporate stock to his attorney, Richard Fuqua ("Fuqua"), and granted him a security interest in it. Id. The district court voided the pledge on the ground that Smith still owned and controlled the stock. Id. at 76. It ordered the debtors and Fuqua to turn the stock over to the marshal for sale. Id. The Fifth Circuit affirmed the turnover order as to Smith and his wife because inter alia there was no dispute that the Smiths continued to own the stock. Id. at 78. It was not error for the court to order them "to turn over whatever interest they had in the [stock]." Id. The court reversed the order voiding the pledge to Fuqua, the attorney, because the turnover statute could not be used to litigate the property rights of third parties. Id. at 79. It also held that "[a] proceeding to determine whether a transaction is fraudulent or otherwise to determine property rights of the parties is improper under the turnover statute, for the statute `does not allow for a determination of the substantive rights of the involved parties.'" Id. at 80 (quoting Republic Ins., 825 S.W.2d at 783). The panel concluded that "the district court erred in using the turnover proceeding to determine that the stock pledge was a fraudulent transfer and was therefore void. The validity of the pledge agreement must be challenged in a further proceeding." Id.
This fact distinguishes Resolution Trust Corp. from the present case, The court cannot rely on the holding in Resolution Trust Corp. that the district court did not err procedurally in ordering the Smiths to turn over the stock because there was no dispute that they owned it despite the fact that it was pledged to the attorney. Here, by contrast, defendants deny that Peter owns the House.
The Cravens court held that the trial court could not determine in a turnover action the question of ownership of funds deposited by a judgment debtor with the Texas State Board of Insurance. Cravens, 770 S.W.2d at 576-77 ("As the turnover statute is purely a procedural tool, it is not a device through which we can determine the ownership of the deposited funds.").
In Steenland v. Texas Commerce Bank Nat'l Ass'n, 648 S.W.2d 387 (Tex.App. 1983, writ ref'd n.r.e.), the court concluded that the judgment debtor was entitled to a trial on the merits, in a separate suit, of the issue of the excess nonexempt value of his homestead. Id. at 390 (addressing precodified version of § 31.002).
These cases support the conclusion that plaintiffs must first bring the proper action to establish that some or all of the House is property that can be sold in satisfaction of Peter's indebtedness to them.
Although plaintiffs rely for relief on Rule 69, they do so only "as it incorporates [§ 31.002] and Texas common law." 1st Am. Applic. at 1. The court need not therefore decide whether under Rule 69 it is otherwise authorized to resolve the substantive issues raised by plaintiffs' turnover application.
B
The court acknowledges that defendants do not explicitly challenge plaintiffs' turnover application on this basis. In the joint pretrial order ("PTO"), however, plaintiffs acknowledge that one of the "substantive legal issues remaining in this case" is "[w]hether this Court has the right to utilize [§ 31.002] to enforce its restitution orders." PTO at 6. And in view of the holding in Resolution Trust Corp., this court would commit patent error by determining substantive rights in the context of a turnover action.Although the court is dismissing plaintiffs' turnover application, it does not suggest that plaintiffs will not ultimately prevail in a separate action on their claim that the House is subject to execution, or on a future turnover application. The present application simply presents unresolved substantive questions that must be separately adjudicated before a turnover application can be entertained.
Texas courts are split concerning whether a court can enter a turnover order against a nonjudgment debtor. Compare, e.g., Parks v. Parker, 957 S.W.2d 666, 668 (Tex.App. 1997, no writ) (noting split of authority in Texas and holding that § 31.002 "authorizes the issuance of an order against only the judgment debtor") with, e.g., Dale, 929 S.W.2d at 498 (noting that Texas courts have held that where third party retains property, if it is shown to be non-exempt, owned by judgment debtor, and subject to debtor's possession or control, trial court may issue and enforce turnover order against third party). The Fifth Circuit stated in Resolution Trust Corp., however, that "Texas courts do not apply the turnover statute to non-judgment debtors." Resolution Trust Corp., 53 F.3d at 77 (quoting Beaumont Bank, 806 S.W.2d at 227). This court is bound by the Fifth Circuit's interpretation of Texas law unless the Texas courts later definitively settle this question to the contrary. Accordingly, if plaintiffs later seek turnover relief, they must assert their claim only against Peter unless Texas law clearly permits them to seek relief from Gabrielle.
Even if a court cannot enter a turnover order against Gabrielle, this does not mean, of course, that plaintiffs cannot obtain turnover relief concerning the House from Peter if they establish the required elements for turnover relief. "The turnover statute allows the court to reach the assets owned and subject to the control of a judgment debtor, even if those assets are in the hands of a third party." Id.
III
Plaintiffs also seek to impose a constructive trust against the House. Peter and Gabrielle assert the affirmative defense that this claim is barred by limitations. The court finds and concludes that they have proved this defense.A suit to impose a constructive trust "is an action in equity to prevent unjust enrichment of a person who has wrongfully acquired property." Thompson v. Mayes, 707 S.W.2d 951, 954 (Tex.App. 1986, writ ref'd n.r.e.)). "When the proven circumstances show that the holder of the legal title may not in good conscience retain the beneficial interest, then equity converts him into a trustee." Id.
"In actions to establish a constructive trust based on fraud, the four-year statute of limitations applies." Austin Lake Estates, Inc. v. Meyer, 557 S.W.2d 380, 383 (Tex.Civ.App. 1977, no writ). "The statute of limitations begins to run against the enforcement of a constructive trust by the beneficiary against the trustee at the inception of the trust." Powers v. McDaniel, 785 S.W.2d 915, 918 (Tex.App. 1990, writ denied).
Plaintiffs did not file this action until May 18, 1998. They do not challenge the proposition that the inception of the trust occurred before May 18, 1994 — four years before they filed suit — and the court finds that it did. Instead, they attempted at trial to assert that the limitations period was tolled under the discovery rule, or under the doctrine of fraudulent concealment, because Brupbacher did not learn of the existence of the House until the trial of Peter's codefendant in approximately 1997.
The court judicial knows that the trial occurred in January through March 1996, but this difference is immaterial.
The court recognizes that the discovery rule and fraudulent concealment are available to toll the limitations period in a constructive trust case. In Texas, however, "the party seeking to benefit from the discovery rule `bear[s] the burden of proving and securing favorable findings thereon.'" FDIC v. Shrader York, 991 F.2d 216, 220 (5th Cir. 1993) (quoting Woods v. William M. Mercer, Inc., 769 S.W.2d 515, 518 (Tex. 1988)). Likewise, fraudulent concealment must be established by the party who seeks to avoid limitations. See SM Representatives, Inc. v. Hrga, 1998 WL 267945, at *3 n. 4 (N.D. Tex. May 15, 1998) (Fish, J.) (placing burden on party seeking to avoid limitations bar to establish fraudulent concealment, and holding that "[t]he doctrine of fraudulent concealment is, essentially, a fraud specific application of the general discovery rule." (citing Computer Assocs. Int'l Inc. v. Altai, Inc., 918 S.W.2d 453, 455-56 (Tex. 1994); Colonial Penn Ins. Co. v. Market Planners Ins. Agency, 1 F.3d 374, 377 (5th Cir. 1993)), aff'd, 180 F.3d 265 (5th Cir. May 6, 1999) (per curiam) (table); see Powers, 785 S.W.2d at 918 (holding that burden to plead fraudulent concealment in constructive trust case was on plaintiff). Plaintiffs did not include these avoidance theories in the PTO. When plaintiffs attempted to introduce evidence at trial to toll the limitations period on these grounds, defendants timely objected inter alia on this basis. The court carried the objection and now sustains it. Plaintiffs did not include these matters in the PTO and defendants had no reason to prepare to refute them at trial. Plaintiffs' failure to include them in the PTO precludes their relying on them to avoid the limitations defense. See Seatrax, Inc. v. Sonbeck Int'l, Inc., 200 F.3d 358, 367 (5th Cir. 2000) (holding that although court has power in interest of justice to allow introduction of new issue or claim after entry of pretrial order, court does not abuse its discretion if doing so unduly prejudices or surprises opposing party).
"To trigger the tolling of limitations in a constructive trust case, there must have been a fraudulent concealment of facts. However, the time will be tolled from the time the concealed fraud is discovered or could have been discovered by reasonable diligence. The beneficiary of a constructive trust must use reasonable diligence in determining when his cause of action arises." Powers, 785 S.W.2d at 918 (citations omitted).
The court dismisses plaintiffs' constructive trust claim as time-barred.
* * *
The court dismisses plaintiffs' turnover action and dismisses with prejudice plaintiffs' constructive trust claim by judgment filed today.