State Farm Mutual v. Wilkins, et al

Filing 126

MEMORANDUM AND ORDER granting 123 MOTION for Appointment of A Receiver and Turnover After Judgment.(Signed by Judge Lee H Rosenthal) Parties notified.(ypippin, )

State Farm Mutual v. Wilkins, et al

Do c. 126

IN THE UNITED STATES DISTRICT COURT F O R THE SOUTHERN DISTRICT OF TEXAS H O U S T O N DIVISION S T A T E FARM MUTUAL A U T O M O B IL E INSURANCE CO., P l a in tif f , v. R A L P H A E L L V. WILKINS and R I T A L. FRILLARTE, D e f e n d a n ts . § § § § § § § § § § §

C IV IL ACTION NO. H-99-2822

M E M O R A N D U M AND ORDER S ta te Farm Mutual Automobile Insurance Co. ("State Farm"), which holds an u n s a tis f ie d damages judgment against Ralphaell L. Wilkins, has filed an application for the a p p o in tm e n t of a receiver and master in chancery and for turnover after judgment. (Docket E n try No. 123). Wilkins has responded, (Docket Entry No. 124), and State Farm has replied, (D o ck et Entry No. 125). B a se d on the motion, response, and reply, the parties' submissions, and the applicable law , this court grants State Farm's application. The reasons for this ruling are set out in d e ta il below. I. B a c k gro u n d T h is case arises from a "sudden-stop" collisions insurance fraud scheme. Participants in the scheme sued State Farm in state court to recover proceeds under their automobile

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in s u r a n c e policies for personal injuries and property damage allegedly sustained in accidents. S ta te Farm counterclaimed, alleging that the insureds' claims were fraudulent and that the s c h e m e was organized and implemented by Wilkins, an attorney practicing in the Wilkins L a w Firm, P.C., and his office manager, Frillarte. Wilkins filed for bankruptcy in 1998. S ta te Farm's fraud and civil conspiracy claims proceeded in the bankruptcy court. In several a m e n d e d complaints, State Farm alleged that Wilkins and Frillarte had presented over 150 f ra u d u le n t claims for personal injuries and property damage allegedly sustained in the staged c o l lis io n s . Wilkins filed a third-party claim alleging fraud, conspiracy, and abuse of process a g a in st the attorneys representing State Farm ("the Attorney Defendants") in both the state c o u rt fraud action and in the bankruptcy action. The Attorney Defendants removed the statec o u rt action to this court in 1999. In 2000, this court denied Wilkins's motions to remand a n d for sanctions against the Attorney Defendants and referred the case to the bankruptcy co u rt. (Docket Entry No. 52). In May 2004, the bankruptcy court issued a memorandum of decision and entered ju d g m e n t against the debtor, Wilkins, and Frillarte. The court found them jointly and s e v e ra lly liable to State Farm for actual economic damages in the amount of $1,880,876.60 a n d punitive damages of $1,000,000 each. The bankruptcy court ruled that Wilkins could n o t discharge this judgment in bankruptcy under 11 U.S.C. § 523(a)(2) and (a)(6). (Docket E n try No. 54, Exs.. A­B).

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W ilk in s and Frillarte filed motions for new trial.

The bankruptcy court issued a

m e m o ra n d u m opinion and order in August 2004, (id., Exs. C­D), denying the motions for a new trial in all respects save one. The bankruptcy court stated: It appears that State Farm's claims against [Frillarte] were not a core p ro c e ed in g within the meaning of the bankruptcy code. In this Court's prior M e m o r a n d u m of Decision, this Court made various findings and conclusions ab o u t [Frillarte] as agent of Debtor. Those findings and conclusions are core p ro c e ed in g s only insofar as they related to establishing findings and c o n c lu s io n s and a Judgment against Debtor. Although it is recognized that an a g e n t can be individually liable for a tort or fraud he or she commits as an a g e n t for another, the individual liability of the agent ([Frillarte] in the present instan ce s) would not be a core proceeding for purposes of the bankruptcy court estab lish in g individual liability against the agent, [Frillarte]. (D o c k e t Entry No. 54, ex. C, at 5). The bankruptcy court agreed with the earlier decision of th is court and concluded that it had "at a minimum, appropriate `related to' jurisdiction" over F rillarte under 28 U.S.C. 157(c)(1): A bankruptcy judge may hear a proceeding that is not a core proceeding but th a t is otherwise related to a case under title 11. In such proceeding, the b a n k ru p tc y judge shall submit proposed findings of fact and conclusions of la w to the district court, and any final order or judgment shall be entered by the d is tric t judge after considering the bankruptcy judge's proposed findings and c o n c lu s io n s and after reviewing de novo those matters to which any party has tim e ly and specifically objected. 2 8 U.S.C.A. 157(c)(1) (West 2005). Accordingly, and as to Frillarte alone, the bankruptcy c o u rt modified the judgment. The findings of fact, conclusions of law, and holdings of the p re v io u s final judgment became proposed findings, conclusions, and holdings as to Frillarte. T h e bankruptcy court did not "in any manner, modify the Findings, Conclusions, Holdings a n d Judgment against Ralphaell V. Wilkins and the Memorandum Decision as to him." 3

(D o ck et Entry No. 54, ex. D). O n August 24, 2005, this court adopted the bankruptcy's court's proposed final ju d g m e n t against Frillarte. (Docket Entry No. 56). Wilkins appealed this court's August 2 0 0 5 decision as to Frillarte and the bankruptcy court's August 2004 decision as to him. The F if th Circuit dismissed the appeal as untimely. The bankruptcy estate was closed in early 2008. II. State Farm is Not Precluded from Executing its Judgment Wilkins argues that State Farm is precluded from executing its judgment by an August 1 1 , 1998 order issued by the bankruptcy court modifying the automatic stay. That order, title d "Order Modifying Automatic Stay," provided: A t Houston, Texas, came to be considered the Motion of State Farm M u tu a l Automobile Insurance Company's ("State Farm") Relief from Stay F ile d herein. Based upon State Farm's motion, Debtor's response and the a rg u m e n ts of counsel, the Court is of the opinion that the motion shall be G R A N T E D ; it is therefore O R D E R E D that the automatic stay pursuant to 11 U.S.C. § 362 shall be lif te d to allow the lawsuit . . . to proceed for the purpose of liquidating any and a ll claims of State Farm, including all appeals, except that the stay shall not by th is order be lifted as to execution of any judgment against Debtor; it is further O R D E R E D State Farm shall be allowed to exercise all of its State law re m e d ie s regarding the prosecution of the lawsuit . . . except for execution of an y judgment against debtor. (D o c k e t Entry No. 124, Ex. B). An automatic stay issued in a bankruptcy case expires when the case is closed or d ism iss e d or when a discharge is granted or denied. 11 U.S.C. § 362(c)(2); Climer v. United S ta te s, No. 98-50363, 1998 WL 915374, at *2 n.18 (5th Cir. Dec. 21, 1998) (citing 11 U.S.C. 4

§ 362(c)(2) (B)) ("[T]he statute makes clear that the automatic stay is abrogated when the c a se is dismissed to the same extent that it would be if the case were closed."); In re Prado, 3 4 0 B.R. 574, 585 (Bankr. S.D. Tex. 2006); Shell Oil Co. v. Capital Fin. Servs., 170 B.R. 9 0 3 , 906 (Bankr. S.D. Tex. 1994); Norton v. Hoxie State Bank, 61 B.R. 258, 260 (D. K a n .1 9 8 6 ) . The bankruptcy court issued a final judgment against Wilkins on August 25, 2 0 0 4 , when it denied his new trial motion. The automatic stay expired. Wilkins argues that the part of the August 11, 1998 order stating that "State Farm shall b e allowed to exercise all of its State law remedies regarding the prosecution of the lawsuit . . . except for execution of any judgment against debtor" did not relate to the modification o f the automatic stay, but was a "a second part of the court's order, separate and apart from th e first part of the order that addressed the modification of the automatic stay" that itself p e r m a n e n tly barred State Farm from executing any judgment it obtained against Wilkins. (D o c k e t Entry No. 124 at 6­7). The bankruptcy court's order was solely concerned with m o d if yin g the automatic stay to allow the claims to proceed against Wilkins. The order did n o t permanently bar State Farm from executing any final judgment entered against Wilkins. S ta te Farm is not precluded from executing the judgment against Wilkins. III. T h e Motion for Turnover After Judgment and Appointment of a Receiver and M a s te r in Chancery A. T h e Legal Standard

U n d er Rule 64 of the Federal Rules of Civil Procedure, a court may order the seizure o f property "to secure satisfaction of the potential judgment." FED. R. CIV. P. 64. The 5

m a n n e r in which property is seized depends on state law. Rule 64 provides: A t the commencement of and throughout an action, every remedy is available th a t, under the law of the state where the court is located, provides for seizing a person or property to secure satisfaction of the potential judgment. F ED. R. CIV. P. 64. The Texas turnover statute, section 31.002 of the Texas Civil Practice & Remedies C o d e , is a "procedural mechanism that gives Texas courts the power to satisfy a judgment b y reaching the assets of a judgment debtor that cannot be attached or levied by ordinary le g a l process." Bollore S.A. v. Import Warehouse, Inc., 448 F.3d 317, 322 (5th Cir. 2006). " T h e purpose of the turnover proceeding is merely to ascertain whether or not an asset is in th e possession of the judgment debtor or subject to the debtor's control." Resolution Trust C o rp . v. Smith, 53 F.3d 72, 77 (5th Cir. 1995) (quoting Beaumont Bank, N.A. v. Buller, 806 S .W .2 d 223, 224 (Tex. 1991)). Section 31.002 provides: A judgment creditor is entitled to aid from a court of appropriate jurisdiction th ro u g h injunction or other means in order to reach property to obtain s a tis f a ctio n on the judgment if the judgment debtor owns property, including p re se n t or future rights to property, that (1 ) c a n n o t readily be attached or levied on by ordinary legal p ro c e ss ; and (2) is not exempt from attachment, execution, or seizure for th e satisfaction of liabilities. TEX. CIV. PRAC. & REM. CODE § 31.002(a). T h e Texas turnover statute may be used only to reach "assets of parties to the ju d g m e n t, not the assets of non-judgment third parties." Bollore, 448 F.3d at 322 (citations o m itte d ). It "may not be used to determine the substantive property rights of the judgment 6

d e b to rs or of third parties." Id. (citations omitted). T h e Texas turnover statute provides that a court may "appoint a receiver with the a u th o rity to take possession of the nonexempt property, sell it, and pay the proceeds to the ju d g m e n t creditor to the extent required to satisfy the judgment." TEX. CIV. PRAC. & REM. C ODE § 31.002(b)(3). Courts consider several factors in determining the need for a receiver, in c lu d in g the following: (1) whether there exists a valid claim by the party seeking th e appointment; th e probability that fraudulent conduct has occurred or w ill occur; the likelihood of imminent danger that property will be c o n c ea le d , lost, or diminished in value; the inadequacy of legal remedies; the lack of a less drastic equitable remedy; and the likelihood that appointing the receiver will do more g o o d than harm.

(2 )

(3 )

(4 ) (5) (6)

A v ia tio n Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316­17 (8th Cir. 1993) (c ita tio n s omitted). The "appointment [of a receiver] is in the sound discretion of the court." S a n tib a n e z v. Wier McMahon & Co., 105 F.3d 234, 239 (5th Cir. 1997) (citation omitted). " T h e form and quantum of evidence required on a motion requesting the appointment of a re c eiv e r is a matter of judicial discretion." 12 CHARLES A. WRIGHT, ARTHUR R. MILLER,
A ND

RICHARD L. MARCUS, FEDERAL PRACTICE AND PROCEDURE § 2983 (2d ed. 1997).

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U n d e r Texas law, a "court may, in exceptional cases, for good cause appoint a master in chancery . . . who shall perform all of the duties required of him by the court, and shall be u n d e r orders of the court, and have such power as the master of chancery has in a court of e q u ity," including the power to hold hearings, require the production of evidence, rule upon th e admissibility of evidence, and examine witnesses. TEX. R. CIV. P. 171; Christensen v. C h r is te n se n , No. 04-03-00095-CV, 2003 WL 22897120, at *1 (Tex. App.­San Antonio Dec. 1 0 , 2003, pet. denied). Appointing a master is in the trial court's discretion. Simpson v. C a n a le s, 806 S.W.2d 802, 811 (Tex. 1991). The "exceptional case" and "good cause" s ta n d a rd s are "not susceptible [to] precise definition." Id. "Although the trial court may c o n s id e r the complexity of the case, the rule's standards may not be satisfied merely by s h o w in g that a case is time-consuming or complicated." In re Holt, No. 01-06-00290-CV, 2 0 0 6 WL 1549968, at *3 (Tex. App.­Houston [1 Dist.] June 8, 2006) (citing Simpson, 806 S .W .2 d at 811). B. A n a ly sis

S ta te Farm invokes the turnover statute to reach Wilkins's shares in the Wilkins Law F irm , P.C. and his contingent fee interests in causes of action and cases. State Farm asserts th a t this property cannot readily be attached or levied on by ordinary legal process and that it is not exempt from attachment, execution, or seizure to satisfy an unpaid judgment. (D o c k e t Entry No. 123 at 2­5; Docket Entry No. 125 at 1­3). Wilkins does not dispute that

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th e property State Farm identified is nonexempt and cannot readily be attached or levied on b y ordinary legal process. Instead, Wilkins argues that the turnover statute does not permit S tate Farm to reach his shares in the Wilkins Law Firm or his contingent fee interests b e c a u s e the law firm was not a party to the judgment that State Farm obtained against W ilk in s; he does not own any shares in the firm; and he is not a signatory on any of the firm 's bank accounts. (Docket Entry No. 124 at 2­4). T h e Wilkins Law Firm is not subject to a turnover order because it was not a party to th e judgment against Wilkins and there has been no finding that the Wilkins Law Firm is W ilk in s 's alter ego. See Maiz v. Virani, 311 F.3d 334, 345 (5th Cir. 2002) (citing United B a n k Metro v. Plains Overseas Group, Inc., 670 S.W.2d 281, 283 (Tex. App. 1983)). H o w e v e r, Wilkins himself is subject to a turnover order reaching any shares he owns in the la w firm and any of his other property related to the firm and his legal practice, including c o n tin g e n t fee interests in cases or causes of action. Wilkins contends that he does not own any shares in the Wilkins Law Firm, but he has g iv e n inconsistent testimony about his ownership interest in the firm. Wilkins testified in a d e p o sitio n taken by a court-appointed receiver on August 25, 2000 that the Wilkins Law F irm "is a corporation whose shares are not owned by me." (Docket Entry No. 125, Ex. C). In a February 13, 2006 deposition taken by State Farm, Wilkins testified that he owned "100 p e rc e n t" of the shares of the Wilkins Law Firm and that no other person had ever owned any s h a re s in the firm. (Docket Entry No. 125, Ex. A). In an April 2008 affidavit, Wilkins

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stated , "I do not own any shares in The Wilkins Law Firm, P.C." and "I am not the signatory o n any bank accounts owned by The Wilkins Law Firm, P.C." (Docket Entry No. 124, Ex. A ). Wilkins offers no explanation for these inconsistencies. He has not presented stock c e rtif ic a te s, stock ledgers, bank statements, or other support for his affidavit statement that h e no longer owns any shares in the firm and is not a signatory on any of the firm's bank a c co u n ts . Wilkins does not assert that he transferred or sold his shares after the 2006 d e p o sitio n and he does not identify a current owner of the shares. The only person Wilkins h a s ever identified as a shareholder in his firm is himself. Wilkins has refused to identify the lo c a tio n of shares in the Wilkins Law Firm or their present owner. State Farm has made the necessary showing that Wilkins owns the identified property, th e shares in the Wilkins Law Firm and contingent fee interests in a number of cases and c a u s e s of action. See Beaumont Bank, 806 S.W.2d at 227 (finding that debtor's "blanket a ss e rtio n " and "unsubstantiated claim" that she no longer possessed nonexempt property was n o t sufficient to show that she did not possess the property). Turnover is an appropriate means to reach a debtor attorney's shares in a law firm and h is contingent fee interests in cases or causes of action. See Ross v. 3D Tower Ltd., 824 S .W .2 d 270, 272 (Tex. App.1992, writ denied) ("We find that an attorney's accounts re c eiv a b le , which consists of legal fees to be paid in the future are subject to turnover under the Texas Turnover Statute."); Hennigan v. Hennigan, 666 S.W.2d 322, 325 (Tex. A p p .­ H o u s to n [14th Dist.] 1984, writ ref'd n.r.e.) (stating that "[i]ncome of this nature,

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a tto rn e y fees, is inherently difficult to get to satisfy a judgment," and applying turnover sta tu te to "accounts receivable, earned future income and unearned future income"); see also D a n ie ls v. Pecan Valley Ranch, 831 S.W.2d 372, 375 (Tex. App. 1992, writ denied) (finding th a t the turnover statute may be used to reach payments from an annuity), cert. denied, 508 U .S . 965 (1993); Cain v. Cain, 746 S.W.2d 861, 863 (Tex. App.1988, writ denied) (noting th a t the turnover statute could be used to reach military retirement pay); First City Nat'l Bank o f Beaumont v. Phelan, 718 S.W.2d 402, 405­06 (Tex. App.­Beaumont 1986, writ refused n .r.e.) (upholding the use of the turnover statute to reach future payments from a testamentary tru st); Matrix, Inc. v. Provident Am. Ins. Co., 658 S.W.2d 665, 668 (Tex. App. 1983, no writ) (f in d in g that the turnover statute could be used to reach a promissory note). The appointment of a receiver with the authority to take possession of the nonexempt p ro p e rty, sell it, and pay the proceeds to State Farm to the extent required to satisfy the jud g m en t is warranted in this case. State Farm has a valid claim against Wilkins. Wilkins's inco n sisten t and evasive accounts of his ownership and involvement in his law firm d e m o n s tra te a likelihood that fraudulent conduct has occurred or will occur and an imminent d a n g e r that his nonexempt property will be concealed, lost, or diminished in value. Legal re m e d ie s are inadequate to protect State Farm's interests; there is no less drastic remedy that w o u ld be effective; and there is no reason to believe that appointing a receiver will do more h a rm than good. See Aviation Supply Corp., 999 F.2d at 316­17. Wilkins's inconsistent and sk etch y accounts of his interest in the law firm also counsel in favor of appointing a receiver.

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S e e Santibanez, 105 F.3d at 241 (quoting 7 JAMES MOORE ET AL., MOORE'S FEDERAL P RACTICE ¶ 66.04[3] (2d. ed. 1996) ("Courts have held that receivers may be appointed `to p rese rve property pending final determination of its distribution in supplementary p roc ee d ing s in aid of execution.'"). T h e appointment of the receiver as a master in chancery is also warranted. The r e c e iv e r will be unable to identify and take possession of Wilkins's exempt property unless th e receiver has the power to hold hearings, require the production of evidence, rule on the a d m is s ib ility of evidence, and examine witnesses. Unlike In re Holt, 2006 WL 1549968, at * 3 , in which the court found that it was not appropriate to appoint a master for a case in v o lv in g the discovery of nonexempt property, this case involves the recovery of such p ro p e rty from an individual who has provided inconsistent and evasive accounts of his in te re sts and who will likely refuse to cooperate with the receiver's attempts to identify and tak e possession of the property. Wilkins's inconsistent and evasive accounts of his

o w n e rs h ip in and involvement with his law firm present "exceptional circumstances" and " g o o d cause" to appoint a receiver who is a master in chancery, under section 31.002 of the T e x a s Civil Practice and Remedies Code and Rule 171 of the Texas Rules of Civil P ro c e d u re .

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I V . Conclusion S ta te Farm's application for turnover after judgment of Wilkins's shares in his law p ra c tic e , the Wilkins Law Firm, P.C., and Wilkins's contingent fee interests, and for a p p o in tm e n t of a receiver and master in chancery, is granted. An order for turnover of p ro p e rty and for appointment of a receiver is separately entered. SIGNED on July 28, 2008, at Houston, Texas.

______________________________________ L e e H. Rosenthal United States District Judge

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