DAVID J. WILLIS ATTORNEY
Copyright © 2018. All rights reserved worldwide.
JUDGMENTS IN TEXAS
by David J. Willis, J.D., LL.M.
Any discussion of judgments in Texas needs to be broadly divided into two parts: first, the process of obtaining a judgment (which, after all, is only a piece of paper signed by a judge) and second, actually collecting on the judgment. The second part may be more challenging, since Texas is a state notoriously favorable to debtors. It is unconstitutional to garnish wages in Texas, and an individual's home and vehicles are usually beyond reach. Unless a judgment debtor has a going business with valuable inventory or cash flow, rental property, or cash in the bank, collecting on a judgment may be problematic. Often, the creditor's attorney receives word from the constable that he is unable to collect and is returning the writ of execution nulla bona.
To get a more complete picture, the reader may want to review our web article on judgment liens and the homestead.
Finality of Judgments
One can only obtain a judgment after filing a lawsuit and complying with the rules of civil procedure in order to either prevail at trial or obtain a judgment by default. After the judgment is signed, the court clerk will not issue a writ of execution until it is at least 30 days old (21 days in justice court) at which time the judgment is considered final. This post-judgment waiting period exists so that the debtor has ample time to file a motion for new trial as a prerequisite to appeal. If the motion is granted, or if the debtor files an appeal, then execution efforts must cease.
Abstracting the Final Judgment
It is normal procedure for the creditor to request an abstract of judgment from the court clerk and then file that abstract in the real property records where it must be indexed by the county clerk (Note that judgment records and real property records are often located in different computers, which explains the occasional disparity). In certain courts and counties, the judgment creditor's attorney may prepare the abstract. Either way, the abstract must substantially comply with the requirements of Property Code sec. 52.003 (including providing a list of specific information such as names, addresses, amount of the judgment, and so forth) or no lien attaches. Texas American Bank v. Southern Union Exploration, 714 S.W.2d 105 (Tex.App.—Eastland 1986, write ref'd n.r.e.). If a judgment lien is challenged by the debtor, the burden of proof is on the judgment creditor to show that abstract is correct and substantially meets statutory requirements. Day v. Day, 610 S.W.2d 195 (Tex.Civ.App.—Tyler 1980, writ ref'd n.r.e.). All of the foregoing apply equally to foreign judgments domesticated in Texas. Reynolds v. Kessler, 669 S.W.2d 801 (Tex.App.—El Paso 1984, no writ).
Filing the abstract puts the public on notice that the judgment exists and attaches to non-exempt real property of the debtor. Title companies will search for these AJs to determine if they should collect from sales proceeds to satisfy them. This represents a problem for any judgment debtor who is trying to sell property out of his own name, including homestead property. Even though a judgment lien does not attach to, and does not constitute a lien on, a judgment debtor's homestead, it can be difficult to persuade a title company to ignore a judgment and go forward with closing. A title company's self-serving reaction is to minimize risk to itself and require that all liens be cleared.
The abstract or "AJ" stays on file for 10 years but may be refiled for successive 10-year periods. Note, however, that a judgment will become dormant if no attempt is made to execute upon it during the 10 years following its effective date. Tex. Civ. Proc. & Rem. Code sec. 34.001. Dormant judgments may nonetheless be revived if action is taken within 2 years of their dormancy.
To clarify a common misunderstanding: a judgment standing alone is not a lien. A judgment lien "comes into existence by the recording an indexing of an abstract of judgment . . . it terminates by the expiration of the ten-year period [and] can never be extended. . . . Clearly, the law contemplates that abstracts of a judgment may be recorded in different counties. If such abstract be recorded in a number of different counties, each is an independent lien. . . . So it is thus seen that one or more liens may exist to secure the same judgment." Burton Lingo Co. v. Warrant, 45S.W.2d 750, 752 (Tex.App.—Eastland 1931, writ ref'd).
Filing an AJ is often the only realistic way that a judgment creditor has to collect—in some cases years after the judgment was obtained.
The Hunt for Assets
Online resources available to judgment creditors are considerable. A prudent creditor will undertake a search prior to investing in a lawsuit at all, and will then refresh that search after the judgment is final. Possible searches include:
(1) The Secretary of State's website can reveal what Texas companies a judgment debtor has an interest in. Although this database actually indicates managers and officers rather than owners (members or shareholders), it is often the case that a manager of an LLC or the president of a corporation is also at least a part owner of the enterprise. Corporate stock may be attached and LLC membership interests may be placed under a charging order. The Secretary of State also maintains a statewide registry of assumed names.
The Role of Post-Judgment Discovery in Locating Assets
(2) The Texas Comptroller's website allows an inquirer to search sales tax records and ascertain if a company is current with its franchise tax payments and reports. Plenty of information can be gleaned from these.
(3) Appraisal district websites, although not as reliable as the county clerk's real property records, can reveal whether or not a judgment debtor is being taxed on property other than a homestead (which is exempt from execution of course). Let's say that a search of the Secretary of State's website suggests that a debtor may have an interest in an LLC established to invest in real estate; an appraisal district's rolls may give a creditor an idea of exactly which real estate that is.
(4) The county clerk maintains a number of data bases that are useful to a judgment creditor. The first is of course the real property records, which show both current recorded ownership and chain of title as to properties located within the county. The right type of search can show conveyances out of the judgment debtor's name in the recent past—possibly an indication of fraudulent transfers.
The clerk's assumed name records are a second useful tool. Assumed names are not legal entities, so if a debtor is operating under a DBA then the assets associated with that DBA could well be subject to execution on the judgment.
The county clerk also maintains a record of UCC filings which can lead a creditor to attachable assets such as inventory and equipment.
(5) The multiple listing service can indicate an attempt by a judgment debtor to move properties out of the debtor's name and also suggest what these properties may be worth.
(6) Judgment creditors frequently use other sites such as TLO, Accurint, and Public Data to locate other assets such as vehicles.
Judgment creditors, often at a disadvantage in Texas, have a particularly important collection tool: post-judgment discovery which includes interrogatories, requests for admission, and requests for production. Tex. R. Civ. P. 621a. This discovery can be incredibly complex since rules pertaining to limits on trial discovery do not apply post-judgment.
The purpose of post-judgment discovery is (1) to ascertain whether or not the debtor possesses non-exempt property sufficient to satisfy the judgment; and (2) to determine if the debtor has fraudulently hidden assets. In addition to written discovery, it is possible to delve into these matters by taking the debtor's deposition, although written discovery generally comes first. Note that if a debtor who has been properly served fails to answer post-judgment discovery, he or she may be held in contempt by the judge, resulting in a fine or even jail. Tex. R. Civ. P. 215.
If actionable information is obtained, the judgment creditor can approach the court and request a writ of attachment, Tex. R. Civ. P. 641, Tex. Bus. & Com. Code § 8.112; garnishment, Tex. R. Civ. P. 669; or a turnover order, Tex. Civ. Prac. & Rem. Code § 31.002.
Writ of Execution
The judgment creditor bears the burden of preparing the writ of execution and placing it in the hands of the appropriate officer for execution. Sintim v. Larson, 489 S.W.3d 551 (Tex.App—Houston [14th District] 2016, no pet.). The writ of execution is usually sent to the local constable (or sheriff, in some counties) who charges a fee for attempting to collect. The reality is that these officers may not try very hard—no flashing lights, no guns drawn. Often, the constable will knock at the debtor's door early in the morning, present the judgment, and ask if there are any assets available to satisfy it. If the debtor says no, then the officer may withdraw and send the unsatisfied writ back to the court. Unless the creditor's attorney can direct the officer to a specific, known, non-exempt asset for attachment or garnishment, then the collection process may come to halt. Other mechanisms available to the judgment creditor include a writ of possession or, for personal property, writs of garnishment and sequestration.
Writs of execution are generally available after the expiration of 30 days, when a judgment becomes final, so long as no supersedeas (appeal) bond has been filed by the debtor. It is, however, possible to get a writ sooner under Tex. R. Civ. P. 628 "upon the filing of an affidavit by the plaintiff in the judgment or his agent or attorney that the defendant is about to remove his personal property subject to execution by law out of the county, or is about to transfer or secrete such personal property for the purpose of defrauding his creditors."
Rule 637 states what happens next: "When an execution is delivered to an officer he shall proceed without delay to levy the same upon the property of the defendant found within his county not exempt from execution, unless otherwise directed by the plaintiff, his agent or attorney. The officer shall first call upon the defendant, if he can be found, or, if absent, upon his agent within the county, if known, to point out property to be levied upon, and the levy shall first be made upon the property designated by the defendant, or his agent. If in the opinion of the officer the property so designated will not sell for enough to satisfy the execution and costs of sale, he shall require an additional designation by the defendant. If no property be thus designated by the defendant, the officer shall levy the execution upon any property of the defendant subject to execution." Once levied upon, real property may then be sold at public auction on foreclosure day.
The Homestead is Exempt from Execution
Many Texas debtors have numerous judgments against them but live in expensive homes. They can do this because the entire homestead equity is exempt from execution. What constitutes a debtor's homestead? Within broad parameters, a homestead is what a person intends it to be, subject to size limitations (10 acres for an urban homestead, 200 acres for a rural one). Tex. Prop. Code § 41.002. A rental property or even a vacant lot can be homestead if the owner has reasonable expectations of building a home on it. Moreover, 41.001(c) states that "proceeds of a sale of a homestead are not subject to seizure for a creditor's claim for six months after the date of sale." This expressly permits homestead protections to be rolled over from one home to the next.
Certain personal property is also exempt under chapter 42 of the Property Code. Personal property valued at $60,000 for a family or $30,000 for a single adult (exclusive of liens) is exempt from garnishment, attachment, execution or other seizure so long as it is on the statutory list. This includes home furnishings, clothes, jewelry, firearms, and vehicles—even 12 head of cattle—but excludes cash on hand or in checking or savings accounts. Retirement plans (including rollover proceeds) are exempted under section 42.0021 so long as contributions do not exceed the amount that is deductible under current law. College tuition funds are exempted under section 42.0022. It is important to note that homestead protections are available only to individuals, not LLCs or corporations.
For more detail on homestead protections, see our web article Homestead Protections in Texas which is devoted entirely to this subject.
Release of Liens against the Debtor’s Homestead
A homestead is exempt from forced sale so long as the property remains the homestead of the debtor. Exocet Inc. v. Cordes, 815 S.W.2d 350, 352 (Tex. App.—Austin 1991, no writ). In furtherance of this principle, Property Code section 52.0012 provides an expedited statutory method for securing a release of any judgment lien against homestead property, available only for AJ's abstracted after September 1, 2007.
Section 52.0012 provides for the filing of an Affidavit that must substantially comply with the appearing in this section of the Property Code. Filing of the affidavit must be preceded by a 30-day notice sent certified mail and addressed to the judgment creditor and its attorney of record. The letter must contain a copy of the affidavit that the homestead owner intends to file in the real property records. The requirements of the letter and the affidavit are highly technical and should be done by an attorney knowledgeable in this procedure. The judgment creditor may contest the homeowner's action by filing a contradicting affidavit if there is reason to believe that the homeowner's affidavit is false. The ultimate result, if this procedure is followed to the letter, is that the homeowner's affidavit when executed and filed serves as a release of the judgment lien as to the homestead property.
Turnover Orders and Receivership
A post-judgment turnover order pursuant to Civ. Prac. & Rem. Code sec. 31.002 et seq. is a "procedural device by which judgment creditors may reach assets of a debtor that are otherwise difficult to attach or levy on by ordinary legal process." Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223, 224 (Tex. 1991). The turnover order requires that the judgment debtor bring to the court any non-exempt items available for execution on the judgment, rather than relying solely on the judgment creditor's ability to utilize conventional methods of execution and attachment through the local sheriff or constable. Sec. 31.002 states that a "judgment creditor is entitled to aid from a court of appropriate jurisdiction through injunction or other means in order to reach [non-exempt] property to obtain satisfaction on the judgment if the judgment debtor owns property, including present or future rights to property that . . . cannot readily be attached or levied on by ordinary legal process."
Contempt is serious business. A fine or incarceration (or both) may be employed. "The court may enforce the order by contempt proceedings or by other appropriate means in the event of refusal or disobedience." Civ. Prac. & Rem. Code §31.002(c).
Included among the tools available is the most powerful weapon in the collection arsenal—the appointment of a receiver—"with the authority to take possession of the non-exempt property, sell it, and pay the proceeds to the judgment creditor to the extent required to satisfy the judgment." Tex. Civ. Prac. & Rem. Code §31.002(b)(3). Property subject to a receivership order may include limited authority over a defendant's membership interest in a limited liability company. Bennett v. Broocks Baker & Lange, LLP, No. 01-13-00674-CV (Tex.App.—Houston [1st Dist.] 2014, no pet.). Even though an LLC membership interest is personal property, the exclusive remedy against it (notwithstanding the presence of a receiver) is still a charging order. Pajooh v. Royal W. Invs., 518 S.W.3d 557, 565-66 (Tex.App.—Houston [1st] 2017, no pet.). How would this likely play out in practice? The appointed receiver would simply ask the judge for a charging order—but that is as far as the receiver could go with respect to the judgment debtor's LLC membership interest. Its sale could not be forced as is the case with other types of non-exempt personal property.
Back to the subject of receivers: these individuals are court-appointed czars who have nearly unlimited power to take over not just the business but seemingly the entire life of a judgment debtor and wring every available cent from non-exempt assets in order to satisfy the debt—including, of course, the receiver's often crushing fees. Receivership is highly profitable for court-favored attorneys who are appointed to serve in that capacity, but devastating to the debtor. This author has never seen a small business survive a receivership. In the real world, more often than not, receivership of a real estate investment business is the equivalent of a forced liquidation.
Usually, the power of a court to issue or amend orders ends 30 days after the judgment (Tex.R. Civ. P. 329(b)(d)). Not so with receivership. A court's power to enforce a judgment and to enable the judgment creditor to continue to pursue the judgment debtor is essentially indefinite so long as the judgment remains unpaid. See Tex.R. Civ. P. 308; Matz v. Bennion, 961 S.W.2d 445, 452 (Tex.App.—Houston [1st Dist.] 1997, pet. denied). Accordingly, a judgment creditor facing an aggressive receiver (particularly one who is motivated to collect a large amount) may find himself on the perpetual defensive.
Judgments against Married Persons: Community vs. Separate Property
This can get complicated because the rules are different for community and separate property. Texas Family Code sections 3.201-203 govern spousal liability, rules of marital property liability, and the order in which marital property may be subject to execution on a judgment. Generally, a non-debtor spouse's community property interest under the control of both spouses may be levied upon to satisfy a judgment which was rendered against the other spouse alone. A common example is a judgment for credit card debt that is taken against one spouse. Once the judgment becomes final and is properly abstracted, filed, and indexed, the credit card company will then have a lien against all community property that is subject to joint management, control, and disposition by the two spouses—which will be all of it in most cases—regardless of whether or not the non-debtor spouse was named in the suit. This is true even if the judgment is against one spouse only for attorneys' fees incurred in the couple's divorce! Gardner Aldrich, LLP v. Teddler, 2011 WL 3546589 (Tex.App.—Fort Worth, August 1, 2011).
Separate property is another matter. A judgment lien against one spouse does not generally attach to the separate property of the non-debtor spouse.
Enforcement of Judgments from other States
Unfortunately for Texas debtors, this is not as difficult as it used to be. Enforcement of "foreign judgments" is governed by Civil Practice & Remedies Code chap. 35, also referred to as the "Uniform Enforcement of Foreign Judgments Act" or "UEFJA." The UEFJA provides that a foreign judgment may be authenticated as follows: (a) at the time the foreign judgment is filed, the judgment creditor or the judgment creditor's attorney must file with the clerk of court an affidavit showing the name and last known address of the judgment debtor and the judgment creditor; (b) the clerk then mails notice of the filing of the foreign judgment to the judgment debtor at the address given; and (c) the notice must include the name and address of the judgment creditor and, if the judgment creditor has an attorney in Texas, the attorney's name and address. If a judgment from another state (a "foreign judgment") is properly domesticated in Texas, it immediately becomes a Texas judgment. Citicorp Real Estate, Inc. v. Banque Arabe International D'Investissment, 747 S.W.2d 926 (Tex.App.—Dallas, 1988, writ denied). So long as the judgment is not being appealed in its original jurisdiction, the creditor will have access to post-judgment discovery and other remedies allowed under Texas rules.
The result is that a foreign judgment may be enforced and collected in Texas just as any other judgment, with one limitation: Civil Practice & Remedies Code section 16.066(b) provides that the foreign judgment may not be enforced in Texas if 10 years have passed since the judgment was rendered in its home state or after the judgment debtor has resided in Texas for 10 years. Good news or bad news, depending on which end of the dispute you are on.
Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes and any statutes or cases referred to should be checked for updates. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.
©2018 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, http://www.LoneStarLandLaw.com.