Detox Industries, Inc. v. Gullett – Case Brief Summary (Texas)

In Detox Industries, Inc. v. Gullett (Tex.Ct.App. 1989) 770 S.W.2d 954, a judgment creditor filed an application for turnover relief under the Texas turnover statute and Texas Business and Commercial Code section 8.317 (hereafter "Texas section 8.317"), Texas's version of Uniform Commercial Code section 8317, the predecessor to section 8112. (Id. at pp. 955-956.)

One of the judgment debtors, Ernest Dardas, owned stock in Detox Industries (Detox). He could not be located and was not before the court. He had no other assets that were available for execution. The other judgment debtor, Tom Dardas, was the president and chief executive officer of Detox. He had no significant assets to satisfy the judgment. (Id. at p. 955.)

The judgment creditor obtained a court order directing Detox to cancel the shares issued in Ernest Dardas's name and reissue the stock certificate in the name of a court-appointed receiver. The court directed the receiver to deliver the reissued stock certificate to the sheriff to be sold at an execution sale.

The corporation, Detox, appealed, claiming the trial court's order directing it to cancel the shares and reissue the certificate was not authorized by the Texas turnover statute or Texas section 8.317 because there was no evidence that Detox owned or possessed the stock certificate or that Ernest Dardas owned the shares at the time of the court's order. (Detox Industries, supra, 770 S.W.2d at pp. 955-956.)

Texas section 8.317 provided:

"(a) Subject to the exceptions in Subsections (c) and (d), no attachment or levy upon a certificated security or any share or other interest represented thereby which is outstanding is valid until the security is actually seized by the officer making the attachment or levy. . . . . . . (f) A creditor whose debtor is the owner of a security is entitled to aid from the courts of appropriate jurisdiction, by injunction or otherwise, in reaching the security or in satisfying the claim by means allowed by law or in equity in regard to property that cannot readily be reached by ordinary legal process." (Detox Industries, supra, 770 S.W.2d at p. 956, citing Texas Bus. & Com. Code Ann. ' 8.317.)

Detox argued that if the trial court's order were upheld, it might be liable to a bona fide purchaser as a result of complying with the order. (Id. at p. 958.)

The appellate court reversed.

The court explained that Texas section 8.317 does not authorize a court to order cancellation of an original stock certificate and issue a new certificate in the creditor's name where neither the stock transfer agent nor the judgment debtor was the owner or holder of the certificate. The court reasoned that Texas section 8.317 "affords a creditor a means of gaining control of a certificate from the owner or holder thereof, not the issuer" and that the statute "provides no right to the issuance of a new certificate when the old one cannot be reached." (Detox Industries, supra, 770 S.W.2d at p. 956.)

The court stated:

"The requirement that a corporation have possession of the stock certificate before it cancels the certificate and issues a new one is sound. Without the shares of stock, the corporation does not know if the shares have been transferred by the purchaser. Moreover, 'an attachment filed at the issuer's office against the shares represented by the security on the books is ineffective unless the security itself has been surrendered to the issuer. . . .' Consequently, Section 8.317 'prevents attaching or levying creditors from securing rights paramount to those of purchasers who have actual possession of the security. . . .' " (Id. at p. 957.)

The court also determined that the relief the creditor sought was not authorized by the Texas turnover statute. (Id. at pp. 957-958.)

The court concluded that since Detox was not the judgment debtor and did not own or possess the stock certificate, the trial court improperly ordered Detox to cancel the shares. (Id. at p. 958.)