Mutual Life Insurance v. Bohart (743 F.2d 313, 1984)

GARWOOD, Circuit Judge:

The Mutual Life Insurance Company of New York (“Mutual”) appeals the dismissal of its interpleader action, brought under Fed.R.Civ.P. 22(1) and Bankruptcy Rule 722, and the money judgment against it and in favor of Universal Metals & Machinery, Inc. (“Universal”), a defendant in the interpleader, on the latter’s counterclaim in those proceedings. Appellees are Universal, James T. Bohart (“Bohart”), and Bo-hart’s trustee in bankruptcy (the “Trustee”). The bankruptcy court based its dismissal of the interpleader on laches, finding that the filing of the interpleader was untimely and that such delay caused prejudice to appellees. The judgment for Universal against Mutual was based on Universal’s prior garnishment of sums due by Mutual to Bohart as beneficiary of a Mutual life insurance policy. We reverse and remand.

FACTS

The facts leading up to this lawsuit are undisputed. On May 10, 1974, Mutual issued a term life insurance policy in the amount of $350,000 on the life of Jean Bohart. The policy named as beneficiary Mrs. Bohart’s husband, James T. Bohart. About five weeks later, Mrs. Bohart died, and Bohart became entitled to the proceeds of the policy. The policy apparently provided several possible alternate “Modes of Settlement” which could be elected by the beneficiary, including installment payments of the policy proceeds. In June 1974, Bohart elected the option providing for him to receive the policy proceeds in monthly payments of $5,000.

On May 8, 1974, two days before Mutual issued the policy on Mrs. Bohart’s life, Universal obtained a judgment against Bohart in the Texas district court in Dallas in the amount of $219,000, plus interest at 6.75 percent per annum from September 12, 1972, and costs. Bohart timely appealed this judgment, but never superseded it. None of this judgment has been paid. To recover its judgment, Universal applied for post-judgment writs of garnishment against Mutual in the United States District Court for the Northern District of Texas, Dallas Division, and in the state district court in Dallas, on November 1 and November 4, 1974, respectively. The writs were issued and served on Mutual on these same dates. As authorized by Rule 658a, Texas Rules of Civil Procedure, Universal posted no bond in these garnishments as they were pursuant to subdivision 3 of article 4076, Texas Revised Civil Statutes, providing for garnishment “[wjhere the plaintiff has a valid, subsisting judgment.”

On November 5, 1974, however, after it had been served with the writs of garnishment, Mutual paid Bohart the policy sums due him for the months of June through October 1974, a total of $25,000. On November 13, Mutual filed garnishee affidavits in the state and federal garnishment suits brought by Universal. In the affidavits, Mutual admitted liability to Bohart for the remaining proceeds of the insurance policy ($325,000) and committed to hold this amount “subject to the further order of the court.” Mutual apparently filed no additional pleadings in these garnishment actions. Bohart never intervened in the garnishments. So far as the record reflects, no judgment has been entered in either of the garnishment actions.

A few months after the initiation of the garnishments, however, a complication arose. On March 27,1975, the Texas Court of Civil Appeals reversed the judgment won by Universal against Bohart and rendered judgment instead that Universal take nothing in that action. Bohart v. Universal Metals & Machinery, Inc., 523 S.W.2d 279 (Tex.Civ.App. — Dallas 1975). Following this decision, on September 30, 1975, Mutual paid Bohart an additional $50,000 representing the monthly insurance payments for the period extending from November 1974 through August 1975.

Shortly thereafter, in October 1975, another creditor of Bohart, Citibank of New York (“Citibank”), filed suit against him in New York state court. In connection with this suit, Citibank applied for an order of attachment against Bohart’s property. Mutual was served with this order on October 8 at its New York office and on October 10 filed in that proceeding its “affidavit of garnishee pursuant to order of attachment,” admitting that it held $275,000 of policy proceeds payable at $5,000 a month to Bohart. Mutual filed no additional pleadings in that suit. On January 30, 1976, Citibank obtained a judgment against Bohart in the amount of $368,275.46 and in early February 1976 a judgment was entered against Mutual in Citibank’s attachment suit. This latter judgment required Mutual to pay all sums presently owing to Bohart and “all future sums to become payable to James T. Bohart, in the sums of $5,000.00 per month, at such times and in such a manner as they will have become payable to James T. Bohart until such sums will, if possible, satisfy the ... demand against James T. Bohart____” Mutual complied with the judgment and on March 1,1976 paid the sheriff of New York County, New York the payments due September 17, 1975 through February 17, 1976, a total of $30,000. In accordance with the attachment judgment, Mutual made $5,000 payments, totaling $25,000, on the seventeenth day of each of the months of March, April, May, June, and July 1976. Bohart did not intervene in these attachment proceedings. Nor did Universal, which apparently first found out about them a few days prior to May 18, 1976. Citibank never intervened in the Texas garnishment proceedings (it is not shown when it learned of them).

Universal’s suit against Bohart remained pending, having been appealed to the Texas Supreme Court. In an opinion dated March 10, 1976, apparently before Mutual’s second payment on Citibank’s attachment suit, the Texas Supreme Court reversed the judgments of both lower courts, remanding Universal’s action against Bohart to the district court for a new trial. Universal Metals & Machinery, Inc. v. Bohart, 19 Tex.Sup.Ct.J. 212 ( — . —, 1976). On June 23, 1976, however, the Texas Supreme Court, on motion for rehearing, withdrew its prior action, reversed the decision of the Court of Civil Appeals, and in all things affirmed the district court’s judgment for Universal against Bohart. Universal Metals & Machinery, Inc. v. Bohart, 539 S.W.2d 874 (Tex.1976). Shortly before this June 23 decision by the Texas Supreme Court, however, yet another complication occurred. On May 14,1976, Bohart’s creditors instituted an involuntary bankruptcy proceeding against him in the United States District Court for the Northern District of Texas. He was adjudicated a bankrupt on June 9, 1976. In connection with the bankruptcy action, Bohart and the Trustee also made claims to the insurance proceeds. Bohart apparently claimed the proceeds were exempt under article 21.22 of the Texas Insurance Code. There is no evidence that Bohart had ever previously claimed the proceeds were exempt or that Mutual was aware of his claim in this regard prior to filing its interpleader in January 1977.

By July 1976, Mutual had paid $75,000 of the policy benefits to Bohart and $55,000 to Citibank. Mutual made no further payments. Of the $75,000 received by Bohart, $25,000 was paid after service of the garnishment writs and before Mutual’s answer in those proceedings, and $50,000 was paid after the judgment of the Court of Civil Appeals and before either the Citibank attachment proceedings or the March 1976 initial opinion of the Texas Supreme Court. Of the $55,000 paid Citibank, $10,000 or $15,000 was paid after initiation of the bankruptcy proceedings against Bohart, including $5,000 which was- paid after the June 23, 1976 final decision by the Texas Supreme Court. The remainder of the payments to Citibank were made after both its attachment and the judgment of the Court of Civil Appeals and before the bankruptcy and the June 23, 1976 Texas Supreme Court decision.

On January 14, 1977, Mutual filed a bill of interpleader under Bankruptcy Rule 722 and Fed.R.Civ.P. 22(1) in Bohart’s involuntary bankruptcy proceeding. In connection with its interpleader, Mutual deposited with the bankruptcy court and the Trustee all then accrued payments due on or after August 17, 1976 on the insurance benefit payable to Bohart. On the filing of the interpleader, the bankruptcy court entered an order restraining Citibank and Universal from further prosecuting their respective attachment and garnishment suits against Mutual. The defendants answered Mutual’s complaint and counterclaimed for recovery of the insurance proceeds: the Trustee claimed the proceeds as Bohart’s trustee in bankruptcy; Universal claimed the proceeds, without any deduction for Mutual’s payments to Bohart and Citibank, based upon Universal’s post-judgment writs of garnishment; and Bohart claimed the proceeds as his exempt property. Citibank moved to dismiss the interpleader on jurisdictional grounds. After their answers, however, the defendants entered into a settlement agreement among themselves which was approved by the bankruptcy court. As part of the settlement, the Trustee purchased for $64,729.44 the judgment against Mutual entered in Citibank’s attachment suit. In addition, the Trustee, Bohart, and Universal agreed that each would receive one third of any recovery from Mutual. They then filed an amended answer and counterclaim, requesting dismissal of Mutual’s interpleader, dissolution of the restraining order against Citibank, and rendition of judgment against Mutual on Universal’s counterclaim; Bohart and the Trustee disavowed any claims in their own individual rights to the policy proceeds. The case was submitted to the bankruptcy court on a pretrial order that stipulated the facts and set forth the contested issues of law. On February 8, 1983, the bankruptcy court entered final judgment dismissing Mutual’s interpleader on the basis of laches. The court also entered judgment in favor of Universal on its counterclaim against Mutual for the full amount of Universal’s judgment against Bohart, $219,000 plus interest since September 12, 1972. Mutual appealed to the district court and that court affirmed the bankruptcy court’s judgment. This appeal followed.

DISCUSSION

Issues

In holding that the interpleader should be dismissed for laches, both the bankruptcy court and the district court purported to pretermit the question of whether the decision of the Court of Civil Appeals in Universal’s suit against Bohart “suspended” Universal’s garnishment of Mutual. Nevertheless, it appears that the judgment below in favor of Universal on its counterclaim against Mutual necessarily rests on the determination that Universal’s garnishment, at least as a consequence of the Texas Supreme Court’s June 23, 1976 final decision, “trapped” the entire face amount of the Mutual policy, including the $50,000 thereof which Mutual paid to Bohart after the Texas Court of Civil Appeals’ decision and before either the Texas Supreme Court’s decision or the Citibank attachment, and also the some $50,000 thereof which Mutual paid to Citibank on its attachment after the Court of Civil Appeals’ decision and before the June 23, 1976 final decision of the Texas Supreme Court. Moreover, Universal’s claim that it was prejudiced by Mutual’s delay in bringing the interpleader rests in large part on the assertion that allowance of the interpleader would cause it to “lose” its right to these funds which Mutual had paid out on the policy, and this factor also seems to have influenced the courts below in dismissing the interpleader. Consequently, we first consider the question of the effect of the Court of Civil Appeals’ decision on the garnishment proceedings, and then turn to the question of laches in bringing the inter-pleader.

Texas Law/Effect of Reversal

As Mutual asserts, Texas courts have held that “[generally, reversal of a judgment or order completely nullifies it, leaving it as if it had never been rendered other than as to further rights of appeal.” Flowers v. Flowers, 589 S.W.2d 746, 748 (Tex.Civ.App. — Dallas 1979, no writ). See also Ex parte Rutherford, 556 S.W.2d 853 (Tex.Civ.App. — San Antonio 1977, no writ); Bichsel v. Heard, 328 S.W.2d 462 (Tex.Civ. App. — San Antonio 1959, no writ). Further, it is well-established that under Texas law a post-judgment garnishment is “ancillary to the original proceedings and is the extension and enforcement of the trial court’s judgment.” Pitts v. Dallas Nurseries Garden Center, Inc., 545 S.W.2d 34, 37 (Tex.Civ.App. — Texarkana 1976, no writ). A reversal of the lower court’s judgment sets aside not only that judgment, but also any ancillary proceedings dependent upon it. Flowers, 589 S.W.2d at 748; Thurmond v. Kleberg First National Bank, 481 S.W.2d 164, 165 (Tex.Civ.App.— Corpus Christi 1972, writ ref’d n.r.e.).

Thurmond involved an action for garnishment which was brought against the Kleberg First National Bank based upon a final judgment in another case against a depositor of the bank. Because it had reversed the judgment in the main case, the Court of Civil Appeals found it unnecessary to resolve the issues presented in the appeal of the garnishment action and simply reversed and remanded this action to the trial court for further proceedings. In so doing, the court stated that “[t]he garnishment proceeding brought ... after judgment in the main case fails because of the reversal of that judgment, and in the present posture of the case it appears that there is no final judgment on which to base the instant garnishment proceeding.” 481 S.W.2d at 165. Unlike the present case, as appellees point out, the trial court in Thurmond had ordered the dismissal of the garnishment suit upon the filing of a supersedeas bond by the defendant in the main suit. The appeal in that case was thus by the garnishor who apparently wished to proceed with garnishment of the debtor’s checking accounts. For this reason, Thurmond is not precisely on point. Nevertheless, we find that the language of this opinion supports the appellant’s position.

Bichsel, Ex parte Rutherford, and Flowers all involved contempt proceedings brought to enforce an order of the district court that had been reversed by a judgment of the Court of Civil Appeals. Flowers and Ex parte Rutherford involved contempt proceedings as a result of a custody order. In Bichsel, the Court of Civil Appeals reversed an order by the district court enjoining a police chief from ordering a police officer to take a polygraph examination. Almost immediately after this reversal the police chief ordered the officer to take the test, and a contempt proceeding was initiated against the chief. The court refused to enforce the contempt order, determining that its judgment had the “effect of instantly dissolving the injunction, although the appellee had a right to file a motion for rehearing and, if this were overruled, then to apply for a writ of error to the Supreme Court of Texas.” 328 S.W.2d at 466.

Appellees attempt to distinguish these three cases on the basis that they involve contempt proceedings and do not apply in the garnishment context. This argument has some appeal. Because an order of contempt is a harsh and punitive measure, it is reasonable that a court would be reluctant to enforce such an order where the basis for it was in doubt. However, we do not consider the reasoning of these cases to be limited to contempt proceedings.

Appellees also attempt to distinguish the cases relied on by Mutual by pointing out that these are all cases in which the decision by the Court of Civil Appeals was in fact the final decision because no writ of error was subsequently granted by the Texas Supreme Court. This distinction is not persuasive and is not supported by the reasoning in these decisions. In Bichsel, for example, the court decided that its reversal dissolved the injunction granted by the district court even before the date for motion for rehearing in that court.

We find most persuasive a decision by the Texas Supreme Court, Flanary v. Wade, 102 Tex. 63, 113 S.W. 8 (Tex.1908). In that land title suit, the Texas Supreme Court was required to determine who was entitled to a particular tract of land that had been sold under execution as a result of a previous suit. In the earlier suit, the district court had held in favor of the plaintiff, but the Court of Civil Appeals, in a decision rendered April 18, 1903, had ordered that the judgment of the district court be reversed and the cause remanded unless the appellee filed a remittitur within twenty days. A remittitur was timely filed, and on May 9, 1903 the appellate court ordered that the judgment be affirmed in the original amount, less the re-mittitur. The plaintiff in the district court caused a writ of execution to be issued on April 28, 1903, and on May 8, 1903 the writ was levied on the land of the defendant. The land was sold under this execution on July 7, 1903. The Texas Supreme Court held that the execution and levy were void because the execution had been issued on a judgment that was then annulled by the Court of Civil Appeals. For this reason, the court held that the sale of the land was void and conferred no title upon the buyer, or his assignee, a party to the land title suit, notwithstanding that when the sale took place the judgment had been affirmed. The court reasoned as follows:

“On the 28th day of April, 1903, there was no judgment in the district court of Bosque county between the parties hereto which would authorize the issuance of the execution that the clerk of that court issued directed to the sheriff of Erath county. Therefore the execution issued upon the judgment which had been annulled by the Court of Civil Appeals being'without authority was void, and the levy made by virtue of that execution upon the land in controversy on the 8th day of May was likewise invalid. It follows that, the execution and the levy upon which the subsequent proceeding and sale depended being invalid, the sale itself was void, and conferred no title upon Wood who purchased at the sale made on July 17, 1903. The title of Wade being derived from Wood, necessarily falls with it, and the conclusion must be reached that Wade had no cause of action in this case for the recovery of this land.

“The subsequent affirmance of the judgment of the district court of Bosque county by the Court of Civil Appeals was in fact the entering of a new and different judgment, but in no phase of the case could the subsequent entry of the judgment have the effect to make valid that which was void before.” 113 S.W. at 10.

Appellees argue that Flanary is distinguishable as involving an execution rather than a garnishment. We are not persuaded that this is a sufficient basis on which to distinguish Flanary, particularly as the Texas courts have characterized garnishment as “being but a mode of enforcing execution.” Kelly v. Gibbs, 84 Tex. 143, 19 S.W. 563, 564 (1892). See also Tom Benson Chevrolet Company, Inc. v. Beall, 567 S.W.2d 857, 859 (Tex.Civ.App. — San Antonio 1978, writ ref’d n.r.e.) (“Garnishment is but a mode of enforcing execution of a court’s judgment.”). Moreover, the important point is that Flanary held the judgment of the Court of Civil Appeals was immediately effective to set aside the trial court’s judgment and render it inoperative, notwithstanding that no mandate had issued and the judgment of the Court of Civil Appeals was not final in the sense that it was still subject to being set aside by the Court of Civil Appeals itself or by the Texas Supreme Court.

We agree with appellees that none of the cases cited by Mutual fit the precise facts of the present case. Based on our review of this authority, however, certain principles emerge that must govern our decision here. First, it appears that a reversal by the Court of Civil Appeals results in the immediate suspension of the judgment of the district court. This is so even though the mandate has not issued in the case and there is a petition for writ of error pending. Moreover, the reversal has a like effect on any ancillary action, such as post-judgment garnishment under subdivision 3 of article 4076, that depends on the judgment which is reversed by the appellate court. For these reasons, we hold that the writs of garnishment in the present case ceased to be in effect during the period after the decision by the intermediate Texas appellate court and prior to the June 23, 1976 judgment of the Texas Supreme Court.

Appellees argue, however, that under Texas law the duties of a garnishee, such as Mutual, are those described in Cohen v. Advance Imports, Inc., 597 S.W.2d 449 (Tex.Civ.App. — Dallas. 1980, writ ref d n.r. e.). Cohen was a conversion suit brought by Advance Imports, Inc., which had arranged with the defendants Cohen and Alpha Enterprises to act as its agent in selling its goods in Texas to several customers, including the Gibson retail stores. Goods had been shipped by Advance Imports to Houston and had been stored in a warehouse owned by Alpha when a dispute arose between Advance Imports and Gibson. As a result of this dispute, Gibson filed suits in two justice of the peace , , , . , , „ courts, and caused prejudgment writs of ... , ... T garnishment to be served on Alpha. In . ... ,. . , T , each of those proceedings Advance Imports allowed a default judgment to be rendered against it but then timely filed bonds for appeal and trial de novo m the county court at law. Because of these two prejudgment writs, Cohen and Alpha refused to return the goods to Advance Imports, and Ad-t j. ii. -j. • vanee Imports then filed its conversion ac- ,. . , ,, „ , tion against them. The district court found . „ „ . . T , m favor of Advance Imports on its conver- . . . ; . , , smn suit and awarded damages against defendants Cohen and Alpha. On appeal of that judgment, the issue for the Court of Civil Appeals was whether Cohen and Alpha were justified m detaining the goods pending Advance Imports appeal of the two justice court suits in which prejudgment garnishment writs had been issued. Advance Imports argument was that the justice court prejudgment writs no longer had any effect because of the appeals in the principal suits. Expressly noting that the writs of garnishment were based on the garnishor’s bond and were not based on judgments, the court determined that it need not decide whether the writs remained in effect pending the appeals to the county courts at law in the main suits, which appeals, though without supersedeas bonds, had the effect of vacating the judgments against Advance Imports. The court con-eluded that a garnishee is simply not required to resolve such questions, and stated:

“If we accept the argument of Advance Imports, the garnishee would also act at his peril if he obeys the writ and retains the goods or money that he is otherwise bound to deliver or pay over to the defendant in the main suit. He would have to make repeated investigations of the proceedings in the main suit, to which he n°t a Party> an(t seek legal advice in order to determine whether he should b