IN RE: STEM (2025)

SUBSTITUTE OPINION

We issued our opinion in this case on May 22, 2025. We withdraw our previous opinion and issue this substitute opinion in its stead.

On November 21, 2024, relators Stem, Inc. and Stem US Operations Inc., filed a petition for writ of mandamus in this court. See Tex. Gov't Code Ann. § 22.221; see also Tex. R. App. P. 52. Relators ask this court to compel the Honorable Elaine Palmer, former presiding judge of the 215th District Court of Harris County, to vacate (1) the court's October 17, 2024 “Order Granting Plaintiffs’ Verified Application for Deposit of Disputed Funds into Registry;” and (2) a November 11, 2024 “Order Denying Stem's Motion to Reconsider.”¹ In the underlying lawsuit, plaintiffs and real parties in interest, Lullwater Energy Projects Fund, L.P. and Lullwater Bess I, LLC (collectively, “Lullwater”), allege that relators breached a contract and violated the Texas Deceptive Trade Practices Act. Real parties seek a recission of the alleged contract and return of a deposit made pursuant to the contract.

We conditionally grant the petition for writ of mandamus.

Background

This lawsuit involves a contract dispute between relators (collectively, “Stem”) and Lullwater. In a September 2022 contract, Lullwater committed to buying battery energy storage systems from Stem. Lullwater paid Stem a $2 million down payment as partial consideration. According to Lullwater, Stem breached the contract is several respects, violated the Deceptive Trade Practices Act, and made misrepresentations upon which Lullwater relied in signing the agreement. For its part, Stem alleged in a counterclaim that Lullwater breached the agreement and negligently or fraudulently misrepresented certain facts.

On October 17, 2024, Lullwater filed an opposed “Verified Application For Deposit Of Disputed Funds Into Registry,” which requested an order for Stem to deposit $2 million into the court's registry. Lullwater asserted that it was “legitimately concerned that Stem will not hold [Lullwater's] $2,000,000 deposit for satisfaction of any judgment in this case (or voluntarily return the funds as requested) but instead will lose or deplete it.”

On the same day that Lullwater filed its motion, the trial court granted Lullwater's requested relief, ordering Stem to deposit $2 million into the court's registry. Although Lullwater advised the court in a certificate of conference that Stem opposed its motion, the court signed the order granting relief before a response was filed and without conducting an oral hearing. Stem filed a motion to reconsider, which the trial court denied.

Stem petitioned for a writ of mandamus and filed a motion for emergency temporary relief. We granted a temporary stay of the trial court's orders pending our disposition of the petition. We now conditionally grant mandamus relief.

Issues

Stem contends the trial court's orders amount to a writ of attachment governed by Civil Practice and Remedies Code chapter 61. Because chapter 61's requirements were not satisfied, Stem asserts, the trial court abused its discretion in compelling the deposit. Further, Stem contends that, to the extent the trial court possessed inherent authority to grant the relief requested, it was an abuse to do so under the present circumstances. Stem alleges it lacks an adequate appellate remedy to cure the trial court's error because it is deprived of the use of its money and the orders will be moot by the time an appeal from a final judgment may be taken.

Lullwater maintains that the trial court had the inherent authority to compel the deposit. Lullwater offers no argument as to whether Stem lacks an adequate ordinary appellate remedy.

Mandamus Standard

To obtain mandamus relief, a relator generally must show both that the trial court clearly abused its discretion and that relator has no adequate remedy at law, such as an appeal. In re Warrior Energy Services Corp., 599 S.W.3d 110, 114 (Tex. App.—Houston [14th Dist.] 2020, orig. proceeding); see In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135-36 (Tex. 2004) (orig. proceeding). A trial court clearly abuses its discretion if it reaches a decision so arbitrary and unreasonable as to amount to a clear and prejudicial error of law or if it clearly fails to analyze the law correctly or apply the law correctly to the facts. Warrior, 599 S.W.3d at 114; see In re Cerberus Capital Mgmt. L.P., 164 S.W.3d 379, 382 (Tex. 2005) (per curiam) (orig. proceeding). “The relator must establish that the trial court could reasonably have reached only one decision.” Warrior, 599 S.W.3d at 114; see Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992) (orig. proceeding). We review the trial court's determination of the legal principles controlling its ruling with limited deference. Id.

Analysis

A. Abuse of Discretion

We have observed that an order compelling a party to deposit money into the court's registry based on the potential that the party may be found liable for damages—but before that party has been determined to be liable—is tantamount to a pre-judgment writ of attachment. See Warrior, 599 S.W.3d at 114; In re Wakefield, No. 14-10-01160-CV, 2010 WL 5237857 (Tex. App.—Houston [14th Dist.] Dec. 15, 2010, orig. proceeding) (per curiam) (mem. op.). Chapter 61 governs such orders. See Tex. Civ. Prac. & Rem. Code Ann. § 61. “Because pre-judgment attachment is a harsh, oppressive remedy, the statutes and rules governing this remedy must be strictly followed.” Warrior, 599 S.W.3d at 114.

Like the real parties in Warrior, Lullwater does not rely on chapter 61—it made no attempt to meet the statute's requirements—but rather defends the challenged orders based on the proposition that a trial court has inherent authority to require a pre-adjudication deposit of “disputed funds” into the registry if there is evidence that the funds are in danger of being lost or depleted. See, e.g., Castilleja v. Camero, 414 S.W.2d 431 (Tex. 1967); Zhao v. XO Energy LLC, 493 S.W.3d 725, 736 (Tex. App.—Houston [1st Dist.] 2016, orig. proceeding); N. Cypress Med. Ctr. v. St. Laurent, 296 S.W.3d 171, 178-79 (Tex. App.—Houston [14th Dist.] 2009, orig. proceeding) (citing Castilleja).

We conclude, however, that we must conditionally grant the writ in this case for several reasons. A trial court abuses its discretion by ordering disputed funds be deposited into the registry of the court without allowing the party resisting the order an opportunity to present evidence disputing the validity of the movant's claim. Zhao, 493 S.W.3d at 737 (citing In re Noteboom, 111 S.W.3d 794, 796-97 (Tex. App.—Fort Worth 2003, orig. proceeding)). Lullwater filed its motion requesting the deposit on October 17, 2024 at 3:41 p.m. The court signed an order granting the requested relief in full within three hours, before Stem had a reasonable opportunity to file a response, without conducting an evidentiary hearing, and despite the fact that Lullwater notified the court that Stem opposed the motion. The trial court also denied Stem's motion to reconsider, in which it argued that it should be afforded an opportunity to present a response to Lullwater's motion.

This situation contrasts with Zhao, when evidence of the defendant's contractual breach was conclusive, and the defendant had the chance, but refused, to present proof that he did not breach the agreement or that he did not intend to use the money at issue to compete with his prior employer. Zhao, 493 S.W.3d at 737. Here, we have before us only allegations but no evidence that Stem has in fact breached the alleged contract.

Separately, whether the trial court possessed the inherent authority to order the registry deposit in this case under the standard articulated in Castilleja is not clearly shown. We have stated that Castilleja concerned “post-judgment remedies to conserve an asset that was the subject of a judgment during the appeal's duration; it did not address an order to deposit disputed funds—here, anticipated contract damages—into the court's registry before trial.” Warrior, 599 S.W.3d at 116. The order in Castilleja applied to a “specific fund” and was intended to “protect specific property awarded in the judgment.” Id. Appellate courts have construed Castilleja as applicable only when there exists a “dispute about a particular fund.” See In re Lavender, No. 02-22-00309-CV, 2022 WL 3723306, at *3 (Tex. App.—Fort Worth Aug. 30, 2022, orig. proceeding) (mem. op.) (stating, “[t]he Castilleja rule applies to a ‘fund which [i]s the subject of litigation between the[ ] parties [and i]s in dispute.’ ”) (quoting Castilleja, 414 S.W.2d at 433 (emphasis added)); Behringer Harvard Royal Island, LLC v. Skokos, No. 05-09-00332-CV, 2009 WL 4756579, at *4 (Tex. App.—Dallas Dec. 14, 2009, no pet.) (mem. op.). In Lavender, for instance, the court of appeals conditionally granted mandamus relief when an order required a pre-trial deposit of funds into the registry because there was “no specific res” of rental funds “contained in an identifiable bank account,” nor did the parties dispute the ownership of the escrow account associated with relators’ failed closing at issue in that case. Lavender, 2022 WL 3723306, at *3. For that reason, the court held that Castilleja did not apply. Id.

In Warrior, we were confronted with circumstances much like those now before us. We presumed without deciding that Castilleja governed the case, but we ultimately held that its standards had not been met on that record. Warrior, 599 S.W.3d at 117. Indulging the same presumption here leads to a similar conclusion. In its motion, Lullwater asserted that Stem currently maintains possession of the $2 million deposit as well as the batteries for which the deposit was made. Lullwater expressed concern that Stem would not hold the deposit for satisfaction of any judgment in this case but instead would lose or deplete it. Absent court intervention, Lullwater argued, it would be left with a “hopelessly valueless judgment in the event its claims are successful.” In support of its concern, Lullwater cited the following:

• Stem has refused to return the $2 million deposit;

• Several key executives, including Stem's Chief Executive Officer and Chief Financial Officer, recently “stepped down”;

• Stem has recently lost hundreds of millions of dollars. Specifically, according to Stem's 2023 10-K SEC filing, its net operating loss that year was $140,413,000;

• Stem's second quarter 2024 10-Q filing reported $654,577,000 in losses for the first half of 2024, which was represented to be $630,000,000 more losses than in 2023;

• Stem's stock price has fallen 85% at the same time; and

• Stem is in danger of being de-listed on the New York Stock Exchange.

Lullwater relies on selective information contained in the documents attached to its motion. When read as a whole, however, they do not by themselves support the trial court's orders. For example, the balance sheet included with Stem's June 30, 2024 10-Q filing—the most recent financial information included in our record—shows cash on hand of $89 million and total assets of $691 million. To be sure, the documents indicate that Stem has suffered great operating losses within the eighteen months prior to the most recent 10-Q filing. Even assuming that the alleged $2 million deposit constitutes a “particular fund” as contemplated by Castilleja, there is no indication that the particular fund is likely to be lost or depleted or that Stem's substantial assets existing at that time were likely to be depleted such that Stem would be unable to pay or supersede a possible future judgment against it in the amount claimed by Lullwater.

As in Warrior, Lullwater's motion showed Stem “has incurred recent losses and that its stock price has depreciated substantially,” but Lullwater “offered no proof of how those losses or depreciation affect” Stem “and why (or when) they would probably deplete” Stem's “assets to a degree that” Stem “is likely unable to satisfy a judgment.” See Warrior, 599 S.W.3d at 117. As we stated in Warrior:

․ Oilfield showed that Superior has incurred recent losses and that its stock price has depreciated substantially, but Oilfield offered no proof of how those losses or depreciation affect Warrior and why (or when) they would probably deplete Warrior's assets to a degree that Warrior is likely unable to satisfy a judgment ․ Moreover, Oilfield offered no evidence that Warrior does not intend to pay any future judgment in the 2019 Lawsuit or that Warrior will be unable to secure a similar supersedeas bond if the need arises. Oilfield's assertion that Warrior has possession of funds in danger of loss or depletion is utterly speculative.

Warrior, 599 S.W.3d at 117.

Accordingly, we conclude that the record does not establish the likelihood that disputed funds are in danger of being lost or depleted such that Stem would be unable to satisfy any ultimate judgment. Assuming Castilleja applies and when the record reveals insufficient evidence that particular funds are in danger of being “lost or depleted,” the trial court abuses its discretion by ordering funds deposited in the registry of the court pretrial. See id.; In re Reveille Res. (Tex.) Inc., 347 S.W.3d 301, 304 (Tex. App.—San Antonio 2011, orig. proceeding) (granting mandamus); O'Brien v. Baker, No. 05-15-00489-CV, 2015 WL 6859581, at *3 (Tex. App.—Dallas Nov. 9, 2015, orig. proceeding) (mem. op.) (granting mandamus); N. Cypress Med. Ctr., 296 S.W.3d at 178-79 (holding that order compelling party to deposit disputed funds into court registry before trial was abuse because there was no evidence that disputed funds were likely to be lost or depleted); In re Deponte Invs., No. 05-04-01781-CV, 2005 WL 248664, at *2 (Tex. App.—Dallas Feb. 3, 2005, orig. proceeding) (mem. op.) (granting mandamus) (“[T]he Allens were required to present evidence the revenues in Deponte's possession were in danger of being lost or depleted. They did not do so. We conclude that absent any evidence, the trial court abused its discretion in ordering Deponte to deposit the funds into the registry of the court.”).

B. Inadequate Remedy by Ordinary Appeal

Stem argues that it has no adequate remedy at law to cure the trial court's abuse. This and other appellate courts have found relief by ordinary appeal inadequate to cure a trial court's abuse of discretion in compelling a prejudgment registry deposit. Warrior, 599 S.W.3d at 118-19; e.g., In re G-M Water Supply Corp., No. 12-16-00223-CV, 2016 WL 6873181, at *3 (Tex. App.—Tyler Nov. 22, 2016, orig. proceeding) (mem. op); O'Brien, 2015 WL 6859581, at *3; Reveille, 347 S.W.3d at 304; N. Cypress Med. Ctr., 296 S.W.3d at 178-79; Wakefield, 2010 WL 5237857, at *1; Deponte Invs., 2005 WL 248664, at *2. An ordinary appeal is an inadequate remedy for such orders. Warrior, 599 S.W.3d at 119. Lullwater does not refute this point, and we conclude that relators lack an adequate remedy by appeal.

Conclusion

We conditionally grant the petition for writ of mandamus and direct the trial court to vacate its orders signed October 17, 2024 and November 11, 2024, requiring relators to deposit $2 million into the court's registry. We are confident the trial court will act in accordance with this opinion. The writ will only issue if the trial court fails to comply. We lift our November 22, 2024 stay order.

FOOTNOTES

1.   Judge Palmer ceased to hold the office of Judge of the 215th District Court, Harris County, Texas, as of December 31, 2024. On January 14, 2025, this court abated this proceeding and ordered Judge Palmer's successor, Honorable Nathan Milliron, to reconsider the decision regarding relators’ request for relief. See Tex. R. App. P. 7.2(b); see also In re Baylor Med. Ctr. at Garland, 280 S.W.3d 227, 228 (Tex. 2008) (orig. proceeding) (“Mandamus will not issue against a new judge for what a former one did.”). On February 21, 2025, relators filed a motion to reinstate the mandamus proceeding, attaching an order signed by Judge Milliron on February 16, 2025 declining “to vacate this Court's November 11, 2024 Order confirming this Court's October 17, 2024 Order to Deposit Funds into the Registry of the Court.” This court reinstated this mandamus proceeding on March 4, 2025.

Kevin Jewell, Justice