Lead Opinion
The State of Texas brought suit against Brent Ranch Operating, Inc. (“BRO”), Elmer J. Jonnet, and Joseph E. Jonnet to collect an administrative penalty the Texas Railroad Commission (“the Commission”) assessed against BRO for failure to plug abandoned oil wells in accordance with Statewide Rule 14. 16 Tex.Admin.Code § 3.14 (1993) (hereinafter “Rule 14”).
THE CONTROVERSY
Central to this appeal is the construction and application of section 171.255(a) of the Tax Code, which provides:
If the corporate privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived. The liability includes liability for any tax or penalty imposed by this chapter on the corporation that becomes due and payable after the date of the forfeiture.
Tex.Tax Code Ann. § 171.255(a) (West 1993) (emphasis added). The background facts that gave rise to the Jonnets’ liability are as follows.
On December 1, 1985, BRO became the operator of record of fourteen oil wells on two separate leases in Carson County, Texas. The oil wells already had become dry or inactive prior to this date. The Natural Resources Code requires that inactive oil wells be plugged in accordance with Rule 14. See Tex.Nat.Res.Code Ann. § 89.011 (West Supp. 1994) & § 89.012 (West 1993). BRO’s wells were not in compliance with Rule 14 from on or before December 1, 1985 until August 2, 1990.
The forfeiture of BRO’s corporate privileges resulted from BRO’s failure to file a franchise tax report. In March 1989, BRO had filed a franchise tax public information report and a franchise tax report listing the Jonnets as officers and directors of BRO. The franchise tax report form covered the tax period from May 1, 1989 through April 30, 1990. However, BRO failed to file its next franchise tax report, due on March 15, 1990. This failure resulted in the forfeiture of BRO’s right to do business on June 14, 1990, and ultimately the forfeiture of BRO’s corporate charter on December 10, 1990.
On December 27, 1989, the Commission sent a warning letter to BRO stating that its oil leases were not in compliance with Rule
BRO failed to bring its leases into compliance with Rule 14, so the Commission began administrative proceedings against BRO, holding a hearing on October 18, 1990. See Tex.Nat.Res.Code Ann. §§ 81.0531-.0532, 85.381 (West 1993). The Jonnets were not joined individually in the Commission’s proceedings. On December 3, 1990, the Commission issued an order assessing a penalty of $28,000 against BRO for the two leases. The order required that within thirty days of the order becoming final, BRO either remit an administrative penalty in the amount of $28,000, establish an escrow account, or post a supersedeas bond with the Commission in the amount of the penalty pursuant to section 81.0533 of the Natural Resources Code. Tex.Nat.Res.Code Ann. § 81.0533 (West 1993).
BRO did not comply with the order and, as a result, the State brought suit against BRO and the Jonnets individually to collect the initial penalty of $28,000, additional civil penalties for failure to pay the $28,000, attorney’s fees, and court costs. The State asserted that the Jonnets were jointly and severally liable for BRO’s debt pursuant to section 171.255(a). The Jonnets filed answers in the collection suit, but did not file verified pleadings denying liability in their individual capacities.
To establish the liability of the Jonnets, the State relied on section 171.255(a), which provides that officers and directors are liable for the debts of a corporation that are created or incurred after a failure to pay franchise taxes, when that failure leads to the forfeiture of corporate privileges. Tex.Tax Code Ann. § 171.255(a) (West 1993). The State contended that because BRO failed to file its franchise tax report on March 15, 1990, resulting in forfeiture of its corporate privileges, the Jonnets were liable for the penalty assessed in the final order of the Commission dated December 3, 1990 because the penalty was a debt created or incurred after March 15, 1990.
The Jonnets responded that they were not liable under section 171.255(a) because the penalty in the final order was not a debt created or incurred after March 15, 1990. They argued that the debt related back to the date of BRO’s initial noneompliance with Rule 14 on or before December 1, 1985. Thus, the central issue before the district court regarding the Jonnets’ individual liability under section 171.255(a) was on what date the debt imposed by the Commission’s final order was created or incurred.
The district court rejected the Jonnets’ position and accordingly rendered judgment against BRO and the Jonnets, jointly and severally, for $48,000 in administrative and civil penalties, $2,550 in attorney’s fees, and court costs. The Jonnets appeal, raising three points of error. First, the Jonnets contend that the district court erred in finding that the penalty was a debt which was “created or incurred,” as those terms are used in section 171.255(a), after the date BRO’s franchise tax report became delinquent. Second, the Jonnets argue that there is no evidence that they were officers and directors when the penalty or debt was created and incurred. Third, the Jonnets argue that the district court erred by determining that the Jonnets had waived any complaint that they were not individually liable by failing to file a verified pleading.
DISCUSSION
In their first point of error, the Jonnets contend that the district court erred in concluding that BRO’s indebtedness for the penalties assessed under the Commission’s final order was a debt “created or incurred” for purposes of section 171.255(a) after March 15, 1990, the date on which BRO’s franchise tax report was due, but not filed. The Jon-nets argue that the debt was created or incurred not when the Commission issued its order, but on or before December 1, 1985, when BRO first began violating Rule 14.
Under section 171.255(a), officers and directors lose the protection from liability provided by the corporate form after the date
BRO began violating Rule 14 on or about December 1, 1985, when the corporation failed to plug the abandoned oil wells on its property. BRO then continued to violate Rule 14 for nearly four years, until August 2, 1990; the Commission issued its order assessing a penalty for BRO’s continued violation over this period of time. We hold that BRO’s debt for the penalty assessed by the Commission was “created or incurred” by the Commission order of December 3, 1990 directing BRO to pay the administrative penalty. On March 15, 1990, BRO’s franchise taxes were due, but not paid, which later resulted in the forfeiture of BRO’s corporate privileges. Because the Commission’s order was issued after the date BRO’s franchise taxes were due, the Jonnets, as officers and directors of BRO, are individually liable for the penalties assessed by the Commission.
The Jonnets, however, cite us to cases involving debts based on written instruments, where the debts arising from breach of the instruments were held to relate back to the date of the instrument. For example, in Curry Auto Leasing, Inc. v. Byrd,
Based on the foregoing case authority, the Jonnets contend that BRO’s debt should likewise “relate back” to the date when BRO first failed to comply with Rule 14. However, these cases are distinguishable from the present case. Here, the State is not seeking to recover damages arising from a post-forfeiture breach of an existing agreement. Rather, the State seeks to recover a penalty assessed against the corporation by the Commission pursuant to its statutory authority under section 81.0531 of the Natural Resources Code, which provides:
(a) If a person violates provisions of this title which pertain to safety or the prevention or control of pollution or the provisions of a rule, order, license, permit, or certificate which pertain to safety or the prevention or control of pollution and are issued under this title, the person may be assessed a civil penalty by the commission.
(b) The penalty may not exceed $10,000 a day for each violation. Each day a violation continues may be considered a separate violation for purposes of penalty assessments.
(c) In determining the amount of the penalty, the commission shall consider the permittee’s history of previous violations, the seriousness of the violation, any hazard to the health or safety of the public, and the demonstrated good faith of the person charged.
Tex.Nat.Res.Code Ann. § 81.0531 (West 1993) (emphasis added). Under section 81.-0531(a), the Commission may or may not assess penalties for violations of its rules, among them Rule 14. Thus, unlike situations in which the execution of a written instru
While we reject the Jonnets’ “relation back” argument, we note that it would not help the Jonnets avoid individual liability for the administrative penalties even if we were to accept it. Section 81.0531(b) of the Natural Resources Code, quoted above, states that each day of a continuing violation constitutes a separate violation. Tex.Nat.Res. Code Ann. § 81.0531(b) (West 1993). Accordingly, the penalties assessed by the Commission were based not just on BRO’s initial violation of Rule 14 on December 1,1985, but on BRO’s ongoing violation of Rule 14, which continued day after day for nearly four years. Unlike the relation-back cases cited above in which the debt can be said to relate back to a single date — the date of the written instrument — the conduct underlying the Commission’s order is of a continuous nature, with no single date to which the penalty can relate back.
We thus rest our holding on the statutory language that creates the debt, as we did in Wilburn v. State,
In their second point of error, the Jonnets argue that the district court erred in finding that the Jonnets were officers and directors of BRO “at all times relevant to this cause of action,” and particularly at the time the indebtedness at issue was created or incurred, because there is no evidence to support such a finding. The 1989 franchise tax report filed by BRO is part of the record. The report was effective for the period from May 1, 1989 through April 30, 1990, and reflected that “E.J. Jonnet” was the president and a director of BRO, and that “Joseph Jonnet” was the vice president, secretary, treasurer, and a director of BRO. Furthermore, the record contains a copy of Railroad Commission form P-5, an operator’s organization report that lists “Elmer J. Jonnet” as the president of BRO and “Joseph E. Jon-net” as BRO’s vice president, secretary, and treasurer. The P-5 form must be amended immediately if there are substantive changes, such as the resignation or retirement of officers.' If no new officers are named, it is presumed that the old officers continue. See 16 Tex.Admin.Code § 3.1 (1993). Since the Jonnets produced no evidence that they resigned or were otherwise removed as corporate officers or directors of BRO, the only evidence in the record indicates that the Jonnets were officers and directors when the Commission issued its order. The Jonnets’ second point of error is overruled.
In their third point of error, the Jonnets contend that the district court erred in concluding that they waived any complaint that they were not liable in their individual capacities for BRO’s debts by failing to file a verified pleading on the issue. We need not reach this issue because we agree with the district court’s finding that the Jonnets are liable in their individual capacities under section 171.255(a), irrespective of any pleading deficiencies.
CONCLUSION
We affirm the judgment of the district court.
Notes
. The Commission has the authority to assess penalties for violations of its rules or orders that pertain to the prevention or control of pollution. Tex.Nat.Res.Code Ann. § 81.0531 (West 1993).
Concurrence Opinion
concurring.
I concur in the judgment that the Jonnets are personally hable under section 171.255(a)
The issue is whether the corporation incurred the “debt” before or after March 15, 1990, the due date of the franchise-tax report the corporation failed to file. If the “debt” existed before that date, the Jonnets are not personally hable; if the “debt” came into existence after that date, they are personally hable under section 171.255(a). One must initially inquire, then, as to the legislature’s intended meaning of the word “debt.”
In ordinary usage, the word “debt” can mean anything from an obhgation arising out of sin, to a social obhgation, to a money obhgation due and payable. In legal usage, however, the word “debt” carries a narrower, restricted, and technical meaning. The word “debt” means a liquidated money obhgation that is legally enforceable. See Seay v. Hall,
Section 171.255(a) was preceded by another statute that also made corporate officers and directors personally liable for “debts” that were “created” by the corporation after loss of its corporate privileges. The court construed and applied the statutory language in Schwab v. Schlumberger Well Surveying Corp.,
The court held against such liability, reasoning as follows: The statute was “penal in nature” and “must be strictly construed and [not] extended beyond the clear import of [its] literal language.” Schwab,
the renewal merely operates as an extension of time to pay the original indebtedness. The debt ... remains the same; it is in substance and in fact the same indebtedness evidenced by a new promise.
Id., at 82 (open account). Since the statute imposed personal liability “only for debts contracted after the forfeiture of the right to do business, [it can have] no application to the renewal of obligations arising prior thereto.” Id.,
The decision in Curry Auto Leasing, Inc. v. Byrd,
When parties enter into a contract the law presumes they intend the consequences of its performance. It follows that performance or implementation of thé contractual provisions relate back to and are authorized at the time of execution of the contract.
Curry,
Other decisions have followed Curry and Schwab with almost no real discussion of the “strict construction” rule and the relation-back doctrine. In each of these cases, the corporation had breached its contract before forfeiture but the resulting damages remained unliquidated until after forfeiture of corporate privileges. See McKinney v. Anderson,
Thus, the relevant decisions turn upon the “strict construction” rule of Schwab and the relation-back doctrine of Curry. I believe the rule and the doctrine require more careful consideration than they have received before in this context. They are sophisticated judicial instruments; they have a history and a specific meaning; they have a purpose. They are not mere incantations delivered by a court in rejecting a claim of personal liability under section 171.255(a).
The Relation-Back Doctrine
The relation-back doctrine holds that an act done at one time is considered to have been done at an earlier time for the purposes of the case before the court. Like all such fictions, it enables the court to arrive at
Broadly speaking, the relation-back doctrine may be applied to give effect to the parties’ lawful intentions, preserve rights that would otherwise be lost, or afford a remedy where none would otherwise exist. See Brandon v. Claxton,
When parties enter into a contract the law presumes they intend the consequences of its performance. It follows that performance or implementation of the contractual provisions relate back to and are authorized at the time of execution of the contract.
Curry,
Merely to refer to the purposes of the relation-back doctrine demonstrates that it is not justified in the Jonnets’ case. The doctrine is not necessary to effectuate their lawful intentions; neither is the doctrine necessary to protect from loss some right they have acquired nor to furnish them a remedy because they would not otherwise have one for a wrong they have suffered. Contrary to their argument, the decisions cited above have not engrafted upon section 171.255(a) an appendage holding that officers and directors are never personally hable whenever it may appear that a post-forfeiture debt, in the sense of a legally enforceable, liquidated money obligation, has some connection to a pre-forfeiture event, cause, or circumstance.
The Rule of “Strict Construction”
Schwab adhered to the narrow, strict, or technical meaning of the word “create” and operated, moreover, on the assumption that the word “debt” was similarly restricted to its legal meaning of a liquidated money obligation that was legally enforceable. The subsequent decisions mentioned previously also operated on that assumed meaning in applying the relation-back doctrine. It is therefore difficult to understand the Jonnets’ invocation of the strict-construction rule because, under that rule, the corporation’s “debt” first came into existence after forfeiture and the Jonnets are therefore personally hable for the corporate “debt” under section 171.255(a). They argue in reahty for an
The language and legal effect of a statute may require its “strict” construction, meaning a limited, narrow, or inflexible reading and application of the statutory language. This is true generally of two kinds of statutes, those that authorize a penalty and those that infringe upon private property or liberty interests. Application of the rule does not, however, follow automatically once the court is able to ascertain that the legal effect of the statute places it within one of the two categories.
The rule rests upon two basic propositions. The first is that of fair notice. When statutory language is susceptible of either an expansive or a restricted meaning, and it imposes a penalty, it may be necessary to adhere to the latter meaning so
that the party upon whom it is to operate may with reasonable certainty ascertain what the statute requires to be done, and when it must be done; otherwise there would be no opportunity for a person charged with the statutory duty to protect himself by the performance of it according to law.
Missouri, K. & T. Ry. of Tex. v. State,
In this connection, I should observe that the necessity for a literal, narrow, and technical, and inflexible interpretation diminishes considerably when the penal statute supplies procedures for preventing or circumscribing the chances of arbitrary action being taken by government in the name of the statute, whatever it lacks in specificity. Carbide Int’l Ltd. v. State,
The second proposition underlying the rule of strict construction is that of proportion:
[T]he more severe the penalty, and the more disastrous the consequences to the person subject to the provisions of the statute, the more rigid will be the construction of its provisions in favor of such a person and against the enforcement of such law.
Missouri, K & T. Ry.,
So far as I am able to find, the word “debt” as used in section 171.255(a) has never been thought to include an obligation that is unliquidated. Indeed, it is difficult to see how such a meaning could be assigned the word if it is required to be construed “strictly,” that is to say, narrowly, literally, and technically.
Under the strict meaning of the word “debt,” no debt came into existence in the Jonnets’ case until after forfeiture. Before forfeiture, the corporate debt existed only in unliquidated form; the obligation did not become liquidated until after forfeiture. If the Jonnets are to escape liability under the judicial decisions they cite, then they must show some basis justifying a relation-back of the liquidated debt to a time before forfeiture. They do not claim that the relation-back
Section 171.255(a) was meant “to prevent wrongful acts of culpable officers of a corporation, and was for the protection of the public and particularly those dealing with the corporation.” Schwab,
. This is presumptively the meaning intended by legislature in its use of the word "debt” in section 171.255(a) of the Tax Code, a section within Chapter 171 covering the franchise tax.
The idea that "debt” referred to a liquidated sum was augmented considerably in 1987 when the legislature amended Chapter 171 to add the following definition:
§ 171.109. Surplus
(a) In this chapter:
sj: tj: ;}: jt.
(3) "Debt” means any legally enforceable obligation measured in a certain amount of money which must be performed or paid within an ascertainable period of time or on demand.
(Emphasis added). Although section 171.109 is entitled "Surplus,” this does not mean that the definition of "debt” is limited to the calculation of corporate surplus according to the formula set out subsequently in the section. Subsection (a) declares expressly and literally that the definition applies throughout "this chapter,” not “this section.” If one is tempted to construe differently the scope of the definition’s applicability, then one must give weighty reasons for doing so in the face of the literal language and the presumption that the legislature intends the same words to have the same meaning throughout the statutory scheme. See Fox v. Burgess,
. Curry, Adler, Pagan, and McKinney appear to have been decided before the effective date of the 1987 amendment discussed in note 1, supra.
. A few examples will suffice. See 17A C.J.S. Contracts § 455, at 574 (1963) (when contracting party elects one of alternatives permitted by contract, all rights as between the parties attach as from the making of the contract); 26 C.J.S. Deeds § 94, at 853-54 (1956) (if no other equities intervene, legal effect of deed may relate back to a date earlier than its delivery); 33 C.J.S. Executors and Administrators § 151, at 1113 (1942) (issuance of letters testamentary related back to date of deceased’s death and validated necessary or proper acts of the representative done in the interim); 84 C.J.S. Taxation § 623, at 1244 (1954) (bank’s payment of taxpayer’s check relates back to the date the check was received by taxing authority).
. In Dae Won Choe v. Chancellor, Inc.,
In Wilburn v. State,
Dissenting Opinion
dissenting.
Believing that the majority has extended officer and director liability under section 171.255 of the Tax Code far beyond what the legislature intended, I respectfully dissent.
Brent Ranch Operating, Inc. (“BRO”) was incorporated on November 1,1985, with R.P. Brent as its sole director. On December 1, 1985, BRO became the operator of record of certain oil wells in Carson County. At that time, the wells in question apparently had already become dry or inactive, never again producing after October 1985. Pursuant to Statewide Rule 14 promulgated by the Railroad Commission (“Commission”), the operator of the wells was required to commence plugging operations within a period of ninety days after drilling or operations ceased (the deadline is now one year). See 16 Tex.Admin.Code § 3.14 (1993). BRO did not plug the wells. Sometime thereafter, perhaps as late as March 1989, Elmer and Joseph Jon-net became directors and officers of BRO. BRO subsequently faded to report and pay franchise taxes due March 15, 1990. Its right to do business and charter were later forfeited. As far as the record reveals, BRO had no remaining assets on March 15, 1990, and conducted no business whatsoever after that date. Nor does the record reflect that the Jonnets dealt improperly with any assets the corporation may have had before it ceased doing business.
Based on BRO’s failure to plug the wells, in 1990 the Commission initiated an administrative proceeding to assess a penalty against BRO. See Tex.Nat.Res.Code Ann. §§ 81.-0531-.054, 85.381 (West 1993). That proceeding culminated in a final order of the Commission dated December 3,1990, assessing BRO an administrative penalty of $28,-000. The Jonnets were not parties to that proceeding. The present suit was brought pursuant to Tex.Tax Code Ann. § 171.255 (West 1992) (hereinafter “Tax Code”), to collect the penalty from the Jonnets individually. After a bench trial at which only documentary evidence was produced, the trial court rendered judgment against the Jonnets for $48,000 in civil and administrative penalties, plus attorney’s fees and court costs. The majority affirms.
Section 171.255 of the Tax Code provides:
(a) If the corporate privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is Hable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived. The Habihty includes Habihty for any tax or penalty imposed by this chapter on the corporation that becomes due and payable after the date of forfeiture.
(b) The Habihty of a director or officer is in the same manner and to the same extent as if the director or officer were a partner and the corporation were a partnership.
(c) A director or officer is not Hable for a debt of the corporation if the director or officer shows that the debt was created or incurred:
(1) over the director’s objection; or
(2) without the director’s knowledge and that the exercise of reasonable diligence to become acquainted with the affairs of the corporation would not have revealed the intention to create the debt,
(d) If a corporation’s charter or certificate of authority and its corporate privileges are forfeited and revived under this chapter, the liability under this section of a director or officer of the corporation is not affected by the revival of the charter or certificate and the corporate privileges.
Tax Code § 171.255. Considering the statute as a whole, its nature and object, and the consequences that would follow from an imposition of liability on persons in the Jonnets’ position, I believe the result reached by the majority is contrary to the intent of the legislature.
“In determining the meaning of a statute, a court must consider the entire act, its nature and object, and the consequences that would follow from each construction.” Sharp v. House of Lloyd, Inc.,
The key question for determining personal liability under section 171.255(a) is when the corporate debt in question was “created or incurred.” The critical clause of subsection (a) is stated in the passive voice rather than the active voice: “each director or officer ... is liable for each debt ... that is created or incurred” (had it been written in the active voice, the statute would have read, “each debt ... that the corporation creates or incurs”). If we look at subsection (a) in isolation, therefore, it is possible to conclude that a corporate debt could be created or incurred by a third party, without the involvement of the corporation itself, such as by the Commission’s assessing a penalty or a court’s rendering a judgment against the corporation. Looking at the statute as a whole, however, it becomes obvious that such an interpretation is incorrect. For example, subsection (c)(2) relieves directors and officers from liability for debts created or incurred “without the director’s knowledge and [for which] the exercise of reasonable diligence to become acquainted with the affairs of the corporation would not have revealed the intention to create the debt.” Tax Code § 171.255(e)(2). Thus, the statute contemplates that directors and officers should be personally liable only for debts (1) they knew were being created or incurred, or (2) where the exercise of reasonable diligence to become acquainted with the affairs of the corporation would have revealed the intention to create the debt. Viewing the enactment from this perspective reveals that the legislature envisioned personal liability only for debts created or incurred through some sort of “affairs of the corporation” about which the director or officer in question had some knowledge and control. In referring to “the intention to create the debt,” the legislature can only have been speaking of the corpora> turn’s intention. Thus, an interpretation allowing personal liability to be imposed for a debt “created” by a third party such as the Commission, without any involvement or transaction of business by the corporation, is contrary to the clear intent of the legislature.
Similarly, subsection (c)(1) relieves directors and officers from personal liability for debts created or incurred “over the director’s objection.” Tax Code § 171.-255(c)(1). Such a provision would make no sense if subsection (a) were interpreted to impose personal liability on directors and officers for corporate debts “created” by a third party without any transaction of business by the corporation; in the case of an administrative penalty or court judgment, for example, a director or officer could escape personal liability simply by “objecting” to the imposition of the penalty or judgment against the corporation. Again, therefore, this provision demonstrates that the legislature contemplated personal liability of directors and
Before reviewing what the courts have said about the provision, a word about the evolution of the statutory language is in order. Before 1977 the statute required affirmative proof that a corporate debt was created with the “knowledge, approval and consent” of the officer or director sought to be held liable. See Act of Aug. 8, 1961, 57th Leg., 1st C.S., ch. 24, art. VII, § 9, 1961 Tex.Gen.Laws 71, 110-11; Act of May 24, 1969, 61st Leg., R.S., ch. 801, § 11, 1969 Tex.Gen.Laws 2366, 2372 (Tex.Tax.-Gen.Ann. art. 12.14, since repealed and codified at Tax Code § 171.255). In 1977 the statute was amended to delete the requirement for affirmative proof of knowledge, approval, and consent, but the following sentence was added: “However, any officer or director may avoid liability if he shows that the debt was created (1) over his objection, or (2) without his knowledge, if the exercise of reasonable diligence to acquaint himself with the affairs of the corporation would not have revealed the intention to create the debt.” Act of May 25, 1977, 65th Leg., R.S., ch. 671, § 1, 1977 Tex.Gen.Laws 1692, 1692-93.
The purpose of this amendment was not to expand the actual scope of officer and director liability by completely removing the elements of knowledge and consent. Rather, the legislative history behind the 1977 amendment shows that the intent of the legislature was simply to shift the burden of proof to the officers and directors regarding their knowledge of and consent to the corporation’s creation of the debt:
The current law ... provides that the officers and directors of a corporation that has forfeited its right to do business become personally liable for debts incurred with their knowledge after such forfeiture. The bill shifts the burden of proof to the directors and officers who must show that they could not have reasonably known of such a debt before they can escape liability.
House Study Group, Bill Analysis, Tex.H.B. 1860, 65th Leg., R.S. (1977). “The purpose of this bill is ... to place the burden of proof on the directors and officers of such a corporation with respect to their liability for all debts incurred by the corporation on or after forfeiture.” House Ways and Means Comm., Bill Analysis, Tex.H.B. 1860, 65th Leg., R.S. (1977).
Keeping in mind that the purpose of the 1977 amendment was simply to shift the burden of proof regarding knowledge and consent to the officers and directors, not to expand the overall scope of officer and director liability, early court interpretations of the statute become extremely helpful. For example, the following passage from First National Bank v. Silberstein,
[Article 12.14] does not purport to require actual knowledge on the part of the officers and directors of the franchise tax delinquencies of the corporation and the forfeiture of its right to do business as a condition to personal liability for subsequently incurred corporate debts. The statute takes for granted that officers and directors will know these facts or, in any event, does not make such knowledge a condition to liability. It is further clear under the statute that after a corporation no longer has the right to do business the personal liability of officers and directors for subsequently incurred corporate debts is limited to those debts of which they have knowledge and, with the opportunity afforded thereby, which they have consented to and approved. This does not mean that officers and directors are personally liable only for debts of the corporation which they personally create, or which are created in their presence, or of which they have contemporaneous knowledge. There is no implication in the wording of the statute that these circumstances are conditions to liability or that knowledge must co-exist in exact time with the purchase transaction giving rise to the debt. To the contrary, the reasonable construction of the statute to the facts at hand is that personal liability is determined by the acts of Respondents in consenting to and approving the debts of the corporation where knowledge of their creation is shown to have come to them in the regular course of the business of the corporation. This ... is liability which results from and is attributable to the acts of Respondents. They had only to disapprove and disavow the debts to avoid personal liability; but having consented to and approved the debts, they became personally liable therefor.
Under the terms of [article 12.14], the personal liability of officers and directors for debts incurred after the corporation no longer has the right to do business is limited to those debts of which they have knowledge and which they have consented to and approved in the regular course of the business of the corporation.
Although the burden is now on the officers and directors to prove their disapproval of or reasonable lack of knowledge of posMorfei-ture debts,
Moreover, construing section 171.255 to permit imposition of personal liability only for debts created or incurred through the transaction of corporate business (as opposed to debts “created” solely by the action of a court or administrative agency) is consistent with the purposes of the act. Section 171.255 has two purposes: First, the statute is meant to discourage the transaction of business by a corporation whose right to do business has been forfeited for failing to timely report and pay franchise taxes; the imposition of personal liability on corporate officers and directors is a reasonable means of accomplishing this purpose, because they are the corporate agents responsible for controlling the nature and extent of the business the corporation transacts. See Schwab v. Schlumberger Well Surveying Corp.,
With these purposes in mind, interpreting section 171.255 to permit imposition of personal liability on directors and officers for debts imposed by third parties without any post-forfeiture transaction of business by the corporation arguably creates another inconsistency. Such an interpretation would, as in the present case, allow such liability to be imposed on corporations whose failure to report and pay franchise taxes was the result of being insolvent and wholly defunct. The directors and officers of a defunct corporation may, of course, avoid all possibility of personal liability under section 171.255 by formally dissolving the corporation, thereby eliminating any future need to report and pay franchise taxes. See Tex.Bus.Corp. Act Ann. arts. 6.01-.07 (West 1980 & Supp.1994). Thus, in the case of a defunct, inactive corporation, the only purpose that could be served
Justice Kidd’s majority opinion relies heavily on the notion that BRO’s failure to plug the wells was a “continuing violation” of the Commission’s Rule 14. This fact is not material, however, because under section 171.255 a debt is not “created or incurred” when the violation of a duty occurs (as long as the violation arises from a failure to act), but on the occurrence of the event that triggers the obligation or duty in the first place. For example, in Wilburn v. State,
[W]e decline to hold that the debt is incurred when contributions are due [to the Employment Commission] because to do so would hold officers and directors personally hable for a corporate debt that is based, at least in part, on wages paid before the date the franchise taxes were due. For example, while the first quarter contributions are due April 1, they are based on wages paid between January 1 and March 30. If the debt were incurred when “due,” Wilburn would be held personally hable for contributions that are based, in part, on wages paid before March 15, 1986. We beheve the State’s construction would extend officer and director liability beyond that contemplated by the legislature when it enacted § 171.255.
Finally, the majority’s interpretation of the statute is contrary to existing caselaw. Earlier cases that have addressed the liability of an officer or director under section 171.255 or its predecessors have uniformly held that, for purposes of that statute, a corporate debt is “created or incurred” on the occurrence of the event that initially triggers the existence of the corporation’s duty or obligation:
(1) In Schwab v. Schlumberger Well Surveying Corp.,
(2)In Curry Auto Leasing, Inc. v. Byrd,
When parties enter into a contract the law presumes they intend the consequences of its performance. It follows that performance or implementation of the contractual provisions relate back to and are authorized at the time of execution of the contract.... [T]he debt plaintiff sought to recover from defendant corporate officers was authorized by the rental agreement and, therefore, was brought into existence, caused by, resulted from, or arose out of the performance or implementation of the provisions of the rental contract at the time Curry Auto opted to terminate the contract on or before September 10,1982. The items in question, as debts of the corporation, relate back to [the corporation’s] promise to pay made in the rental contract executed December 1, 1980. No debt for which the corporate officers are hable is shown to have been “created or incurred” after the forfeiture.
Id. (citations omitted).
(3) In River Oaks Shopping Center v. Pagan,
(4) In McKinney v. Anderson,
[T]his debt resulted from the equipment lease agreement executed by the parties on February 4, 1982. As such, strictly construing the language of section 171.255, this debt arose on February 4, 1982, and cannot be said to have been “created” or “incurred” on or after the dates that the semi-annual payments were due.
McKinney,
(5) In Dae Won Choe v. Chancellor, Inc.,
Under our facts, [the corporate officer] is not liable for debts of the corporation incurred on March 15, 1988, the date on which the franchise tax and report were due, because the due date is excluded under the statute; however, she is liable for the corporate debts incurred for the period beginning March 16, 1988 through March 24, 1988. The summary judgment evidence raises a genuine issue of material fact as to the amount of debt incurred during this time period.
Id. at 743-44. Thus, the court’s holding was that the obligation to pay for personal services was incurred when the services were rendered.
(6) In Wilburn v. State,
[T]he debt (the obligation to pay contributions to the Unemployment Compensation Fund) is created or incurred when wages are actually paid. The payment of wages is the event that both creates (brings into existence) and incurs (brings on or occasions) the employment-tax liability. Absent payment of employment wages, there is no employment-tax liability.
Id. at 765. Wilburn is closely analogous to the present case, because it involved a statutorily created obligation rather than one created by contract.
I believe the foregoing demonstrates that there is only one reasonable interpretation of the scope of the personal liability imposed on directors and officers by section 171.255(a): the debt must have been created or incurred by a post-forfeiture transaction of business by the corporation.
Justice Powers’s concurring opinion takes a different tack, concluding that the Jonnets are personally liable under section 171.255 because the term “debt” has been defined by the Texas Supreme Court as a “specified sum of money” and is defined elsewhere in chapter 171 of the Tax Code as an obligation “measured in a certain amount of money.” See Seay v. Hall,
First, as demonstrated by the terms of the definition in section 171.109 and as confirmed by legislative history, the definition was not intended to apply to the use of the word “debt” in section 171.255. The definition contained in section 171.109 states, “‘Debt’ means any legally enforceable obligation measured in a certain amount of money which must be performed or paid within an ascertainable period of time or on demand.” Tax Code § 171.109(a)(3). This statutory definition cannot reasonably apply to a court judgment or an administrative penalty. Although judgments and administrative penalties are “measured in a certain amount of money,” they clearly are not required to be “performed or paid within an ascertainable period of time.” Nor would it make sense to say that judgments and penalties are payable “on demand.” Thus, the language of the definition itself is inconsistent with its application to judgments and administrative penalties.
The legislature’s intent that the definition not apply to section 171.255 is confirmed by the legislative history of the bill that became the 1987 amendment adding the definition of “debt” to section 171.109. The report of the House Ways and Means Committee, the “Fiscal Note” from the director of the Legislative Budget Board, and the bill analysis prepared by the House Research Organization all reflect that the purpose of the amendment was to codify an existing accounting rule of the State Comptroller of Public Accounts that was being challenged in court by various parties. See House Ways and Means Comm., Bill Analysis, Tex.S.B. 1170, 70th Leg., R.S. (1987); Fiscal Note, Tex.S.B. 1170, 70th Leg., R.S. (1987); House Research Organization, Bill Analysis, Tex. S.B. 1170, 70th Leg., R.S. (1987). A corporation calculates how much franchise tax it owes based, in part, on the amount of its surplus. The comptroller had adopted an accounting rule prohibiting corporations from deducting from their calculation of surplus any sums set aside by the corporation to provide for contingent or estimated losses. Rather, under the comptroller’s rule, only debts of a fixed amount could be used to reduce a corporation’s surplus. Several corporations had successfully challenged the validity of the comptroller’s rule in court and, although the court rulings were being appealed, the legislature sought to codify the rule in order to protect against a possible revenue shortfall in the event the appeals were unsuccessful. Thus, the legislature added the amendment in order to guarantee that corporations could not, in calculating their franchise taxes, reduce the amount of their surplus by unrealized, estimated, or contingent losses. Rather, as under the comptroller’s rule, only debts of a fixed, certain amount would be allowed to reduce surplus. Based on the eventual results of the state’s appeals in the court challenges, the legislature’s decision to adopt the amendment was a wise one. See State v. Shell Oil Co.,
Second, the analysis adopted by the concurring opinion is contrary to a strict construction of the statute and has been expressly rejected by at least two courts. In Rogers v. Adler,
[Wjhile we adhere to the supreme court’s definition of “debt” as being an obligation for a specific sum, we are persuaded that it cannot be so narrowly applied within the context of the Code section before us....
... [A] strict construction of the statute would prohibit the imposition of liability in a case, such as here, where all of the operative facts occurred at least four years before the charter was forfeited. The mere fact that the amount of money owed to [the plaintiff] as damages was unspecified at the time of the forfeiture does not establish that the debt was created or incurred after forfeiture.
[[Image here]]
... We are persuaded that, as applied to the case before us, the distinction [between tort and contract] is one without a difference. This is true because the major premise forming the basis for [the plaintiffs] argument is not that her claim “sounded in tort,” but, instead, that no debt was in existence, that is, incurred until her claim was reduced to judgment.
The analysis embraced by the concurring opinion was also rejected in Curry Auto Leasing, where the court held that the mere reduction of an indebtedness to judgment does not constitute the “creation” or “incur-rence” of a debt:
Curry Auto is not understood to urge that the reduction of its damages to judgment converted the sum thereof into new indebtedness created or incurred after forfeiture. Nevertheless, it is worthwhile to note that the principles of strict construction enunciated in Schwab would prohibit this construction. Under this prohibited construction, officers and directors would become hable for any judgment rendered after forfeiture, regardless of when the debt on which the judgment is based was created or incurred.
Finally, the concurring opinion misconstrues the strict-eonstruction doctrine. That opinion asserts that a strict construction of section 171.255 requires that a narrow, restricted meaning be given to the term “debt,” which would then support the opinion’s conclusion that no debt was created or incurred until the corporate obligation ripened into a fixed amount through the Commission’s assessment of a penalty. This application of the strict-construction doctrine is incorrect. Under strict construction, it is the operation of the statute as a whole that is restricted, not the meaning of some isolated word or phrase:
Strict construction ... does not require that the words of a statute be given the narrowest meaning of which they are susceptible. The language used by the Legislature may be accorded a full meaning that will carry out its manifest purpose and intention in enacting the statute, but the operation of the law will then be confined to cases which plainly fall within its terms as well as its spirit and purpose.
Coastal States Gas Producing Co. v. Pate,
For the foregoing reasons, I would reverse the judgment of the trial court.
. "Post-forfeiture” is a term by which I mean the time after the date the franchise taxes and report were due and before coiporate privileges were revived. See Wilburn v. State,
. I do not mean by this to say that the corporation must commit some affirmative act. Passive acts, such as the acceptance of money or services, may also constitute the transaction of business.
. This Court has called the statute "highly penal in nature and one which could produce great hardship.” See Sheffield v. Nobles,
. Moreover, even, though the definition of "debt” in section 171.109 applies "in this chapter,” the placement of the definition in that section lends support to the conclusion that it was not intended to alter the meaning of the word "debt" in section 171.255. The title of section 171.109 is "Surplus,” and it contains other definitions and provisions indicating clearly that the purpose of the entire section is to regulate how a corporation calculates the amount of its surplus, from which it determines the amount of franchise taxes owed.
. The trial court also concluded that the Jonnets waived any complaint about their individual liability because they did not respond to the State's suit with a verified answer pursuant to Rule 93(2), Tex.R.Civ.P., denying that they were liable in the capacity in which they were sued. Because the trial court’s waiver conclusion could be an independent ground for affirming the trial court’s judgment, this point of error would also have to be sustained before the trial court’s judgment could be reversed. As a result of the majority’s decision on the “created or incurred" issue, however, neither the majority nor concurring opinion addresses the Jonnets’ third point of error in which they complain of the trial court’s conclusion as to waiver.
Without addressing the issue in depth, suffice it to say that Rule 93(2) applies when a defendant wishes to assert that he has been sued in a mistaken legal capacity. See John Chezik Buick Co. v. Friendly Chevrolet Co.,