Hovel v. Batzri

• Decision Date: 01 March 2016
• Docket Number: NO. 01–14–00305–CV,01–14–00305–CV
• Citation: 490 S.W.3d 132
• Parties: Robert Hovel and Tania Hovel, Appellants v. Gal Batzri, Appellee
• Court: Texas Court of Appeals

490 S.W.3d 132

Robert Hovel and Tania Hovel, Appellants

v.Gal Batzri, Appellee

NO. 01–14–00305–CV

Court of Appeals of Texas, Houston (1st Dist.).

Opinion issued March 1, 2016

Rehearing En Banc Overruled April 28, 2016

Matthew J. Kita, Dallas, TX, for appellant.

Danny M. Sheena, P.E., Hung Michael Nguyen, The Sheena Law Firm, Houston, TX, for appellee.

Panel consists of Justices Keyes, Higley, and Brown.

OPINION

Harvey Brown

, Justice

This is a statutory-construction case. Robert and Tania Hovel sued a limited liability company, 7677 Real Property LLC, for breach of contract and DTPA violations. After suit was filed but before any determination of liability was made, the company stopped paying its franchise tax and forfeited its corporate privileges. Eventually, the Hovels obtained a default judgment against the company.

The Hovels then sought to have the sole manager of the company, Gal Batzri, held personally liable for the company's debt under Section 171.255 of the Texas Tax Code

. That statute charges corporate directors and officers with personal liability for business debts “created or incurred” after the business fails to pay its franchise tax and before any subsequent revival of corporate privileges. Tex. Tax Code Ann. § 171.255 (West 2015).

The sole manager and the Hovels filed cross motions for summary judgment. The trial court granted the manager's motion and denied the Hovels'. In two issues, the Hovels contend that the trial court erred in concluding that the manager was not personally liable.

Recognizing that Section 171.255

is penal in nature and that our established precedent requires that any ambiguity in a penal statute be interpreted in favor of the party facing the penalty, we hold that, in the context of a contract between a plaintiff and entity-defendant that leads to contractual, statutory, and tort claims against the entity-defendant, the debt is created or incurred when the events giving rise to the claim occurred. Using this construction of the phrase “created or incurred,” we hold that, under Section 171.255 of the Tax Code

, judgment-debts arising from or related to pre-forfeiture agreements and pre-forfeiture acts are considered to have been created or incurred pre-forfeiture even if not liquidated until post-forfeiture, whether the claims are expressed solely as contract claims or a combination of contract, statutory and tort claims. Because the Hovels' claims relate to their contract with 7677, it is uncontested that the contract was executed pre-forfeiture, and the breach, tortious conduct, and injury occurred pre-forfeiture, we affirm.

Background

The Hovels contracted with 7677 to build a custom home. 7677 is a Texas limited liability company with a single member and manager: Gal Batzri. The Hovels became dissatisfied, alleging that 7677 was in breach of the construction contract by delivering the home late and with construction defects. The Hovels sued 7677.¹ They asserted numerous causes of action, including breach of contract, violation of the DTPA, and statutory fraud. They also alleged that 7677 misrepresented that it would timely perform the contract and follow applicable construction standards.

The Hovels sought as expectation damages the difference between the contract price and the actual value of the property they received. They also sought consequential damages, reliance damages, mental-anguish damages, and other damages under the DTP A, as well as attorney's fees and costs. Tex. Bus. & Com. Code Ann. § 17.50(b)(1)

, (d) (West 2011).

While the suit was pending, 7677 forfeited its charter and corporate privileges by failing to pay its franchise tax. During the period of forfeiture, the Hovels obtained a default judgment against 7677.² The trial court awarded lump-sum actual-damages of $2,067,166.50, without specifying on which of the Hovels' multiple legal theories the damages were awarded. A few months after the default judgment, 7677 revived its charter and corporate privileges.

Post-default, the Hovels brought this lawsuit, seeking to hold Batzri personally liable for the judgment against 7677 under Tax Code section 171.255

, which imposes personal liability akin to a general partnership for “each debt of the [entity] that is created or incurred” between the date that a company forfeits its corporate privileges and the date that it revives them.³

Tex. Tax Code Ann. § 171.255(a)

. Both parties moved for summary judgment. The trial court denied the Hovels' motion and granted Batzri's motion, apparently concluding that the debt was not “created or incurred” by the default judgment, which was the only event that occurred during the period of forfeiture. The Hovels timely appealed.

Standard of Review

We review a summary judgment de novo. Tex. R. Civ. P. 166a

; Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex.2009). Summary judgment is proper if, having viewed all of the evidence in the light most favorable to the non-movant, there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 600 (Tex.2004). If a trial court grants summary judgment without specifying the grounds for doing so, as is the case here, we must uphold the trial court's judgment if any ground relied upon by the movant is meritorious. Parker v. Valerus Compression Servs., LP, 365 S.W.3d 61, 65 (Tex.App.–Houston [1st Dist.] 2011, pet. denied).

We also review issues of statutory construction de novo. Tex. Lottery Comm'n v. First State Bank of DeQueen, 325 S.W.3d 628, 635 (Tex.2010)

. Our primary objective in construing statutes is to give effect to the Legislature's intent. Id.

Section 171.255

Section 171.255 of the Tax Code

penalizes directors and officers of a corporation for knowingly creating or incurring debt in the name of the corporation while its corporate privileges are in forfeiture.⁴ The relevant portion of that section reads:

(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 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.

(b) The liability 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 liable 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.

Tex. Tax Code Ann. § 171.255(a)

-(c).⁵ The statute applies to limited liability companies, such as 7677. See id. § 171.2515 (West 2015); see also

Bruce v. Freeman Decorating Servs., Inc ., No. 14–10–00611–CV, 2011 WL 3585619 (Tex.App.–Houston [14th Dist.] Aug. 16, 2011, pet. denied) (mem.op.).

Both parties agree that Batzri—7677's sole member and manager—is personally liable for any debt created or incurred during forfeiture of 7677's corporate privileges and that the Hovels obtained a default judgment against 7677 during that period. But the parties dispute whether 7677's debt was created or incurred when the default judgment was entered or when the tortious or otherwise wrongful conduct occurred that ultimately led to the Hovels' judgment against 7677.

Relying, in part, on a narrow definition of “debt” adopted by the Legislature in 1987, the Hovels argue that a debt does not come into existence until it is liquidated, their damages remained unliquidated until they obtained the default judgment, and therefore, no debt was created or incurred until the default judgment issued during the forfeiture. Conversely, Batzri argues that the 1987 narrow definition of “debt” is no longer significant because the legislation enacting it has been repealed. He argues for a broad definition of “debt” that includes unliquidated obligations and contends that 7677's debt was created or incurred when the acts or omissions that gave rise to the Hovels' claim occurred. According to Batzri, the debt was created or incurred at that time—pre-forfeiture—and the default judgment relates back to that time.

The Rule of “Strict Construction”

Although the statute imposes civil liability, Section 171.255 of the Tax Code

operates as a penal statute. Schwab v. Schlumberger Well Surveying Corp., 145 Tex. 379, 198 S.W.2d 79, 81 (1946) ; Sheffield v. Nobles, 378 S.W.2d 391, 392 (Tex.App.–Austin 1964, writ ref'd) (statute is “highly penal in nature and one which could produce great hardship”); see also Robert W. Hamilton, The Corporate Entity, 49 Tex. L.Rev. 979, 995–96 (1971) (describing individual liability arising from failure to pay franchise taxes as “[d]raconian provision”).⁶ Because Section 171.255 is a penal statute, we must “strictly construe” any ambiguity in favor of the party penalized by it. Schwab, 198 S.W.2d at 81 ; see

Curry Auto Leasing, Inc. v. Byrd, 683 S.W.2d 109, 111 (Tex.App.–Dallas 1984, no writ).⁷

Courts have repeatedly invoked this rule of statutory construction when construing Section 171.255

. For example, this court has stated that Schwab requires us to strictly construe the statute “to protect individuals against whom recovery of such quasi-penal damages is sought.” McKinney v. Anderson, 734 S.W.2d 173, 174 (Tex.App.–Houston [1st Dist.] 1987, no writ) (reviewing Section 171.255 ); see

Tri–State Bldg. Specialties, Inc. v. NCI Bldg. Sys., L.P., 184 S.W.3d 242, 251 (Tex.App.–Houston [1st Dist.] 2005, no pet.) (“It is well-settled that section...