Jonnet v. State

• Decision Date: 08 June 1994
• Docket Number: No. 3-93-101-CV,3-93-101-CV
• Citation: 877 S.W.2d 520
• Parties: Elmer J. JONNET and Joseph E. Jonnet, Appellants, v. STATE of Texas, Appellee.
• Court: Texas Court of Appeals

Page 520

877 S.W.2d 520

Elmer J. JONNET and Joseph E. Jonnet, Appellants, v. STATE of Texas, Appellee.

No. 3-93-101-CV.

Court of Appeals of Texas,

Austin.

June 8, 1994.

Rehearing Overruled June 29, 1994.

William L. Smith, Jr., Denton, for appellants.

Dan Morales, Atty. Gen., Joe Foy, Jr., Asst. Atty. Gen., Austin, for appellee.

Before POWERS, JONES and KIDD, JJ.

KIDD, Justice.

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"). ¹ The State sought to recover from the Jonnets individually based on section 171.255(a) of the Tax Code. Tex.Tax Code Ann. § 171.255(a) (West 1993). After a bench trial, the district court rendered a final judgment finding the defendants jointly and severally liable for the administrative penalty, a civil penalty for failure to pay the administrative penalty, attorney's fees, and court costs. The Jonnets alone appeal. We will affirm the judgment of the district court.

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).

14 and that the Commission was recommending legal action. The letter warned that once legal action was initiated, the Commission would likely assess an administrative penalty. The letter went on to state that this would be BRO's last opportunity to bring the leases into compliance without incurring a penalty.

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 noncompliance 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 Jonnets 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.

when taxes, penalties, or tax reports are delinquent and result in forfeiture of corporate privileges. Officers and directors remain without protection from liability until corporate privileges are revived. Each officer and director is individually liable for corporate debts "created or incurred" in the interim.

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, 683 S.W.2d 109 (Tex.App.--Dallas 1984, no writ), an automobile lessor sought to recover expenses stemming from the corporate lessee's breach of the rental agreement. While the lessor suffered losses after the event that caused the lessee's loss of corporate privileges, the rental agreement itself predated the event. Accordingly, because the debts were authorized by the rental agreement, "[t]he items in question, as debts of the corporation, relate back to [the] promise to pay made in the rental contract." Id. at 112. Courts have followed the reasoning of Curry in other cases where the debts arose from breach of agreements reflected by written instruments that predate the delinquency resulting in forfeiture of corporate privileges. See McKinney v. Anderson, 734 S.W.2d 173, 174-75 (Tex.App.--Houston [1st Dist.] 1987, no writ) (damages from breach of equipment lease agreement relate back to execution of lease); River Oaks Shopping Ctr. v. Pagan, 712 S.W.2d 190 (Tex.App.--Houston [14th Dist.] 1986, writ ref'd n.r.e.) (damages arising from breach of real estate agreement relate...