Paddock v. Siemoneit, A-1976.

• Decision Date: 02 March 1949
• Docket Number: No. A-1976.,A-1976.
• Parties: PADDOCK et al. v. SIEMONEIT et al.
• Court: Texas Supreme Court

218 S.W.2d 428

PADDOCK et al. v. SIEMONEIT et al.

No. A-1976.

Supreme Court of Texas.

March 2, 1949.

Rehearing Denied March 30, 1949.

COPYRIGHT MATERIAL OMITTED

Error to Court of Civil Appeals of Second Supreme Judicial District.

Action by Burton B. Paddock, trustee in bankruptcy, and others against C. J. Siemoneit and others, to impose a constructive trust on property wherein the United States intervened to recover delinquent taxes. A judgment of the Court of Civil Appeals, 214 S.W.2d 651, was affirmed in part and reversed and rendered in part on defendants' appeal and Burton B. Paddock, trustee in bankruptcy, and others bring error.

Judgment of the district court and Court of Civil Appeals affirmed with respect to suit by the trustee in bankruptcy; with respect to the intervention of United States, judgment of the Court of Civil Appeals reversed and judgment of the district court reformed and affirmed.

Melvin F. Adler, of Fort Worth, Tex., for petitioners Paddock and others.

Theron Lamar Caudle, Asst. Atty. Gen., Andrew D. Sharpe and Frank K. Foster, Sp. Assts. to Atty. Gen., and Frank B. Potter, U. S. Atty., and A. W. Christian, Asst. U. S. Atty., both of Fort Worth, for petitioner United States.

Ernest May and Van Zandt Smith, both of Fort Worth, for respondents.

HART, Justice.

The trustee in bankruptcy of Siemoneit Drilling Company, Inc., brought this suit against C. J. Siemoneit and his wife and others, seeking to establish a constructive trust in favor of the bankrupt corporation upon certain real estate and personal property. The United States of America intervened in the suit, asking for a judgment for a tax penalty against Mr. and Mrs. Siemoneit and foreclosure of a tax lien upon the same property. In a trial before the court without a jury, judgment was entered against the trustee in bankruptcy but in favor of the United States, as against C. J. Siemoneit. The Court of Civil Appeals affirmed the judgment against the trustee in bankruptcy, but reversed the judgment in favor of the United States and rendered judgment in favor of Siemoneit. 214 S.W.2d 651.

Applications for writs of error on behalf of the trustee and the United States have been granted. These applications present distinct questions and therefore will be considered separately.

The position of the trustee in bankruptcy is that C. J. Siemoneit was guilty of a breach of fiduciary duty in using funds borrowed from the corporation to purchase and improve property which he bought for himself, and that therefore a constructive trust was imposed upon the property in favor of the corporation, which can be enforced against all property into which the funds can be traced. Siemoneit's reply in effect is that under the facts in this case he was guilty of no breach of trust in borrowing money from the corporation and that the property in question, which admittedly would ordinarily be exempt from execution to pay debts, is not subject to a constructive trust or an equitable lien to secure the repayment of the sums borrowed.

The corporation was formed in Delaware in 1941 and soon thereafter began doing business in Texas under a permit authorizing it to engage in a drilling business. C. J. Siemoneit owned 6000 shares of the capital stock; his son J. Robert Siemoneit owned 500 shares, and an employee, E. R. Land, owned 480 shares, subject to a purchase option contract in favor of C. J. Siemoneit. The stock owned by the Siemoneits was paid for with the assets of a Texas corporation, wholly owned by C. J. Siemoneit. These assets were incumbered with debts which were assumed by the Delaware corporation, so that the corporation was in debt from the time it began doing business. C. J. Siemoneit was the president and a director of the corporation, the parties stipulating that he was "its managing officer."

From the beginning, C. J. Siemoneit drew freely on the corporation for his own personal expenses. He maintained no personal bank account, but caused checks to be issued on the company's bank accounts for his individual purposes. An account was kept on the books of the company in his name, in which he was credited with the amount of his agreed salary and sums expended for the benefit of the company, and charged with his withdrawals. It was stipulated that "the other stockholders consented to all withdrawals by C. J. Siemoneit."

On May 24, 1941, C. J. Siemoneit purchased for his homestead a tract of land in River Crest in Tarrant County for a total consideration of $17,500, of which $5,000 was paid in cash and $12,500 was evidenced by a vendor's lien note. The cash payment was made with a corporation check, but at that time the corporation owed C. J. Siemoneit more than the amount of the check, and no objection is made to this payment. The last day on which the company's books showed a balance in favor of C. J. Siemoneit was July 31, 1941. Thereafter the amount he owed the company fluctuated, but generally there was a rise in the indebtedness until on December 1, 1944, he executed and delivered his note payable to the corporation for $38,610.63, which approximately represented the balance then owing. In the meantime, from September, 1941, to November, 1944, and while he was indebted to the corporation, he caused checks to be issued on the corporation's bank accounts in payment for purchase money, loan expenses, improvements, taxes and insurance on the River Crest property in the total amount of $14,263.87. During the same period Siemoneit caused company checks to be issued to pay for a piano and a silver service. In 1946 the River Crest property was sold, and the proceeds were used by C. J. Siemoneit to purchase other real property. The trustee in bankruptcy seeks to impose a constructive trust on this property and also on the personalty paid for with company checks.

At the time the payments were made for the benefit of the River Crest property, the corporation was solvent. Not counting the claim of the corporation against C. J. Siemoneit for money advanced to him, the corporation still had assets valued at more than the amount of its debts. There was no attempt to conceal from any creditor the nature and extent of Siemoneit's loans from the corporation. His indebtedness to the corporation was disclosed on statements furnished to the principal creditors, and they made no objection. In 1942 and 1943 Siemoneit borrowed from other sources and paid to the corporation amounts in excess of the total corporate funds which had been spent for the benefit of the River Crest property. Siemoneit testified that his agreement with E. R. Land, the company's bookkeeper, was that all of these payments should be credited against the advances made by the corporation with respect to the homestead. However, there remained at all times after July, 1941, a balance owing by Seimoneit to the company, which at the time the petition for reorganization was filed on March 2, 1945, amounted to $30,510.63. This balance has never been paid.

During the years that it operated from 1941 to 1945, the corporation operated at a loss for each year except 1942, when it made a small profit. It declared no dividends. While the company was not insolvent, it was in financial difficulties almost from the first, and in November, 1942, it began depositing its money in special accounts in the name of E. R. Land to avoid garnishment of its funds by creditors. C. J. Siemoneit testified that the corporation's insolvency was precipitated by the blowout of a well it was drilling, which caused it a loss in excess of $100,000, and that the advancements to him on account of his homestead had nothing to do with the filing of the petition for reorganization.

The first question for determination is whether C. J. Siemoneit was guilty of a breach of fiduciary duty under these facts. Undoubtedly, as a director and the managing officer of the corporation, Siemoneit occupied the position of a fiduciary toward the company. Tenison v. Patton, 95 Tex. 284, 67 S.W. 92; 3 Hildebrand, Texas Corporations (1942), Secs. 681, 692; 3 Fletcher, Cyclopedia of the Law of Private Corporations (1947), Secs. 838, 850; Ballantine, Corporations (1946), Sec. 66. Nevertheless, the texts cited point out that officers and directors of corporations are not strictly trustees, and that their duties and liabilities are not necessarily identical with those of other fiduciaries. The character and consequences of the acts of an officer or a director have apparently been determined on the basis of the facts of each case. Acts which might well be considered breaches of trust as to other fiduciaries have not always been so regarded in cases of corporate officers or directors.

We therefore have to consider the nature of the acts which C. J. Siemoneit did in this particular case. With the consent of all of the stockholders, and without concealment from the creditors, he borrowed money from the company, while it was a solvent and going concern. What he attempted to do was to create between himself and the company the relation of debtor and creditor. The authorities seem to agree that, in the absence of fraud or statutory prohibition, an officer or director may borrow money from the corporation without being guilty of a breach of trust. Felsenheld v. Bloch Bros. Tobacco Co., 119 W.Va. 167, 192 S.E. 545, 123 A.L.R. 334; Klein v. Independent Brewing Association, 231 Ill. 594, 83 N.E. 434; Garrison Canning Co. v. Stanley, 133 Iowa 57, 110 N.W. 171; Barber v. Kolowich, 282 Mich. 143, 275 N.W. 797; Platt v. Birmingham Axle Co., 41 Conn. 255; Witters v. Sowles, C.C., 31 F. 1; 19 C.J.S., Corporations, § 771, page 134; 3 Fletcher, Cyclopedia of the Law of Private Corporations (1947), Sec. 955. There is no claim of actual fraud in this case and no statute prohibits a loan of this kind. No Texas case precisely in point has been discovered, but in Marosis v. Alamo Amusement Co., Tex.Civ.App., 60 S.W.2d 876, affirmed in the Supreme Court by...