Court Opinion

ID: 9765906
Source: CourtListenerOpinion
Date Created: 2023-08-29 04:24:21.77826+00
Date Added: 2024-06-11T07:30:16.623661
License: Public Domain

BARROW, Justice.
Petitioner, Henry I. Siegel Co., Inc. (Sie-gel), sued respondent, Edna Holliday, along with Alfred and Barbara Graham to collect on a sworn account. Siegel is a creditor of now-dissolved Holly Gram, Inc. (Holly Gram). Mrs. Holliday and the Grahams were officers and directors of Holly Gram. Siegel sought to hold the directors personally liable for Siegel’s claim against Holly Gram on the basis of the “trust fund doctrine.” The trial court, after a non-jury trial, rendered judgment for Siegel against all three officers/directors jointly and severally. Only Mrs. Holliday appealed. The court of appeals reversed that portion of the trial court’s judgment imposing liability on Mrs. Holliday and rendered a take-nothing judgment for her. 648 S.W.2d 519. We affirm the judgment of the court of appeals.
Holly Gram was a Texas corporation, which operated a shoe store and two dress shops. After slightly less than one year in business, Mrs. Holliday and the Grahams decided to dissolve the corporation. They agreed, however, to continue the business as sole proprietorships, with Mrs. Holliday taking the assets and liabilities of the shoe store and the Grahams doing likewise with the dress shops. They did not notify the known creditors of Holly Gram of the dissolution as required by Tex.Bus.Corp.Act Ann. art. 6.04 A(2).
It is undisputed that Mrs. Holliday has paid more money in discharge of the debts of Holly Gram than the value of all corporate assets at the time of dissolution. The trial court found those assets were worth about $20,000, and Mrs. Holliday received assets with a value of $10,000. After dissolution, Mrs. Holliday paid a total of $26,000 to various Holly Gram creditors.
The debt sued on by Siegel was for merchandise sold on account to the dress shops. Under the directors’ agreement, the Grahams were responsible for payment of that debt, but they were unable to pay it. Although no attempt was made by the directors to pay the debts on any particular basis, it is significant that Siegel makes no allegation that the directors have been guilty of fraud or even favoratism in their payment of corporate debts.
Siegel brought this suit for the remaining balance of $2,087.98 owed by Holly Gram on a trade account. Siegel bases its case for holding Mrs. Holliday personally liable on the trust fund doctrine as presently embodied in Tex.Bus.Corp.Act Ann. art. 6.04 A (3) and Tex.Rev.Civ.Stat.Ann. art. 1302-2.-07 B. Siegel argues that the directors of Holly Gram, upon dissolution, became trustees of the corporate assets. As trustees, Siegel contends, the directors owed a fiduciary duty to see that the assets were applied to the satisfaction of creditors’ claims on a pro rata basis. Siegel further urges that the directors were bound to keep records from which each creditor’s pro rata share of assets could be determined. Failure to fulfill these responsibilities, the argument concludes, renders each director jointly and severally liable to each creditor for the full amount of the creditor’s claim.
Article 6.04 A(3) directs that if the assets of a dissolved corporation are inadequate to pay all the corporation’s debts those assets must be applied, so far as they will go, to the just and equitable payment of debts. Because the matter is not material to our disposition of the case, we assume, without deciding, that the statute dictates a pro rata distribution of corporate assets to creditors in the instant context.1 *827Article 1302-2.07 B requires the board of directors, inter alia, to make a correct distribution to creditors. Article 1302-2.07 B also contains the trust fund doctrine. In this respect, it provides:
In the exercise of ... powers [necessary to wind up corporate affairs], the directors and officers shall be trustees for the benefit of creditors, shareholders, members, or other distributees of the corporation and shall be jointly and severally liable to such persons to the extent of the corporate property and assets that shall have come into their hands, (emphasis added).
The trust fund doctrine was considered in Hunter v. Fort Worth Capital Corp., 620 S.W.2d 547 (Tex.1981). We determined that under the trust fund doctrine “when the assets of a dissolved corporation are distributed among its shareholders, a creditor of the dissolved corporation may pursue the assets on the theory that in equity they are burdened with a lien in his favor.” Id. at 550. We further stated that the theory “applies whenever the assets of a dissolved corporation are held by any third party, .. . so long as the assets are traceable and have not been acquired by a bona fide purchaser.” Id. Accord Waggoner v. HerringShowers Lumber Co., 120 Tex. 605, 40 S.W.2d 1, 5 (1931); Lyons-Thomas Hardware Co. v. Perry Stove Mfg. Co., 86 Tex. 143, 24 S.W. 16, 20-21, 25 (1893); Koch v. United States, 138 F.2d 850, 852 (10th Cir.1943); Norton, Relationship of Shareholders to Corporate Creditors Upon Dissolution: Nature and Implications of the “Trust Fund” Doctrine of Corporate Assets, 30 Bus.Law 1061, 1069-79 (1975).
In Waggoner, this Court held that a transfer of the assets of an inactive and insolvent corporation made in an attempt to provide for payment of corporate obligations is made subject to an equitable lien. The Court stated:
We think the board of directors, as directors and trustees, had the right to sell the property to [one or two of the directors] ... to have the debts of the corporation paid; but the property passed ... charged with an equitable lien in favor of the creditors of the corporation dischargeable only upon the payment of the creditors in full or pro rata from the funds received from the corporate property .... [citations omitted]. Moreover, the directors were charged with the duty of seeing that the creditors [are so paid]....
Waggoner, 120 Tex. 605, 40 S.W.2d at 5. The meaning of the foregoing authorities is unmistakable. The existence of the so-called “trust” relationship in situations controlled by the trust fund doctrine provides no basis for personal liability of directors. It only allows corporate creditors to follow the corporate assets and to subject those assets to the payment of their claims.
Our attention has been directed to several Texas cases that purportedly support Sie-gel’s position. None of the cases cited hold that directors of a defunct corporation may, by virtue of the trust fund doctrine, be held personally liable to corporate creditors in an amount greater than the value of corporate assets received by the directors, nor do any of these cases permit a personal judgment based upon the breach of a fiduciary relationship.
The correct construction of article 1302-2.07 B and article 6.04 A(3) is that the last board of directors of a dissolved corporation is charged with a duty to manage the corporate assets and wind up corporate affairs. Among its duties in this regard is the duty to make a just and equitable distribution of assets to the creditors first and then to the stockholders. If a preferential transfer is made in the course of this distribution, equity, under our statutory trust fund doctrine, will burden the transferred property with an equitable lien. *828By virtue of that equitable lien, the excluded creditor may follow the assets preferentially transferred and have them subjected to his claim. This is true so long as the transferred corporate assets are traceable and are not in the hands of a bona fide purchaser. On this basis, personal liability of the director arises only because he has disposed of the assets in such a manner that they cannot be traced or because he has caused a diminution in the value of the assets. Koch, 138 F.2d at 852; Norton, supra at 1073-74, 1078-79.
Article 1302-2.07 B does provide a further basis for personal liability of directors. The statute stipulates that the directors shall be jointly and severally liable for breach of their duty to distributees of the corporation. This liability is limited, however, to the extent of corporate assets that come into their hands. The obvious effect of this provision is to make each director personally liable to the corporation’s distributees to the extent of the value of corporate assets received by all the directors. This provides the creditors with an additional remedy apart from their right to subject the corporate assets to their claim. The directors may be held personally liable, but in no case may their joint liability to all creditors exceed the value of the corporate assets that came into their hands by virtue of the dissolution. White v. Texas Motor Car & Supply Co., 228 S.W. 138, 141-42 (Tex.Comm’n App.1921, holding approved) (construing predecessor to article 1302-2.-07).
Siegel has made no effort to trace the assets of Holly Gram, but has chosen only to enforce personal liability against Mrs. Holliday. It is undisputed that Mrs. Holliday has paid more to the creditors of Holly Gram than the total value of the corporate assets at dissolution. The limit on her liability has been surpassed, and Siegel cannot hold her personally liable for its claim.
We affirm the judgment of the court of appeals.
RAY, J., dissents with opinion in which SPEARS, J., joins.

. Statutes existing since 1871 have been interpreted as requiring a defunct corporation to make a pro rata distribution of assets to creditors. See, e.g., Lyons-Thomas Hardware Co. v. Perry Stove Manufacturing Co., 86 Tex. 143, 24 S.W. 16, 19-21 (1893). In 1955, however, the legislature in enacting the Texas Business Corporation Act chose to charge the directors to make a “just and equitable” distribution. Tex. Bus.Corp.Act Ann. art. 6.04 A(3). This is evi*827dence that the legislature, presumably possessed of full knowledge of the existing standard, rejected it and opted for a new one. Therefore, the corporation may now have more flexibility in paying its creditors than it had before adoption of the Business Corporation Act.