Court Opinion

ID: 9769426
Source: CourtListenerOpinion
Date Created: 2023-08-29 14:50:14.096761+00
Date Added: 2024-06-11T07:31:03.292054
License: Public Domain

ON MOTION FOR REHEARING
GUITTARD, Chief Justice.
Three points raised in appellees’ motion for rehearing deserve additional comment. All are overruled except the one concerning corporations other than Heritage Building Company and Heritage Corporation. Insofar as the judgment concerns those corporations, the motion is granted.

Inadequate Capitalization

Appellees contend that we erred in considering capitalization of Heritage Building Company at the time its assets were transferred to Pointer rather than at the time it was originally incorporated. They argue that a corporation that had adequate capital to begin business cannot be considered un-dercapitalized merely because it suffers losses, and, therefore, its inability to pay its debts does not establish inadequacy of capital.
Our opinion should not be understood as holding that a stockholder is liable for a corporate debt merely because the corporation has insufficient funds. Neither should it be taken as holding that personal liability is necessarily imposed on a stockholder who makes advances of personal funds to a financially weak corporation. We hold, rather, that when a corporation transfers virtually all its assets to its controlling stockholder to repay his advances, without providing for other creditors, the court may consider the amount of the capital stock as compared with the funds that the stockholder has actually invested in the enterprise as one of the factors in determining whether his manipulation of the corporate form of business organization to serve his individual interests justifies imposition of personal liability. Consideration of inadequacy of capital in the context of later developments is supported by the following authorities: DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., 540 F.2d 681, 686 (4th Cir.1976); Luckenbach S. S. Co. v. W. R. Grace & Co., 267 F. 676, 681 (4th Cir. 1920), cert. denied 254 U.S. 644, 41 S.Ct. 14, 65 L.Ed. 454 (1920); Automotriz del Golfo de California S. A. v. Resnick, 47 Cal.2d 792, 306 P.2d 1, 4 (1957); Dix, Adequate Risk Capital: The Consideration for the Benefits of Incorporation, 53 N.W.U.L.Rev. 478, 491 (1958); and see Chesapeake Stone Co. v. Holbrook, 168 Ky. 128, 181 S.W. 953 (1916).

Breach of Duty by Controlling Stockholder

Appellees complain that we erred in resting our holding of a breach of duty by Pointer on the trust-fund doctrine when that doctrine was not pleaded and its requisites were not proved. We adhere to our original holding and point out that the peculiar duty of a controlling stockholder to deal fairly with the corporation, its stockholders, and creditors is broader than the trust-fund doctrine. It rests on his inside knowledge of the corporation’s affairs and his opportunity to manipulate them for his personal advantage. Pepper v. Litton, 308 U.S. 295, 309-312, 60 S.Ct. 238, 84 L.Ed. 281 (1939); Dix, supra, at 493.
Breach of that duty may have consequences other than liability as a trustee of corporate assets, particularly when the controlling stockholder has used his control *400of corporate affairs to gain an unfair advantage for his individual interests as a creditor. One such consequence may be to treat his advances to the corporation as risk capital by subordinating his claims against the corporation to those of other creditors in a division of corporate assets. Pepper v. Litton, supra; In re U. Loewer’s Gambrinus Brewery Co., 167 F.2d 318 (2d Cir. 1948); Boyum v. Johnson, 127 F.2d 491, 494 (8th Cir. 1942); S. G. V. Co. v. S. G. V. Co., 264 Pa. 265, 107 A. 721, 722 (1919); Dix, supra, at 491. Another may be to subordinate his claims to those of preferred stockholders. Taylor v. Standard Gas & Elec. Co., 306 U.S. 307, 322, 59 S.Ct. 543, 83 L.Ed. 669 (1939). Still another may be to treat the corporation as the stockholder’s tool or agent and thus to hold him as well as the corporation liable for the corporation’s debts. Continental Supply Co. v. Forrest E. Gilmore Co., 55 S.W.2d 622, 628 (Tex.Civ. App.—Amarillo 1932, writ dism’d); Oriental Investment Co. v. Barclay, 25 Tex.Civ.App. 543, 64 S.W. 80, 88 (1901, writ ref’d). Although none of these cases are precisely parallel, they illustrate that the principle is not confined to situations in which a creditor asserts that particular assets formerly held by the debtor corporation constitute a trust fund. Consequently, even though that particular relief was not properly invoked here, we regard our holding that Pointer breached his duty to deal fairly with creditors of his solely-owned corporation as being well sustained by authority and as warranting the imposition of personal liability under the circumstances shown by the undisputed evidence in this case.

Plaintiff’s Standing to Attack Other Corporations

In their motion for rehearing appellants raise for the first time the question of plaintiff’s standing to attack the separate existence of corporations with which plaintiff has never dealt. We have no difficulty with this question in the case of Heritage Corporation, since, as pointed out in our opinion, it received substantially all of the property of Heritage Building Company and was an integral part of Pointer’s scheme to place that company’s assets beyond the reach of its creditors. If the relationship between several corporations is such that they constitute a single business enterprise, a creditor may attack the separate identity of each without showing that he dealt with all of them. Allright Texas, Inc. v. Simons, 501 S.W.2d 145, 148 (Tex. Civ.App.—Houston [1st Dist.] 1973, writ ref’d n. r. e.); Mull v. Colt Co., 31 F.R.D. 154, 163 (S.D.N.Y.1962); Walkovszky v. Carlton, 24 A.D.2d 582, 583, 262 N.Y.S.2d 334, 336 (1968); and cf. State v. Lone Star Gas Co., 86 S.W.2d 484, 491 (Tex.Civ.App.—Austin 1935, writ ref’d, but reversed on other grounds, 304 U.S. 224, 58 S.Ct. 883, 82 L.Ed. 1304) (relationship between corporations examined in gas rate case to determine whether they constituted a single business enterprise). No such relationship, however, is shown, in the case of East Realty Company, South Management Company, and Heritage Apartment Company. We sustained plaintiff’s attack on those corporations on the basis of Pointer’s testimony that they had no assets of their own, but merely held title to certain assets owned by him individually. On reconsideration, we conclude that under the facts of this case we are not justified in imposing liability on those corporations for plaintiff’s judgment against Heritage Building Company. Rosenthal v. Leaseway of Texas, Inc., 544 S.W .2d 180, 183 (Tex.Civ.App.—Tyler 1976, no writ). All plaintiff is entitled to under this evidence is to pierce the corporate veil with respect to Heritage Building Company and Heritage Corporation.
The motion for rehearing is granted with respect to East Realty Company, South Management Corporation, and Heritage Apartment Company, and the trial court’s judgment in their favor is affirmed. Otherwise, the motion for rehearing is overruled.
AKIN, J., dissenting.