Under Sections 171.252 and 171.255 of the Texas Tax Code, directors and officers become liable for corporate debts when corporate privileges are forfeited for failure to file a franchise tax report, failure to pay franchise taxes, or failure to pay penalties. These Tax Code provisions also apply to limited liability companies and their members and managers.
Texas courts had consistently held that if the “debt” was based on a contract executed prior to corporate privileges being forfeited, then the officers/directors were not personally liable for the debt. For example, if a corporation signed a promissory note in 2008, forfeited its corporate privileges in 2009, but did not breach the note by missing a payment until 2010, then the debt ‘related back” to 2008, resulting in no personal liability for the officers and directors. Now, this defense to personal liability appears to be a thing of the past.
In Taylor v. First Community Credit Union, the 14th Court of Appeals of Texas determined that the relation back doctrine did not save Taylor, a director, from being tagged with company debt resulting from the company’s breach of a contract with a credit union, even though the contract was executed before corporate privileges were forfeited. The court focused on the definition of “debt” under the Tax Code, reasoned that no debt was owed until the contract was breached, and held that the relation back doctrine is inconsistent with the definition of debt and therefore did not apply to relieve Taylor of personally liability for the debt.
Significance: Officer, directors, managers, and members of corporations and limited liability companies that forfeit their privileges will be liable for debts arising out of the company failing to meet its contractual obligations, even though the company was in good standing with the State of Texas when the contract was executed. And, under the Texas Tax Code, reviving the corporate privileges will not relieve the personal liability. The best way to avoid this potential personal liability is to keep franchise tax filings and franchise tax payments current. Before your company signs any contract or takes any action that could result in a significant financial obligation, especially a long term financial obligation, verify that the company is in good standing with the State of Texas.