Texas courts previously provided plaintiffs a number of ways to hold owners of business entities liable through the use of “alter ego” or “veil piercing” methods.  Since the Castleberry decision in 1986, the Texas legislature has limited the abilities of plaintiffs to hold owners liable.  The Texas Business Organizations Code limits the liability of owners in several ways.  An owner cannot be held liable for any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory.  However, the Texas Business Organizations Code Subsection (a)(2) does not prevent or limit the liability of a holder, beneficial owner, subscriber, or affiliate if the obligee demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate

Although the Texas legislature passed the provision discussed above to limit Castleberry, Texas courts have attempted to harmonize the two, leading to what can be a confusing state of the law.  Texas case law has held that to prove the actual fraud element, a plaintiff must prove “dishonesty of purpose or intent to deceive” in relation to the contract issue.  Additionally, case law states that a plaintiff must show that the holder, beneficial owner, subscriber, or affiliate received a direct personal benefit.  Courts have held that there are essentially three ways that the corporate veil may be pierced in Texas: (1) where the corporation is the alter ego of its owners/and/or shareholders; (2) actual or constructive fraud; or (3) the corporation is used as a sham to perpetrate a fraud.  However, in addition to proving one of the above, the plaintiff must also prove the actual fraud by “dishonesty of purpose or intent to deceive” and the direct personal benefit as discussed above.

Additionally, pursuant to the statute, an owner cannot be held liable for any obligation of the corporation on the basis of the failure of the corporation to observe any corporate formality, including the failure to comply with this code or the certificate of formation or bylaws of the corporation or observe any requirement prescribed by the Texas Business Organizations Code or the certificate of formation or bylaws of the corporation for acts to be taken by the corporation or its directors or shareholders.

As attorneys in Houston, Texas, we are sometimes asked about foreclosure on property on which the IRS has a junior lien.  In accordance with IRC § 7425, the Internal Revenue Service has the right to redeem real property which was sold in nonjudicial foreclosure action by a third party to satisfy an outstanding encumbrance which has priority over the Notice of federal Tax Lien.  This means that after the property is sold at a foreclosure sale, the IRS can purchase the property at the price that the property was sold for at the foreclosure sale.  In accordance with Title 28 U.S.C. § 2410(c), the Internal Revenue Service has the right to redeem real property which is sold in a judicial sale where the United States’ position is junior to the foreclosure party.  The time period for a redemption after a foreclosure sale with respect to either a nonjudicial or judicial foreclosure is 120 days or the period allowable for redemption under State law, whichever is longer.  In Texas, the mortgagor/property owner has no right of redemption if the senior lienholder is a mortgagee.

In addition to the sale price, if the IRS redeems the property, it must pay an amount equal to the excess of the expenses necessarily incurred to maintain the property over any income realized from the property, plus a reasonable rental value of the property (to the extent the property is used by the foreclosure sale purchaser or with his/her consent is rented at less than its reasonable rental value).  The foreclosure sale purchaser has the right to be reimbursed for necessary maintenance expenses/fees incurred during the time he/she is in possession of the property. These expenses/fees are subject to review and approval either in whole or in part by the IRS.  Specific maintenance expenses/fees to consider are those utilized to keep the property safe and intact. Examples of expenses to consider are: recording fees, insurance, and new locks for security purposes.  The IRS will not reimburse for expenses to enhance or improve the property, such as cleaning, utilities, property taxes, or construction of structures.

As business attorneys in Texas, we are often asked whether electronic contracts and signatures are valid in Texas.  In Texas, a record or signature may not be denied legal effect or enforceability solely because it is in electronic form.  Likewise, a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.  Additionally, if a law requires a record to be in writing, an electronic record satisfies the law, and an electronic signature satisfies a legal requirements for a signature.  An electronic record or electronic signature is attributable to a person if it was the act of the person.  The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable.

In Texas, once a plaintiff has filed a lawsuit against a business entity (corporation, limited liability company, etc.) defendant, the plaintiff will attempt to serve the registered agent, president or vice president of said business entity. If the registered agent is served, the registered agent should forward the citation and petition on to the business entity.  In district and county courts, the business entity’s answer to the suit will be due by 10:00 am on the first Monday after the expiration of twenty days from the date the registered agent or officer was served with the citation.

If the defendant does not answer by the date the answer is due, the court may render a default judgment against the defendant.  When a defendant does not answer, all allegations of facts in the plaintiff’s petition except unliquidated damages are deemed as admitted.  That is why tt is essential that when a defendant’s registered agent or officer is served with citation, the citation and suit be forwarded to the defendant as soon as possible.  Otherwise, the defendant risks missing the deadline to answer.  If a default judgment is awarded, the plaintiff can start garnishing accounts of the defendant immediately and can levy and execute once the judgment is final.

As business attorneys in Houston, Texas we are sometimes asked about what duties are owed to creditors of an entity.  During times of solvency, directors and officers owe fiduciary duties to an entity and its owners.  Additionally, during times of solvency, a creditor’s relationship with an entity is a contractual relationship, and a fiduciary relationship does not exist between the officers/directors and the creditors of an entity.

An entity becomes insolvent when it cannot pay its bills as they come due or when its total liabilities exceed its total assets.  When an entity becomes insolvent, the officers and directors owe the entity’s creditors a fiduciary duty because the creditors have essentially become the owners of the entity.  Upon or during insolvency, the officers and directors of an entity have a fiduciary duty to administer the entity’s assets as a trust fund for the creditors.  The officers and directors may not prefer one creditor over another.  Additionally, the officers and directors may not engage in acts of self dealing to the detriment of the entity’s creditors.  Texas recognizes a cause of action by creditors against the officers and directors of an entity for breach of fiduciary duty.

As business lawyers in Houston, Texas, we are often asked about the rights of defendants in litigation.  You may have read or heard in recent news that Texas legislators were debating about a “Loser Pays” law or “the English Rule” dealing with litigation in Texas.  The “Loser Pays” law passed and was signed into law on May 30, 2011 and becomes effective on September 1, 2011.  The law enhances defendants’ rights in litigation in Texas state courts.  The law changes some of the procedural rules of Texas litigation and also allows for the recovery of attorney’s fees under certain circumstances.  The “Loser Pays” law provides a new procedural vehicle for disposal of cases and the award of attorneys fees in Texas.  Additionally, the “Loser Pays” law amends the current Civil Practice and Remedies Code Chapter 42 provisions regarding the award of litigation costs after an offer of settlement.

The law directs the Texas Supreme Court to adopt new rules that provide for the dismissal of causes of action that have no basis in law or fact on motion and without evidence.  In a civil proceeding, on the court’s granting or denial, in whole or in part, of a motion to dismiss, the court must award costs and reasonable attorney’s fees to the prevailing party.

Additionally, the “Loser Pays” law amends the Texas Civil Practice and Remedies Code (“CPRC”) regarding offers of settlement.  Chapter 42 of the CPRC allows for the award of litigation costs to an offering party incurred after a settlement offer is rejected and the judgment to be rendered is significantly less favorable (20% or more less favorable) to the rejecting party than was the settlement offer.  For example, if a plaintiff offers to settle for $100,000.00, the defendant rejects the offer, and plaintiff gets a judgment in the amount of $120,000.00 or higher, the plaintiff is awarded litigation costs.  Likewise, if a defendant offers to settle for $100,000.00, the plaintiff rejects the offer, and plaintiff gets a judgment of $80,000.00 or less (but greater than $0.00), the defendant is awarded its litigation costs, to be offset from the amount of the plaintiff’s judgment.

The “Loser Pays” law amends the CPRC limit on the amount of litigation costs that may be awarded.  Previously the maximum amount of litigation costs that could be recovered was computed by (1) determining the sum of: (a) 50% of the economic damages to be awarded to the claimant in the judgment; and (b) 100% of the noneconomic and exemplary or additional damages to be awarded to the claimant in the judgment; and (2) subtracting from the amount determined under part (1) the amount of any statutory or contractual liens in connection with the occurrences or incidents giving rise to the claim.  The “Loser Pays” law amends the limit, providing that the litigation costs awarded under the Chapter 42 of the CPRC may not be greater than the total amount the claimant recovers or would recover before adding an award of litigation costs or subtracting an offset of litigation costs.  This change increases the amount that can be recovered as litigation costs.  Essentially, litigation costs can potentially be awarded to plaintiffs in an amount up to the total amount of the judgment (before litigation costs are added).  Similarly, litigation costs can potentially be awarded to defendants in an amount up to the total amount of the judgment (before litigation costs are subtracted).

The current CPRC definition of “litigation costs” includes (1) court costs; (2) reasonable fees for not more than two testifying expert witnesses; and (3) reasonable attorney’s fees.  The new law adds reasonable deposition costs to “litigation costs”.  The procedure for making a settlement offer pursuant to the CPRC remains unchanged.  A CPRC settlement offer must still: (1) be in writing; (2) state that it is made under Chapter 42 of the CPRC; (3) state the terms by which the claims may be settled; (4) state a deadline by which the settlement offer must be accepted; and (5) be served upon all parties to whom the settlement offer is made.  The new law specifies that the parties are not required to file the settlement offer with the court.
The “Loser Pays” law provides the basis for a new procedural vehicle for disposal of cases and the award of attorneys fees in Texas.  The Texas Supreme Court will have to promulgate new rules before the law is implemented.  Additionally, the “Loser Pays” law amends the current Civil Practice and Remedies Code Chapter 42 provisions regarding the award of litigation costs after an offer of settlement.  Litigants should be aware of these changes and adjust their tactics accordingly.

As business lawyers in Texas, we are sometimes asked about a creditor’s remedies when a debtor transfers its assets to others in an effort to avoid its creditors.  The Texas Uniform Fraudulent Transfer Act gives creditors a cause of action against the transferee under certain circumstances.   If a debtor makes a transfer with the actual intent to hinder, delay or defraud a creditor of the debtor, a transfer is fraudulent as to that creditor.  Some factors that can be used to determine the actual intent of the debtor are whether: (1) the transfer or obligation was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer or obligation was concealed; (4) before the transfer was made or obligation incurred, the debtor had been sued or threatened with suit; or (5) the transfer was of substantially all the debtor’s assets.  There are numerous other factors the court can consider in determining the debtor’s actual intent to hinder, delay or defraud a creditor.  The Texas Uniform Fraudulent Transfer Act also provides creditors a cause of action for fraudulent transfer under certain other circumstances such as when the debtor was insolvent and did not receive reasonably equivalent value for the transfer.  The Texas Uniform Fraudulent Transfer Act is a useful tool for creditors when debtors transfer assets in order to avoid paying their obligations.

As attorneys in Houston, Texas, we are sometimes asked about whether individuals are considered employees under the Fair Labor Standards Act.  In making their determination, courts will look to the facts and the “economic realities” of the situation, rather than denying an alleged employee’s claim because of the person’s title as an “independent contractor”     The major factors a court will look at to determine the status of the employment relationship are: (1) degree of control exercised by alleged employer; (2) the extent of the relative investments of the worker and the alleged employer; (3) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer; (4) the skill and initiative required in performing the job; (5) permanency of the relationship.  Some other factors the court may consider are: (1) whether alleged employer had the power to hire and fire employees; (2) whether alleged employer supervised and controlled employee work schedules or conditions of employment; (3) whether alleged employer determined the rate and method of payment; and (4) whether alleged employer maintained employee records.  Also, under the Fair Labor Standards Act, it is possible for an entity to be a “joint employer” which means that an employer can be the employer of an employee, along with another entity.  In other words, an employee can have more than one employer.

As business lawyers in Houston, Texas, we are often asked questions about registered agent and office requirements. Every corporation, limited liability company, limited partnership, general partnership, professional corporation and professional association must have a registered agent and registered office in the state of Texas. This is true even when the corporation, company or partnership is a foreign entity. The registered agent allows the entity to be contacted, and takes delivery of:
– Lawsuits, citations, and petitions if the entity is sued;
– Notices regarding the status of the entity and its right to do business in Texas;
– Tax notices; and
– Notices and correspondence from the Texas Secretary of State and Texas Comptroller.

If an entity is not located in Texas, but does business in Texas, the entity must haves someone act as a registered agent and keep a registered office in Texas. Entities that are located in Texas often hire a registered agent so they do not have to have an employee perform that function and so that notices, lawsuits, etc. are not overlooked.

Failure to properly designate a registered agent may foreclose or hinder the entity’s ability to legally enter into contracts and/or gain access to Texas state courts. Also, failure to maintain a registered agent in Texas may cause the entity to fall out of good standing with the state of Texas. If an entity falls out of good standing, it could result in personal liability to the officers or owners of that entity.

As lawyers in Houston Texas, we are often asked about how the property tax appraisal protest process works in Harris County and throughout Texas.   A taxpayer can protest their property value for property tax purposes by following the procedure below.  A taxpayer can protest the valuation of property for tax purposes for several reasons:
•    the value the appraisal district placed on the property was too high;
•    the property was unequally appraised;
•    the appraisal district denied a special appraisal, such as open-spaced land, or incorrectly denied an exemption application; or
•    several other less common reasons listed in Texas Tax Code Section 41.41.

The taxpayer should file his or her Notice of Protest with the Appraisal Review Board (“ARB”) no later than 30 days after the appraisal district mailed the Notice of Appraised Value to the taxpayer.  The ARB will notify the taxpayer at least 15 days in advance of the taxpayer’s hearing.  At least 14 days before the protest hearing, the appraisal district should mail a copy of ARB procedures, a statement that the taxpayer can inspect and obtain a copy of the data, schedules, formulas and any other information the chief appraiser plans to introduce at the hearing.  Said information is not required to be delivered, it must only be made available to the taxpayer.  Many counties have informal hearings that are used to settle protests without a formal hearing.  If the protest is not resolved at the informal hearing, a formal hearing with the ARB will be held.  The ARB is not bound by discussions or offers made at the informal hearing.  Copies of any documents, photographs, plans, etc. submitted at the informal hearing become part of the ARB hearing file and will likely be reviewed by the ARB before the formal hearing.  If third-party evidence is submitted, the information must contain a statement of authenticity or be accompanied by a business records affidavit.

Evidence used to dispute the appraised value should be significant.  The ARB requests the following type of documentation for real property value hearings:

Sale of the Property under Protests
•    Closing Statement – full and complete document signed and dated, which includes a legal description of the property being transferred.

Income Approach
•    Previous year rent roll and income statement – typically, three years of data should be provided although additional year’s data may be required.  Documentation of lease offering rates and lease concessions from leasing agent as of January 1 of the subject tax year and an explanation of any line items.

Cost Approach
•    Construction contract(s) – signed and dated, including a detailed description of the work to be performed
•    Certified AIA documents, in detail.
•    Subcontracts – documentation must reflect all hard and soft costs.
•    IRS records.

Market Approach
•    Independent fee appraisals – complete copy of the appraisal report.
•    Confirmed sales of comparable properties including: photographs, property description, location, land area, building area, year built, grantor, grantee, date of contract, sales price, financing terms, basis of sale, actual or Pro forma income and source.

The ARB requests the following type of documentation for business personal property value hearings:
•    CPA statements;
•    Certified balance sheets;
•    IRS returns;
•    Actual books and records showing acquisitions by year or purchase, or
•    Receipts, invoices, or leases.

Evidence of valuation changes after January 1 are not taken into account until the next tax year.

A taxpayer is entitled to appeal an order of the ARB determining a protest by the taxpayer as provided in Subchapter C of Chapter 41 of the Texas Tax Code (quoted in paragraph one) to district court.  A taxpayer who wishes to appeal must file a petition for review with the district court within sixty (60) days after the taxpayer received a notice that a final order was entered from which an appeal may be had or at any time after the hearing but before the 60-day deadline.  Failure to timely file a petition for review bars any judicial appeal pursuant to Texas Property Code Chapter 42.  The petition for review must be brought against the appraisal district.  The review is by trial de novo.  The court may not admit in evidence the fact of prior action by the appraisal review board or comptroller, except to the extent necessary to establish its jurisdiction.

A property owner who prevails in an appeal to the court under Section 42.25 (excessive appraisal) or 42.26 (unequal appraisal) may be awarded reasonable attorney’s fees.  The amount of the award may not exceed the greater of: (1) $15,000.00; or (2) 20 percent of the total amount by which the property owner’s tax liability is reduced as a result of the appeal.