# Henry I. Siegel Co., Inc. v. Holliday

> Texas Supreme Court · January 11, 1984 · 27 Tex. Sup. Ct. J. 162

URL: https://www.frixlaw.com/law-library/cases/9765907

## Case

- **Full name:** HENRY I. SIEGEL COMPANY, INC., Petitioner, v. Edna HOLLIDAY, Respondent
- **Court:** Texas Supreme Court
- **Decided:** January 11, 1984
- **Citations:** 27 Tex. Sup. Ct. J. 162; 663 S.W.2d 824; 1984 Tex. LEXIS 306
- **Precedential status:** Published
- **Opinion:** Dissent by Ray
- **Judges:** Barrow, Robertson, Ray, Spears
- **Cited by:** 24 later opinions in the Frix Law Library

## Citator (automated)

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- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9765907

## Opinion text

RAY, Justice,
dissenting.
I respectfully dissent. The majority has reached a result and has adopted reasoning to which I cannot subscribe. Under the majority’s opinion, directors of a dissolved corporation will be able to escape their statutorily-imposed fiduciary duty to creditors; they will be free to pick and choose among the creditors they wish to pay, secure in the knowledge that creditors who do not receive their pro rata share will have no claim against them individually so long as the directors pay out at least an amount equal to the corporate assets on hand at dissolution. This result is patently inequitable, and is unnecessary under the pertinent statutes.
In its opinion, the court of appeals erroneously analyzed this case as if it were an alter-ego case. This case, however, does not involve the alter-ego doctrine. Rather, it involves an altogether different doctrine, a doctrine originally of equity but now embodied in statute (at least as it applies to dissolved corporations), a doctrine long known in Texas jurisprudence as the “trust fund doctrine.” It was on that basis that this case was argued by Siegel before the trial court and the court of appeals, and it is on that basis that I would reverse the court of appeals.
This case involves no new departure in Texas law. For almost a century, this court has held the equitable trust fund doctrine to be the law of this state. This doctrine, stated in general terms, is to the effect that whenever a corporation (1) is dissolved, (2) becomes insolvent and ceases doing business, or (3) simply ceases doing business with no intention to resume business, then the assets of the corporation become a “trust fund” for the benefit, primarily, of creditors. The officers and directors hold the corporate assets in trust for the corporate creditors. They are placed in a fiduciary relation to and owe a fiduciary duty to the creditors. That duty obliges them to administer the corporate assets for the benefit of the creditors and to ratably distrib *829 ute them. The breach of that duty gives rise to a cause of action against the officers and directors which can be prosecuted directly by the creditors. 1
The majority asserts that “the trust fund doctrine provides no basis for personal liability of directors.” They assert that the trust fund doctrine merely burdens inequitably distributed property with an equitable lien, and thus “only allows corporate creditors to follow the corporate assets and to subject those assets to the payment of their claims.” But then the majority goes on to state (rather inconsistently) that “personal liability of the director [may arise] 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.” In all these statements, 2 the majority has unfortunately confused director liability under the trust fund doctrine with shareholder liability. The distinction is critical because of the difference in position of shareholders and directors vis-a-vis creditors. This distinction was pointed out in Friedlander, Post-Dissolution Liabilities of Shareholders and Directors for Claims Against Dissolved Corporations, 31 Vand.L.Rev. 1363, 1368 (1978):
Receipt of the distributed assets creates no personal liability for a shareholder unless the shareholder ‘has disposed of the trust fund in such a manner that it cannot be followed or where he has caused a diminution in the value of the trust assets.’
The trust fund theory applies differently to directors of the dissolved corporation. Since shareholders are not trustees, they have no fiduciary duties and, as noted above, they are not personally liable except in special circumstances. Under the trust fund theory, shareholder liability arises because the shareholders possess the distributed assets to which an equitable lien has attached. The liability of distributing directors for claims against the dissolved corporation arises because they are trustees for creditors and shareholders in settling the dissolved corporation’s affairs. Thus, director liability is personal and exists even though the director no longer possesses any of the dissolved corporation’s assets. The liability arises, however, only if there is a breach of the fiduciary duties owed to creditors and shareholders while the director is acting in his capacity as trustee.
The primary fiduciary duty directors owe to creditors is to make adequate provision for payment of creditors’ claims against the dissolved corporation. If directors perform this duty, they are not liable to their dissolved corporation’s creditors, (emphasis added).
Friedlander, p. 1368.
The majority also insists that article 1302-2.07 3 limits director liability such that *830 a director may not be held personally liable for breach of his fiduciary duty so long as he pays out at least an amount equal to the corporate assets on hand at dissolution. This interpretation of article 1302-2.07, it seems to me, effectively emasculates the trust fund doctrine as it has long existed and nullifies the fiduciary duty which the same article imposes on directors. I cannot believe the legislature intended this. It seems to me that a preferable reading of the pertinent clause (see footnote 3) is that it merely restates the basic principle that in normal circumstances the officers and directors of a dissolved corporation need only ratably distribute the assets on hand at dissolution and nothing more.
The statutes involved in this case, articles 6.04 and 1302-2.07, embody the trust fund doctrine as that doctrine existed in equity, and the majority concedes as much. The purpose of the trust fund doctrine was, and is, to assure the fair, equitable treatment of creditors upon dissolution. The statutes achieve this by requiring dissolved corporations to pay off creditors on a pro rata basis, by making directors trustees for the benefit of creditors, and by making directors jointly and severally liable for breach of their fiduciary duties to creditors. Under the majority’s reading of the statutes, however, they have no effect in a situation such as we have in this case. Under their reading, the directors upon dissolution will be able to prefer one creditor over another, which is exactly the result the trust fund doctrine seeks to prevent. It is not unfair or unduly harsh to expect directors at dissolution — which is, after all, a unique time in the life of a corporation — to use reasonable care to pay off creditors equally. The corporate veil need not be as broad as the majority would have it. The majority’s opinion allows corporate directors to avoid their statutorily imposed fiduciary duty and unnecessarily burdens creditors. Their opinion gives directors carte blanche to prefer those creditors with whom they want to remain on good terms (which may very well have been the case with Mrs. Holliday and her co-directors).
I remain convinced that the majority opinion does not state the law as intended by the legislature. It is not a good idea to hold that articles 6.04 and 1302-2.07 have no effect in a case such as this, where the directors haphazardly ended the life of their corporation without making any reasonable arrangements for the pro rata payment of the corporate debts.
SPEARS, J., joins in this dissenting opinion.
. See Waggoner v. Herring-Showers Lumber Co., 120 Tex. 605 , 40 S.W.2d 1 (1931); Burkburnett Refining Co. v. Ilseng, 116 Tex. 366 , 292 S.W. 179 (1927); Orr & Lindsley Shoe Co. v. Thompson, 89 Tex. 501 , 35 S.W. 473 (1896); Lyons-Thomas Hardware Co. v. Perry Stove Mfg. Co., 86 Tex. 143 , 24 S.W. 16 (1893); State v. Nevitt, 595 S.W.2d 140 (Tex.Civ.App.—Dallas 1980, no writ); Tigrett v. Pointer, 580 S.W.2d 375 (Tex.Civ.App.—Dallas 1979, writ ref'd n.r.e.); Fagan v. La Gloria Oil & Gas Co., 494 S.W.2d 624 (Tex.Civ.App.—Houston [14th Dist.] 1973, no writ); Wortham v. Lachman-Rose Co., 440 S.W.2d 351 (Tex.Civ.App.—Houston [1st Dist.] 1969, no writ). See generally, 20 Tex.Prac. (Hamilton) § 734 (1973 ed. and 1982 supp.); 15 Tex.Jur.3d, Corporations § 389 (1981).
. The majority’s citations to Koch v. United States, 138 F.2d 850 (10th Cir.1943); Norton, Relationship of Shareholders to Corporate Creditors Upon Dissolution: Nature and Implications of the “Trust Fund” Doctrine of Corporate Assets, 20 Bus.Law. 1061 (1975); as well as their quote from Hunter v. Fort Worth Capital Corp., 620 S.W.2d 547 (Tex.1981), are inap-posite, too, because they deal with shareholder liability, not director liability.
.Article 1302-2.07 provides, in pertinent part: During such period [after dissolution], the board of directors ... shall continue to manage the affairs of the corporation with a limited purpose or purposes specified in this Article and ... 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).

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9765907. Public record. Not legal advice.