Presuit Considerations
I. Liability for Debts of Another
The easiest and most often encountered method for imposing personal liability for the obligation of a corporation is a personal guaranty. Actions on personal guaranties are discussed at section 14.31 in this manual.
§ 6.2Taxable Entity that Fails to Pay Franchise Tax
§ 6.2:1Forfeiture of Right to Do Business
A corporation or other taxable entity that fails to pay its franchise tax or file a required report will forfeit its right to do business in Texas, thereby losing its right to sue or defend in any court in this state. See Tex. Tax Code §§ 171.251–.257. The forfeiture of the corporate privileges of a corporation is effected by the comptroller without a judicial proceeding. Tex. Tax Code § 171.257. “Taxable entity” means a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity. Tex. Tax Code § 171.0002(a).
§ 6.2:2Individual Liability of Directors, Officers, and Managers
If the corporate privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived. Tex. Tax Code § 171.255(a). The liability of partners is joint and several, so not all the officers and directors need be sued; the obligation can be enforced against individual officers or directors. Sheffield v. Nobles, 378 S.W.2d 391, 392 (Tex. Civ. App.—Austin 1964, writ ref’d) (judgment affirmed against defendant-president only; other officers not sued); but see Williams v. Adams, 74 S.W.3d 437, (Tex. App.—Corpus Christi 2002, pet. denied) (section 171.255 cannot be used to impute personal liability to an officer or director of a corporation for a corporate debt when the “debt” at issue is a tort judgment based on negligence liability). The creditor should serve each individual whose liability is sought.
Liability extends to officers and directors of forfeited limited liability companies. “The comptroller may, for the same reasons and using the same procedures the comptroller uses in relation to the forfeiture of the corporate privileges of a corporation, forfeit the right of a taxable entity to transact business in this state.” Tex. Tax Code § 171.2515(a). “The provisions of this subchapter, including Section 171.255, that apply to the forfeiture of corporate privileges apply to the forfeiture of a taxable entity’s right to transact business in this state.” Tex. Tax Code § 171.2515(b). See also Bruce v. Freeman Decorating Services, Inc., No. 14-10-00611-CV, 2011 WL 3585619, at *6–7 (Tex. App.—Houston [14th Dist.] Aug. 16, 2011, pet. denied) (mem. op., not designated for publication) (affirming judgment against defendant-officer; Texas Franchise Tax Public Information Reports listed defendant as director of forfeited limited liability company; defendant failed to bring forth an exception to personal liability).
If a corporation’s charter or certificate of authority and its corporate privileges are forfeited and revived, the liability under of a director or officer of the corporation is not affected by the revival of the charter or certificate and the corporate privileges. Tex. Tax Code § 171.255(d). Other means of imposing liability on officers, directors, and managers can be found at section 6.3 below.
“When parties enter into a contract the law presumes they intend the consequences of its performance. It follows that performance or implementation of the contractual provisions relate back to and are authorized at the time of execution of the contract.” Curry Auto Leasing v. Byrd, 683 S.W.2d 109 (Tex. App.—Dallas 1984, no pet.) (officers not liable on breach of lease agreement, which was signed before corporate forfeiture).
“A director or officer is not liable for a debt of the corporation if the director or officer shows that the debt was created or incurred: (1) over the director’s objection; or (2) without the director’s knowledge and that the exercise of reasonable diligence to become acquainted with the affairs of the corporation would not have revealed the intention to create the debt.” Tex. Tax Code § 171.255(c).
§ 6.3Personal Liability of Individual Signing in Representative Capacity
An authorized representative signing an instrument will not be personally liable on the instrument if the party represented is identified in the instrument and the instrument shows unambiguously that the representative signed on behalf of the represented party. Tex. Bus. & Com. Code § 3.402(b)(1). The representative will be liable to a holder in due course without notice of the representative capacity if either condition is not met. The representative will be liable to a party not a holder in due course if either condition is not met, unless the representative can prove that the original parties to the instrument did not intend for the representative to be liable. Tex. Bus. & Com. Code § 3.402(b)(2). Notwithstanding the above, if the representative signs his name as drawer of a check without indication of his representative status and the check is payable from an account of the represented party who is identified on the check, the representative is not liable if his signature is an authorized signature of the represented party. Tex. Bus. & Com. Code § 3.402(c).
One who contracts in his own name as an agent for an undisclosed principal is personally liable, even if he disclosed the fact of agency. Carter v. Walton, 469 S.W.2d 462, 471–72 (Tex. Civ. App.—Corpus Christi 1971, writ ref’d n.r.e.). An individual is personally liable on a contract he signed as a purported agent if no authority to do so existed. Talmadge Tinsley Co. v. Kerr, 541 S.W.2d 207, 209 (Tex. Civ. App.—Dallas 1976, writ ref’d n.r.e.). “It is the duty of the agent, if he would avoid personal liability on a contract entered into by him on behalf of the principal, to disclose not only the fact that he is acting in a representative capacity but also the identity of his principal, as the person dealt with is not bound to inquire whether or not the agent is acting as such for another.” Mahoney v. Pitman, 43 S.W.2d 143, 146 (Tex. Civ. App.—Amarillo 1931, no writ). The fact that a person opened an account in the name of a business without use of the terms incorporated, corporation, or company in the business name is not enough to create a duty for a creditor to investigate to see if the business is in fact a corporation. See Ferrant v. Graham Associates, Inc., No. 02-12-00190-CV (Tex. App.—Fort Worth, May 8, 2014, no pet.) (mem. op.) (CFO personally liable; “West Fort Worth” was insufficient disclosure of the true principal, West Fort Worth Day Care, LLC); Avenell v. Chrisman Properties, LLC, No. 14-08-01180-CV, (Tex. App.—Houston [14th Dist.] April 8, 2010, no pet.) (mem. op.) (manager personally liable on lease; “K&S Contracting” insufficient disclosure of K&S Contracting, Inc.). The test of disclosure is the creditor’s actual knowledge that a business is a corporation or whether the creditor had reasonable grounds to know of the corporation’s existence. Wynne v. Adcock Pipe & Supply, 761 S.W.2d 67, 69 (Tex. App.—San Antonio 1988, writ denied). Knowledge of the real position of affairs acquired after a cause of action accrued cannot affect the right to recover from the agent personally on a contract. Burch v. Hancock, 56 S.W.3d 257, 262 (Tex. App.—Tyler 2001, no pet.).
A shareholder may not be held liable to the corporation or its obligees with respect to any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the shareholder 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. Tex. Bus. Orgs. Code § 21.223(a)(2). However, subsection (a)(2) does not prevent or limit the liability of a shareholder if the obligee demonstrates that the shareholder 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 shareholder. Tex. Bus. Orgs. Code § 21.223(b).
Moreover, a shareholder may not be held liable for failure to observe corporate formalities, including the failure to comply with the certificate of formation or bylaws of the corporation. See Tex. Bus. Orgs. Code § 21.223(a)(3).
The same protections afforded corporate shareholders are available to members of a limited liability company. See Tex. Bus. Orgs. Code § 101.002.
§ 6.6Piercing the Corporate Veil
Traditionally, Texas cases have attempted to treat contract claims and tort claims differently in determining whether to pierce the corporate veil. Menetti v. Chavers, 974 S.W.2d 168, 173 (Tex. App.—San Antonio 1998, no pet.). The theory behind disparate treatment is that plaintiff, in contract cases, had the opportunity to select the entity with which plaintiff deals, as opposed to tort cases in which no such choice exists.
In Castleberry v. Branscum, the Texas Supreme Court laid out six instances where the corporate veil could be pierced: (1) when the corporate fiction is used as a means of perpetrating fraud; (2) where a corporation is organized and operated as a mere tool or business conduit of another corporation; (3) where the corporate fiction is resorted to as a means of evading an existing legal obligation; (4) where the corporate fiction is employed to achieve or perpetrate monopoly; (5) where the corporate fiction is used to circumvent a statute; and (6) where the corporate fiction is relied upon as a protection of crime or to justify wrong. See Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex. 1986); but see SSP Partners v. Gladstrong Investments (USA) Corp., 275 S.W.3d 444, 455 (Tex. 2008) (constructive fraud not grounds to pierce corporate veil).
It is extremely difficult to pierce the corporate veil on contract claims. Actual fraud must be proved, committed primarily for the direct personal benefit of a shareholder. See Tex. Bus. Orgs. Code § 21.223(b); Willis v. Donnelly, 199 S.W.3d 262 (Tex. 2006) (no liability for individual shareholders under implied ratification theory absent showing of actual fraud); Menetti v. Chavers, 974 S.W.2d 168 (Tex. App.—San Antonio 1998, no pet.) (judgment against individual shareholders reversed; claims arose from construction contract and no showing of actual fraud).
§ 6.6:1Single Business Enterprise
The Texas Supreme Court rejected the single business enterprise theory, which advocates that corporations may be held liable for each other’s obligations merely because of centralized control, mutual purposes, and shared finances. See SSP Partners v. Gladstrong Investments (USA) Corp., 275 S.W.3d 444, 456 (Tex. 2008) (single business enterprise liability theory would not support imposition of one corporation’s obligations on another without evidence of fraud to support disregard of corporate structure under Tex. Bus. Corp. Act Art. 2.21 (now Tex. Bus. Orgs. Code § 21.223)).
The statutory limitations on piercing the corporate veil may or may not apply to foreign corporations. See Tex. Bus. Orgs. Code § 1.002(14), which includes for-profit corporation, nonprofit corporation, and professional corporation in its definition of “corporation” but does not specify domestic or foreign. Also, Tex. Bus. Orgs. Code § 21.223 refers only to “corporations” and does not specify domestic or foreign. The manual committee is not aware of case law on this matter.
§ 6.7Insolvency, Dissolution, and Forfeiture of Corporations
§ 6.7:1Terminated Legal Entity
A terminated entity has a limited existence for three years after termination for the purposes of prosecuting or defending proceedings in its entity name by or against the terminated entity, permitting the survival of a claim by or against the terminated entity, holding title to and liquidating property for the purpose of distributing the property, and settling affairs not completed before termination. See Tex. Bus. Orgs. Code § 11.356. A “terminated entity” means a domestic entity the existence of which has been (1) terminated in a manner authorized or required by the Business Organizations Code or (2) forfeited pursuant to the Tax Code. See Tex. Bus. Orgs. Code § 11.001(4).
Under the “trust fund” theory, when a corporation becomes insolvent and ceases doing business, the officers and directors hold corporate assets in trust for the benefit of creditors. Hixson v. Pride of Texas Distributing Co., 683 S.W.2d 173, 176 (Tex. App.—Fort Worth 1985, no writ). The officers owe a fiduciary duty to administer the corporate assets for the benefit of the creditors, and breach of that duty gives rise to a cause of action against the officers and directors, which can be prosecuted directly by the creditors. Hixon, 683 S.W.2d at 176. See also Fagan v. La Gloria Oil & Gas Co., 494 S.W.2d 624, 628 (Tex. Civ. App.—Houston [14th Dist.] 1973, no writ) (judgment affirmed against officer under trust fund theory; officer failed to hold corporate assets in trust for benefit of creditors once corporation became insolvent).
This common-law doctrine has been circumscribed by statute. It does not apply, for instance, to a dissolved corporation except for predissolution claims. Hunter v. Fort Worth Capital Corp., 620 S.W.2d 547, 551–52 (Tex. 1981). But see Smith v. Chapman, 897 S.W.2d 399, 401–02 (Tex. App.—Eastland 1995, no writ) (trust fund cause of action available against directors of dissolved corporation).
§ 6.7:3“Denuding” of Corporate Assets
If one or more shareholders appropriate the corporation’s assets, leaving it unable to satisfy corporate claims, the corporation’s creditors may trace the assets and hold the shareholders responsible for the corporation’s obligations, to the extent of the corporate assets received by the shareholder. World Broadcasting System, Inc. v. Bass, 328 S.W.2d 863, 865–66 (Tex. 1959); Huff v. Harrell, 941 S.W.2d 230, 236 (Tex. App.—Corpus Christi 1996, writ denied). A “denuding” claim is typically brought with one or more causes of action, such as fraudulent transfer. See section 14.30 in this manual for more discussion on fraudulent transfer.
Texas general partnerships are governed by the Texas Business Organizations Code. See Tex. Bus. Orgs. Code § 152.052 for the factors determining whether a partnership exists.
Generally, all partners are jointly and severally liable for all obligations unless otherwise agreed by the claimant or provided by law. Tex. Bus. Orgs. Code § 152.304(a). An incoming partner has no liability for an obligation of the partnership arising before the partner’s admission to the partnership, relating to an action taken or omission occurring before the partner’s admission, or arising under a contract or commitment entered into before the partner’s admission. Tex. Bus. Orgs. Code § 152.304(b).
An action may be brought against the partnership and any individual partner in the same or in separate actions. Tex. Bus. Orgs. Code § 152.305. Service on any partner will support a judgment against the partnership and the partner served. Tex. Civ. Prac. & Rem. Code § 17.022. If the suit is against several partners jointly indebted under a contract and citation is served on at least one but not all partners, judgment may be rendered only against the partnership and the partners actually served, not against the partners not served. Tex. Civ. Prac. & Rem. Code § 31.003. See section 16.10 in this manual regarding citation and service on partnerships.
A judgment against a partnership is not by itself a judgment against a partner. Tex. Bus. Orgs. Code § 152.306(a). A creditor may proceed against the property of one or more partners to satisfy a judgment based on a claim against the partnership only if (1) judgment is obtained against the partner and (2) judgment based on the same claim is obtained against the partnership; the judgment has not been reversed or vacated; and the judgment remains unsatisfied for ninety days after entry or ninety days after the expiration date of a stay. See Tex. Bus. Orgs. Code § 152.306(b). The creditor can proceed directly against an individual partner if (1) the partnership is a debtor in bankruptcy; (2) the creditor and the partner agree that the creditor is not required to comply with section 152.306(b)(2); (3) the court orders otherwise, based on a finding that partnership property subject to execution is clearly insufficient to satisfy the judgment; or (4) liability is imposed on the partner by law or contract independently of the person’s status as a partner. Tex. Bus. Orgs. Code § 152.306(c).
A limited partner is not liable for the debts of the limited partnership unless he either is also a general partner or participates in the control of the business. If the limited partner participates in control of the business, he is liable only to persons transacting business with the limited partnership who reasonably believe, based on the limited partner’s conduct, that he is a general partner. Tex. Bus. Orgs. Code § 153.102.
See Tex. Bus. Orgs. Code § 153.103 for a nonexclusive list of actions a limited partner can take that are deemed not to constitute participation in control of the business.
§ 6.10Limited Liability Partnership
A limited liability partnership is an entity distinct from its partners. Tex. Bus. Orgs. Code § 152.056. The limited liability partnership should be sued in its partnership name. Tex. Bus. Orgs. Code § 2.101(1). The limited liability partnership should be identified as a limited liability partnership in the petition. See Tex. Bus. Orgs. Code §§ 5.063, 152.803.
Partners are not individually liable, directly or indirectly, by contribution, indemnity, or otherwise, for any obligation of the partnership incurred while the partnership is a registered limited liability partnership. Tex. Bus. Orgs. Code § 152.801(a).
See section 16.10 in this manual regarding citation and service on a limited liability partnership.
§ 6.11Limited Liability Company
A limited liability company is an entity distinct from its members. See Tex. Bus. Orgs. Code § 101.101(a). (A limited liability company may have one or more members.) Except as otherwise provided, the limited liability company's existence begins on the filing of the certificate of formation. See Tex. Bus. Orgs. Code §§ 3.001, 4.051.
Except as and to the extent the regulations specifically provide otherwise, a member or manager is not liable for the debts, obligations or liabilities of a limited liability company including under a judgment, decree, or order of a court. Tex. Bus. Orgs. Code § 101.114. A member of a limited liability company is not a proper party to proceedings by or against a limited liability company, except where the object is to enforce a member’s right against or liability to the limited liability company. Tex. Bus. Orgs. Code § 101.113.
Courts in other states have begun to allow piercing the limited liability company veil in many, but not all, of the circumstances in which corporate veils have been pierced in other cases. For example, in Kaycee Land & Livestock v. Flahive, 46 P.3d 323 (Wyo. 2002), the Wyoming supreme court concluded that wording similar to that of the Texas statute (construed in conjunction with the legislative history of the Wyoming statute) was not intended to limit the piercing doctrine to corporations. Some commentators have noted that, except for the failure to follow corporate formalities (one of the key purposes of organizing as a limited liability company being to escape such formalities), tests similar to those applied to corporations may be applied to limited liability companies in deciding when and whether to pierce the entity veil. See, e.g., Warren H. Johnson, Limited Liability Companies (LLC): Is the LLC Liability Shield Holding Up Under Judicial Scrutiny?, 35 New Eng. L. Rev. 177 (2000). The court in Pinebrook Properties, Ltd. v. Brookhaven Lake Property Owners Ass’n, 77 S.W.3d 487 (Tex. App.—Texarkana 2002, no pet.), reversed the holding of the trial court that a limited liability company was the alter ego of the company’s president. The court analyzed the issue using the same factors that would determine whether to pierce a corporate veil: commingling of assets, failure to comply with formalities, use of entity assets for personal purposes, and fraudulent use or purpose in the creation or operation of the entity. Pinebrook Properties, Ltd., 77 S.W.3d at 500–01. The court’s disposition is generally in accord with the approach suggested by the commentators mentioned above.
§ 6.12Professional Corporation
A professional corporation is an entity distinct from its shareholders. One or more individuals may incorporate a professional corporation by filing a certificate of formation with the secretary of state. See Tex. Bus. Orgs. Code §§ 3.001, 4.002. Unless otherwise provided in its governing documents, a professional corporation exists perpetually until the winding up and termination of the corporation. Tex. Bus. Orgs. Code §§ 3.003, 303.005. Shareholders of a professional corporation have no greater liability than do shareholders of a for-profit corporation. Tex. Bus. Orgs. Code § 303.002; see Tex. Bus. Orgs. Code §§ 2.109, 301.010, 303.001. The professional corporation should be sued in its corporate name. See Tex. Bus. Orgs. Code § 2.101(1).
§ 6.13Association or Unincorporated Joint-Stock Company
Liability for a debt of a foreign or domestic association or unincorporated joint-stock company can be fixed on an individual member as well as on the company or association, provided that the individual sought to be held liable is served and judgment is obtained against him. Execution cannot issue against a stockholder’s or member’s individual property until execution has issued against the organization’s joint property and has been returned without satisfaction. Tex. Rev. Civ. Stat. arts. 6133, 6136, 6137. The composition and liability of these entities are discussed in Thompson v. Schmitt, 274 S.W. 554 (Tex. 1925), and Wells v. Mackay Telegraph-Cable Co., 239 S.W. 1001 (Tex. Civ. App.—Galveston 1921, no writ).
[Sections 6.14 through 6.20 are reserved for expansion.]
§ 6.21Criminal Prosecution of Debtor
Caveat: The manual committee strongly advises against pursuing simultaneous civil and criminal actions against the debtor. As set out in the following two sections, both creditor and attorney face substantial risks in pursuing criminal prosecution in any case. If criminal charges are brought or threatened before the civil suit is resolved, the debtor will almost certainly demand that the criminal charges be dropped as a condition of settlement. Even participating in such a discussion opens the creditor’s attorney to a charge that he has violated Tex. Disciplinary Rules Prof’l Conduct R. 4.04(b). Refusing to discuss the criminal case may make settlement of the civil action impossible. Therefore, the attorney should caution the creditor to defer criminal prosecution, or the threat of prosecution, until the civil action is resolved.
Criminal prosecution of a debtor should be pursued with extreme caution. The client’s potential exposure for malicious prosecution and unreasonable collection efforts must be evaluated. See section 6.29 below and section 17.49 in this manual. The attorney and the client should consult with the prosecutor’s office before the client institutes criminal proceedings against a debtor. Various crimes relating to debts and credit are reviewed in this chapter. See sections 6.25, 6.26, 6.27, 6.28, and 6.29. Threats of criminal prosecution may violate the Texas Debt Collection Practices Act and the federal Fair Debt Collection Practices Act. See Tex. Fin. Code § 392.301(a); 15 U.S.C. §§ 1692–1692p.
A creditor cannot threaten criminal action if the debtor has not violated the law. Tex. Fin. Code § 392.301(a)(6). Likewise, the creditor does not have the power and authority to determine the guilt or innocence of the debtor. Brown v. Oaklawn Bank, 718 S.W.2d 678, 680 (Tex. 1986).
§ 6.22Ethical Considerations for Attorneys
A lawyer must not present, participate in presenting, or threaten to present criminal charges solely to gain an advantage in a civil matter. See Tex. Disciplinary Rules Prof’l Conduct R. 4.04(b). A lawyer who represents a creditor in a civil suit cannot “assist” in prosecuting a criminal charge against a defendant even if both the creditor and the attorney insist that the motivation is not solely to gain an advantage in the civil matter. See Tex. Comm. on Prof’l Ethics, Op. 455 (1988).
Giving any notice required by law or applicable rules of practice or procedure as a prerequisite to instituting criminal charges is allowed, unless the underlying criminal charges were made without probable cause. Tex. Disciplinary Rules Prof’l Conduct R. 4.04 cmt. 2. See, for example, section 6.26:5, notice required for prosecution of theft by check.
§ 6.23False Statement to Obtain Property or Credit or in the Provision of Certain Services
It is an offense if a person intentionally or knowingly makes a materially false or misleading written statement to obtain property or credit for himself or another or in providing an appraisal of real property for compensation. Tex. Penal Code § 32.32(b), (b–1). “Credit” is broadly defined to include a loan of money; furnishing property or service on credit; extending the due date of an obligation; comaking, endorsing, or guaranteeing a note or other instrument for obtaining credit; a line or letter of credit; and a credit card. Tex. Penal Code § 32.32(a). Making the written false or misleading statement is the offense; actually acquiring the property or credit is not a required element. Cheney v. State, 755 S.W.2d 123, 129 (Tex. Crim. App. 1988). Whether the offense is classified as a felony or a misdemeanor will depend on the value of the property or the amount of credit obtained. See Tex. Penal Code § 32.32(c).
§ 6.24Credit and Debit Card Abuse
Various acts involving the use of a credit or debit card may constitute criminal offenses. Tex. Penal Code § 32.31(b) lists eleven offenses, including presentment or use of a card that has expired or been revoked, use of a fictitious card to obtain property or services, and sale of a debit or credit card without being the issuer. These offenses are state jail felonies, unless it is shown at trial that the offense was committed against an elderly individual, in which case the offense is a felony of the third degree. Tex. Penal Code § 32.31(d).
It is an offense if a person issues or passes a check knowing that there are not sufficient funds available to pay in full the check and all other checks outstanding on his account at that time. See Tex. Penal Code § 32.41(a). The issuer’s knowledge of insufficient funds is presumed (except in the case of a postdated check or order) if: (1) he had no account with the bank or other drawee at the time he issued the check or order; or (2) payment was refused by the bank or other drawee for lack of funds or insufficient funds on presentation within thirty days after issue and the issuer failed to pay the holder in full within ten days after receiving notice of that refusal. Tex. Penal Code § 32.41(b).
If the check was refused for lack of funds or insufficient funds, notice may be actual notice or notice given in writing that is sent by (1) first-class mail supported by an affidavit of service or (2) registered or certified mail with a return receipt requested. Tex. Penal Code § 32.41(c)(1). The notice must be sent to the address (1) on the check or order, (2) in the bank’s records, or (3) in the holder’s records. Tex. Penal Code § 32.41(c)(2). The notice must also contain the following statement:
This is a demand for payment in full for a check or order not paid because of a lack of funds or insufficient funds. If you fail to make payment in full within 10 days after the date of receipt of this notice, the failure to pay creates a presumption for committing an offense, and this matter may be referred for criminal prosecution.
Tex. Penal Code § 32.41(c)(3). If notice is given in accordance with subsection (c), there is a presumption that it was received no later than five days after it was sent. Tex. Penal Code § 32.41(d).
Practice Note: To avoid potential violations of the federal Fair Debt Collection Practices Act and the Texas Debt Collection Practices Act, the better practice is to have the creditor send the required notice, not the creditor’s attorney.
A person charged with an offense under this section may make restitution for the bad checks or sight orders. Restitution shall be made through the prosecutor’s office if collection and processing were initiated through that office. In other cases restitution may be, with the approval of the court in which the offense is filed: (1) made through the court; or (2) collected by a law enforcement agency if a peace officer of that agency executes a warrant against the person charged with the offense. Tex. Penal Code § 32.41(e).
§ 6.25:4Classification of Offense
Issuance of a bad check is a class C misdemeanor unless the check was issued to pay a child support obligation established by court order; in that case, it is a class B misdemeanor. Tex. Penal Code § 32.41(f).
§ 6.26Theft of Property or Service by Check
§ 6.26:1Issuance of Bad Check vs. Theft by Check
Prosecution for issuance of a bad check or similar sight order under Penal Code section 32.41 is usually used only for the payment of a preexisting debt by a bad check. Theft of property or service by check is a more serious offense. The key distinction between the two offenses is whether the issuer of the check received any property. The same logic presumably extends to theft of service. Receipt of property and proof of its value are critical elements in the offense of theft. They are not required elements in the offense of issuance of a bad check. Christiansen v. State, 575 S.W.2d 42, 44 (Tex. Crim. App. 1979); see also Tex. Penal Code §§ 31.03, 31.06, and 32.41.
Issuance of a bad check or similar sight order is not a lesser included offense of theft by check of property or service. Tex. Penal Code § 32.41(g).
Practice Tip: Check your local district attorney’s office before filing a theft by check complaint. Statutory notice under Texas Penal Code section 31.06(f)(3) may be required. In Travis County, a driver’s license number, or other identification number, is required on the face of the check.
Theft of Property: A person commits theft of property if he unlawfully appropriates it with the intent to deprive the owner of the property. Tex. Penal Code § 31.03(a). Appropriation of property is unlawful if it is without the owner’s consent or the property is received with knowledge that it is stolen by another. Tex. Penal Code § 31.03(b)(1), (2).
Theft of Service: A person commits theft of service if, with intent to avoid payment for service that the actor knows is provided only for compensation:
1.the actor intentionally or knowingly secures the service by deception, threat, or false token;
2.having control of the disposition of the services of another to which the actor is not entitled, the actor intentionally or knowingly diverts the other’s services to the actor’s own benefit or to the benefit of another not entitled to the services;
3.having control of personal property under a written rental agreement, the actor holds the property beyond the expiration of the rental period without the effective consent of the owner, thereby depriving the owner of the use of the property for further rentals; or
4.the actor intentionally or knowingly secures the performance of the service by agreeing to provide compensation and, after the service is rendered, fails to make payment after receiving notice demanding payment.
§ 6.26:3Presumption for Theft by Check
If the actor did not have sufficient funds in the account to pay the check or similar sight order, intent to deprive the owner of property under Penal Code section 31.03 (Theft) or to avoid payment for service under section 31.04 (Theft of Service) is presumed if the issuer had no account with the bank at the time he issued the check or similar sight order or the bank refused payment for lack of funds or insufficient funds on presentation within thirty days after issue, and the issuer failed to pay the holder in full within ten days after receiving notice of that refusal. Tex. Penal Code § 31.06(a).
§ 6.26:4Presumption for Stop Payment on Check
Intent to deprive an owner of property is presumed if:
1.the actor ordered the bank or other drawee to stop payment on the check or order;
2.the bank or drawee refused payment to the holder on presentation of the check or order within thirty days after issue;
3.the owner gave the actor notice of the refusal of payment and made a demand to the actor for payment or return of the property; and
4.the actor failed to pay the holder within ten days after receiving the demand for payment or return the property to the owner within ten days after receiving the demand for return of the property.
Partial restitution does not preclude the presumption of intent for theft by check. Tex. Penal Code § 31.06(e). For presumptions of intent regarding theft of service, see Tex. Penal Code § 31.04(b).
The notice required by Tex. Penal Code § 31.06(f)(3) may be actual notice or notice in writing that is sent by (1) first-class mail supported by an affidavit of service or (2) registered or certified mail with a return receipt requested. Tex. Penal Code § 31.06(b)(1). Notice must be sent to the address (1) on the check or order, (2) in the bank’s records, or (3) in the holder’s records. See Tex. Penal Code § 31.06(b)(2). If the property is rental property, the better practice is to send notice by registered or certified mail or by telegram to the person who took control of the property under the rental agreement at the address shown on the agreement.
The notice must include the following language:
This is a demand for payment in full for a check or order not paid because of a lack of funds or insufficient funds. If you fail to make payment in full within 10 days after the date of receipt of this notice, the failure to pay creates a presumption for committing an offense, and this matter may be referred for criminal prosecution.
Tex. Penal Code § 31.06(b)(3).
If notice is given, there is a presumption that it was received no later than five days after it was sent. Tex. Penal Code § 31.04(d).
Practice Note: To avoid potential violations of the federal Fair Debt Collection Practices Act and the Texas Debt Collection Practices Act, the better practice is to have the creditor send the required notice, not the creditor’s attorney.
§ 6.26:6Classification of Offense
The classifications for theft of property and theft of service vary from class C misdemeanors to first-degree felonies, depending on the value of the stolen property or service. See Tex. Penal Code §§ 31.03(e), 31.04(e).
§ 6.26:7Theft as Ground for Removing Limitation on Exemplary Damages
Although there are generally limits on the recovery of exemplary damages, those limitations are removed if the action is based on theft punishable as a third-degree felony or higher. See Tex. Civ. Prac. & Rem. Code § 41.008(c)(13); see also Tex. Civ. Prac. & Rem. Code §§ 41.003, 41.008(b).
§ 6.27Hindrance of Secured Creditor
A person who has signed a security agreement creating a security interest or lien on property commits an offense if, with intent to hinder enforcement of that interest or lien, he destroys, removes, conceals, encumbers, or otherwise harms or reduces the value of the property. Tex. Penal Code § 32.33(b). Removal occurs if the property is transported, without the secured party’s effective consent, from the state in which the property was located when the security interest or lien attached. Tex. Penal Code § 32.33(a)(1).
A debtor under a security agreement who does not have a right to sell or dispose of secured property or is required to account to the secured party for the proceeds of a permitted sale or disposition commits an offense if, with intent to appropriate the proceeds, he sells or disposes of the property or does not account to the secured party for the sale or other disposition as required. Tex. Penal Code § 32.33(e).
A debtor who removes the property to another state with the intent to hinder enforcement of the security interest or lien may be subject to extradition under the Uniform Criminal Extradition Act. See Tex. Code Crim. Proc. art. 51.13.
Intent to hinder enforcement is presumed if the debtor fails to pay any part of the secured debt when due and, after demand by the secured party, fails to deliver possession of the secured property to the secured party. Tex. Penal Code § 32.33(c). Despite the statutory presumption, difficult fact questions may be involved in proving intent to hinder. See, e.g., Guernsey Community Federal Credit Union v. Gonzalez, 539 S.W.2d 896 (Tex. Civ. App.—El Paso 1976, writ ref’d n.r.e.).
§ 6.27:3Classification of Offense
Hindering a secured creditor is classified as either a misdemeanor or felony, depending on the value of the property involved. Tex. Penal Code § 32.33(d).
§ 6.27:4Combining Criminal Prosecution with Repossession
A secured creditor will often request his attorney to threaten the debtor with prosecution for hindrance if the debtor does not voluntarily relinquish possession of the collateral. If the debt is a consumer debt, such a threat may violate Tex. Fin. Code § 392.301. See Brown v. Oaklawn Bank, 718 S.W.2d 678, 680 (Tex. 1986) (bank’s letters threatening criminal prosecution violated Texas Debt Collection Act). Even if the debt is not a consumer debt, such a threat may violate Tex. Disciplinary Rules Prof’l Conduct R. 4.04.
§ 6.28Unauthorized Automobile Title Transfer
A person commits an offense if he acquires, accepts possession of, or exercises control over the motor vehicle of another under a written or oral agreement to arrange for the transfer of the vehicle to a third party and—
1.knowing the vehicle is subject to a security interest, lease, or lien, transfers the vehicle to a third party without first obtaining written authorization from the vehicle’s secured creditor, lessor, or lienholder;
2.intending to defraud or harm the vehicle’s owner, transfers the vehicle to a third party;
3.intending to defraud or harm the vehicle’s owner, disposes of the vehicle in a manner other than by transfer to a third party; or
4.does not disclose the location of the vehicle on the request of the vehicle’s owner, secured creditor, lessor, or lienholder.
Tex. Penal Code § 32.34(b). This offense is either a class A misdemeanor, a state jail felony, or a third-degree felony, depending on the nature of the offense. Tex. Penal Code § 32.34(f), (g).
§ 6.29Malicious Criminal Prosecution
A plaintiff in a malicious criminal prosecution claim must establish—
1.commencement of a criminal prosecution against the plaintiff;
2.causation (initiation or procurement) of the action by the defendant;
3.termination of the prosecution in the plaintiff’s favor;
4.innocence of the plaintiff;
5.absence of probable cause for the proceedings;
6.malice in filing the charge; and
7.damage to the plaintiff.
Richey v. Brookshire Grocery Co., 952 S.W.2d 515, 517 (Tex. 1997).
The creditor who considers bringing a criminal action against a debtor should make certain there is probable cause to believe the debtor has committed a crime; he must not file criminal charges merely to collect a debt. If the creditor had probable cause to believe the debtor had committed a crime, the fact that the creditor was attempting to collect a debt is not sufficient to show malice. See Jackson v. Train, 495 S.W.2d 36, 39 (Tex. Civ. App.—Beaumont 1972, no writ) (creditor not liable for malicious prosecution; all facts fully and fairly disclosed to prosecutor; no showing of malice).
Except as otherwise provided by the Truth in Lending Act, 15 U.S.C. §§ 1601–1667f, or other federal law—
a bank has a right of setoff, without further agreement or action, against all accounts owned by a depositor to whom or on whose behalf the bank has made an advance of money by loan, overdraft, or otherwise if the bank has previously disclosed this right to the depositor. If the depositor defaults in the repayment or satisfaction of the obligation, the bank, without notice to or consent of the depositor, may set off or cancel on its books all or part of the accounts owned by the depositor and apply the value of the accounts in payment of and to the extent of the obligation.
Tex. Fin. Code § 34.307(a). “The relationship of a bank to its general depositors is that of debtor to creditor. It follows that the bank has the right to set off against an amount on deposit an equal amount of indebtedness owed by the depositor to the bank.” Sears v. Continental Bank & Trust Co., 562 S.W.2d 843, 843 (Tex. 1997).
For purposes of section 34.307, a default occurs if an obligor has failed to make a payment as provided by the terms of the loan or other credit obligation and a grace period provided for by the agreement or law has expired. An obligation is not required to be accelerated or matured for a default to authorize setoff of the depositor’s obligation against the defaulted payment. Tex. Fin. Code § 34.307(b).
A bank may not exercise its right of setoff under section 34.307 against an account unless the account is due the depositor in the same capacity as the defaulted credit obligation. A trust account for which a depositor is trustee, including a trustee under a certificate of trust delivered under section 34.306(b), is not subject to the right of setoff unless the trust relationship is solely evidenced by the account as provided by subchapter B, chapter 11, and chapters 112 and 113 of the Texas Estates Code. Tex. Fin. Code § 34.307(c).
Section 34.307 does not limit the exercise of another right of setoff, including a right under contract or common law. Tex. Fin. Code § 34.307(d).
Chapter 9 of the Texas Business and Commerce Code does not generally apply to a right of recoupment or setoff. Tex. Bus. & Com. Code § 9.109(d)(10). But its provisions both recognize and affect such rights in specific contexts. See Tex. Bus. & Com. Code § 9.340. Section 9.340 contains three important provisions: (1) If a debtor has a deposit account at a bank to which the debtor’s secured party holding a security interest in the deposit account also owes money, the bank can offset the account in respect to a debt of the secured party; (2) generally a bank can permit a third party to take a security interest in a deposit account maintained with the bank without impairing any common-law or statutory right the bank has to offset the deposit account balance against a debt owed the bank by the account owner; and (3) as an exception to the foregoing general rule, even a bank’s right of setoff will be ineffective as against a secured party of the bank’s deposit account holder who takes the steps to acquire control over the account prescribed by Tex. Bus. & Com. Code § 9.104(a)(3) (the secured party in effect becomes the bank’s customer or owner of the account). See also Tex. Bus. & Com. Code § 9.404 (with respect to possible claims by way of recoupment of an account debtor against an assignee of the account).
See Tex. Bus. & Com. Code § 4.303 regarding priority rights of payment between checks presented to the bank and the bank’s offset rights. See section 27.70 in this manual regarding the relationship between offset and garnishment.
§ 6.31Suit on Debt vs. Suit on Bad Check
Ordinarily the creditor will want to sue on the account or note itself and, in the alternative, on the check. Attorney’s fees are recoverable in suits on sworn accounts, whereas they have not been available in suits on worthless checks. Recovery of attorney’s fees is allowed, however, if the claim is founded on an oral or written contract. Awards of attorney’s fees in suits on bad checks should therefore be permitted on the theory that a check is a contract. See Tex. Civ. Prac. & Rem. Code § 38.001(8). See also 1/2 Price Checks Cashed v. United Automobile Insurance Co., 344 S.W.3d 378 (Tex. 2011) (holder entitled to recover attorney’s fees against drawer of dishonored check).
Suit on the check may be preferable to suit on the account or note for the following reasons:
1.Venue for a suit on the contract may be in a distant county, but venue for a suit on the check may be permitted in a closer county. See Tex. Civ. Prac. & Rem. Code §§ 15.001–.039.
2.The check may be viewed by the court as an admission of the debt.
3.The passing of a bad check by the defendant may create a bias favorable to the creditor with the trier of fact.
4.Suit on a bad check will enable judicial foreclosure of a worker’s lien if one is allowed by Tex. Prop. Code § 70.001.
Suits on a note are discussed at section 14.25 in this manual. Criminal prosecution on a bad check is discussed at section 6.25 above. Worker’s possessory liens are discussed at section 7.2.