Tuesday, May 8, 2012

Massengale says Tax Code Section 171.255 [providing for personal liability of corporate officers when corporate privileges of corporation are forfeited based on non-payment of tax] does not provide an independent basis for personal jurisdiction over nonresident officer or director of Delaware company.

A panel of the First Court of Appeals, in an opinion penned by Justice Michael Massengale, has ruled that the manager of Delaware company could not be sued in Texas based on the corporation's forfeiture of corporate privileges in Texas for failure to pay state taxes in the absence of any other basis for personal jurisdiction over him. The appeals panel accordingly affirmed the individual defendant's dismissal from the pending suit against the Delaware company in the 333rd District Court Harris County in an interlocutory appeal.
Trial court judge: Joseph J. Halbach aka Tad Halbach 
ACS Partners, LLC v. Gross  (Tex.App. - Houston [1st Dist.] April 4, 2012, no pet. h.)
(personal jurisdiction over foreign defendant, grant of special appearance affirmed).

Appellant ACS Partners, LLC appeals the trial court’s interlocutory order granting appellee Allen Gross’s special appearance. See Tex. Civ. Prac. & Rem. Code Ann. § 51.014(a)(7) (West 2008); Tex. R. Civ. P. 120a. ACS argues that the trial court has personal jurisdiction over Gross, who is the manager of a Delaware limited liability company, because the company’s certificate of authority was forfeited for failure to satisfy Texas franchise tax requirements. We affirm the trial court’s order dismissing Gross from the case.

In 2009, ACS contracted with Chateau Carmel, LP and Windswept Realty, LP, which are both Delaware limited partnerships, to perform improvements to two apartment complexes located in Houston and respectively owned by Chateau Carmel and Windswept. Alleging that it was not paid for work under those contracts, ACS sued GFI Houston Holdings Management, LLC and Allen Gross. GFI is a Delaware limited liability company, and Gross is a resident of New York. ACS alleged in its original petition that GFI was a general partner of both Chateau Carmel and Windswept, and that Gross was a manager of GFI. ACS further alleged that GFI and Gross are subject to the personal jurisdiction of the court “because they do business in Texas.”
Gross filed a special appearance supported by his sworn affidavit, wherein he testified that he was an employee of GFI, had a business address in New York City, and lived in the state of New York his entire life. GFI filed an answer but did not file a special appearance.
Before the trial court held a hearing on Gross’s special appearance, ACS filed a second amended petition. As to GFI, ACS alleged that jurisdiction is proper in Texas because “GFI is the general partner of the two entities that entered into the subject contracts in Texas . . . .” As to Gross, ACS alleged that jurisdiction is proper because GFI’s certificate of authority had been forfeited in 2005, and thus under an “alter ego theory,” GFI’s jurisdictional contacts became imputable to Gross. ACS did not allege any other facts in the second amended petition to support jurisdiction over Gross.
At the hearing on Gross’s special appearance, the trial court ordered the parties to submit legal briefs on the special appearance issue. ACS attached to one of its briefs a “Certificate of Account Status” issued by the Texas Comptroller of Public Accounts reflecting that GFI was not in good standing because “it has not satisfied all franchise tax requirements.” ACS argued that Section 171.255(a) of the Tax Code—which under certain circumstances makes corporate directors and officers liable for corporate debts incurred after a tax becomes due but is unpaid—operated not only to make Gross personally liable for the debts of GFI, but also to confer personal jurisdiction over Gross. See Tex. Tax Code Ann. § 171.255(a) (West 2008). ACS also presented to the trial court printouts from the Texas Secretary of State website. The documents showed that in “last updates” dated September 2006, GFI was listed as the general partner of Chateau Carmel and Windswept. They also showed that in a “last update” dated June 2003, Gross was listed as a manager of GFI.
Gross denied having sufficient contacts with Texas or the underlying litigation to be subject to personal jurisdiction in the state. Gross submitted his sworn affidavit stating that he was a resident of New York and not of Texas. Gross also stated that by the time Chateau Carmel and Windswept executed the contracts at issue, GFI was no longer the general partner of those companies. To support this, Gross submitted the affidavit of attorney Moshe Lehrfied, stating that in 2004 and 2005 GFI transferred all its interests in Chateau Carmel and Windswept to other entities. Lehrfield’s affidavit did not state, and the appellate record does not otherwise reflect, who owns or manages the transferee companies.
In response, ACS argued that even if GFI transferred all its interests in the limited partnerships before the 2009 contracts were executed, GFI remained liable for the debts of the limited partnerships because according to the 2006 “last updates” on record with the Secretary of State, GFI failed to amend the limited partnerships’ registrations as required by law to reflect the change in general partners. Thus, ACS argued, personal jurisdiction could be asserted over Gross by virtue of GFI’s status as the officially registered general partner and the forfeiture of GFI’s certificate of authority.
The trial court granted Gross’s special appearance, thereby dismissing him from the suit for want of jurisdiction. The trial court did not file findings of fact or conclusions of law related to that order.
  I. Standard of review
Whether a trial court has personal jurisdiction over a nonresident defendant is a mixed question of fact and law. See BMC Software Belg., N.V. v. Marchand, 83 S.W.3d 789, 794 (Tex. 2002); Glattly v. CMS Viron Corp., 177 S.W.3d 438, 445 (Tex. App.—Houston [1st Dist.] 2005, no pet.). The trial court’s factual findings concerning the existence of personal jurisdiction may be reviewed for legal and factual sufficiency, while the legal conclusions based upon those findings constitute a question of law subject to de novo review. See BMC Software, 83 S.W.3d at 794; Glattly, 177 S.W.3d at 445. When, as in this case, the trial court does not make findings of fact and conclusions of law in support of its determination on a special appearance, “all facts necessary to support the judgment and supported by the evidence are implied.” BMC Software, 83 S.W.3d at 795.
II. Personal jurisdiction

In the context of a special appearance, “the plaintiff and the defendant bear shifting burdens of proof in a challenge to personal jurisdiction.” Kelly v. Gen. Interior Const., Inc., 301 S.W.3d 653, 658 (Tex. 2010). Ordinarily, the plaintiff bears the initial burden of pleading allegations sufficient to assert personal jurisdiction over a nonresident defendant, and upon filing a special appearance, the nonresident defendant assumes the burden to negate all of the plaintiff’s alleged bases of personal jurisdiction. Am. Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 807 (Tex. 2002). “Because the plaintiff defines the scope and nature of the lawsuit, the defendant’s corresponding burden to negate jurisdiction is tied to the allegations in the plaintiff’s pleading.” Kelly, 301 S.W.3d at 658.
The alleged basis for personal jurisdiction over a nonresident defendant must be consistent with both the Texas long-arm statute and the Due Process Clause of the Fourteenth Amendment. See Moki Mak River Expeditions v. Drugg, 221 S.W.3d 569, 574 (Tex. 2007); Lamar v. Poncon, 305 S.W.3d 130, 136 (Tex. App.—Houston [1st Dist.] 2009, pet. denied). The long-arm statute lists several activities that constitute “doing business” in Texas for jurisdictional purposes. Tex Civ. Prac. & Rem. Code Ann. § 17.042 (West 2008); see also BMC Software, 83 S.W.3d at 795 (noting that listed activities are “not exclusive”).
ACS, as the plaintiff, bears the initial burden to allege in the trial court a valid basis for personal jurisdiction under the long-arm statute. Coleman, 83 S.W.3d at 807. However, in its live petition, ACS did not allege that Gross performed any of the acts listed in the long-arm statute, or that Gross did anything else that constituted “doing business” in Texas. “If the plaintiff fails to plead facts bringing the defendant within reach of the long-arm statute . . . the defendant need only prove that it does not live in Texas to negate jurisdiction.” Kelly, 301 S.W.3d at 658–59. The defendant can meet this burden by filing an affidavit testifying to that fact. See Touradji v. Beach Capital P’ship, L.P., 316 S.W.3d 15, 25 (Tex. App.—Houston [1st Dist.] 2010, no pet.) (citing Kelly, 301 S.W.3d at 659).
Gross’s special appearance was supported by his sworn affidavit, in which he states that he is a full-time resident of New York, has been domiciled in New York for over forty years, does not reside in Texas, and has never resided in Texas. Thus, given ACS’s failure to allege jurisdictional facts relevant to the long-arm statute, Gross has met his burden to negate personal jurisdiction based upon his own forum contacts. See Kelly, 301 S.W.3d at 658–59; Touradji, 316 S.W.3d at 25.
However, ACS has also alleged personal jurisdiction over Gross based on an “alter ego theory.” This circumstance presents an exception to the general rule about the burdens of proof. See Tri-State Bldg. Specialties, Inc. v. NCI Bldg. Sys., L.P., 184 S.W.3d 242, 250 (Tex. App.—Houston [1st Dist.] 2005, no pet.) (citing BMC Software, 83 S.W.3d at 798–99). When the plaintiff alleges jurisdiction based on an alter ego theory, it bears the initial burden to prove facts that justify imputing another party’s contacts with the forum to the defendant. See BMC Software, 83 S.W.3d at 799.
In BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (Tex. 2002), the Texas Supreme Court referenced the alter ego exception for pleading burdens in the context of a plaintiff seeking to “fuse” a parent company and its subsidiary for jurisdictional purposes. See BMC Software, 83 S.W.3d at 798–99. Our court has “logically . . . extended” that exception to attempts to “fuse” a corporation with its corporate officers, “because the same presumption of legal separateness exists with regard to a corporation and its officers.” Tri-State, 184 S.W.3d at 250. Similarly, there is a presumption of legal separateness between a limited liability company and its managers. See McCarthy v. Wani Venture, A.S., 251 S.W.3d 573, 590 (Tex. App.—Houston [1st Dist.] 2007, pet. denied) (“Generally, members are not individually liable for the debts of the LLC.”). This presumption holds regardless of whether the limited liability company was formed in Texas or in Delaware. Compare Tex. Bus. Orgs. Code Ann. § 101.114 (West 2009) (providing that managers are ordinarily not liable for limited liability company’s debts), with Del. Code tit. 6, § 18-303(a) (same); see also Tex. Bus. Orgs. Code Ann. § 9.203 (West 2009) (“[I]n any matter that affects the transaction of intrastate business in this state, a foreign entity and each member, owner, or managerial official of the entity is subject to the same duties, restrictions, penalties, and liabilities imposed on a domestic entity to which it most closely corresponds or on a member, owner, or managerial official of that domestic entity.”). Therefore, ACS, as the plaintiff, bears the burden of proving that the forum contacts of GFI and Gross should be “fused” for jurisdictional purposes.
ACS does not premise its jurisdictional veil-piercing theory on the jurisdictional alter ego doctrine reflected in our state’s case law, which ordinarily requires the plaintiff to show that one of two entities exerted a level of control over the other such that in reality they constituted the same entity. See, e.g., PHC-Minden, L.P. v. Kimberly-Clark Corp., 235 S.W.3d 163, 175 (Tex. 2007); BMC Software, 83 S.W.3d at 799. Rather, ACS asserts that Gross is subject to personal jurisdiction in Texas by virtue of the Tax Code, which provides in relevant part:
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 Ann. § 171.255(a). ACS argues that the forfeiture of GFI’s certificate of authority pursuant to Section 171.255(a) means that GFI became “fused” with Gross for jurisdictional purposes such that GFI’s contacts in Texas are imputable to Gross.
“In construing statutes, ‘our primary objective is to ascertain and give effect to the Legislature’s intent.’” Hernandez v. Ebrom, 289 S.W.3d 316, 318 (Tex. 2009) (quoting City of Marshall v. City of Uncertain, 206 S.W.3d 97, 105 (Tex. 2006)). “However, it is cardinal law in Texas that a court construes a statute, ‘first, by looking to the plain and common meaning of the statute’s words.’” Fitzgerald v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864, 865 (Tex. 1999) (quoting Liberty Mut. Ins. Co. v. Garrison Contractors, 966 S.W.2d 482, 484 (Tex. 1998)). “Unambiguous statutory language is interpreted according to its plain language unless such an interpretation would lead to absurd results.” Hernandez, 289 S.W.3d at 318 (citing Fleming Foods of Tex., Inc. v. Rylander, 6 S.W.3d 278, 284 (Tex. 1999)). When construing a statute according to its plain language, we “may not add language that is not implicitly contained in the language of the statute.” Villarreal v. Wells Fargo Brokerage Servs., LLC, 315 S.W.3d 109, 122 (Tex. App.—Houston [1st Dist.] 2010, no pet.). Moreover, “[i]t is well-settled that section 171.255 must be strictly construed to protect those individuals against whom liability is sought because it is penal in nature and cannot be extended beyond the clear meaning of its language.” Tri-State, 184 S.W.3d at 251.
We conclude that the operation of Section 171.255 does not create a basis for asserting personal jurisdiction over a nonresident officer or director of an entity that enjoys or once enjoyed corporate privileges in Texas. Notably, Section 171.255 does not mention jurisdiction in any way. The “central concern of the inquiry into personal jurisdiction” is “the relationship among the defendant, the forum, and the litigation.” Shaffer v. Heitner, 433 U.S. 186, 204, 97 S. Ct. 2569, 2580 (1977). Even if the plaintiff proves that the entity’s privileges have been forfeited, that fact only establishes the potential liability of the entity’s officers or directors, not personal jurisdiction over those persons. This is because the defendant’s potential liability to the plaintiff is not dispositive of our personal-jurisdiction inquiry. Cf. Glattly, 177 S.W.3d at 449 (“Ultimate tort liability is not a jurisdictional fact; the merits of claims are not at issue during a special appearance; and the proof necessary to show personal jurisdiction is only that the purposeful act was committed in Texas.”). The crucial distinction between liability and personal jurisdiction must be observed because “personal jurisdiction involves due process considerations that may not be overridden by statutes or the common law.” PHC-Minden, 235 S.W.3d at 174. Given the absence of any mention of jurisdiction in Section 171.255, the important distinction between liability and personal jurisdiction, and the rule that Section 171.255 should be “strictly construed,” we conclude that Section 171.255 does not provide an independent basis for personal jurisdiction over Gross, a nonresident defendant.
Because ACS has failed to suggest any other factual basis for asserting personal jurisdiction over Gross, we overrule ACS’s sole issue.
We affirm the order of the trial court granting Gross’s special appearance and dismissing him from the suit.
Michael Massengale
Panel consists of Justices Keyes, Higley, and Massengale.

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