Marken Enterprises, Inc., a Texas Corporation And Edward D. Endsley, Individually v. State of Texas The City of Houston, Texas And the Transit Authority of Houston, Texas

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-98-00352-CV

Marken Enterprises, Inc., a Texas Corporation; and

Edward D. Endsley, Individually, Appellants

State of Texas; The City of Houston, Texas; and The Transit

Authority of Houston, Texas, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT

NO. 96-08606, HONORABLE DERWOOD JOHNSON, JUDGE PRESIDING

The State of Texas; City of Houston, Texas; and the Transit Authority of Houston, Texas (collectively "State") sued Marken Enterprises, Inc. ("Marken") and Edward D. Endsley, individually, as president and director of Marken, for the failure to remit state and local sales taxes. After a bench trial, the trial court awarded judgment for the State. Appellants challenge the judgment in three issues. We will affirm.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

Marken owned and operated a Mexican food restaurant in Houston. From December 1, 1994 through April 30, 1995 ("liability period"), Marken sold tangible personal property subject to the Texas sales tax and collected sales taxes from its patrons in the amount of $16,366.50. Although Marken filed the required monthly sales tax reports during the liability period, Marken did not remit any checks with these reports.

In July 1996, the State brought suit to recover unpaid state and local sales taxes, penalties, interest, attorneys' fees, and costs for the liability period. The trial was before the court on Joint Stipulations of Fact and Joint Stipulations of Evidence. The trial court awarded judgment in favor of the State against Marken and Endsley, jointly and severally, for the amount of Marken's sales tax liability including penalties, interest, costs, and attorney's fees in the amount of $17,655.08, together with interest at the statutory rate. See Tex. Tax Code Ann. § 111.010(d) (West 1992).

DISCUSSION

Joint and Several Liability for Corporate Sales Tax Debt

In their first issue, appellants contend that there was insufficient evidence to support the trial court's judgment that Endsley is jointly and severally liable for the sales tax liability of Marken. Appellants argue that no individual liability can be imposed on Endsley for Marken's sales tax liability because the $16,366.50 collected in sales tax receipts by Marken during the liability period was not paid to an entity "other than the state," see Dixon v. State, 808 S.W.2d 721, 724 (Tex. App.--Austin 1991, writ dism'd w.o.j.), but rather, were paid to the State. Marken argues that it paid $17,982.44⁽¹⁾ to the State from October 1994 through June 1995, thus the State received all the sales tax receipts to which it was entitled.

The State argues Endsley can be held individually liable because he committed the torts of conversion and breach of fiduciary duty by wrongfully assuming and exercising dominion and control over the State's sales tax receipts. In support of its position, the State relies on section

111.016 of the Tax Code, which provides:

Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected.

Tex. Tax Code Ann. § 111.016 (West 1992).⁽²⁾

The parties stipulated at trial to the following facts. During the liability period, Marken operated a restaurant in Houston and sold tangible personal property--prepared food for immediate consumption--subject to Texas sales taxes. From October 1, 1994 through April 30, 1995, Marken collected sales taxes from persons purchasing food in the amount of $16,366.50.⁽³⁾ Marken commingled the sales tax receipts with other corporate monies. Marken filed monthly sales tax reports but did not attach checks for the payment of the sales tax receipts. From October 1994 through March 1995, Marken paid $10,124.44 to the Comptroller for its mixed beverage tax liability, penalties and interest, along with the appropriate mixed beverage tax reports.

Endsley was president and a director of Marken. Endsley had actual knowledge that Marken collected sales taxes during the period and consented and approved of their collection. Endsley also had actual knowledge and did not object to the commingling of the sales tax receipts with other corporate monies. Endsley was the only individual authorized to sign checks on Marken's bank account.

It is the corporation, as the taxpayer, that owes the State a fiduciary duty to hold the sales tax receipts in trust for the benefit of the State. State v. Mink, No. 03-98-00032-CV, slip op. at 7 (Tex. App.--Austin, February 11, 1999, no pet. h.); see also Dixon, 808 S.W.2d at 723-24. However, this Court has held individuals liable for a corporation's sales tax obligation if the individual has engaged in tortious conduct. See, e.g., Mink, slip op. at 9-10; Dixon, 808 S.W.2d at 724. Here, the State alleged Endsley committed the tort of conversion. Conversion is the wrongful exercise of dominion and control over another's property to the exclusion of, or inconsistent with, the owner's rights to that property. Dixon, 808 S.W.2d at 723. The essence of conversion is not acquisition of property by the wrongdoer, but a wrongful deprivation of it to the owner. Bradley v. McKinzie, 226 S.W.2d 458, 460 (Tex. Civ. App.--Eastland 1950, no writ). An act for the conversion of money will lie if a party breaches an obligation to deliver to another party a specific and identifiable sum of money. Dixon, 808 S.W.2d at 723. A party can sue for conversion of money if the money is delivered to another party for safekeeping, the keeper claims no title, and the money is required or intended to remain segregated. Id.

Sales taxes are a tax on the transaction and are generally collected at the point of sale. Davis v. State, 904 S.W.2d 946, 952 (Tex. App.--Austin 1995, no writ). Section 111.016 imposes on the taxpayer (seller of goods) a fiduciary duty to hold the dollars its receives in trust for the benefit of the State. Dixon, 808 S.W.2d at 723. If a corporation breaches its fiduciary duty to the State, it does so because of the conduct of a corporate agent. Mink, slip op. at 9. That is, a corporation must act through its agents. Id. While the corporation, as the taxpayer, must satisfy its fiduciary duty to the State by holding collected sales tax receipts in trust and by remitting them to the State, an officer or agent of the corporation may be held liable for the tax receipts based on his own individual tortious conduct in instigating, aiding or abetting the corporate taxpayer in spending the State's money for something other than its sales tax liability. Dixon, 808 S.W.2d at 724; Mink, slip op. at 7.

This Court recently addressed an individual's liability for corporate sales taxes in State v. Mink. In that case, Mink contended that he could not be individually liable for conversion because he did not divert any sales tax receipts to his own personal use. Mink, slip op. at 8. Rather, he contended that the sales tax receipts were used on legitimate corporate expenses. Id. We determined that it was immaterial that Mink did not convert the tax receipts to his own personal use, and held him individually liable for the corporation's sales tax liability. Id. at 9. We concluded that Mink's actions as an officer and agent of the corporation in knowingly collecting, commingling, failing to remit sales tax receipts, and paying other corporate obligations, caused the corporation to breach its fiduciary duty to the State to remit the tax receipts held in trust for the State. Mink, slip op. at 8-9.

Similarly, by knowingly collecting sales tax receipts, commingling the trust funds with other corporate funds, and failing to pay the trust fund money to the State, Endsley caused Marken, as the agent of the State for the collection of sales taxes, to breach its fiduciary duty to remit the trust funds to the State. See Mink, slip op. at 9-10; Dixon, 808 S.W.2d at 723. As in Mink, it is immaterial how Endsley spent the State's sales tax receipts. See Mink, slip op. at 9; Bradley, 226 S.W.2d at 460 (it is of no importance what subsequent application was made of converted property). As trust fund taxes, sales tax receipts are not available for the corporation to spend on any other liability, including other obligations the taxpayer may owe the State. See Tex. Tax Code Ann. § 111.016 (West 1992). Endsley's conduct caused Marken to breach its fiduciary duty to remit the State's sales tax receipts. Accordingly, we conclude that Endsley is liable for Marken's sales tax liability based on his own tortious conduct.⁽⁴⁾

We conclude that the evidence is both legally and factually sufficient to support the trial court's judgment.⁽⁵⁾ We overrule appellants' first issue.

Comptroller Sustained Damages by Appellants' Failure to Remit Sales Taxes

Appellants argue in their second issue that the State received all the money due, therefore, no damages were sustained by the State. Appellants argue that by paying $17,982.44 to the State, (mixed beverage tax payments of $10,124.44 plus the $7,858 levied by the State), Marken's sales tax liability of $16,366.50 has been satisfied. Appellants' argument ignores the simple fact that Marken had multiple tax liabilities payable to the State. Clearly, payment of one tax liability does not eliminate the obligation to pay the other.

Appellants also argue that the State should credit the amounts paid by Marken as mixed beverage taxes to Marken's sales tax liability. In support of its position, appellants cite 34 Texas Administrative Code section 3.2.⁽⁶⁾ Appellants argue that section 3.2 allows the Comptroller to apply tax payments without regard to the manner in which the taxpayer designates them. Such reliance is misplaced.

Section 3.2 addresses only the issue of application of payments to pay periods. The payments made by Marken, which it now argues should be credited by the Comptroller to its sales tax liability, were designated by Marken as payment for its mixed beverage tax liability. Section 3.2 requires the comptroller to credit payments as the taxpayer designates, unless there is a statute of limitations problem, which was not present here. In this case, the Comptroller simply applied the payments as designated by the taxpayer. We conclude Marken's failure to remit the sales tax receipts damaged the State. We overrule appellant's second issue.

Motion of Frivolous Claim

In their third issue, appellants contend the trial court erred in failing to grant Endsley's Motion of Frivolous Claim. See Tex. Civ. Prac. & Rem. Code §§ 105.001-.004 (West 1997). Because appellants failed to provide any trial court order showing action on the motion or their objection to the trial court's refusal, if any, to rule, appellants failed to preserve any error for this Court to review. See Tex. R. App. P. 33.1(a)(2) & 34.5(a)(5). Moreover, because we affirm the trial court's judgment in favor of the State, we conclude appellants are not entitled to fees, expenses, and attorney's fees. See Tex. Civ. Prac. & Rem. Code § 105.002 (West 1997). Accordingly, we overrule issue three.

CONCLUSION

Having overruled each of appellants' three issues, we affirm the trial court's judgment.

J. Woodfin Jones, Justice

Before Justices Jones, Kidd and Patterson

Affirmed

Filed: March 25, 1999

Do Not Publish

1. Marken calculates the $17,982.44 figure by adding the $10,124.44 it paid in mixed beverages taxes with the $7,858 the Stated seized from its bank account.

2. Act of July 21, 1987, 70th Leg., 2d C.S., ch. 1, § 1, 1987 Tex. Gen. Laws 1 (amended 1995) (current version at Tex. Tax Code Ann. §111.106 (West Supp. 1999)).

3. The State subsequently levied $7,858 from Marken's bank account in June 1995. This amount was applied to satisfy Marken's sales tax liability, penalties and interest for October and November 1994. The Comptroller applied the remainder in partial satisfaction of Marken's sales tax liability for December 1994. Thus, the liability period begins with December 1994.

4. We do not base our decision on Endsley's status as a corporate officer.

5. Our review of the evidence was guided by the well-established principles found in Glover v. Texas General Indemnity Co., 619 S.W.2d 400, 401 (Tex. 1981), In re King's Estate, 150 Tex. 662, 244 S.W.2d 660, 661-62 (1951), and Raw Hide Oil & Gas, Inc. v. Maxus Exploration, 766 S.W.2d 264, 276 (Tex. App.--Amarillo 1988, writ denied). In addition, because there were no findings of fact or conclusions of law filed or required, it is implied that the trial court made all the necessary findings to support its judgment. Roberson v. Robinson, 768 S.W.2d 280, 281 (Tex. 1989). When the implied findings are supported by the evidence, the appellate court must uphold the judgment on any theory of law applicable to the case. Worford v. Stamper, 801 S.W.2d 108, 109 (Tex. 1990).

6. Section 3.2 (Application of Payments) provides:

(a) Payments received by the comptroller for application against existing liabilities will be credited toward the period designated by the taxpayer under conditions which are not prejudicial to the interest of the State of Texas. A condition which is considered prejudicial is the imminent expiration of the statute of limitations for a period or periods. Nondesignated payments shall be applied in the order of the oldest liability first, until the payment is exhausted. Crediting of a payment toward a specific liability period will be first against the tax, with any surplus used to pay off penalty and interest unless the comptroller determines that a different order of payment credit should be followed with regard to a particular tax or factual situation.

(b) Under circumstances where multiple type tax liabilities exist, such as city and state sales tax, payments will be divided proportionately between the taxes so that each tax shall share the payment on the basis of the amount due each tax.

34 Tex. Admin. Code § 3.2 (1998).

>Motion of Frivolous Claim