The Fifth Circuit Holds Trustee Personally Liable for Failure to Remit State Sales Tax

By:  Katelyn Trionfetti
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

In Texas Comptroller of Public Accounts v. Liuzza (In re Texas Pig Stands, Inc.),[1] the Fifth Circuit considered whether a bankruptcy trustee could be held personally liable for failing to remit state sales tax pursuant to Texas Tax Code section 111.016(b).[2] In Texas Pig Stands, the state taxing authority brought an adversary proceeding against a bankruptcy trustee after the trustee failed to timely remit state sales tax, which violated a court order and a court approved reorganization plan.[3] The Fifth Circuit held that the trustee was personally liable for over $100,000[4] in taxes he failed to remit.[5]

Under Texas Tax Code section 111.016(b), any individual who “controls or supervises” tax collection or tax payment is personally liable for a failure to remit these taxes when the failure is “willful[].”[6] The trustee, however, contended that the personal liability standard for a bankruptcy trustee is higher than the “willful” standard imposed by section 111.016(b).[7] The Fifth Circuit rejected this view, pointing out that the Bankruptcy Code does not address trustee liability.[8] Relying instead on 28 U.S.C. § 959, which provides that a trustee must abide by state law when operating a debtor’s business, and 28 U.S.C. § 960, which provides that a trustee must comply with all tax laws when operating the debtor’s business, the court concluded that a trustee is subject to applicable state tax laws to the same extent as other actors.[9] Thus, if a trustee acts willfully, then this trustee will be personally liable under section 111.016(b).[10] 

The court also noted that both the United States Trustee Manual and the United States Trustee’s Chapter 11 Handbook put trustees on notice that failure to remit taxes may result in personal liability.[11] The Manual advises trustees to remit taxes because failing to do so breaches both the statutory obligations and fiduciary duties of a debtor.[12] The Handbook informs trustees that they may be held personally liable for failing to remit trust-fund taxes under federal withholding tax provisions.[13]

The Texas Pig Stands result is harsh for bankruptcy trustees. A trustee reaps no pecuniary benefit from his failure to remit a debtor’s taxes and yet the trustee is made responsible for payment of these taxes even if the trustee withheld with “good intentions” in mind.[14] Despite the severe consequences for trustees, the result is consistent with Fifth Circuit precedent establishing a duty to remit state sales tax under section 111.016.[15] Furthermore, holding a trustee personally liable for a “willful” failure to remit taxes continues the case law stating trustees may be held personally liable for willful and deliberate violations of the law.[16]


[1] 610 F.3d 937 (5th Cir. 2010).

[2] Tex. Comptroller of Pub. Accounts v. Liuzza (In re Tex. Pig Stands, Inc.), 610 F.3d 937, 940 (5th Cir. 2010). Under Texas law, state sales taxes are trust–fund taxes. See Tex. Tax Code Ann. § 111.016(a) (West 2010); see also In re Tex. Pig Stands, Inc.,610 F.3d at 940.

[3] See In re Tex. Pig Stands, Inc.,610 F.3d at 940–41. Both the March 14, 2006 order appointing the trustee and the September 13, 2006 court-approved reorganization plan contained provisions that required timely submissions of state sales tax. Id. at 940.

[4] See Id. at 942.                                                                                                    

[5] Id. at 940. The Fifth Circuit affirmed the holding of the district court, which reversed that of the bankruptcy court. Id.

[6] Tex. Tax Code Ann. § 111.016(b) (West 2010). The court concluded that “willful[]” under section 111.016(b) meant “‘ voluntary, conscious, and intentional.’” See In re Tex. Pig Stands, Inc., 610 F.3d at 942 (quoting State v. Crawford, 262 S.W.3d 532, 544 (Tex. App. 2008)). This definition was adopted from the state court’s interpretation of the same provision. See Crawford, 262 S.W.3d at 544.

[7] In re Tex. Pig Stands, Inc., 610 F.3d at 942.

[8] See id. at 943; see also Theresa J. Pulley Radwan, Trustees in Trouble: Holding Bankruptcy Trustees Personally Liable for Professional Negligence, 35 Conn. L. Rev. 525, 537 (2003) (“[T]he Code does not mention personal liability of a trustee.”).

[9] See In re Texas Pig Stands, 610 F.3d at 943. Sections 959 and 960 require that a trustee comply with laws outside of the Bankruptcy Code. See 28 U.S.C. § 959(b) (2006) (“[A] trustee . . . shall manage and operate the property in his possession as such trustee . . . according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.”); 28 U.S.C. § 960(a) (2006) (“Any officers and agents conducting any business under authority of a United States court shall be subject to all Federal, State and local taxes applicable to such business to the same extent as if it were conducted by an individual or corporation.”).

[10] See In re Tex. Pig Stands, Inc., 610 F.3d at 943. In Part B of the opinion, the court examined the trustee's liability under the trust agreement. The court concluded that the trust did not limit the trustee’s liability with respect to willful actions, but noted that the trustee would have escaped liability if it had. See id. at 944–45. Examination of the trustee’s liability under the trust is beyond the scope of this blog.

[11] See id at 943–44.

[12] See U.S. Dep’t of Justice, U.S. Trustee Manual, Chapter 11 Case Administration ch. 3-9.4.5 (Oct. 1998), available at http://www.justice.gov/ust/eo/ust_org/ustp_manual/vol3toc.htm (“Failure to remit taxes is also a breach of the debtor’s statutory obligations and fiduciary duties.”).

[13] See U.S. Dep’t of Justice, Chapter 11 Trustee Handbook 52 (May 2004), available at http://www.justice.gov/ust/eo/private_trustee/library/chatper11/docs/Ch11Handbook-200405.pdf (“The trustee must . . . pay tax liabilities on behalf of the estate. A trustee who fails to comply with the federal withholding provisions runs the risk of being held personally liable for trust fund taxes not collected and paid over to the government.” (emphasis added)).

[14] See In re. Tex. Pig Stands, Inc., 610 F.3d at 942 (noting trustee was not enriched and “good intentions” could not relieve him of liability).

[15] See Al Copeland Enters., Inc. v. State (In re Al Copeland Enters., Inc.), 991 F.2d 233, 237–38 (5th Cir. 1993) (invoking sections 959 and 960 to establish debtor-in-possession had duty to remit state sales tax under section 111.016).

[16] See generally Radwan, supra note 8 (discussing history of trustee liability and judicial acceptance of imposing liability on trustees for willful and intention violations of law).