The Delaware Supreme Court’s Signficant New Ruling on Corporate Dissolution Rules, and Related
For Delaware corporations, last week brought a significant new ruling from the Delaware Supreme Court on obligations and rights related to corporate dissolution by companies subject to contingent liability claims. The opinion also addresses key issues regarding a corporation’s liability insurance coverage, and rules for the timing of third party claims against the dissolved corporation. The opinion is analyzed below in a guest post written by Paul Bradley and Stephanie Fox of Delaware’s Maron Marvel Bradley & Anderson LLC in Wilmington. Many thanks to Paul and Stephanie for sharing their analysis.
DELAWARE DISSOLVED ENTITIES CAN CONTINUE TO EXIST
FOR PURPOSES OF CLAIMS AGAINST INSURANCE POLICIES
The Delaware Supreme Court issued a ruling on November 26, 2013 holding that unexhausted insurance policies constitute “property” of a dissolved corporation and that Delaware’s dissolution statutes impose no generally applicable statute of limitations that would time-bar tort claims against a dissolved corporation by third parties. The Supreme Court also held that the existence of the “body corporate” continues beyond the expiration of the statutory winding-up period of 8 Del. C. §278 for purposes of conducting litigation commenced before the expiration of that period, but, for litigation commenced after the expiration of that statutory period, a dissolved corporation may act only through a receiver or trustee appointed under 8 Del. C. §279. The ruling was issued in the case of Robert F. Anderson, et al., v. Krafft-Murphy Company, Inc., (Case No. 85, 2013)
This matter was presented to the Supreme Court as an appeal from a judgment of the Court of Chancery in an action to appoint a receiver for Krafft-Murphy Company, Inc. (the “Corporation”), a dissolved Delaware corporation, under 8 Del. C. §279. The original Petitioners-Below, are asbestos claimants represented by a Baltimore, Maryland law firm, and who have asbestos-related personal injury claims pending against the Corporation in other jurisdictions. During the Court of Chancery proceedings in this case, other tort claimants, represented by a different law firm, were permitted to intervene. The Petitioners-Below/Appellants, sought the appointment of a receiver to enable them lawfully to pursue those claims against the Corporation in the other courts.
The Corporation (as Respondent-Below/Appellee) argued that because it held no assets other than unexhausted liability insurance policies, Delaware law did not authorize the appointment of a receiver and that, in any event, it was not necessary to appoint one. The Court of Chancery granted summary judgment in favor of the Corporation. The Petitioners timely appealed. Because the judgment of the Court of Chancery rested on legal determinations inconsistent with the holdings by the Supreme Court, the judgment was reversed and remanded for further proceedings in accordance with this Opinion.
The parties’ contentions raised several issues to be addressed by the Court. The first was whether a receiver appointed by Del. C. §279 may be appointed for a corporation that has been dissolved for more than ten (10) years and whose assets consist solely of unexhausted liability insurance policies. That issue raised two subsidiary questions: (i) whether contingent contractual rights—here, unexhausted liability insurance policies—constitute “property” that would justify the appointment of a receiver under 8 Del. C. § 279; and (ii) if so, whether those contingent rights in this case can ever vest.
A. Appointment of a receiver
The Supreme Court held that 8 Del. C. §279 authorizes the appointment of a receiver to continue a dissolved corporation’s winding-up process—which may involve participating in litigation—in cases where the corporation has undistributed “property.” Under Delaware law, contingent contractual rights, such as unexhausted liability insurance policies, are “property” within the meaning of 8 Del. C. §279 if, and to the extent that, they are capable of vesting. In the instant matter, the Corporation’s liability insurance policies were capable of vesting, because no statutory provision governing corporate dissolution operated to time-bar claims made by—and thereby terminate or extinguish a dissolved corporation’s potential liability to—third parties.
B. Contingent Rights Constitute “Property”
The Supreme Court reaffirmed existing Delaware law in holding that unexhausted liability insurance policies held by a dissolved corporation constitute “property” within the meaning of §279. In Addy v. Short, the Court held that assets—i.e., “property”—of a dissolved corporation include both vested and contingent rights. Therefore, a receiver can be appointed for a dissolved corporation that holds only contingent rights. Here, the insurance policies obligated its insurers to pay “all sums which the insured shall become legally obligated to pay as damages” covered by the policies. Because the Corporation was exposed to asbestos-related liabilities, those policies represented significant potential indemnification value to the Corporation. Additionally, because the Corporation held those policies before it dissolved, they constitutd “property” of the Corporation within the purview of §279.39.
C. A Corporation’s Liability is not extinguished
The Supreme Court held (citing to existing Delaware authority) that nothing in 8 Del. C. §278 operates as a statute of limitations that would bar claims or extinguish a dissolved corporation’s liability to third parties.
D. A Receiver Must be Appointed for the Dissolved Corporation
The Supreme Court further held that a receiver must be appointed for any dissolved corporation to participate in litigation brought more than three (3) years after dissolution. As a pure matter of statutory law, a corporation lacks any authority to continue managing the winding-up of its business, which includes defending lawsuits brought against it. Only if a receiver is appointed can a corporation lawfully obtain that authority. After the expiration of the three (3) year winding-up period under §278, a dissolved corporation ceases to exist as a “body corporate,” and loses the power to conduct its own affairs. From that point onward, the dissolved corporation continues “solely for the purpose of [any] action, suit or proceeding” commenced before the expiration of the three year period. For all other purposes, including defending lawsuits brought against it after the three year period, a dissolved corporation ceases to exist as a “body corporate,” and by statute loses its authority to manage its unfinished business. The only means by which a corporation may become re-empowered to defend its interests in the litigation is through the appointment of a receiver under §279.77