Chancery Addresses Two Methods for Dissolving Delaware Corporations; No Receiver Appointed 10 Years after Dissolution and No Claims Allowed after 10 Years

In the Matter of Krafft-Murphy Company, Inc., C.A. No. 6049-VCP (Del. Ch. Feb. 4, 2013).

Issue Addressed

This case addresses a question of first impression in Delaware: Whether a receiver should be appointed more than 10-years after the dissolution of a Delaware corporation when the dissolved corporation’s only assets are liability insurance policies.  The Court observed that this specific issue had not yet been squarely addressed previously in Delaware law.

Brief Overview of Case

The respondent company has moved in various other courts to dismiss asbestos-related tort suits that were filed more than 10 years after its dissolution.  The petitioners filed this action seeking the appointment of a receiver for the respondent company based on the perceived existence of undistributed assets in the form of liability insurance coverage.  The respondent is a former corporation that was involved for decades in the business of plastering and spray insulating.  Due to the nature of its business, the respondent has been subject to hundreds of asbestos-related tort suits.  The respondent dissolved in 1999, which was 7 years after ceasing operations.  This decision is based on opposing motions for summary judgment related to a petition for the appointment of a receiver for a dissolved corporation.

Brief Summary of Legal Analysis

Delaware law allows for the appointment of a receiver whenever a dissolved corporation has undistributed assets.  The Court first examined whether insurance liability contracts are undistributed assets of a Delaware corporation that has been dissolved for more than 10 years.  In order to address the question, the Court first had to determine whether a dissolved corporation is amenable to suits brought more than 10 years after dissolution. 

The Court concluded that the respondent company is not amenable to asbestos-related tort suits commenced more than 10 years after its dissolution.  Therefore, based on the facts of this case, the insurance contracts were deemed to be valueless.  Because the company did not have any undistributed assets, the Court found the appointment of a receiver unnecessary.

Overview of Background

Although they were not named as parties in this case, it was alleged that the “real parties in interest” sponsoring the litigation for the company were various insurance companies obligated to defend and settle asbestos-related claims against the company under liability insurance contracts.  Those insurance companies included Travelers, CNA and Great American Insurance Company.

The company involved, Krafft-Murphy, ceased operations in 1991 and filed a Certificate of Dissolution in 1999 pursuant to 8 Del. C. Section 275, although it did not provide notice of its dissolution to creditors, and its directors did not adopt a formal plan of dissolution.

Petitioners sought the appointment of a receiver for a dissolved corporation pursuant to 8 Del. C. Section 279.  The company sought to dismiss the petition, and petitioners moved to perfect service by publication pursuant to 10 Del. C. Section 3111(b) and Rule 4(d)(4) or alternatively under Rule 4(d)(7).  The motion to perfect service of process was granted 

The Court previously issued an opinion at 2011 WL 5420808 (Del. Ch. Nov. 9, 2011), highlighted on these pages here, which denied the company’s motion to dismiss and addressed those situations which warranted the appointment of a receiver under DGCL Section 279.  In that opinion, the Court determined that the company had not shown that the statutory language of Section 281(b) and Section 279, or the overall statutory scheme for dissolution, compels the conclusion that there is an absolute bar against the appointment of a receiver for the sole purpose of allowing claimants to bring claims against the dissolved corporation more than 10 years after its dissolution.

In the current procedural posture, the company’s overarching argument is that the appointment of a receiver is unwarranted due to the liability insurance contracts of the company not being assets of the company, because the company is not amenable to suits brought after 10 years.

Overview of Dissolution Analysis

The Court began its analysis of the dissolution issue by reviewing the history and statutory scheme of dissolution.  The Court referred to the common law view of dissolution as a civil death of the company, but that in order to avoid depriving creditors of the ability to sue, statutory authority prolongs the life of a corporation past its date of dissolution.  That authority is provided in 8 Del. C. Section 278.

Section 278 provides that a dissolved corporation automatically continues for a term of 3 years following its dissolution “or for such other longer period as the Court of Chancery shall in its discretion direct.”

The Court explained that the intention of the statute was to balance the competing public policy interests of ensuring that claimants against the corporation had a fair period in which to assert claims, and ensuring that directors, officers and shareholders of a dissolved corporation could have repose from claims regarding the dissolved corporation.  The latter interest of ensuring repose is addressed in 8 Del. C. Sections 280 through 282.  See footnotes 34 and 35 and accompanying text.

The Court also explained that Section 279, which provides for the appointment of a receiver for a dissolved corporation, functions “primarily for the benefit of shareholders and creditors where assets remain undisposed of after dissolution.”  See footnotes 37 and 38.

Dissolution Procedure Options in Delaware

The Court also instructed that Section 280 through 282 of the Delaware General Corporation Law “create a detailed process, which entails judicial involvement, by which dissolving corporations can essentially smoke out claims, pay off claims in accordance with statutory priorities, and establish reserves for contingent claims.”  See footnotes 40 through 43.

The Court observed that the dissolving corporation has the option of selecting from one of two procedures upon dissolution:  (1) The elective procedures in Sections 280 and 281(a); or (2) The default procedures under Section 281(b).

The procedure in Sections 280 and 281(a) provide for a judicial process where the Court of Chancery approves amounts set aside for corporate claimants. This judicial process protects the directors and shareholders from potential future claims arising from the distribution of assets upon dissolution.  See footnotes 44 through 48 and accompanying text.

The Court explained that although the judicial approval under Sections 280 and 281(a) for dissolution protects directors and shareholders from personal liability, and Section 281(b) at least nominally provides for similar protection, in reality, the non-judicial procedure under Section 281(b) still comes with a risk of litigation about whether or not there was compliance with the statutory standard of  “reasonably likely to be sufficient” in terms of the amount set aside for creditors.  Thus, the Court explained that:  “reliance upon the mechanism of Section 281(b) may present a risky situation for corporate directors regardless of their good faith and due care.”  (citing In re RegO Co., 623 A.2d 92, 97 (Del. Ch. 1992)).

Epilogue

The Court provided an analysis of how the insurance policies in this case should be treated in terms of ownership and asset classification, and then concluded that there is no evidence that the legislature intended to extend corporate liability beyond 10 years.  Moreover, the Court noted that Section 280(c)(3) does not contemplate that corporations will need to provide for claims brought more than 10 years after dissolutionSee footnote 58. 

The Court also distinguished the case of In re Texas Eastern Overseas, 2009 WL 4270799 (Del. Ch. Nov. 30, 2009), highlighted on these pages here.  In part, the Court distinguished that case on the basis that the suit in that case was filed only 7 years after the company’s dissolution and not beyond 10 years.

Therefore, because the Court found that the claims in the instant case were not asserted until more than 10 years after the date of dissolution, the company does not have any undistributed assets, and therefore the appointment of a receiver is unwarranted.