625 B.R. 869
Bankr. S.D. Tex.2020Background
- Two Wheels Properties, LLC forfeited its Texas corporate charter on February 2, 2018, for failure to file/pay franchise taxes.
- Debtor filed a Chapter 11, Subchapter V petition on November 2, 2020; the court sua sponte questioned debtor eligibility and ordered briefing.
- Texas Tax Code §171.251 forbids a forfeited corporation from suing or defending in Texas courts and exposes officers/directors to corporate debts.
- Texas Bus. Orgs. Code §11.356 provides that a terminated entity continues in existence for three years only to wind up (prosecute/defend suits, liquidate/distribute property, and settle affairs) and may not continue its business unless reinstated.
- Debtor relied on §11.356 to argue it could file bankruptcy within three years to liquidate/resolve claims; the U.S. Trustee distinguished chapter 7 liquidation (permissible) from chapter 11 reorganization (continuing business prohibited).
- The court held the entity ineligible as a Chapter 11, Subchapter V debtor (though a Chapter 7 liquidation within three years may be permissible) and dismissed the case.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a forfeited Texas entity is eligible to be a debtor under 11 U.S.C. §109 for Chapter 11 Subchapter V | §11.356’s 3‑year survivability permits the debtor to file Chapter 11 within three years to wind up and distribute assets | Forfeiture under Tax Code bars continuing business or reinstatement; survivability is limited to winding up, not reorganization | Entity ineligible for Chapter 11 Subchapter V; case dismissed |
| Whether §11.356’s 3‑year survivability authorizes a bankruptcy filing to continue business/affairs | Survivability lets the entity “continue in existence” and therefore file bankruptcy to handle affairs | Statute allows only winding up (liquidation/distribution); subsection (b) prohibits continuing business absent reinstatement | §11.356 allows only winding up, not continuation of business; does not authorize Chapter 11 reorganization |
| Whether a terminated entity can be reinstated after forfeiture under the Tax Code | Debtor argued limited survivability supports relief and functional continuation | Texas law: entities terminated by Tax Code forfeiture cannot be reinstated under Subchapter E | Forfeiture under the Tax Code precludes reinstatement; entity cannot resume original business/affairs |
| Whether the bankruptcy court had constitutional authority to enter final judgment on eligibility | Debtor implied core bankruptcy adjudication permits final order | Court considered Stern and related precedent; eligibility turns on Code and bankruptcy law, not purely state counterclaim | Court held it had constitutional authority to enter final order (Stern limitation not implicated) |
Key Cases Cited
- Stern v. Marshall, 564 U.S. 462 (2011) (limits bankruptcy courts’ authority to enter final judgments on certain state law counterclaims)
- Wellness Int’l Network v. Sharif, 575 U.S. 665 (2015) (parties may consent to bankruptcy adjudication on non‑core matters)
- Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925 (5th Cir. 1999) (defining core proceedings under §157)
- Wood v. Wood (In re Wood), 825 F.2d 90 (5th Cir. 1987) (standard for core proceedings)
- In re ABZ Ins. Servs., 245 B.R. 255 (Bankr. N.D. Tex. 2000) (forfeited Texas entity permitted Chapter 7 within three‑year survivability period)
- In re Am. Heartland Sagebrush Secs. Invs., Inc., 334 B.R. 848 (Bankr. N.D. Tex. 2005) (forfeited corporation cannot file bankruptcy to continue operations after three‑year survivability period)