J. Peyton HUNTER, Jr. et al., Petitioners, v. FORT WORTH CAPITAL CORPORATION et al., Respondents.
No. C-58.
Supreme Court of Texas.
July 15, 1981.
Rehearing Denied Sept. 23, 1981.
619 S.W.2d 547
Thorne, Thorne & Robertson, Inc., Michael A. Robertson, Grand Prairie, McBryde, Bogle & Green, John McBryde, Fort Worth, for respondents.
MCGEE, Justice.
The question is whether Theodore Moeller can recover damages against the former shareholders1 of Hunter-Hayes Elevator Company (Hunter-Hayes) for post-dissolution injuries resulting from the negligence of the company. The trial court rendered summary judgment for the shareholders. The court of civil appeals reversed the judgment and remanded the cause for trial. 608 S.W.2d 352. We reverse the judgment of the court of civil appeals and affirm the judgment of the trial court.
In 1960, Hunter-Hayes installed an elevator in a building under construction in Fort Worth, Texas. The company inspected and serviced the elevator until February 1, 1964, when it transferred its assets to Dover Corporation for 25,000 shares of Dover preferred stock. Hunter-Hayes then changed its name to H. H. Hunter Corporation and distributed the shares of Dover stock among its shareholders. On March 11, 1964, H. H. Hunter Corporation (formerly Hunter-Hayes) was issued a certificate of dissolution by the Secretary of State.
Approximately eleven years later, on May 13, 1975, Theodore Moeller was permanently injured when the elevator fell on him. At the time of the accident, Moeller was working in the elevator pit, which is located in the bottom of the elevator shaft, at the direction of his employer, Dover Elevator Company. The elevator fell when a valve in the elevator pit allegedly came apart, allowing its hydraulic system to lose fluid.
Theodore Moeller sued the former shareholders of Hunter-Hayes and others2 to recover damages for his personal injuries. He alleged causes of action based on negligence and strict liability. The other defendants filed cross-actions against the shareholders, seeking contribution and indemnity. In his suit against the shareholders, Moeller alleged his injuries were proximately caused by the negligent installation, inspection, and maintenance of the elevator by Hunter-Hayes. He also alleged the shareholders were personally liable to him, to the extent of the assets they received on dissolution, under the “trust fund theory.”
In response, the shareholders moved for a summary judgment. They alleged Moeller‘s action and the cross-actions against them were barred because they were not brought within three years after the company dissolved as required by
Survival of Remedy After Dissolution
A. The dissolution of a corporation either (1) by the issuance of a certificate of dissolution by the Secretary of State, or (2) by a decree of court when the court has not liquidated the assets and business of the corporation as provided in this Act, or (3) by expiration of its period of duration, shall not take away or impair any remedy available to or against such corporation, its officers, directors, or shareholders, for any right or claim existing, or any liability incurred, prior to such dissolution if action or other proceeding thereon is commenced within three years after the date of such dissolution. Any such action or proceeding by or against the corporation may be prosecuted or defended by the corporation in its corporate name. The shareholders, directors, and officers shall have power to take such corporate or other action as shall be appropriate to protect such remedy, right or claim. If such corporation was dissolved by the expiration of its period of duration, such corporation may amend its articles of incorporation at any time during such period of three years so as to extend its period of duration.
The shareholders contend the court of civil appeals erred in holding that Moeller could maintain suit against them under the “trust fund theory.” More specifically, they argue
This contention calls for a construction of
At common law, dissolution terminated the legal existence of a corporation. Once dissolved, the corporation could nei
To alleviate the harsh effects of the common law on creditors, an equitable doctrine evolved. This doctrine provided that when the assets of a dissolved corporation are distributed among its shareholders, a creditor of the dissolved corporation may pursue the assets on the theory that in equity they are burdened with a lien in his favor. See Koch v. United States, 138 F.2d 850, 852 (10th Cir. 1943). This doctrine is often referred to as the “trust fund theory.” Actually, the equitable doctrine has a much broader application. The trust fund theory applies whenever the assets of a dissolved corporation are held by any third party, including corporate officers and directors, so long as the assets are traceable and have not been acquired by a bona fide purchaser. Norton, Relationship of Shareholders to Corporate Creditors upon Dissolution: Nature and Implications of the “Trust Fund” Doctrine of Corporate Assets, 30 Bus. Law. 1061, 1074 (1975).
Prior to the enactment of
As early as 1879, the Texas legislature began enacting remedial statutes which embodied the trust fund theory.
We find no indication that the legislature intended for
Even if the trust fund theory did exist outside of these remedial statutes, we must assume that when the legislature enacted
While this is a case of first impression in Texas, two courts from other jurisdictions have reached this same result interpreting the Illinois corporate survival statute which resembles
In Teter, the plaintiff argued that although the company was dissolved more than two years before the commencement of the suit, it had an equitable remedy against the shareholders, because “in equity the assets of a dissolved corporation passing to its stockholders constitute a trust fund which can be reached in their hands by the corporation‘s creditors for the purpose of satisfying claims; ...” Id. at 725. The court rejected the argument stating that the two-year Illinois statute controlled both the substantive and procedural rights of the parties, to the exclusion of the equitable trust fund theory.
In a more recent case, an Illinois court of appeals reached this same result regarding the applicability of the trust fund theory to a post-dissolution claim. In Blankenship v. Demmler Manufacturing Co., 89 Ill.App.3d 569, 44 Ill.Dec. 787, 411 N.E.2d 1153 (1980), suit was brought against the shareholder of a dissolved corporation to recover damages for personal injuries sustained about eight years after the company dissolved. The plaintiff argued that the shareholder was liable under the trust fund theory because he held assets of the dissolved corporation. The court disagreed and wrote:
We agree with defendant that extension of the trust fund theory to cover plaintiff‘s claim would mean that the corporation could never completely dissolve
but would live on indefinitely through its shareholders. We do not believe that this result would be in accordance with the spirit of the laws governing the dissolution of corporations.
Id., 44 Ill.Dec. at 790, 411 N.E.2d at 1156.
Moeller contends all remedies available to creditors under the equitable trust fund theory can be utilized where
The case of State v. Liquidating Trustees of Republic Petroleum Co., supra, involved a suit brought by the State of Texas under
Recognition of the trust fund theory in State v. Liquidating Trustees of Republic Petroleum Co., supra, does not support Moeller‘s contention. A proceeding to escheat personal property can be brought by the State of Texas against every “person” holding property “subject to escheat.”
If the legislature had intended for shareholders of a dissolved corporation to be liable for causes of action which accrue after dissolution, it could have easily provided so within the statutory language of
Fort Worth Capital Corporation and Stewart DeVore, Sr., who, along with Moeller, are respondents in this case, contend that their cross-actions against the
We reverse the judgment of the court of civil appeals and affirm the judgment of the trial court.
SPEARS, J., dissents in an opinion in which RAY, J., joins.
SPEARS, Justice, dissenting.
I respectfully dissent.
The legislative intent contrived by the majority opinion of the court cannot survive even casual examination. In
The intention of the legislature in enacting a statute must be determined from the language of the statute as therein set out. Courts must not look elsewhere than to the language of the statute to ascertain its intent.
In A. M. Servicing Corp. of Dallas v. State of Texas, 380 S.W.2d 747, 748 (Tex.Civ.App.—Dallas 1964, no writ), the court stated:
[C]ourts may not, under the guise of construction, amend a statute by adding provisions thereto, no matter how desirable such additions might seem to the judge.
In Gilmore v. Waples, 108 Tex. 167, 188 S.W. 1037, 1038 (1916), this court observed:
A statute so plain and unmistakable leaves nothing for interpretation or construction. All that courts may do with such a statute is to observe it and enforce it. There is an omission in the law, it is true. But it is not the business of courts to supply omissions in laws.
Accord: Rawls v. Terrell, 101 Tex. 157, 105 S.W. 488, 491 (1907).
An analysis of the repealed statutes and case authorities cited in the majority opinion reveals that they all involved only pre-dissolution claims. None of the authorities cited address the question of post-dissolution claims. Even assuming arguendo that
It is important to note that the trust fund theory was available to the creditor under the rules of equity which pre-existed the statutes. See, e. g., Panhandle Nat‘l Bank v. Emery, 78 Tex. 498, 15 S.W. 23, 24 (1890). The egregious error of the court is focused in the erroneous conclusion that the repeal
In Texas, our courts have long adhered to the doctrine that the assets of a dissolved corporation will be protected in equity as a trust fund for creditors and stockholders. In 1907 our Legislature began the enactment of remedial statutes. In 1919 other articles were added. As we construe our statutes, the Legislature has given to creditors and stockholders of a dissolved corporation the same broad measure of relief which equity would have afforded in the absence of legislation. (emphasis added) 218 S.W.2d at 455.
We further said in Burkburnett:
[I]t is probable, at all events, if the statutory remedy is incomplete, or in any set of circumstances inadequate, that equity still has jurisdiction to assist by granting additional relief. 292 S.W. at 181.
In Lyon-Gray Lumber, the court said:
[W]hatever may be contended as to equitable processes and remedies generally, it is quite plain that equitable rights and principles have been continually a part of the law of Texas, and that among these has always been the doctrine that the creditors of a corporation, upon its dissolution, have the right to be paid out of its assets with priority to its stockholders .... To enforce rights of this nature, statutes, sometimes in aid and sometimes to the exclusion of equitable remedies, were passed by various states of this Union, whereby the debts of corporations were declared to survive their dissolution and made collectible against trustees or through receiverships or by means of the extension of corporate existence, especially for winding up. And all of these resorts amounted in substance to the same thing. 269 S.W. at 81. (emphasis added)
The court then held that the statute extending the remedy against the dissolved corporation did not operate to take away or confer any substantive right; it only supplied a form or procedure. The court then said:
Everything it [the statute] did could have been accomplished in the present case without it, though with less ease. 269 S.W. at 82.
Contrary to the view expressed in the court‘s opinion, the case of State of Texas v. Liquidating Trustees of Republic Petroleum Co., 510 S.W.2d 311, 312 (Tex.1974), illustrates this court‘s recognition of the trust fund theory apart from the statutes. We observed:
It is conceded by the parties that both Texas and New Mexico follow the general equitable rule that upon dissolution of a corporation, its assets constitute a trust fund for the benefit of its stockholders and creditors, with the surviving directors serving as liquidating trustees. (emphasis added)
While
That the legislative intent found by the majority is erroneous is further demonstrated by the fact that in enacting
There is still an additional reason why the legislature could not have intended the result reached by the court. Persons sustaining post-dissolution loss or injury resulting from the negligence, a defective product, or breach of warranty of the dissolved corporation are left completely without a remedy under the rule announced by the majority. Not even the legislature was so insensitive as to cut off pre-dissolution claims with no remedy at all. A cause of action for personal injury arises when the wrongful act effects an injury. Robinson v. Weaver, 550 S.W.2d 18, 19 (Tex.1977). In strict liability suits, a cause of action arises when actual physical harm to person or property occurs. Lubbock Manufacturing Co. v. Sames, 598 S.W.2d 234, 236 (Tex.1980). Under the court‘s opinion here, persons injured or damaged by a defective product after the date of dissolution have no remedy at all, not even resort to the equitable trust fund theory. At the time of the enactment of
A more classic instance of unjust enrichment is difficult to imagine, and unjust enrichment is said to be the very basis of the imposition of the trust fund theory. Norton, J.J., Relationship of Shareholders to Corporate Creditors Upon Dissolution: Nature and Implications of the “Trust Fund Doctrine of Corporate Assets,” 30 The Business Lawyer 1061, 1067 (1975). The shareholders of the Hunter-Hayes Corporation have received assets upon dissolution, in this instance, the stock of Dover Corporation, the successor corporation, and thus have sustained no financial loss. Under the court‘s opinion, the burden of loss for defective products, negligence, and breached warranties has now been shifted to innocent parties. This decision is an atavistic return to jurisprudential dark ages when the imposition of a public responsibility on corporations was unheard of. See White, Edward G., The American Judicial Tradition, ch. 2, Oxford Univ. Press 1976.
This case cries out for the application of the equitable trust fund theory under which shareholders of the dissolved corporation are accountable to the creditors of the corporation to the extent of assets received upon the dissolution. If a limitation for bringing suit for post-dissolution claims is to be imposed, it should be done by the legislature as in other suits.
Further mischief is done by the court‘s opinion in this case. The owners of the building have thus far been held liable for Moeller‘s injuries under the rule of Bond v. Otis Elevator Co., 388 S.W.2d 681 (Tex. 1965), under which the negligence of Hunter-Hayes was imputed to the building own
The net effect of the court‘s holding is to permit, and even encourage, the evasion of historic common law principles and sound public policy that wrongdoers respond in damages to a person injured as a proximate cause of that wrong. As some writers have openly observed, a corporation seeking to acquire another corporation should purchase only its assets in exchange for stock in the purchasing corporation. See Wallach, George I., Products Liability: A Remedy in Search of a Defendant—The Effect of a Sale of Assets and Subsequent Dissolution on Product Dissatisfaction Claims, 41 Mo.L. Rev. 321, 335 (1976). The selling corporation, left with no assets except the stock it received for the sale, distributes that stock to its own shareholders, then dissolves. By this procedure, the acquiring corporation obtains all of the benefits and assets of the dissolved corporation but none of its liabilities. The shareholders of the dissolved corporation have received value for their stock, yet are shielded from contributing to the compensation of the victims of the wrongs perpetrated by the dissolved corporation to the extent of assets received by them upon dissolution. The acquiring corporation gets only the best of its bargain, and the new shareholders lose nothing but their obligation to redress their old corporation‘s wrongs. The only losers are the victims of the wrongs that were set in motion during the dissolved corporation‘s existence. Such a public policy should not be countenanced by any court.
In view of the fact that the court‘s opinion is now the law, it should be observed that several viable methods of permitting creditors’ recovery for post-dissolution claims are suggested by Professor Wallach in his article, supra, at pp. 335-344. One theory is the “continuation or successor” theory, under which liability is imposed on the acquiring corporation as a mere continuation of the former. Cyr v. B. Offen & Co., Inc., 501 F.2d 1145, 1152 (1st Cir. 1974). A second theory is the “de facto merger” theory. Under this theory, a continuity in operations, combined with a partial continuation of ownership led the court in Shannon v. Samuel Langston Co., 379 F.Supp. 797 (W.D.Mich.1974), to find that a de facto merger had occurred. And, under facts almost identical to those in the instant case, the court in Knapp v. North American Rockwell Corp., 506 F.2d 361, 368 (3rd Cir. 1974) cert. denied 421 U.S. 965, 95 S.Ct. 1955, 44 L.Ed.2d 452 (1975), imposed liability on the former shareholders of a dissolved corporation, refusing to “allow a formality to defeat Knapp‘s recovery.” Professor Wallach points out that the decision did not adhere to the traditional distinction between acquisition based on a purchase of assets and acquisition by purchase of shares, merger, or consolidation, but he applauds the decision “for refusing to exalt form over substance.”
The summary judgment in this case was granted on the sole ground that the legislature intended that
RAY, J., joins in this dissenting opinion.