Potential clients wanting to dissolve a Texas business entity frequently tell me they “want the three year period to start running” although they can’t really explain what it is or why it needs to begin, but they are sure that it is very important and must commence immediately. What it is, is a statute of repose; what it does, is not exactly what they sometimes think it does.
The current statute of repose is found in Section 11.356 of the Texas Business Organizations Code and applies to any corporation, limited partnership, limited liability company, professional association, cooperative or real estate investment trust formed under the TBOC. Section 11.356 applies after a Texas entity’s existence has “terminated” within the meaning of the TBOC. If the termination is voluntary and the entity completes the winding up of its business as required by the TBOC, then its existence terminates on the date it files a certificate of termination with the Secretary of State.
But pursuant to Section 11.356, the entity continues to exist until the third anniversary of its termination date but only for strictly limited purposes. The most common of those purposes are:
- a lawsuit or other proceeding against the entity or brought by the entity;
- or an “existing claim” against the entity or of the entity.
The litigation exception is pretty clear.
The “existing claim” exception requires examination of what the term “existing claim” means. A terminated entity is liable only for an “existing claim,” which is a “claim” that either
- existed before the entity terminated AND is not barred by the applicable limitations period OR
- is a contractual obligation incurred after the date of termination.
The inquiring client is probably concerned about the first situation if he wants to “get the clock started.” He may be concerned that the counterparty to one of the entity’s pre-termination contracts may assert post-termination a claim for breach or contractual indemnification, or that an individual may assert post-termination that he suffered personal injury in an incident that occurred prior to the termination date, or that the beneficiary of a guaranty made by the terminated entity prior to termination may make demand for payment under the guaranty when the primary obligor defaults post termination. Depending when the possible claims accrued, it is possible that the applicable statute of limitations has not yet expired.
The client may have good cause for wanting to start the three year period. The definition of “claim” means “a right to payment, damages or property, whether liquidated or unliquidated, accrued or contingent, matured or unmatured.” That definition is broad to begin with— for payment, like the cash due in payment of a promissory note; damages, like the monetary remedy awarded in a slip and fall case; or property, like a tangible good deliverable pursuant to a commercial contract or a an intangible contract right, trademark or copyright. And it stretches much further: the damages may be uncertain, the note may not yet be matured, and whether or not any payment or performance is owed may depend on the occurrence or nonoccurrence of one or several events or conditions. The claim — even the basis for a potential claim — may be unknown to the entity at the time of its termination: the claim likely was not asserted prior to the termination date and a cause of action probably had not accrued by that date. Or the entity may have been aware prior to termination that a basis for a potential claim might exist but no claim had been asserted, or a claim may have been asserted before termination but the entity believed it was without merit and that the entity had no obligation or liability to the claimant. But in any of those situations, a “claim” existed because of the broad scope of the meaning of the term “claim.”
The client is seeking to reach the repose offered by Section 11.359(a):
an existing claim by or against a terminated filing entity is extinguished unless an action or proceeding is brought on the claim not later than the third anniversary of the date of termination of the entity.
But the client needs to be advised that the third anniversary is not a solid wall against an existing claim. Section 11.356(c) provides that if an action on an existing claim is brought against the entity before the third anniversary of its termination, then the three year survival period of the entity automatically extends for that claim until “all judgements, orders, and decrees [with respect to that action] have been fully executed” and the subsequent and consequential application by the terminated entity of its property to discharge its obligation or liability (if the claimant wins) or to distribute property to the entity’s owners (if the claimant loses in whole or in part).
The client may also be interested in hearing about a way to accelerate — to shorten — the three year period for existing claims, but he’ll not hear about that alternative in this post.