Anderson v. Krafft-Murphy Co., No. 85, 2013 (Del. Nov. 26, 2013)
In this en banc decision, the Delaware Supreme Court reversed the decision of the Court of Chancery in an action to appoint a receiver for Krafft-Murphy Company, Inc. (the “Company”), a dissolved Delaware corporation. The Supreme Court held, among other things, that Delaware’s dissolution statutes impose no generally applicable statute of limitations that would time-bar claims against a dissolved corporation by third parties.
The Company has been the subject of hundreds of asbestos-related personal injury lawsuits over the last two decades. Based on the potential tort liability, the Company ceased operations in 1991 and filed its certificate of dissolution in 1999. At the time of its dissolution, the Company possessed liability insurance contracts with several insurance companies that covered its asbestos-related tort liability. Under the direction of those insurance companies, the Company continued to defend, litigate, and settle asbestos-related claims for ten years following its dissolution. After ten years, the Company began moving to dismiss new claims on grounds that it was no longer subject to suit. Tort claimants in lawsuits pending against the Company in other jurisdictions brought suit in the Court of Chancery seeking appointment of a receiver. The Court of Chancery granted summary judgment in favor of the Company and declined to appoint a receiver. The Supreme Court held, among other things, that Delaware’s dissolution statutes operate to extinguish a dissolved corporation’s liability after ten years from the date of dissolution because the provisions of such statutes establish a ten year outer limit within which a dissolved corporation can potentially be held liable for third party claims. The petitioners appealed.
On appeal, the Supreme Court explained that a receiver may be appointed for a dissolved corporation in cases where the dissolved corporation holds undistributed property. The Supreme Court further held that unexhausted insurance policies constitute “property” for purposes of determining whether a dissolved corporation has undistributed assets, thus enabling a Delaware court to appoint a receiver for the dissolved corporation under Section 279 of the General Corporation Law of the State of Delaware. The Supreme Court further held that no Delaware statutory provision governing corporate dissolution operates to extinguish the Company’s potential liability to third parties by time-barring those parties’ claims. In refuting the Company’s argument that Delaware’s dissolution statutes necessarily extinguish a dissolved corporation’s post-dissolution to liability to third parties after the ten year period expires because those provisions do not require a dissolving corporate to set aside assets for claims that may arise after ten years from the date of dissolution, the Supreme Court explained that a determination of the “remaining assets” that can be distributed to shareholders must be based on the distributable assets that exist, and on the dissolving corporation’s estimates of the value of pending and future claims, at the time the plan of distribution is adopted. The Supreme Court noted that if the assets set aside to provide for pending claims and for claims likely to arise within ten years after dissolution exceed the value of the claims actually brought within that period, the dissolved corporation will continue to have net assets on the tenth anniversary of its dissolution. Moreover, the Supreme Court stated that even after any initial distribution to stockholders, the dissolved corporation could continue to hold any contingent assets that would vest thereafter to satisfy creditor claims. Accordingly, the Supreme Court explained that there is no statutory requirement that the dissolved corporation must distribute to stockholders all assets that remain after any initial asset distribution to creditors or stockholders.
Because the expiration of ten years does not operate to extinguish a dissolved corporation’s liability to third parties and the Company still had undistributed assets available, the Supreme Court held that the Court of Chancery erred by holding that the appointment of a receiver under Section 279 was inappropriate.