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In the Matter of Texas Eastern Overseas, Inc., C.A. No. 4326-VCN (Del. Ch. November 30, 2009) (Noble, V.C.)

November 30, 2009

In this opinion, the Delaware Court of Chancery addressed the statutory scheme embodied in Sections 278 and 279 of the Delaware General Corporation Law (“DGCL”) and granted petitioner’s motion for judgment on the pleadings seeking the appointment pursuant to Section 279 of a receiver for respondent, a dissolved Delaware corporation

Petitioner AmeriPride Services Inc. (“AmeriPride”) owns and operates an industrial laundry on a California site where respondent Texas Eastern Overseas Inc.’s (“TEO”) predecessor-in-interest owned and operated an industrial cleaning facility that was sold to AmeriPride’s predecessor-in-interest. After the sale, AmeriPride found contaminants in the soil and incurred significant costs relating to the contamination. AmeriPride contends TEO’s predecessor caused the pollution. In January 2000, AmeriPride brought suit against TEO, its predecessor and others in a federal court in California seeking to recover the costs it had incurred related to the contamination. TEO, which was dissolved in November 1992, moved to dismiss AmeriPride’s claims in the federal action, citing DGCL Section 278 and claiming it could not be sued since it had long since been dissolved. The federal court granted the motion but stayed the action to permit AmeriPride to petition the Court of Chancery for the appointment of a receiver pursuant to DGCL Section 279.

In the Delaware proceeding, AmeriPride maintained that TEO has assets in the form of insurance policies issued by the insurers defending TEO. AmeriPride argued that the public policy concerns behind the three-year dissolution period in DGCL Section 278 — that former stockholders, officers and directors should be protected from claims after a reasonable period of time has passed since dissolution  — would not be implicated by its petition because it seeks recovery only from TEO assets and not from any of its principals or shareholders. TEO argued it could not be sued, relying on the Court of Chancery’s decision in In re Dow Chemical International Inc. of Delaware, 2008 WL 4603580 at *2 (Del. Ch. Oct. 14, 2008) (“Dow I”) in which the Court concluded that the appointment of a receiver under Section 279 cannot be used to circumvent Section 278’s three-year time period after which a dissolved corporation may no longer be sued “when a dissolved corporation holds no assets.” TEO also asserted that it has no assets and that the petition should be barred by the equitable doctrine of laches.

The Court stated that Sections 278 and 279 must be read together as part of a statutory scheme providing for two situations: one in which a corporation remains in existence and has officers and directors who can wind up its affairs and one in which the corporation no longer has legal existence and requires a receiver to oversee any unfinished business. The Delaware Supreme Court has held that “‘in tandem,’ the two statutes ensure that a dissolved corporation maintains the authority and viability to sue and be sued ‘incident to the winding up of its affairs.’” (Mem. Op. at 8, quoting In re Citadel Industries, Inc., 423 A.2d 500, 504 (Del. Ch. 1980).) The Court noted that respondent’s reliance on Dow I was misplaced as Dow I was premised upon the dissolved corporation having no assets left to distribute. The Court explained that petitioners seeking to show good cause under Section 279 must show more than mere speculation that the dissolved corporation may still have undistributed assets and held that AmeriPride had made a sufficient showing of existing assets by way of supporting documentation cited in its petition. The Court explained that suit against TEO in the federal action would not endanger the policy concerns underlying Section 278 because Section 279 limits the power of an appointed receiver to controlling the corporation’s property and collecting debts due to the corporation in order to prosecute and defend lawsuits. If insurance policies did not cover TEO’s full liability, the receiver would have no claim on TEO assets distributed in dissolution or any separate claim against former shareholders, officers or directors. Rejecting TEO’s claim that AmeriPride’s claims should be barred by laches, the Court found that AmeriPride acted in a reasonable period of time to investigate and prosecute its claims and that appointing a receiver would not be inequitable. Accordingly, the Court granted AmeriPride’s motion for judgment on the pleadings and denied TEO’s motion to dismiss.

The full opinion is available here