Hunter v. Fort Worth Capital Corp.

620 S.W.2d 547, 20 A.L.R. 4th 399, 24 Tex. Sup. Ct. J. 500, 1981 Tex. LEXIS 354

• Court: Texas Supreme Court
• Decided: July 15, 1981
• Docket: C-58
• Status: Published

Opinions

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 Moel-ler’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 Article 7.12 of the Texas Business Corporation Act.³ The trial court granted the motion and severed all causes of action against the shareholders so that it could render a final and appeala-ble judgment. Moeller and cross-complainants, Fort Worth Capital Corporation and Stewart DeVore, Sr.,⁴ (the prior owner of the building and its majority shareholder) perfected separate appeals. The court of civil appeals reversed the judgment and remanded the cause for trial. The court of civil appeals held that Article 7.12 was vitiated in this cause by the “trust fund theory.”

Article 7.12, which is derived from Section 105 of the Model Business Corporation Act, provides:

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 liabiiity 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.

Article 7.12 provides statutory remedies for pre-dissolution claims only and thus is in the nature of a survival statute. Moeller’s cause of action did not accrue until he was injured more than eleven years after the company dissolved. See Sims v. Southland Corp., 503 S.W.2d 660, 663 (Tex.Civ.App.—Tyler 1973, writ ref’d n. r. e.). Consequently, Moeller cannot recover against the shareholders for his post-dissolution claim against the corporation, unless his suit is authorized by some other statute or legal theory.

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 Article 7.12 supplants the trust fund theory and Moeller must look solely to that statute in order to determine if the legislature provided him with a remedy.

This contention calls for a construction of Article 7.12. In doing so, our primary objective will be to ascertain the legislative intent. State v. Terrell, 588 S.W.2d 784, 786 (Tex.1979); Minton v. Frank, 545 S.W.2d 442, 445 (Tex.1976.) Because Article 7.12 is a provision in the Texas Business Corporation Act, we must ascertain the legislative intent by looking to the entire Act, and not its isolated provisions, keeping in mind at all times “the old law, the evil and the remedy.” Woods v. Littleton, 554 S.W.2d 662, 665 (Tex.1977); Calvert v. Kadane, 427 S.W.2d 605, 608 (Tex.1968). The legislative intent in enacting Article 7.12 is nowhere clearly stated. The comment to Section 105 of the Model Business Corporation Act does not help us either.

At common law, dissolution terminated the legal existence of a corporation. Once dissolved, the corporation could neither sue nor be sued, and all legal proceedings in which it was a party abated.⁵ Nardis Sportswear v. Simmons, 147 Tex. 608, 218 S.W.2d 451, 453 (1949); Burkburnett Refining Co. v. Ilseng, 116 Tex. 366, 292 S.W. 179, 181 (1927); Life Association of America v. Goode, 71 Tex. 90, 8 S.W. 639, 640 (1888); Lyon-Gray Lumber Co. v. Gibraltar Life Insurance Co., 269 S.W. 80, 81 (Tex. Comm’n App.—1925, judgmt. adopted); Model Bus. Corp. Act Ann.2d § 105 Comment (1971).

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 Article 7.12, Texas courts had long applied the trust fund theory to dissolved corporations, but only as it was embodied within the general framework of certain remedial statutes. See Humble Oil & Refining Co. v. Blankenburg, 149 Tex. 498, 235 S.W.2d 891, 893 (1951); Nardis Sportswear v. Simmons, supra, 218 S.W.2d at 453, 454; McBride v. Clayton, 140 Tex. 71, 166 S.W.2d 125, 128 (1942); Peurifoy v. Wiebusch, 132 Tex. 36, 117 S.W.2d 773, 775 (1938); Burkburnett Refining Co. v. Ilseng, supra 292 S.W. at 181; Lyons-Thomas Hardware Co. v. Perry Stove Manufacturing Co., 86 Tex. 143, 24 S.W. 16, 20 (1893); Lyon-Gray Lumber Co. v. Gibraltar Life Ins. Co., supra at 82; Krueger v. Young, 406 S.W.2d 751, 758 (Tex.Civ.App.—Eastland 1966, writ ref’d n. r. e.); Evons v. Winkler, 388 S.W.2d 265, 270 (Tex.Civ.App.—Corpus Christi 1965, writ ref’d n. r. e.).

As early as 1879, the Texas legislature began enacting remedial statutes which embodied the trust fund theory. Tex.Rev.Civ. Stat. arts. 606, 608 (1879). The purpose of these statutes was to abrogate the common law abatement rule. Lyon-Gray Lumber Co. v. Gibraltar Life Ins. Co., supra at 82. In 1909 and 1919, other statutes were added. These statutes were carried forward by subsequent legislatures, with only minor changes, until repealed in 1955 with the enactment of Article 7.12. Among others, the statutes repealed by Article 7.12 were Articles 1388,1389,1390, and 1392, Tex.Rev. Civ.Stat. Under these remedial statutes, the legislature had given creditors of a dissolved corporation “the same broad measure of relief which equity would have afforded in the absence of legislation.” Burkburnett Refining Co. v. Ilseng, supra, 292 S.W. at 181. The effect of these statutes was to supplant the equitable trust fund theory by declaring a statutory equivalent. In Texas, recognition of the trust fund theory, as applied to dissolved corporations, did not exist apart from these statutes.

We find no indication that the legislature intended for Article 7.12 to be interpreted any differently. Because the statute applies to officers, directors, and shareholders of a dissolved corporation, it embodies the trust fund doctrine but only to the extent that the doctrine allows recovery for pre-dissolution claims.⁶ Therefore, Article 7.12 expresses a legislative policy to restrict the use of the trust fund theory to pre-dis-solution claims, and to protect shareholders, officers and directors of a dissolved corporation from prolonged and uncertain liability. See Bishop v. Schieid Bantam Co., 293 F.Supp. 94, 95 (N.D. Iowa 1968); Norton, supra at 1077.

Even if the trust fund theory did exist outside of these remedial statutes, we must assume that when the legislature enacted Article 7.12 it knew to what extent the equitable doctrine already provided a remedy for pre-dissolution claims. See Allen Sales and Servicenter, Inc. v. Ryan, 525 S.W.2d 863, 866 (Tex.1975); McBride v. Clayton, supra, 166 S.W.2d at 128; In re Carrigan Estate, 517 S.W.2d 817, 819 (Tex.Civ.App.—Tyler 1974, no writ). With this in mind, no real purpose would be served by the enactment of Article 7.12, permitting suits against officers, directors, and shareholders of a dissolved corporation, unless the legislature intended for the statute to bar resort to the trust fund theory apart from the statute in order to enforce post-dissolution claims. To hold otherwise would violate the rule of statutory construction that the legislature is never presumed to do a useless act. Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535 (Tex.1981); Red River National Bank v. Ferguson, 109 Tex. 287, 206 S.W. 923, 925 (1918); Brown v. Memorial Villages Water Authority, 361 5.W.2d 453, 455 (Tex.Civ.App.—Houston 1962, writ ref’d n. r. e.). Accordingly, we hold Article 7.12 bars resort to the trust fund theory as it exists apart from the statute.

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 Article 7.12. The first case is Reconstruction Finance Co. v. Teter, 117 F.2d 716 (7th Cir.1949). In that case, suit was brought against a dissolved corporation and its shareholders to recover on certain guaranties. The suit was filed more than two years after the corporation dissolved in violation of the applicable Illinois statute. The only significant difference between the Illinois statute and Article 7.12 is the period of time after dissolution in which suit must be commenced. The Illinois statute requires a two-year period while Article 7.12 requires three years.

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.Ed.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 Article 7.12 fails to supply a statutory remedy. He relies on State v. Liquidating Trustees of Republic Petroleum Co., 510 S.W.2d 311 (Tex.1974).

The case of State v. Liquidating Trustees of Republic Petroleum Co., supra, involved a suit brought by the State of Texas under Article 3272a, Tex.Rev.Civ.Stat., to escheat dividends of a dissolved corporation payable to persons whose whereabouts were unknown. The suit was against the liquidating trustees of the dissolved corporation who held the dividends in a bank in Dallas, Texas. The corporation had been incorporated in New Mexico and had dissolved twenty-four years before the escheat action was filed. In rendering judgment against the liquidating trustees, this Court stated 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 . . . creditors, with the surviving directors serving as liquidating trustees.” Id. at 312.

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 es-cheat personal property can be brought by the State of Texas against every “person” holding property “subject to escheat.” Tex. Rev.Civ.Stat. Ann. art. 3272a (1968). The escheat statutes define “person” to include a “liquidator.” Id. Such a proceeding would always have to be brought against liquidators more than seven years after the date of dissolution because the whereabouts of the owner of personal property must be unknown for seven years before the property is “subject to escheat.” Tex.Rev.Civ. Stat.Ann. art. 3272 (1968). Apart from Article 7.12, the escheat statutes provide a statutory remedy whereby the State can sue liquidating trustees of a dissolved corporation to escheat personal property in their hands. Recitation of the trust fund theory was dictum since it was not necessary to dispose of that case. Under the escheat statutes, the State can recover funds “subject to escheat” without a lien attaching in their favor under the trust fund theory. Also, the only question raised in the case was whether the State could, under the United States Constitution, reach funds belonging to persons whose last known addresses were outside the State. No question was raised concerning the legislature’s intent in enacting Article 7.12.

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 Article 7.12. Only when it is necessary to give effect to the clear legislative intent can we insert additional words into a statutory provision. Mauzy v. Legislative Redistricting Board, 471 S.W.2d 570, 572 (Tex.1971); Texas & N.O.R. Co. v. Railroad Commission of Texas, 145 Tex. 541, 200 S.W.2d 626, 629 (1947). A provision was included to provide creditors with a statutory remedy for pre-dissolution claims. A similar provision could have been included to encompass post-dissolution claims as well. We believe the exclusion of such a provision to be significant. In the absence of such a provision in Article 7.12 or some other statute, we hold Moeller cannot recover from the shareholders for his post-dissolution negligence claim against Hunter-Hayes.⁷

Fort Worth Capital Corporation and Stewart DeVore, Sr., who, along with Moeller, are respondents in this case, contend that their cross-actions against the shareholders for contribution and indemnity can also be brought under the trust fund theory. We disagree. Neither contribution nor indemnity are recoverable from a party against whom the injured party has no cause of action. City of San Antonio v. Talerico, 98 Tex. 151, 81 S.W. 518, 520 (1904); Grove Manufacturing Co. v. Cardinal Construction Co., 534 S.W.2d 153, 156 (Tex.Civ.App.—Houston [14th Dist.] 1976, writ ref’d n. r. e.); City of Houston v. Watson, 376 S.W.2d 23, 33 (Tex.Civ.App.— Houston 1964, writ ref’d n. r. e.); see Reed Tool Co. v. Copelin, 610 S.W.2d 736 (Tex.1980). Because Moeller has no cause of action for personal injuries against the shareholders, we hold Fort Worth Capital Corporation and Stewart DeVore, Sr., have no right of contribution or indemnity from the shareholders.

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.

1 . The shareholders are: J. Peyton Hunter, Jr., Graeme Hunter, G. W. Hayes, Jr., Harold F. Eltrich, H. F. Tobe, and M. G. Hunter (now deceased).

2 . The other defendants are: Fort Worth Title Company, Fort Worth Title Company d/b/a/ USLIFE Title Company of Fort Worth, USLIFE Title Insurance Company of Dallas, Fort Worth Capital Corporation, Walworth Company, and Valve Systems North America, Inc.

3 . All statutory references are to Vernon’s Texas Business Corporation Act unless otherwise noted. Other statutory references are to Vernon’s Texas Revised Civil Statutes Annotated. All emphases are ours.

4 . Stewart DeVore, Sr., is in this suit because cross-actions were filed against him before he was removed as a named defendant in Moel-ler’s amended petition.

5 . The reason usually given for the common law rule was Lord Coke’s statement of the effects of dissolution: realty reverted to the donor, personalty escheated to the sovereign, and choses in action were extinguished with the death of the corporation. Fox v. Horah, 36 N.C. 358, 36 Am.Dec. 48 (1841); Coulter v. Robertson, 24 Miss. 278, 57 Am.Dec. 168 (1857). Thus, creditors were left without a defendant to sue. See G. Wallach, Products Liability: A Remedy in Search of a Defendant — The Effect of a Sale on Assets and Subsequent Dissolution on Product Dissatisfaction Claims, 41 Mo.L.Rev. 321, 324 (1976).

6 . Every case which has applied the trust fund theory has involved claims against the corporation in existence at the time of dissolution. We have been unable to find a single case from this State or any other jurisdiction where the equitable doctrine has allowed recovery for a post-dissolution claim, such as the one here. In theory, there is nothing which precludes application of the trust fund theory to post-dissolution claims. Wallach, supra at 331; Norton supra, at 1076.

7 . We note that there are no allegations or indication that the dissolution of H. H. Hunter Corporation (formerly Hunter-Hayes) constituted a fraud on creditors or other litigants. From the limited record before us, it appears the dissolution was accomplished for a legitimate purpose and in accordance with statutory requirements.