Life After Death for Delaware Corporations

January 23, 2014

The law has frequently regarded corporations as akin to persons, treating them as entities separate from their owners and granting rights to and imposing obligations upon them quite similar to those imposed on individuals. However, a recent Delaware Supreme Court decision demonstrates how the Delaware statutes have granted Delaware corporations a type of corporate immortality - but only when it comes to their potential liability to third parties.

In the case, In the Matter of Krafft-Murphy Company, Inc., the Delaware Supreme Court considered third parties' right to pursue claims against a dissolved corporation, and any time limitations placed upon that right by Delaware's statutory corporate dissolution scheme. Beginning in 1989, the defendant corporation was named as a defendant in hundreds of asbestos personal injury lawsuits in multiple jurisdictions, all of which the corporation's insurance companies have been defending on its behalf. In 1999, the corporation formally dissolved, and its only presently remaining assets are their unexhausted insurance policies. The plaintiffs instituted the Delaware case seeking the appointment of a receiver for the dissolved corporation, to enable them to lawfully pursue their claims against the dissolved entity.

The defendant dissolved corporation argued, among other things, that no receiver should be appointed, because the time during which the corporation could be liable to third parties post-dissolution had lapsed, and the corporation therefore is no longer amenable to suit. The Delaware Supreme Court disagreed, holding that there is no statutory time bar limiting a dissolved corporation's potential liability to third-party claimants post-dissolution.

Prior to the enactment of the Delaware corporation statute, a corporation's "civil death" occurred at the time of dissolution, ending all actions against the corporation. The applicable statute, however, extends a corporation's legal existence and its exposure to lawsuits by three years after dissolution, to facilitate the "winding up" of the dissolved corporation's corporate affairs. After the three year period, the corporation ceases to exist and may neither sue or be sued, because it loses the power to conduct its own affairs. It will only continue to exist for the sole purposes of any action or proceeding commenced before the expiration of the three-year period.

However, as the court explained, the expiration of that three-year period does not mean that the dissolved corporation can no longer be liable to third parties who assert their claims after the three-year period has lapsed. In fact, the court found nothing in the statute or the legislative history indicating any intent to create a generally applicable limitation on the timeframe during which a dissolved corporation may be subject to liability. Although the corporation is unable to defend against such claims itself after the three-year period, the statute permits the appointment of a receiver to participate in a third-party claim. It is only through that vehicle that the corporation may become "re-empowered to defend its interests in the litigation."

Further, although the lower court had accepted the corporation's argument distinguishing between claims filed less than ten years after the corporation dissolved (which the insurers represented they would continue to litigate on behalf of the corporation) and claims filed more than ten years after dissolution (for which the corporation claimed it had no assets and thus did not justify the appointment of a receiver), the Delaware Supreme Court found no merit in this distinction. The ten-year benchmark upon which the corporation relied appeared in statutory language that protected only the corporation's directors and shareholders from liability, provided that certain dissolution procedures were followed. The corporation did not follow those procedures, and even if it had, the liability shield did not extend to the dissolved corporation itself.

While many people elect to incorporate their businesses in Delaware to take advantage of Delaware's favorable corporate laws, this recent ruling extending a corporation's potential liability may make incorporation in Delaware less attractive. The decision may impact insurance companies' willingness to insure Delaware corporations, given the potential perpetual liability claims they may face even after corporate dissolution, if insurance policies remain unexhausted. As a result, businesses incorporated in Delaware may now find it much more difficult - or much more expensive - to secure liability insurance for their businesses.