Citadel Industries, Inc., In re

• Decision Date: 21 November 1980
• Citation: 423 A.2d 500
• Parties: In re CITADEL INDUSTRIES, INC.
• Court: Court of Chancery of Delaware

Page 500

423 A.2d 500

In re CITADEL INDUSTRIES, INC.

Court of Chancery of Delaware, New Castle County.

Submitted Sept. 8, 1980.

Decided Nov. 21, 1980.

Richard R. Wier, Jr., and Vernon R. Proctor, of Prickett, Jones, Elliott & Kristol, Wilmington, for petitioner General Electric Co. Arthur G. Connolly, Jr., and Stanley C. Macel, III, of Connolly, Bove & Lodge, Wilmington, for Citadel Industries, Inc.

BROWN, Vice Chancellor.

As a result of an ex parte application made pursuant to 8 Del.C. § 278, an order was entered by this Court on December 21, 1979 purporting to continue and extend the corporate existence of Citadel Industries, Inc. so as to permit the corporation to be joined as a party defendant in complex tort litigation already pending in Texas. Thereafter, a motion was promptly filed on behalf of Citadel Industries, Inc. to vacate that order. This is a decision on that motion. The decision involves an interpretation of the meaning of 8 Del.C. § 278 in light of certain amendments made to the statute in 1967.

The undisputed background facts are as follows. Citadel Industries, Inc. (hereafter "Citadel") is the corporate successor to American Locomotive Company. It was formerly a New York corporation which, through the merger process, became a Delaware corporation in 1966. Prior to that time it had sold its physical plant, equipment, name, goodwill and complete business of manufacturing locomotives. From 1964 onward, it was a holding company and was not engaged in the manufacture or sale of locomotives.

In 1973 Citadel's shareholders adopted a plan of complete liquidation and dissolution which was to be completed by November 30, 1976. The final liquidating distribution was declared on November 5, 1976, and on November 18, 1976 a certificate of dissolution was filed with the Delaware Secretary of State. At that time, according to the report of its independent auditors, Citadel had no assets and no liabilities.

On December 27, 1977 a grain elevator exploded in Galveston, Texas, killing 12 persons and injuring many others. The accident is said to have spawned some 36 lawsuits in various Texas courts. On September 19, 1979 suit was filed against General Electric Company (hereafter "General Electric") alleging that General Electric had manufactured certain locomotives used at the grain elevator, sparks from which allegedly ignited grain dust causing the explosion. General Electric first became aware of its involvement on September 28, 1979 when process was served upon its registered agent in Texas. It promptly proceeded to investigate the situation through its counsel. On October 15, 1979 it learned that the locomotives in question were supposedly "ALCO-GE" locomotives. Through further investigation General Electric was able to learn the serial numbers of the two locomotives by October 29, 1979. Through a subsequent search of its records General Electric determined that it had not manufactured either of the locomotives, but rather that they had both been manufactured by American Locomotive Company, one in 1943 and the other in 1952. This knowledge was ascertained by November 14, 1979.

On November 19, 1979, General Electric retained New York counsel to track down the contemporary corporate identity of American Locomotive Company. As a result, on December 5, 1979 General Electric was advised that Citadel was the last corporate successor of that corporation. General Electric then retained Delaware counsel to investigate the corporate status of Citadel. This revealed that Citadel had filed its voluntary certificate of dissolution on November 18, 1976. This brings us to the legal issue involved.

The Delaware General Corporation Law provides that upon a dissolution a corporation nevertheless exists for a period of three years for the purpose of winding up its corporate and business affairs. During this three-year period it may not carry on any business for which it previously existed, but it may do that which is necessary to bring its former business affairs to a conclusion. This includes bringing suit as well as defending suits brought by others. The statute which makes this provision is 8 Del.C. § 278.

Prior to 1967, § 278 read as follows:

"All corporations, whether they expire by their own limitation or are otherwise dissolved, shall nevertheless be continued, for the term of three years from such expiration or dissolution, bodies corporate for the purpose of prosecuting and defending suits by or against them, and of enabling them gradually to settle and close their business, to dispose of and convey their property, and to divide their capital stock, but not for the purpose of continuing the business for which the corporation shall have been established. With respect to any action, suit or proceeding begun or commenced by or against the corporation prior to the expiration or dissolution and with respect to any action, suit or proceeding begun or commenced by or against the corporation within three years after the date of the expiration or dissolution, the corporation shall, only for the purpose of such actions, suits or proceedings so begun or commenced, be continued bodies corporate beyond the three-year period and until any judgments, order, or decrees therein shall be fully executed."

In 1967, § 278 was amended so that it now reads as follows:

"All corporations, whether they expire by their own limitation or are otherwise dissolved, shall nevertheless be continued, for the term of 3 years from such expiration or dissolution or for such longer period as the Court of Chancery shall in its discretion direct, bodies corporate for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against them, and of enabling them gradually to settle and close their business, to dispose of and convey their property, to discharge their liabilities, and to distribute to their stockholders any remaining assets, but not for the purpose of continuing the business for which the corporation was organized. With respect to any action, suit, or proceeding begun by or against the corporation either prior to or within 3 years after the date of its expiration or dissolution, the corporation shall, for the purpose of such actions, suits or proceedings, be continued bodies corporate beyond the 3 year period and until any judgments, orders, or decrees therein shall be fully executed, without the necessity for any special direction to that effect by the Court of Chancery." (Emphasis added.)

Concerning this 1967 revision of the statute, the observation has been made that "(t)he only changes of substance in § 278 are the authorization for the Court of Chancery to maintain the corporate entity for a period of more than three years after dissolution, and the addition of the phrase 'civil, criminal, or administrative,' defining the type of suits which may be maintained during the period after dissolution." Folk, The Delaware General Corporation Law (1972 Ed.) at page 433. It is the above-emphasized language of the revised statute which relates to the first of the two so-called changes in substance referred to by Professor Folk.

Accordingly, § 278 existed in this amended form, with this so-called change in substance, when, on December 5, 1979, General Electric first learned that Citadel was the corporate successor to the actual manufacturer of the locomotives, and thus was a party which General Electric desired to bring in as co-defendant in the Texas suit against it. This, of course, was some three weeks after November 17, 1979, the date on which the statutory three-year winding up period provided under § 278 had expired as to Citadel. Accordingly, in reliance on 1967 amendatory language which gives this Court discretion to continue the § 278 winding up period for longer than three years, General Electric filed this action in which it asked the Court to do just that. Since Citadel no longer legally existed as a corporate entity on December 20, 1979, the date on which General Electric's petition was filed, the application was presented to the Court ex parte. It was thus granted without objection or argument based upon the representations made on behalf of General Electric and its interpretation of the statute.

A position having now been taken, and argument presented, on behalf of Citadel, I am convinced that the motion to vacate the prior order of December 21, 1979, must be granted.

At the outset I dispose of one portion of the argument. General Electric points to the language of the statute which leaves the matter to the discretion of this Court. It then relies on the various factual matters set forth herein relating to its involvement with the Texas litigation to demonstrate, in its view, that "continuing" Citadel's existence is a proper exercise of discretion under the circumstances presented. It argues that it acted promptly once it learned on September 28 that it had been sued, and that it proceeded as diligently as it could in investigating the situation and in eventually ascertaining that it was Citadel to whom it needed to look for responsibility for the locomotives, or at least for possible contribution and indemnification for any liability found against General Electric. It also points out that it was able to obtain the ex parte relief here and thus join Citadel as a party in Texas approximately one week prior to the time that the Texas statute of limitations would have run out, a factor which would now permit Citadel's responsibility, if any, to be determined on the merits of the Texas actions as contrasted with the removal of Citadel from the litigation as a party if the present motion to vacate is granted. Citadel, on the other hand, attempts to argue various other factual matters in an effort to show that such an exercise of discretion by the Court was unwarranted.

For the reasons set forth hereafter, I find that under the circumstances the Court is legally barred by the...