Products Engineering Co. v. OKC Corp.

• Decision Date: 12 June 1984
• Docket Number: 82-2568.,Civ. A. No. 82-77
• Citation: 590 F. Supp. 547
• Parties: PRODUCTS ENGINEERING CO. v. OKC CORPORATION. LONE STAR INDUSTRIES, INC. v. Charles REDWINE, etc.
• Court: U.S. District Court — Eastern District of Louisiana

590 F. Supp. 547

PRODUCTS ENGINEERING CO. v. OKC CORPORATION.

LONE STAR INDUSTRIES, INC. v. Charles REDWINE, etc.

Civ. A. Nos. 82-77, 82-2568.

United States District Court, E.D. Louisiana.

June 12, 1984.

Nathan T. Gisclair, Jr., Montgomery, Barnett, Brown & Read, New Orleans, La., for plaintiffs.

Brice & Barron, John P. Lilly, Jim K. Choate, Dallas, Tex., Stone, Pigman, Walther, Wittman & Hutchinson, William D. Treeby, New Orleans, La., for defendants.

Monroe & Lemann, Benj. R. Slater, Jr., Michael R. O'Keefe, III, New Orleans, La., for General Elec. Co.

Phelps, Dunbar, Marks, Claverie & Sim, Rutledge C. Clement, Jr., Danny Shaw, David J. Krebs, New Orleans, La., for Mc-B Steel.

OPINION

ARCENEAUX, District Judge.

OPINION

This matter came before the Court on motions to dismiss filed on behalf of defendants OKC Limited Partnership ("Partnership") and Cloyce K. Box ("Box") in the second of these consolidated matters. After the Court requested supplemental memoranda, the parties waived oral argument and the matter was taken under submission. Having thoroughly reviewed the memoranda of counsel and the law, Civil Action No. 82-2568 is DISMISSED for reasons set forth hereinafter.

The operative facts in this matter are all undisputed as set forth in the documents attached to the Complaint and Amended Complaint. On May 13, 1980, the stockholders of OKC Corporation ("OKC") a Delaware Corporation with its principal place of business in Texas, adopted a Plan of Liquidation and Dissolution, which provided for the complete liquidation and distribution of OKC's net assets. Under the terms of this plan, all of the assets of OKC, except for an amount reasonably required to provide for payment of all claims or liabilities of OKC or expenses of liquidation, were to be distributed to OKC stockholders within one year from the date of stockholder approval. If such final distribution could not be made within the year, the plan called for transfer of the remaining assets and liabilities to a trust created for the pro rata benefit of OKC's stockholders. The sole function of the liquidating trust was to satisfy claims and liabilities of OKC and distribute any remaining assets to OKC stockholders. As reflected in the proxy statement accompanying the notice of the shareholders meeting at which dissolution was sought to be authorized, the trust was designed to comply with Section 337 of the Internal Revenue Code in an effort to avoid double taxation which could otherwise result from the sale of corporate assets and subsequent distribution of the proceeds to shareholders.

However, the chronology of events did not occur as planned. The Certificate of Dissolution of OKC Corporation was filed with the Secretary of State for the State of Delaware on May 11, 1981 at 3:00 P.M. On that same date, Certificate and Articles of Limited Partnership of OKC Limited Partnership were signed and filed with the Secretary of State of Texas, whereby OKC contributed certain properties, which it decided was not in the best interest of its shareholders to sell prior to its liquidation, to the limited partnership composed of CKB & Associates, Inc., a Texas Corporation, and Box as general partners, and OKC as a limited partner. OKC then distributed its limited partnership interest among its shareholders, as a liquidating distribution.

It was not until May 12, 1981, that the OKC Corporation Liquidating Trust ("Trust") was formed. Under the terms, the sole purpose of the Trust was to liquidate the trust estate, composed of OKC's remaining assets and liabilities. The Trustee was not to engage in any business activities, even if deemed necessary for the protection of the trust estate. However, the Trustee assumed all liabilities and claims of OKC. In addition, an Amended and Restated Certificate and Articles of Limited Partnership were executed on that date.¹

Plaintiff, Lone Star Industries, Inc. ("LSI"), a Delaware corporation with its principal place of business in Connecticut, filed this diversity suit against Charles Redwine, Trustee of the OKC Corporation Liquidating Trust, in June, 1982, seeking damages arising out of an alleged breach of a Dock Construction Contract ("construction contract") entered into between LSI and OKC on September 3, 1980. LSI had purchased OKC's Louisiana Cement Company cement manufacturing plant in New Orleans and had contracted with OKC to complete a dock facility under construction at that facility. Upon learning of the alleged insolvency of the Trust, plaintiff amended its complaint in September 1983, to add Charles Redwine, individually, Box, and the Partnership as parties defendant, seeking recovery of transferred assets from the dissolved corporation. In omitting OKC as a defendant, LSI argues that the Trust is the proper party to be named as defendant, due to the assignment of OKC liabilities contained in the Trust agreement; defendants readily agree that the Trust assumed OKC's liabilities under the construction contract, but argue that OKC remains an indispensable party to the action.

The Court rejects the contention that the Trust is the proper party against whom the breach of contract claim can be asserted. Whether this defect is considered as failure to name the proper party defendant, failure to join an indispensable party, or failure to state a claim upon which relief can be granted, (see footnote 1, supra) it can be raised by the Court sua sponte and affects its subject matter jurisdiction over this matter. Johnson v. Boyd-Richardson Co., 650 F.2d 147, (8th Cir. 1981); Kimball v. Florida Bar, 537 F.2d 1305 (5th Cir.1976); 5 C. Wright & A. Miller, Federal Practice & Procedure: Civil § 1357 (1969).

As a preliminary note, the Court holds that all questions involving OKC's actions in liquidation, and upon dissolution, as well as potential liabilities of transferees of its corporate assets, are governed by Delaware law. Corporations are creatures of state law; state law will govern the affairs of the corporation. Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). See also: Speakman v. Bernstein, 59 F.2d 520 (5th Cir.1932), cert. denied 287 U.S. 639, 53 S.Ct. 88, 77 L.Ed. 553 (1932). Because the Trust was created after OKC became dissolved under Delaware law, OKC's very power to assign rights and liabilities at that time is determined by Delaware law, the source of any afterlife it may have enjoyed. Under Delaware law, the corporate existence of a dissolved corporation can be extended only as statutorily specified in 8 Del.Code Ann. § 278 and § 279.²

The Delaware statutory scheme envisions two situations. Under § 278, the dissolved corporation has continuing legal existence and is capable of winding up its own affairs through its officers and directors, while prohibited from continuing the business for which it was organized, although it may "gradually settle and close" its business. Section 279 authorizes the Court of Chancery, on application of a creditor or stockholder, or some other person with "just cause" to designate a liquidating trustee or trustees (who may be directors) to conduct the liquidation of the corporation. This section is clearly designed to care for situations where the corporation, as such, through its directors, does not conduct the liquidation of the dissolved corporation; this section protects creditor or stockholder interests where the corporation fails to liquidate, or liquidation activities conducted by it would prejudice or otherwise adversely affect such creditor or shareholder interests. In these situations the Court of Chancery intervenes and appoints a receiver or trustee, who is permitted to do all acts which might be done by the corporation, if in being, that are necessary for the final settlement of its unfinished business. In re Citadel Industries, Inc., 423 A.2d 500 (Del.Ch.1980).

While the Delaware Code sets forth a procedure for voluntary dissolution of a corporation which would seemingly permit pre-dissolution creation of a trust such as that envisioned in the Liquidating Trust Plan approved by OKC stockholders,³ OKC's activities post-dissolution are restricted by statute. Simply put, OKC's ability to act in its corporate capacity after being dissolved on May 11, 1981, when no Trust had been created, is subject to § 278 and § 279.

Thus, the companion Sections 278 and 279 clearly set forth only two alternative means of achieving liquidation of a dissolved corporation: first, the corporation proceeds to achieve liquidation in the corporate name through its existing officers and directors, or second, the liquidation is conducted by a court appointed trustee, under the continuing supervision of the Delaware Chancery Court. OKC apparently attempted to create yet a third. It created a Section 337 trust, to achieve the attendant tax advantages, with the "337 trustee" also empowered to act as a liquidating trustee. This it could not do, for without the sanction of court authorization, the liquidating powers and duties of the corporation, through its officers and directors, could not and were not vested in Mr. Redwine. That this dual capacity was sought to be achieved through the means of a transfer of corporate assets with an accompanying assumption by the Trust of corporate debts by way of a tax-structured device cannot override the clear mandate of Delaware law. Officers and directors of a corporation — even one in dissolution — owe a fiduciary duty to the corporation and its shareholders. While the Court has found no specific case in point as to whether a similar duty is owed by such persons to a dissolved corporation's creditors, it would seem one should exist. However, it would further seem clear that the duty to shareholders would at least be arguably breached by an attempt to pass a corporate liability on to a trust created for the benefit of shareholders where a serious issue as to the ability of the trust itself to either perform a contract, or...