Suarez v. Sherman Gin Co.

Citation: 697 S.W.2d 17Docket: 05-84-00202-CV

Court: Court of Appeals of Texas; July 17, 1985; Texas; State Appellate Court

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Lucio Suarez filed a lawsuit against Sherman Gin Company and others for personal injuries sustained in an accident involving a cotton ginning machine. The machine was produced by Hardwicke-Etter Company, which had sold its assets, rebranded as Sherman Gin Company, and subsequently dissolved before the accident occurred on November 18, 1977. The appellees successfully argued for summary judgment, asserting that Sherman Gin Company was no longer a legal entity at the time of Suarez's injury. 

Suarez presented two primary legal questions: 1) whether he could recover damages for injuries sustained after the dissolution of Sherman Gin Company under the “trust fund theory” from its former directors, officers, and shareholders, and 2) whether he could invoke the “de facto merger doctrine” to hold liable the corporation that acquired Sherman Gin’s assets. The court ruled negatively on both questions, affirming the trial court's decision. 

The court clarified that the dissolution of a corporation typically ends its legal existence, abating all legal proceedings against it. The trust fund theory allows creditors to pursue assets distributed to shareholders post-dissolution, but the court referenced the Texas Supreme Court's ruling in *Hunter v. Fort Worth Capital Corp.*, which limited this theory's application. Additionally, the court found no evidence to support a de facto merger between Sherman Gin and Continental Conveyor, which had acquired a significant portion of Hardwicke-Etter's stock prior to its dissolution. Thus, Suarez was unable to recover damages from the appellees.

In Hunter, a case with analogous facts, the supreme court determined that the common-law trust fund theory has been fully replaced by TEX.BUS. CORP.ACT ANN. art. 7.12 (Vernon 1980), which stipulates that a corporation's dissolution does not impair remedies for claims existing prior to dissolution if action is initiated within three years. The court emphasized that this statute, which applies to a corporation's officers, directors, and shareholders, incorporates the trust fund doctrine solely for pre-dissolution claims. The court explicitly declined to extend this doctrine to post-dissolution injuries, citing legislative intent to limit the trust fund theory's applicability and protect those associated with a dissolved corporation from indefinite liability. Consequently, the court ruled that article 7.12 bars Suarez from recovering damages under the trust fund theory from Sherman Gin or its former directors, officers, or shareholders, including Continental Conveyor. 

Regarding the de facto merger doctrine, the court noted that neither the Texas supreme court nor the legislature has recognized it. While Suarez argued that a de facto merger existed between Sherman Gin and Continental Conveyor, the court referenced various factors from other jurisdictions that typically indicate such a merger, including the continuity of the seller's enterprise and management, shareholder continuity through stock transactions, the cessation of the seller's business operations, and the assumption of the seller's liabilities by the purchaser. However, these factors alone do not establish a de facto merger under Texas law.

The de facto merger doctrine was applied once by a Texas court in *Western Resources Life Insurance Co. v. Gerhardt*, which held acquiring corporations responsible for the liabilities of acquired corporations, even without an assumption agreement. However, the Texas legislature subsequently amended the Texas Business Corporation Act to explicitly state that such asset dispositions do not constitute mergers and do not make acquiring corporations liable for unassumed liabilities. Although section B of article 5.10 was not in effect when Continental Conveyor acquired Sherman Gin's stock, several factors indicate that no de facto merger occurred between the two entities. The Texas Supreme Court had previously declined to adopt the de facto merger doctrine, and the legislature's quick action to override the *Gerhardt* ruling established a public policy against the doctrine. Additionally, even if the doctrine could apply retroactively, the facts of the case do not satisfy the criteria from *Gerhardt*, particularly regarding the method of payment. Continental Conveyor paid cash for Sherman Gin's stock, contrasting with the *Gerhardt* case where stock was exchanged, which is typically indicative of a de facto merger. Therefore, it was concluded that no de facto merger transpired, preventing Suarez from recovering damages on that basis.

In a related claim, Texas Employers' Insurance Association (T.E.I.A.) sought to recover workers' compensation and medical benefits paid to Suarez, arguing that Sherman Gin waived or is estopped from asserting a defense of dissolution due to alleged false representations in its dissolution affidavit and its purchase of liability insurance.

T.E.I.A. argues that Sherman Gin had a responsibility to market a defect-free product and an implied duty to compensate for any injuries resulting from breaches of this obligation, referencing Pearson v. Hevi-Duty Electric. T.E.I.A. claims that because the cotton gin was defective upon release, Sherman Gin did not fulfill its obligations at the time of its dissolution as required by TEX.BUS.CORP.ACT ANN. art. 6.04. However, the court disagrees, stating that Suarez's cause of action arose post-dissolution when he was injured, indicating that Sherman Gin had no implied duty to compensate him at that time. The Business Corporation Act does not mandate foresight of future tort liabilities, and thus, the emergence of Suarez's claim after dissolution does not invalidate Sherman Gin's articles of dissolution. The court also rejects T.E.I.A.'s argument that purchasing insurance against potential debts or claims waives Sherman Gin's defense of dissolution. Additionally, T.E.I.A. asserts that the insurance company remains liable for Suarez's claim despite Sherman Gin's dissolution, but this is based on the incorrect premise that Sherman Gin was liable to Suarez prior to dissolution. Consequently, T.E.I.A.'s claims are overruled, and the trial court's judgment is affirmed, with costs of appeal allocated two-thirds to Suarez and one-third to T.E.I.A.