Wednesday, September 28, 2011

Ability to Bring Claim Not Terminated by Administrative Dissolution

Ability to Bring Claim Not Terminated by Administrative Dissolution

In Petro Energy, Inc. v. Witham, No 2009-CA-002316-MR (Ky. App. Sept. 2, 2011) (Not To Be Published), the Court addressed the ability of an administratively dissolved corporation to bring a counter-claim.
In 1993 the Withams purchased from the Wilsons real property that was subject to a number of encumbrances, including Wilson’s promissory not in favor of Citizens Bank of Albany.  That note was later assigned to Petro Energy.  The Wilsons were the sole shareholders of Petro Energy.
In 2005 the Withams brought an action to determine what liens on the property were valid, to which Petro Energy answered, asserting its note and mortgage were valid and enforceable.  The trial court dismissed Petro energy’s claim, a determination that was reversed by the Court of Appeals. 
Although it requires some reading between the lines, it appears that the trial court dismissed Petro Energy’s claims on the grounds that it was dissolved, the Court of Appeals noting the Withram’s argument the an administratively dissolved corporation may not bring a counterclaim, citing in support 19 Am.Jur.2d Corporations § 2896. Rejecting this argument, the Court quoted portions of KRS § 271B.14-050, the statute defining what is (and is not) the effect of a corporation’s dissolution.   Specifically:
·                    A dissolved corporation continues its corporate existence and may:
·                    collect its assets;
·                    do every other act necessary to wind up and liquidate it business and affairs; and

·                    Dissolution does not:
·                    transfer title to the corporation’s property;
·                    prevent the commencement of actions by and against the corporation in its name; or
·                    terminate the authority of the registered agent.

At one time the common law directed that a corporation’s dissolution was its legal death (civiliter mortuus).  Dissolution transferred title of the corporation’s property, terminated its ability to sue or be sued, and as well terminated its debts.  See, e.g., 16A William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 8113.  These principles have been long abandoned, a fact recognized by Kentucky’s then highest court when it observed that the purpose of statutes providing for the extension of corporate existence after dissolution “is to abrogate the common law rules relative to the reversion of corporate real estate, escheat of its personal property, and the extinguishment of the debts owed by and to it.”  Greene v. Stevenson, 175 S.W.2d 519, 523-24 (Ky. 1943).
As the Court of Appeals correctly determined from its application of the current statutory formulae, a corporation, after dissolution, continues to exist as a corporation with the capacity to sue and be sued and to collect its assets.
It is worth wondering what may be the additional back-story on the status of Petro Energy.  Under Kentucky law, there exists no requirement that a corporation’s winding up and liquidation be completed within a set period of time.  Kentucky has also abolished any outer limit on seeking reinstatement after administrative dissolution.  See also Montague and Muehlenkamp, Kentucky Corporate Law Developments, 21 N. Ky. L. Rev. 413, 414 (1994).  Assuming Petro Energy has not acted to notify its creditors (KRS § 14A.7-030(1)(e)) and otherwise wind up, it could reinstate, an action that relates back to the administration dissolution with the effect that the dissolution “had never occurred.”  KRS § 14A.7-030(3).

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