Harry Kradel. v. Piper Industries

IN THE SUPREME COURT OF TENNESSEE
AT NASHVILLE
October 3, 2001 Session
HARRY T. KRADEL, ET AL. v. PIPER INDUSTRIES, INC., ET AL.
Rule 23 Certified Questions of Law
United States Court of Appeals for the Third Circuit
Nos. 99-4069, 00-3146
No. M2001-00338-SC-R23-CQ - Filed November 27, 2001
Pursuant to Tennessee Supreme Court Rule 23, this Court accepted certification of five questions
of law from the United States Court of Appeals for the Third Circuit concerning Tennessee’s law
of corporations. For the reasons given herein, we answer that the corporate statutes in effect before
January 1, 1988, apply to determine the rights and remedies available against a corporation dissolved
before that date and that section 48-1-1013(a) (repealed) applies to limit Piper’s liability for post-
dissolution claims. We further answer that Piper Industries, Inc. did comply with the dissolution
statutes in effect before January 1, 1988, which require provisions to ensure the final distribution of
corporate assets, but which do not require a corporation to establish a reserve fund for contingent
claims arising more than two years after the dissolution. Finally, we answer that while the trust fund
doctrine has been previously applied in Tennessee to solvent corporations, its application in this case
is necessarily limited by Tennessee Code Annotated section 48-1-1013(a) (repealed).
Tenn. Sup. Ct. R. 23 Certified Questions of Law
WILLIAM M. BARKER, J., delivered the opinion of the court, in which FRANK F. DROWOTA , III, C.J.,
and E. RILEY ANDERSON, ADOLPHO A. BIRCH, JR., and JANICE M. HOLDER, JJ., joined.
Matthew L. Kurzweg, Pittsburgh, Pennsylvania, and Donald Capparella, Nashville, Tennessee, for
the petitioners, Harry T. Kradel and Marilene Kradel.
Arnd N. von Waldow and Wayne W. Ringeisen, Pittsburgh, Pennsylvania, and Brian Keith Jackson,
Nashville, Tennessee, for the respondent, Kent Reynolds, as escrow agent on behalf of the former
shareholders of Piper Industries, Inc.
OPINION
FACTUAL BACKGROUND
This case arises out of a products liability action brought by Mr. Harry T. Kradel
(“petitioner”)1 against several defendants, including Piper Industries, Inc. (“Piper”), a Tennessee
corporation that filed Articles of Dissolution in 1986. Following the petitioner’s appeal from a grant
of summary judgment in favor of the defendants, the United States Court of Appeals for the Third
Circuit certified five questions to this Court concerning the application of Tennessee’s law of
corporations. The relevant facts from which this case arose are summarized in the Certification
Order:
1. Harry T. Kradel (“Kradel”), appellant in this action and the party we
designate the movant in the certification pursuant to [Tennessee Supreme Court
Rule] 23.3(E), sustained serious injuries to his right leg in September 1994 while
operating a 1970 model Fox forage harvester with [a] multi-row corn head
attachment on his farm in western Pennsylvania.
2. The Fox line of farm equipment was manufactured in 1970 by the
Koehring Company (“Koehring”), a Wisconsin corporation. Koehring sold the Fox
line of farm equipment to Piper in February 1981. In that transaction, Piper acquired,
as an on-going business, all real estate, fixed assets, inventory, sales orders, contracts,
trademarks, patents, and other intangible intellectual property of Koehring’s farm
division. Piper also assumed, pursuant to the agreement, the products liability claims
of Koehring for claims arising out of occurrences after the closing date for certain
farm division products already sold by Koehring, including the specific product at
issue.
3. In 1986, Piper sold certain assets of the Fox line of farm equipment
to Hiniker Company (“Hiniker”), a Minnesota corporation, in an agreement that
expressly provided for no adoption of liabilities by Hiniker.
4. After its sale to Hiniker, Piper filed a Statement of Intent to Dissolve
with the Tennessee Secretary of State (“the Secretary of State”) on September 12,
1986. It then filed Articles of Dissolution with the Secretary of State on December
31, 1986. A Certificate of Dissolution was issued by the Secretary of State that same
day. In their written consent, Piper’s shareholders resolved that Piper’s officers
would establish a reserve to meet known liabilities, liquidating expenses, estimated,
unascertained or contingent liabilities and contingent expenses, if they deemed such
a reserve desirable. Piper did not establish a reserve for future, contingent or
prospective liabilities because the shareholders did not deem such a reserve desirable.
1
The United S tates Court of App eals has also d esignated the petitioner’s wife as a movant in this action.
Because Ms. Kradel’s claims are deriva tive of her husband’s claims, we will refer o nly to Mr. Kradel as the petitioner
for sake of convenience.
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Piper, however, made provisions to satisfy its known or existing claims, debts or
liabilities and judgments in any pending suit.
5. Piper’s shareholders entered into an agreement on October 31, 1986,
by which the company’s assets were to be distributed. Assets (including accounts
receivable, real property, and promissory notes issued by Hiniker for future payments
on its asset purchase) were transferred to an escrow agent to be held and distributed
for the benefit of Piper’s shareholders. [Kent] Reynolds is currently that escrow
agent and he was permitted to intervene in the District Court to assert the defenses
of Piper’s former shareholders. Hiniker made periodic payments to the escrow agent
in fulfillment of its obligations under the Piper-Hiniker agreement, which the escrow
agent then distributed to Piper’s former shareholders. In both 1990 and 1992,
disagreements regarding Hiniker’s obligations under the agreement resulted in
settlement agreements between Hiniker and Paul P. Piper, acting as trustee for the
former shareholders of Piper. Pursuant to these settlements, Hiniker continues to
hold $1 million dollars of the asset purchase price that will be distributed to Piper’s
shareholders upon the conclusion of this litigation. Piper has not held property as a
corporate entity or conducted business after December 31, 1986.
6. Kradel filed a products liability action against Piper and other
defendants in the Court of Common Pleas for Butler County, Pennsylvania in 1996.
Shortly thereafter the case was removed to the United States District Court for the
Western District of Pennsylvania. In an Order dated November 15, 1999, the District
Court granted Piper’s motion for summary judgment. Its opinion . . . held that Piper
had lawfully dissolved under the laws of Tennessee in effect in 1986 and as such,
under common law principles, could not be sued for tort claims accruing after its
dissolution. The Court further held that Piper had no responsibility under the law of
Tennessee to provide for unforeseen liabilities, such as Kradel’s, and by transferring
the right to receive payments to its shareholders, Piper complied with the terms of
Tennessee’s corporate dissolution statute in effect in 1986. In a footnote, the District
Court rejected the argument that Tennessee’s “trust fund” doctrine could apply to
permit Kradel’s recovery of the undistributed assets of Piper’s shareholders.
The petitioner then appealed the grant of summary judgment to the United States Court of
Appeals for the Third Circuit, and on February 6, 2001, that honorable court certified five questions
of law to this Court:
1. What law governs the making of claims arising in 1994 against a corporation
which filed Articles of Dissolution in 1986: the law of 1986 or those revisions to the
law effective January 1, 1988, Tennessee Code Annotated sections 48-24-101, et
seq.? More specifically, do the saving provisions of section 48-27-103(a)(2), which
state that the repeal of the pre-1988 law does not affect liabilities incurred under the
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statute before its repeal, support the contention that a liability incurred after the law’s
effective date is governed by the 1988 revision?
2. If the pre-1988 law applied, do the provisions of Tennessee Code Annotated
section 48-1-1013(a) (repealed) apply to liabilities incurred after Piper filed Articles
of Dissolution, and, if not, does the common law of Tennessee bar such actions?
3. Did Piper comply with Tennessee Code Annotated section 48-1-1007
(repealed)? If not, does the manner in which Piper failed to comply invalidate an
otherwise lawful dissolution and permit a cause of action accruing eight years after
the dissolution was filed?
4. Do the pre-1988 Tennessee dissolution statutes require provision for
unforeseen future liabilities or that the process of asset distribution be final?
5. Could Kradel’s claims proceed under the “trust fund” doctrine, in the absence
of corporate insolvency, if other remedies are unavailable to Kradel for the claims
against Piper?
We accepted the certification of these questions, and for the reasons given below, we answer
that the corporate statutes in effect before January 1, 1988, apply to determine the rights and
remedies available against a corporation dissolved before that date and that section 48-1-1013(a)
(repealed) applies to limit Piper’s liability for post-dissolution claims. We further answer that Piper
did comply with the dissolution statutes in effect before January 1, 1988, which require provisions
to ensure the final distribution of corporate assets, but which do not require a corporation to establish
a reserve fund for contingent claims arising more than two years after the dissolution. Finally, we
answer that while the trust fund doctrine has been previously applied in Tennessee to solvent
corporations, its application in this case is necessarily limited by Tennessee Code Annotated section
48-1-1013(a) (repealed).
QUESTION I: THE LAW GOVERNING THE PETITIONER’S CLAIMS
The first question certified by the United States Court of Appeals concerns the law applicable
to determine the propriety of Piper’s dissolution and the scope of the petitioner’s remedies available
against a dissolved corporation. The petitioner maintains that the Tennessee corporate statutes in
effect at the time of his 1994 injury govern his claim and remedy against Piper, but the respondent
asserts that the law in effect at the time of Piper’s 1986 dissolution constitutes the controlling
authority in this case.
Effective after January 1, 1988, the General Assembly repealed the then-existing Tennessee
General Corporation Act (“old act” or “General Corporation Act”) and replaced it with the
Tennessee Business Corporation Act (“new act”), which was patterned in large part after the Revised
Model Business Corporation Act of 1984. See 1986 Tenn. Pub. Acts ch. 887 (codified as Tenn.
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Code Ann. §§ 48-11-101 to 48-27-103). Recognizing that problems could arise in the transition
between the old act and the new, the General Assembly enacted chapter 27 of Title 48, which was
solely devoted to transition issues. In particular, Tennessee Code Annotated section 48-27-101(e)
(1995) addresses the effect of the new act upon previously dissolved corporations, and it provides
that the old act “shall apply to any dissolution as to which a statement of intent to dissolve has been
filed or a court proceeding filed before January 1, 1988.”
“When the language contained within the four corners of a statute is plain, clear, and
unambiguous, the duty of the courts is simple and obvious, to say sic lex scripta, and obey it.” ATS
Southeast, Inc. v. Carrier Corp., 18 S.W.3d 626, 630 (Tenn. 2000) (citation and internal quotation
marks omitted). Section 48-27-101(e) is clear and plain on its face, and its language can compel only
one conclusion: that the old act governs the dissolution of all corporations that filed a statement of
intent to dissolve before January 1, 1988. Therefore, because Piper filed its Statement of Intent to
Dissolve on September 12, 1986, we conclude that the old act governs the propriety of Piper’s
dissolution and the scope of the petitioner’s remedies against it in this case.
In response, the petitioner cites the “savings provision” of the new act, which provides that
the repeal of the old act does not affect “[a]ny ratification, right, remedy, privilege, obligation, or
liability acquired, accrued, or incurred under the statute before its repeal.” See Tenn. Code Ann. §
40-27-103(a)(2). The petitioner then argues that because the savings provision only addresses claims
existing on or before January 1, 1988, the new act must be applied to claims arising after that date.
We disagree.
A plain reading of this statute indicates that it seeks only to preserve the then-existing status
quo respecting any rights or remedies already existing under the old act, and this statute simply does
not permit the conclusion that the new act must apply to rights and remedies against corporations
that were dissolved under the old act. Moreover, courts do not interpret statutes in isolation, but “are
required to construe them as a whole, read them in conjunction with their surrounding parts, and
view them consistently with the legislative purpose.” State v. Turner, 913 S.W.2d 158, 160 (Tenn.
1995). To the extent that the petitioner’s construction would interfere with Piper’s expectations
upon its dissolution, it would be contrary to section 40-37-103(a)(4), which provides that the repeal
of the old act does not affect “[any] dissolution authorized by the board of directors, under the statute
before its repeal, and the . . . dissolution may be completed in accordance with the statute as if it had
not been repealed.” The petitioner’s argument that this case is properly decided under the new act
is without merit.
Accordingly, in answer to the first question certified, the General Corporation Act, which was
in effect before January 1, 1988, governs the propriety of Piper’s dissolution and the scope of the
petitioner’s remedies available against Piper.
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QUESTION II: THE EFFECT OF TENNESSEE CODE ANNOTATED
SECTION 48-1-1013(A) (REPEALED) AND TENNESSEE COMMON LAW
Having decided that the provisions of the General Corporation Act govern the petitioner’s
claims in this case, the next question certified by the United States Court of Appeals is whether
Tennessee Code Annotated section 48-1-1013(a) (repealed) limits claims asserted against Piper after
it filed its Articles of Dissolution, and, if not, whether Tennessee common law otherwise bars such
actions. In relevant part, Tennessee Code Annotated section 48-1-1013(a) (repealed) provides as
follows:
The dissolution of a corporation . . . shall not take away or impair any remedy
available to or against such corporation, its directors, officers, shareholders or
members, for any right or claim existing, or any liability incurred, prior to such
dissolution if action or other proceeding thereon is commenced within two (2) years
after the date of such dissolution.
(emphasis added). The petitioner argues that because section 48-1-1013(a) (repealed) does not
address post-dissolution claims, this statute cannot bar his 1994 claim against Piper. On the other
hand, the respondent maintains that the statute only permits claims that arose before the dissolution
and that later arising actions are barred by Tennessee common law.
Because statutes cannot often be properly understood in the abstract, the historical
background that gave rise to the statute is often helpful in understanding its intended purpose. Cf.
Penley v. Honda Motor Co., Ltd., 31 S.W.3d 181, 186 (Tenn. 2000). The common law of
corporations in Tennessee has long held that the dissolution of a corporation ends the legal existence
of that corporation. Often referred to as “the civil death of a corporation,” the dissolution of a
corporation extinguished all “debts due to and from the corporation,” and “neither the stockholders
nor the directors or trustees of the corporation can recover the debts, or be charged with them in their
natural capacity . . . .” See White v. Campbell, 24 Tenn. (5 Hum.) 38, 39 (1844) (citation and
internal quotation marks omitted). As a corollary to this principle, “a corporation’s capacity to sue
or be sued terminated upon the corporation’s dissolution.” Swindle v. Big River Broad. Corp., 905
S.W.2d 565, 567 (Tenn. Ct. App. 1995).
The unyielding nature of the common law rule would often lead to inequitable results because
a corporation could “legitimately dissolve for the sole purpose of eliminating its existing, contingent,
and future foreseeable creditor obligations.” See Ann E. Conaway Stilson, Reexamining the
Fiduciary Paradigm at Corporate Insolvency and Dissolution: Defining Directors’ Duties to
Creditors, 20 Del. J. Corp. L. 1, 67 (1995). In part to alleviate the harshness of this common law
rule, the General Assembly enacted a provision from the Model Business Corporation Act of 1950
(“MBCA”), which provides that a corporation does not cease to exist immediately upon its
dissolution. See Swindle, 905 S.W.2d at 567 (acknowledging that section 48-1-1003 (repealed) was
derived from the MBCA). Instead, after its formal dissolution, the corporation continues to exist
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briefly for the purposes of prosecuting and defending actions in its corporate name. See Tenn. Code
Ann. § 48-1-1013(a) (repealed); see also MBCA § 105.
However, as the plain language of section 48-1-1013(a) (repealed) demonstrates, the General
Assembly did not intend for a dissolved corporation to otherwise “live” forever for purposes of
defending claims against it. Rather, the General Corporation Act expressly limits the types of post-
dissolution claims that creditors may assert against a corporation to those claims that (1) arose before
the corporation was dissolved, and (2) are brought within two years of the dissolution. Unless a
claim satisfies both of these criteria, then it cannot be asserted against a corporation properly
dissolved under the since-repealed statute. See id.
Within this context, the petitioner urges this Court to hold that because the statute only
addresses pre-dissolution claims, it cannot be read to bar claims against a corporation arising after
its dissolution. We disagree and observe that the petitioner’s argument ignores that the common law
is not displaced by a statute, except to the extent necessarily required by the statute itself. See Lavin
v. Jordon, 16 S.W.3d 362, 368 (Tenn. 2000) (“While the General Assembly has plenary power
within constitutional limits to change the common law by statute, the ‘[r]ules of the common law
are not repealed by implication, and if a statute does not include and cover such a case, it leaves the
law as it was before its enactment.’” (citations omitted)). Indeed, in the absence of a clearly contrary
intent, courts should presume that the legislature did not intend to change the common law. See
Jordan v. Baptist Three Rivers Hosp., 984 S.W.2d 593, 599 (Tenn. 1999). As such, we disagree with
the petitioner that the General Assembly’s failure to mention later arising claims in section 48-1-
1013(a) (repealed) reveals an intention to permit these claims contrary to the common law rule.
In addition, cases from other jurisdictions interpreting similar statutory provisions confirm
that the savings statute limits Piper’s liability in this case.2 Although other jurisdictions are split as
to whether provisions similar to MBCA section 105 prohibit post-dissolution claims, a clear majority
has held that suits against a dissolved corporation are permissible only when the claim is one that
arose before the dissolution.3 However, even when post-dissolution claims have been permitted
2
When examining provisions derived from uniform or model acts, we may appropriately use interpretations
of similar provisions in other jurisdictions as a guide to interp reting our law. See Holiday Inns, Inc. v. Olsen, 692
S.W .2d 8 50, 8 53 (Tenn. 19 85); see also In re E state of O patz, 554 N.W .2d 8 13, 8 16 (N.D . 199 6).
3
See, e.g., Great Am. Ins. Co. v. Byrd & Watkins Constr. Co., 630 F.2d 460, 461 (6th Cir. 1980) (interpreting
Tennessee Code Annotated section 48-1014 and concluding that “[t]he statute covers only those claims which have
accrued prior to disso lution. It do es not specifica lly relate to claims wh ich arise after disso lution.”); Bishop v. Schield
Bantam Co., 293 F. Supp. 94, 95 (D. Iowa 1968 ) (“It is, therefore, quite clear that under the Model Business Corporation
Act, and those state statutes patterned after it, a corporation may be sued for predissolution torts only.” (citation
omitted)); Blankenship v. Demmler M fg. Co., 411 N.E.2d 1153,1156 (Ill. App . Ct. 19 80) (stating that an identical statute
provides “no basis for allowing a cause of action which accrues after dissolution to be brought against a dissolved
corporation”); Hunter v. Fort Worth Capital Corp., 620 S.W .2d 5 47, 5 52 (Tex. 1981) (“A provisio n was inc luded to
provide credito rs with a statutory rem edy for pre-d issolution claims. A similar provision could have b een included to
encompass post-dissolution claims as well. W e believe the exclusion of such a provision to be significant.”); see also
(continued...)
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under provisions similar to MBCA section 105, courts have still required that the claims be brought
during the statutory survival period. See Oliver v. American Motors Corp., 616 F. Supp. 714, 716
(E.D. Va. 1985); Naugher v. Fox River Tractor Co., 446 F. Supp. 1281, 1283 (N.D. Miss. 1977).4
Apparently, the petitioner would have us hold that dissolved corporations “live” forever for purposes
of defending later arising claims and, in the process, ignore the fact that he brought his claim a full
eight years after the survival period expired. Such an interpretation is not only contrary to the plain
language of section 48-1-1013(a) (repealed), it also enjoys no support from any case interpreting
provisions similar to MBCA section 105. Consequently, we must conclude that section 48-1-1013(a)
(repealed) limits the liabilities to which Piper may be subjected following its dissolution.
Accordingly, in answer to the second question certified, Tennessee Code Annotated section
48-1-1013(a) (repealed) does apply to limit the liabilities incurred by Piper after it filed its Articles
of Dissolution.
QUESTION III: COMPLIANCE WITH THE DISSOLUTION REQUIREMENTS OF
TENNESSEE CODE ANNOTATED SECTION 48-1-1007 (REPEALED)
The third question certified by the United States Court of Appeals is whether Piper complied
with the dissolution requirements of Tennessee Code Annotated section 48-1-1007 (repealed), and
if not, whether any of these deficiencies invalidated Piper’s dissolution. Before a corporation was
permitted to dissolve voluntarily under the General Corporation Act, it had to certify that it met the
various requirements listed in section 48-1-1007(a) (repealed). The failure to follow these
requirements “voids the dissolution as to a creditor whose rights have been prejudiced, thereby
permitting the creditor to sue the corporation after more than two years following the date of
dissolution.” Swindle, 905 S.W.2d at 568 (permitting suit after the survival period based upon the
corporation’s failure to give notice of dissolution). Therefore, if the petitioner can show that Piper
failed to follow the corporate dissolution requirements, and that these failures resulted in prejudice
to his rights, then Piper’s dissolution will be invalidated as to his individual claims.
3
(...continued)
16A W illiam M . Fletcher, Cyclo ped ia of the L aw of Private Corporations § 8144.10 (perm. rev. ed. 1995) (stating that
“most courts deciding the [survival] issue have determined that this type of statute [derived from the MBC A] does not
allow suits that arise after disso lution”); Gre en v. O ilwell, Div. of U.S. Steel Corp., 767 P.2d 1348, 1350-51 n.1 (Okla.
1989) (“We note many jurisdictions have patterned their statutes after the 1969 M odel B us. Corp. Act § 105[,] which
allowed corporations, [their] officers, directors or shareholders to be sued for pre-dissolution claims only. The 1984
Revised Mo del Bu s. Corp. A ct § 14.0 7 now p rovides for the co mmencement of post-dissolution claims within the first
five years after published notice of dissolution.” (citations omitted)).
4
The p etitioner also cites Continental Insurance Co. v. City of Knoxville, 488 S.W.2d 50 (Tenn. 1972), for
the proposition that a corporation cannot avoid its obligations simply b y dissolving. W e note, howe ver, that Continental
Insurance Co. provides no relief for the petitioner, because that case involve d a suit that was properly commenced under
the savings statute, i.e., one that arose before the dissolution and one that was filed within the two-year survival period.
Only under these circumstances will a dissolution not affect the rights and remedies available to the plaintiff. Contrary
to the petitioner’s argume nts, therefo re, Continental Insurance Co. does not permit a suit against a dissolved corporation
to be filed outside the two-year survival period as set forth in section 48-1-1013(a) (repealed).
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To this end, the petitioner alleges that Piper failed to satisfy two dissolution requirements,
thereby rendering the attempted dissolution void: (1) a failure to ensure that “all debts, obligations
and liabilities of the corporation [were] paid and discharged or that adequate provision has been
made therefor,” Tenn. Code Ann. § 48-1-1007(a)(3) (repealed); and (2) a failure to ensure that “all
the remaining property and assets of the corporation [were] distributed among its shareholders in
accordance with their respective rights and interests,” Tenn. Code Ann. § 48-1-1007(a)(4) (repealed);
see also MBCA § 92. The respondent, on the other hand, alleges that both contested conditions were
fully satisfied under the General Corporation Act.
Provisions for Unknown, Prospective, or Contingent Claims
The petitioner first alleges that Piper was required to “adequately provide” for prospective
claims, and initially, it appears as though this argument has some merit. Section 48-1-1007(a)(3)
(repealed) requires that “all” debts, obligations, and liabilities be paid, discharged, or have adequate
provision made therefor. In one recent case, we have held that the term “all liabilities,” when used
in its plain and ordinary meaning, means exactly what it says: “all liabilities.” Culbreath v. First
Tenn. Bank, 44 S.W.3d 518, 524 (Tenn. 2001) (emphasis in original). Under this interpretation, the
phrase “all debts, obligations and liabilities” does encompass prospective debts, obligations, and
liabilities, and if so interpreted, then section 48-1-1007(a)(3) (repealed) would require a dissolving
corporation to make adequate provision for prospective liabilities.
However, as we stated earlier, statutory provisions cannot be interpreted in isolation and apart
from the remaining provisions of the statute. Notably, section 48-1-1007(a)(7) (repealed) requires
only that adequate provision be made for lawsuits “pending” at the time of the dissolution, and no
requirement can be found regarding lawsuits that may or may not arise in the future. Moreover, in
addressing the procedures to be followed after a Statement of Intent to Dissolve is filed, Tennessee
Code Annotated section 48-1-1004(1) (repealed) only requires that notice of the dissolution be
mailed to each “known creditor of the corporation.” (emphasis added). One court has held that
because this language does not require any type of notice for “prospective” or “foreseeable”
creditors, a corporation is not obliged to make provision for these creditors before effecting a proper
dissolution under the statute. See Blankenship v. Demmler Mfg. Co., 411 N.E.2d 1153, 1155 (Ill.
App. Ct. 1980). Indeed, it appears that requiring a reserve fund for all future lawsuits is unnecessary,
because, as we held earlier, the common law barred any suit against a corporation filed more than
two years after its dissolution. See Tenn. Code Ann. § 48-1-1013(a) (repealed).
Other states have also held that similar provisions are not intended to require that adequate
provision be made for future, contingent, or unknown claims. Rather, the phrase “all debts,
obligations, and liabilities” as used in the MBCA applies only to claims existing prior to the
dissolution. See Burnett v. Chase Oil & Gas, Inc., 700 S.W.2d 737, 745 (Tex. Ct. App. 1985).5
5
The Burnett Court did acknowledge that corporations had to make adequate provisions for “contingent
claims,” but it interpreted the term “contingent claim” in a narrow sense as being a claim that accrued prior to the
(continued...)
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Indeed, while the MBCA requires that the dissolving corporation certify that it has discharged all
debts and obligations or has made adequate provision therefor, the MBCA
does not require that provision be made for prospective liabilities that might
foreseeably arise, such as product liability claims. Furthermore, the provision
requiring a certificate that there are no suits pending against the corporation in any
court, or that adequate provision has been made for the satisfaction of any judgment,
order or decree which may be entered against it in any pending suit does not require
that provision be made for any suit that might be filed in the future.
See 19 Am. Jur. 2d Corporations § 2879 (1986) (emphasis added). Finally, as at least one academic
commentator has noted, the failure of the MBCA to require provisions for contingent or prospective
claims arising after a dissolution was a primary motivation leading to the Revised Model Business
Act of 1984, which expressly makes a distinction between known and unknown creditors. See James
P. Connolly, The Post-Dissolution Products Liability Claim Problem: A Statutory Versus a Judicial
Solution, 38 Syracuse L. Rev. 1279, 1291 (1987); see also RMBCA § 14.07; Tenn. Code Ann. § 48-
24-107 (1997). Therefore, presuming that the drafters of the MBCA did not intend to require that
adequate provisions be made for prospective liabilities—and we see no evidence to the contrary—we
are reluctant to hold that the General Assembly somehow intended a different meaning through its
use of the model act’s language. See Armstrong v. Pilot Life Ins. Co., 656 S.W.2d 18, 28 (Tenn. Ct.
App. 1983).6 Accordingly, we conclude that Piper’s dissolution complied with Tennessee Code
Annotated section 48-1-1007(a)(3) (repealed).
Final Distribution of Corporate Property
The petitioner next asserts that Piper failed to make proper provisions for the final
distribution of its property. However, while Tennessee Code Annotated section 48-1-1007(a)(4)
does require a corporation to ensure that “all the remaining property and assets of the corporation
are distributed among its shareholders in accordance with their respective rights and interests,” the
5
(...continued)
dissolution, but which still awaits litigation. See 700 S.W.2d at 745.
6
See also, e.g., Universal Motors, Inc. v. Neary, 984 P.2d 5 15, 517 (Alaska 19 99) (“In construing statutes
taken from mo del acts we generally regard the commentary to the model act as a reliable guide to the statute’s
meaning.”); In re E state of Dobert, 963 P.2d 327, 331 (Ariz. Ct. App. 1998) (“When a statute is based on a uniform act,
we assume that the legislature ‘intended to adop t the construction place d on the act by its drafters.’ Thus, commentary
to such a uniform act is ‘highly persuasive unless erroneous or contrary to settled policy in this state.’” (citations
omitted)); In re N ocita, 914 S.W .2d 3 58, 3 59 (Mo. 19 96) (“W hen ‘co nstruing uniform and m ode l acts enacted by the
General Assem bly, we m ust assum e it did so with the intention o f adopting the acco mpa nying interpretations placed
thereon by the drafters of the mode l or uniform act.’” (citations omitted)); Clymer v. Summit Bancorp, 758 A.2d 652,
653 (N.J. Super. Ct. App. Div. 2000) (“In the absence of a contrary design, clearly articulated, the Legislature is taken
to have a dop ted the expressed intention of the uniform act drafters.”); In re Margaret Susan P., 733 A.2d 38, 4 7 (V t.
1999) (“We are reluctant to conclude, however, that when the Legislature uses mode l language it does so for a purpo se
different from the purpose in the model act.”).
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petitioner’s claim that Piper did not satisfy this requirement is directly contradicted by the factual
findings submitted by the United States Court of Appeals. These findings clearly state that “Piper
has not held property as a corporate entity or conducted business after December 31, 1986.”
Nevertheless, because the United States Court of Appeals has specifically inquired as to the propriety
of Piper’s dissolution under Tennessee law, we undertake a more thorough analysis on this point.
Although not directly stated, the petitioner seems to argue that because the former
shareholders of Piper have not received all of the corporate property—Piper was owed money after
its dissolution, which, when received, was placed in escrow for the benefit of the shareholders—the
dissolution has yet to be completed. We disagree. The statute does not require that Piper’s
shareholders actually receive all of the corporate property in hand before the Articles of Dissolution
were filed; it only requires that the property be distributed “in accordance with their respective rights
and interests.” Because the accounts receivable from Hiniker were not due and payable at the time
of Piper’s dissolution, the shareholders possessed no right to the actual monies owed by Hiniker
immediately upon Piper’s dissolution; they only possessed the right to receive these monies at a
future date.
In essence, the petitioner seeks to expand Piper’s obligation under the statute, which was only
to ensure that this right to receive the monies was distributed to the shareholders “in accordance with
their respective rights and interests.” So long as Piper held no property in its own name and
otherwise transferred its interest in the accounts receivable to its shareholders, we cannot say that
Piper violated either the letter or the spirit of section 48-1-1007(a)(4) (repealed) by requiring
payment of those monies into escrow for the benefit of its shareholders. Therefore, we conclude that
Piper’s dissolution complied with Tennessee Code Annotated section 48-1-1007(a)(4) (repealed).
Accordingly, in answer to the third question certified, Piper fully complied with the
dissolution provisions of the Tennessee General Corporation Act, effective prior to January 1, 1988.
QUESTION IV: NECESSITY OF DISSOLUTION PROVISION ADDRESSING
UNFORESEEN FUTURE LIABILITIES AND FINAL ASSET DISTRIBUTION
The fourth question certified by the United States Court of Appeals is whether Tennessee’s
corporate statutes in effect prior to January 1, 1988, require the following provisions for the proper
dissolution of a corporation: (1) a provision providing for unforeseen future liabilities, or (2) a
provision ensuring the final distribution of its assets. Because we have already discussed the answers
to this question in addressing the third question certified, we answer respectfully, and without further
comment, that the General Corporation Act does not require that adequate provisions be made for
unforeseen future liabilities to effect a proper dissolution under the statute. In addition, we answer
that the General Corporation Act does require a final distribution of corporate assets to shareholders
“in accordance with their respective rights and interests,” a requirement that appears to have been
satisfied under the facts as certified.
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QUESTION V: APPLICATION OF THE “TRUST FUND” DOCTRINE
The final question certified by the United States Court of Appeals is whether Tennessee law
permits the petitioner to use the “trust fund” doctrine against a dissolved, but then-solvent,
corporation in the absence of other available remedies. The trust fund doctrine was developed by
the courts primarily as an equitable rule to alleviate the harsh effects of the common law principle
that all suits by creditors against a corporation are extinguished upon the corporation’s dissolution.
See Shields v. Clifton Hill Land Co., 94 Tenn. 123, 157, 28 S.W. 668, 676 (1894). Under this
doctrine, as it has been applied in Tennessee, the creditors of an insolvent or dissolved corporation
“are entitled in equity to payment of their debts before any distribution of corporate property is made
among stockholders,” and these creditors also possess “a right to follow its assets or property into
the hands of [anyone] who is not a holder in good faith in the ordinary course of business.” See
Jennings, Neff & Co. v. Crystal Ice Co., 128 Tenn. 231, 236, 159 S.W. 1088, 1089 (1913).
The respondent alleges that the trust fund doctrine is unavailable to assist the petitioner in
this case because he cannot establish that Piper was insolvent at the time of its dissolution, a
necessary element to invoke the trust fund doctrine. The respondent’s claim has some merit because
virtually every case applying the trust fund doctrine in this State has involved an insolvent
corporation.7 Indeed, one case from this Court has specifically held that insolvency is a necessary
requirement for the invocation of the trust fund doctrine against a corporation. See Rawlings v. New
Memphis Gaslight Co., 105 Tenn. 268, 292, 60 S.W. 206, 212 (1900).
However, as originally developed by this Court in Marr v. Bank of West Tennessee, 44 Tenn.
(4 Cold.) 471 (1867), the trust fund doctrine seems to have been designed to provide relief to
creditors against corporations that were either insolvent or dissolved, but not necessarily both.
Indeed, while Marr factually involved an insolvent corporation, its description of the trust fund
doctrine was not quite as limited:
The doctrine, that the assets of an insolvent or dissolved banking, or other
monied corporation, constitutes a pledge or trust fund for the payment of the
corporation debts, is now so firmly settled, upon the plainest principles of reason and
justice, as well as authority, that it cannot be shaken, or brought into doubt. The
assets of such an institution are always liable for its debts; and if they are held by the
corporation itself, and so invested as to be subject to legal process, they may be
levied on by such process. But, if they have been distributed among stockholders,
or gone into the hands of others than bona fide creditors, or purchasers, leaving debts
of the corporation unpaid, such holders take the property charged with the trust, in
7
See, e.g., Nickey Bros. v. Lonsdale Mfg. Co., 149 Tenn. 391 , 258 S.W . 776 (1924); Hicks v. Whiting, 149
Tenn. 41 1, 25 8 S.W . 784 (1924); Mechanics’ Bank & Trust Co. v. Knoxville, S. & E. Ry. Co., 148 Tenn. 11 3, 25 1 S.W .
906 (1923); Voightman & Co. v. Southern Ry. Co., 123 Tenn. 452, 131 S.W . 982 (1910); McClaren v. U nion R oller-M ill
& Elevator Co., 95 Tenn. 696, 35 S.W . 88 (1 895 ); Shields v. Clifton Hill Land Co., 94 Tenn. 123, 28 S.W . 668 (1894 );
Ottarson v. Dobson & Johnson, Inc., 58 T enn. A pp. 4 08, 4 30 S .W .2d 8 73 (196 8).
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favor of the corporation creditors; and a Court of Equity will follow the property, and
enforce and compel its application to the corporation debts.
Marr, 44 Tenn. (4 Cold.) at 497. In fact, this Court has applied the trust fund doctrine for the benefit
of creditors against a solvent corporation in at least one case. See Crystal Ice Co.,128 Tenn. at 233,
159 S.W. at 1089 (applying doctrine though the corporation possessed a net asset value of $200,000).
Admittedly, while the doctrine as applied in Crystal Ice Co. is contrary to its usual applications, that
case does demonstrate that the doctrine is not as limited as the respondent argues. Therefore, based
on the authority of Crystal Ice Co., we conclude that the application of the trust fund doctrine in
Tennessee is not limited to insolvent corporations.
However, while the trust fund doctrine could be applied in this state to solvent, but dissolved,
corporations, we must still recognize that the General Corporation Act has significantly restricted
the application of that doctrine in this case. The trust fund doctrine has not always been a creature
of the common law in Tennessee, and significantly, the General Assembly codified this doctrine as
part of the General Incorporation Act of 1875 to permit creditors to reach corporate assets through
the subscribers of unpaid stock. See 1875 Tenn. Pub. Acts ch. 142, § 5 (codified originally at Tenn.
Code § 1708 (Milliken & Vertrees 1884)).8
With the General Corporation Act of 1968, however, the General Assembly repealed many
of the older 1875 corporate statutes, including the trust fund statute. See 1968 Tenn. Pub. Acts ch.
523 § 17.02. In its place, the General Assembly enacted section 48-1-1007(a)(3) (repealed), which
again codified the essential principle, if not the particulars, of the trust fund doctrine, i.e., that “‘the
[corporate] property must first be appropriated to the payment of the debts of the company, before
any portion of it can be distributed to the stockholders.’” Hicks v. Whiting, 149 Tenn. 411, 453, 258
S.W. 784, 797 (1924) (quoting Fogg v. Blair, 133 U.S. 534, 541 (1890)). The enactment, repeal, and
modified re-enactment of the essential principles of the trust fund doctrine demonstrate that the
General Assembly is mindful of the doctrine and the role that it plays within the corporate statutory
scheme.
Even with these principles in mind, however, the General Assembly nevertheless restricted
the types of claims that creditors could assert against dissolved corporations to those that arose prior
to the dissolution and were filed within two years of the dissolution. See Tenn. Code Ann. § 48-1-
1013(a) (repealed). No other provision of the General Corporation Act permits creditors to reach
corporate assets after the survival period, and although the legislature could have eliminated the two-
year survival period altogether, cf. Cal. Corp. Code § 2010(a) (West 1990), it obviously chose not
to do so. Therefore, it seems that the General Assembly has placed some degree of emphasis upon
8
This statute provided that “[t]he amount of any unpaid stock due from a subscriber to a corporation shall be
a fund for the payment of any debts due from the corpo ration; nor shall the transfer of stock by any subscriber release
him from payment, unless his transferee has paid up all or any of the balance due o n said o riginal sub scription.” See also
Shields, 94 T enn. at 157 -58, 28 S.W . at 676 (recognizing that this statute codified the trust fund doctrine from the
common law, and stating that the “clear and plain meaning of the statute is that all unpaid stock, whenever subscribed,
shall be a fund for the payment of all corporate debts, whenever created”).
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finality in the dissolution context, and as such, we must conclude that the legislature did not intend
for the trust fund doctrine to have effect outside the confines of the General Corporation Act.
Further evidence that section 48-1-1013(a) (repealed) operates to limit the application of the
trust fund doctrine within the survival period may be seen in the decisions of other courts interpreting
similar statutory provisions. In Hunter v. Fort Worth Capital Corp., 620 S.W.2d 547, 552 (Tex.
1981), for example, the Texas Supreme Court held that a substantially identical statute did not permit
the trust fund doctrine to expand the limited survival period of the corporation following its
dissolution. As that court candidly observed,
no real purpose would be served by the enactment of Article 7.12, permitting suits
against officers, directors, and shareholders of a dissolved corporation, unless the
legislature intended for the statute to bar resort to the trust fund theory apart from the
statute in order to enforce post-dissolution claims. To hold otherwise would violate
the rule of statutory construction that the legislature is never presumed to do a useless
act.
620 S.W.2d at 551.
A similar holding is also reflected in Blankenship v. Demmler Manufacturing Co., 411
N.E.2d 1153 (Ill. App. Ct. 1980), a case in which the plaintiff sued the former shareholder of a
dissolved corporation eight years after its dissolution. Rejecting a claim that the former shareholder
was liable under the trust fund doctrine, the Illinois Appellate Court cited its version of the MBCA
survival statute and held that
[o]nce this [survival] period extending the existence of the corporation has ended,
however, the corporation cannot sue or be sued. Consequently, we believe that the
survival statute reflects a legislative intent to establish a definite point in time when
a corporation ceases to exist. . . . In the absence of a statute permitting a cause of
action which accrues after dissolution to be brought against a dissolved corporation,
plaintiff has no valid cause of action against [the dissolved corporation]. Therefore,
application of the trust fund doctrine to the assets held by [the former shareholder]
is inappropriate.
411 N.E.2d 1156-57. The court also recognized that the “extension of the trust fund theory to cover
plaintiff’s claim would mean that the corporation could never completely dissolve but would live
on indefinitely through its shareholders. We do not believe that this result would be in accordance
with the spirit of the laws governing the dissolution of corporations.” Id. at 1156. We agree with
Hunter and Blankenship and conclude that their statements regarding the application of the trust fund
doctrine within the MBCA are accurate reflections of Tennessee’s law as well.
Accordingly, in answer to the final question certified, the trust fund doctrine has been applied
to solvent corporations under Tennessee law, but the application of that doctrine in this case is
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necessarily limited by the provisions of Tennessee Code Annotated section 48-1-1013(a) (repealed).
CONCLUSION
To summarize our answers to the five questions certified by the United States Court of
Appeals for the Third Circuit, we respectfully answer that the corporate statutes in effect before
January 1, 1988, apply to determine the rights and remedies available against a corporation dissolved
before that date and that section 48-1-1013(a) (repealed) applies to bar the petitioner’s claims. We
further answer that Piper Industries, Inc. did comply with the dissolution statutes in effect before
January 1, 1988, which require provisions to ensure the final distribution of corporate assets, but
which do not require a corporation to establish a reserve fund for contingent claims arising more than
two years after the dissolution. Finally, we answer that while the trust fund doctrine has been
previously applied in Tennessee to solvent corporations, its application in this case is necessarily
limited by Tennessee Code Annotated section 48-1-1013(a) (repealed).
The Clerk is directed to transmit a copy of this opinion to the United States Court of Appeals
for the Third Circuit and to the parties in accordance with Tennessee Supreme Court Rule 23(8).
Costs in this Court are taxed to the petitioners, Harry T. Kradel and Marilene Kradel.
____________________________________
WILLIAM M. BARKER, JUSTICE
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