On November 26, 2013, the Delaware Supreme Court reversed the decision of the Delaware Court of Chancery in In the Matter of Krafft-Murphy Company, Inc. on matters of first impression involving dissolved corporations (No. 85, 2013, (Del. Nov. 26, 2013)). The Supreme Court held that the DGCL does not time-bar third-party claims against dissolved corporations and that a receiver should be appointed on behalf of the dissolved corporation to defend against claims brought after the third anniversary of dissolution.

Krafft-Murphy Company, Inc. was a Delaware corporation that had been engaged in the plastering business. Beginning in 1989, Krafft-Murphy was named in hundreds of asbestos-related personal injury lawsuits. The corporation, before it dissolved, obtained several insurance policies that are still in effect and which are its only remaining assets. The corporation ceased operations in 1991 and formally dissolved in 1999 under the procedures of Section 275 of the DGCL (8 Del. C. § 275).

Under Section 275(d), the dissolution of a Delaware corporation becomes effective once a certificate of dissolution is accepted and date-stamped by the Delaware Secretary of State. Under Section 278 of the DGCL, the dissolved corporation's existence is deemed continued for a period of three years (or any longer period as determined by the Delaware Court of Chancery) for the limited purposes of prosecuting and defending lawsuits and other actions needed to wind up the business (8 Del. C. § 278). For the sake of providing for the settlement of any outstanding claims, a dissolving corporation can also choose to undertake one of two procedures:

Krafft-Murphy did not take advantage of either of these two procedures. In 2010, Krafft-Murphy began filing motions to dismiss asbestos-related claims commenced more than ten years after its dissolution. Its theory was that because Section 281(b) requires dissolving corporations to only contemplate claims that may arise within ten years, it follows that the statute bars new claims once the ten-year anniversary of dissolution has passed. Krafft-Murphy also argued that a receiver should not be appointed to defend against claims brought before the end of the ten-year period, but after the three-year period of Section 278, because its insurers were prepared to defend against those claims.

Earlier this year, the Delaware Court of Chancery accepted many of Krafft-Murphy and its insurers' arguments (see In the Matter of Krafft-Murphy Company, Inc., 62 A.3d 94 (Del. Ch. 2013)). The Court of Chancery held in pertinent part that:

Implicit in the Chancery Court's ruling was an understanding that Section 281(b) acts not only as a limit on the planning necessary to avoid post-dissolution liability, but as a ten-year time-bar against new third-party claims. The Court of Chancery also agreed with Krafft-Murphy that it was unnecessary to appoint a receiver to defend against the claims brought between the third-year and tenth-year expiration dates, because the insurers were in a position to continue that litigation.

The Delaware Supreme Court overruled the Court of Chancery on the issue of the operation of Section 281(b) as a time-bar. The Supreme Court held that the statutory winding-up regime only provides a set of pathways for the discharge of the board's fiduciary duties to existing and future claimants. Nothing in the statute, however, acts as a time-bar against claims brought after the three-year or ten-year periods. The Supreme Court noted that Section 280(a) does bar certain claims if the dissolving corporation has followed the statute's notice procedures. By implication, only these claims are barred and not others. In addition, the legislative history of the statute indicates that the Delaware General Assembly never intended for the winding-up procedures to act as statutes of limitations on third-party claims.

Therefore, the insurance policies held by Krafft-Murphy continued to have value, which gave the Court of Chancery authority to appoint a receiver for the corporation.

The Supreme Court also rejected the Court of Chancery's finding that it would be sufficient for Krafft-Murphy's insurers to defend against claims brought after the three-year period of Section 278. Because the corporation ceased to exist as a "body corporate" after the expiration of the three-year period, it lost the power to control its own affairs. This meant that it had no remaining authority to direct its insurers to continue conducting its litigation proceedings. Rather, once a new suit is brought after the three-year period, only a receiver can defend the corporation's interests.

The Krafft-Murphy decision settles an open question of Delaware law, confirming that third-party claims are not barred under the DGCL after the tenth anniversary of a corporation's dissolution. Consequently, to bar future claims, dissolving corporations must go through the notice-and-security procedures of Sections 280 and 281(a). By doing so, the corporation can, under Section 280(a) bar future claims brought by claimants who had received notice of dissolution or who had not responded to the corporation's rejection of their claims.

For more information about the procedures for dissolving a corporation, see Practice Note, Dissolving a Delaware Corporation.