Editor's note: The following are summaries of Texas appellate court opinions released over the past several months that are relevant to executives and their businesses.
Contracts, Choice of Law
THE BOTTOM LINE: Where a contract doesn't specify which state's law will govern a dispute, courts will look to the parties' intent to determine which law should apply.
Sonat Exploration Co. and Cudd Pressure Control Inc. signed a master service agreement in May 1998 to govern oilfield services Cudd was to perform for Sonat. The agreement contemplated operations in at least four places and specified the law in three of them. It required each company to indemnify the other for claims brought by their respective employees. It also required on jobs in Louisiana that Cudd name Sonat as an additional insured on its insurance policies. In October 1998, an explosion at one of Sonat's Louisiana wells killed seven workers, including four Cudd employees. When the survivors of those four sued Cudd and Sonat in Texas, Sonat demanded indemnity, but Cudd refused it. Sonat also demanded coverage as an additional insured from Cudd's insurer, Lumbermens Mutual Casualty Co., and again was refused. Sonat filed an indemnity claim against Cudd in the survivors' suit. Sonat filed a separate suit asserting claims against Lumbermens as an additional insured and alternatively against Cudd for failing to name Sonat as an additional insured. Sonat and Cudd jointly settled with one of the four Cudd employees but could not agree on settlement amounts for the other three. Eventually Sonat alone paid about $28 million to settle those claims, for which it sought indemnity from Cudd. The trial court found the parties' indemnity agreement enforceable under Texas law. After a jury found a reasonable settlement would have been $20,719,166.74, the trial court entered judgment in that amount for Sonat and against Cudd. Cudd filed a notice of appeal, and Lumbermens as its insurer posted $29 million as security. After the case went back to a lower court for proceedings, Sonat appealed, claiming its indemnity was waived under Texas law. Lumbermens responded that the indemnity was invalid under Louisiana law. Cudd conditionally appealed, claiming the indemnity was invalid even under Texas law. The Texas Supreme Court said that under Texas law, oilfield indemnity clauses are valid if they are mutual and supported by liability insurance, and under Louisiana law, such clauses are invalid if the party seeking indemnity was negligent or strictly liable. The court concluded that under the circumstances in this case, Louisiana law applied and remanded the case to the trial court for further proceedings applying Louisiana law.
Texas Supreme Court, No. 06-0979, Nov. 21, 2008
THE BOTTOM LINE: If the privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is treated like a general partner and is liable for each debt of the corporation created or incurred after the date the report, tax or penalty is due, until the corporate privileges are revived.
Thomas Wilson is the sole officer and director of Wilson Nursery Inc. Wilson Nursery twice had its corporate privileges forfeited for failing to timely file its franchise tax reports — once during 2000 and again from November 2001 to July 2002. In March 2003, the Texas comptroller of public accounts commenced a sales tax audit of Wilson Nursery for the period of April 1, 1999, through Jan. 31, 2003. Following the completion of the audit in June 2003, the comptroller sent Wilson Nursery a notification of audit results. The notification stated that the total amount due was $564,244.40 and that the amount would become final Aug. 18, 2003, unless Wilson Nursery requested an administrative redetermination by that date. Wilson Nursery missed the deadline but did request an administrative redetermination. The comptroller granted the request Dec. 12, 2003. In 2004, Wilson Nursery filed a Chapter 7 bankruptcy petition in federal court, and the redetermination process was stayed. After the conclusion of the bankruptcy proceeding and the lifting of the bankruptcy stay, the comptroller sent its position letter to Wilson Nursery but received no response. An administrative law judge issued a proposed decision to dismiss the redetermination, which the comptroller approved and adopted. The dismissal became final Dec. 16, 2005. The state filed suit against Wilson Nursery and Wilson in district court Sept. 27, 2006, for the taxes, penalties and interest due from the 2003 audit. The state filed a motion for summary judgment against both defendants, basing Wilson's personal liability for a portion of Wilson Nursery's tax delinquency on Tax Code §171.255. Section 171.255 imposes a corporation's tax liability on the corporation's directors and officers during a period of forfeiture of corporate privileges for failing to file franchise tax reports. If the corporate privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax or penalty is due and before the corporate privileges are revived. Such individual liability "is in the same manner and to the same extent as if the director or officer were a partner and the corporation were a partnership," according to Texas Tax Code §171.255(b). The district court granted the state's motion for summary judgment on July 12, 2007. Wilson appealed the judgment, arguing 1. the comptroller failed to assess Wilson personally for the tax owed within four years from the date that the tax became due and payable in accordance with Tax Code §111.201; and 2. the state failed to file suit against Wilson within three years from the date the tax deficiency became due and payable in accordance with Tax Code §111.202. Austin's 3rd Court of Appeals concluded that the tax claims against Wilson were not barred by any statutes of limitations.
Austin Court of Appeals, No. 03-07-00444-CV, Nov. 21, 2008