Forfeit Your Entity Charter – Lose Your Right to Bring a Law Suit in Texas.

The Twelfth Court of Appeals affirmed the trial court’s
ruling that an entity is barred from bringing a lawsuit more than three years
after it forfeits its charter for unpaid franchise taxes pursuant to Texas
Business Organizations Code Section 11.359 (“TBOC”).

For several years, Ray Lewis, a principal of Lord Lewis & Coleman, LLC (“Lord Lewis”) worked for John Renfro and two of Renfro’s companies.  Lewis and Renfro entered into several timber transactions together over the years that were profitable for both of them.  However, in December 2010, one of their timber transactions went sideways.  As a result, Lord Lewis filed suit against Renfro and his companies for several claims.  Renfro and his companies moved for traditional summary judgment on the grounds that Lord Lewis’s claims were extinguished pursuant to Section 11.359 of the TBOC because Lord Lewis’s charter was forfeited for unpaid franchise taxes in January 2011, more than three year before Lord Lewis filed its suit. 

On appeal, the Court of Appeals began by noting that Section
11.359(a) of the TBOC provides that “an existing claim by or against a
terminated filing entity is extinguished unless an action or proceeding is
brought on the claim not later than the third anniversary of the date of the
termination of the entity.”  Tex.
Bus. Org. Code § 11.359(a).

Lord Lewis’s charter was forfeited by the Secretary of State on January 28, 2011 for failure to pay franchise taxes, and its claims accrued no later than December 31, 2010.  However, Lord Lewis failed to file its lawsuit until December 1, 2014, more than three years after its charter was forfeited.  Accordingly, the Court of Appeals affirmed the trial court’s decision and held that Lord Lewis’s claims were extinguished prior to filing suit.   In closing, it bears noting that while this case focused on forfeiture of a charter due to unpaid taxes, TBOC § 11.001(4) additionally defines “terminated entity” to include a domestic entity that has been terminated in a manner authorized or required by the TBOC.  Therefore, if an entity has been terminated for any reason under the TBOC, it should bear in mind that it may only have three years to bring a lawsuit before its claims are extinguished.

By: Austin Priddy