Opinion
Civil Action No. 3:96-CV-2923-D, Consolidated with Civil Action No. 3:97-CV-0353-D.
November 23, 2004
MEMORANDUM OPINION AND ORDER
This is an action by plaintiff Phillip Harrison Robinette ("Robinette") against defendant Merrill Lynch, Pierce, Fenner Smith, Inc. ("Merrill Lynch") that, due principally to Robinette's incarceration, is still unresolved. Before reaching the pending substantive motions, however, the court must decide whether to permit H.C. Oil Gas Corp. ("HC") to be substituted as plaintiff. For the reasons that follow, the court concludes that it should. Accordingly, the court grants Robinette and HC's motion to substitute parties plaintiff.
I
Although the parties are familiar with the background facts and procedural history of this case, it will be helpful in understanding the court's reasoning if it begins by recounting the relevant facts and procedural history. In October 1996, while Robinette was a Texas state prisoner, HC and Robinette brought this lawsuit against Merrill Lynch. Robinette did so pro se, and he also purported to act on behalf of HC. Robinette sought leave to proceed in forma pauperis in the case, which was docketed as Civil Action No. 3:96-CV-2923-D. Because Robinette was a pro se prisoner, the magistrate judge screened the case, ordering him to demonstrate that he was a licensed attorney who could represent HC. When Robinette acknowledged that he is not a lawyer, the magistrate judge recommended that the court strike the pleadings, without prejudice to Robinette's right to submit a complaint in which he was the sole party plaintiff. The court adopted the recommendation, struck the complaint without prejudice to Robinette's filing a new complaint in which he was the sole plaintiff, and ordered him to file a new complaint. The court later dismissed the lawsuit without prejudice on the basis that Robinette had failed to file a new complaint.
Although Robinette failed to file a new complaint in Civil Action No. 3:96-CV-2923-D, he did initiate a new lawsuit in his own name — docketed as Civil Action No. 3:97-CV-0353-D — shortly after the magistrate judge filed his recommendation, and one day after the court adopted it.
Robinette responded to the magistrate judge's recommendation and the court's order by initiating a second lawsuit as the sole plaintiff, which was docketed as Civil Action No. 3:97-CV-0353-D. Robinette sought leave to proceed in forma pauperis, which the magistrate judge granted in January 1998. He also granted Robinette leave to amend his complaint to substitute a typewritten version.
Robinette denominated some of his pleadings "petitions" rather than "complaints." The court for clarity will use the term "complaint" throughout this memorandum opinion.
Merrill Lynch moved to dismiss Robinette's suit for failure to state a claim on which relief can be granted, contending that he could not bring the claims in his own name and for his own benefit because they belonged to HC. Robinette responded that he was bringing the claims in a representative or derivative, not in an individual, capacity. In a June 11, 1998 order, the court granted Merrill Lynch's motion. It reasoned that Robinette did not have standing to sue in his own name unless he did so in a derivative capacity under Fed.R.Civ.P. 23.1 or sued in an individual capacity for injuries that he had sustained personally. The court held that Robinette had not alleged sufficient facts to bring a derivative suit and that he had not alleged injuries that he sustained personally. Because Robinette was proceeding pro se, the court granted him an opportunity to replead. The amended complaint that he filed on June 29, 1998 is the current operative pleading in this case. In apparent recognition of the court's decision, Robinette acknowledged that he must bring suit in a representative capacity as a derivative action under Rule 23.1. See P. Am. Compl. ¶ 9 ("Therefore, the suit at bar must be brought by Robinette in a representative capacity as a derivative action pursuant to Rule 23.1, Fed.R.Civ.Proc.")
Merrill Lynch moved again to dismiss Robinette's suit for failure to state a claim on which relief can be granted. It maintained, inter alia, that Robinette could not bring a derivative suit pro se. In a September 16, 1998 memorandum opinion and order, the court granted the motion. It ordered Robinette to cause counsel to enter a written appearance or the case would be dismissed. An attorney timely entered an appearance.
A few days before the court filed its September 16, 1998 memorandum opinion and order, Robinette filed a pro se motion in Civil Action No. 3:96-CV-2923-D requesting reinstatement of the case. The magistrate judge recommended that the motion be granted, that the judgment dismissing Civil Action No. 3:96-CV-2923-D be vacated, and that Civil Action No. 3:97-CV-0353-D be consolidated with the earlier-filed case. The court adopted the magistrate judge's recommendation and consolidated the 1997 lawsuit into the 1996 case, with Robinette as the sole plaintiff.
In October 1999 the court administratively closed the case while Robinette completed his term of imprisonment. It did so in response to the parties' joint request for a trial continuance and to amend the scheduling order. The case lay dormant until May 2003, when a new attorney sought leave to be substituted as Robinette's counsel and moved for entry of a new scheduling order.
In February 2004 Merrill Lynch moved once again to dismiss Robinette's amended complaint, arguing, inter alia, that he had not properly asserted derivative claims on HC's behalf. Robinette failed to respond to the motion. In an April 12, 2004 memorandum opinion and order, the court held that Robinette could not sue Merrill Lynch derivatively under Rule 23.1 because HC was barred from bringing suit due to the forfeiture of its corporate charter and the consequential loss of its right to sue in court. Although Robinette had not responded to Merrill Lynch's motion to dismiss, the court gave him an opportunity to respond to this basis for dismissal because the court had raised it sua sponte.
Robinette argued in response to the April 12, 2004 memorandum opinion and order that the court had incorrectly concluded that he was barred from suing in a representative capacity. He maintained that the right of a stockholder to sue on behalf of a corporation whose charter had been forfeited for failure to pay franchise taxes had been upheld in both state and federal court. Robinette contended that he had taken the necessary actions to have HC's charter reinstated, and he attached a letter from the Comptroller of Public Accounts to support this assertion. He argued that all legal requirements to reinstate the corporation had been met, and that HC is legally a corporation. Robinette later filed a copy of a document from the Office of the Secretary of State of Texas recognizing HC's existence.
Robinette and HC now move to substitute HC as the plaintiff, acknowledging that the causes of action alleged in the suit are HC's property and recognizing that HC is the proper plaintiff. Merrill Lynch opposes substitution, contending the motion is untimely when viewed in the context of the entire litigation and, absent a showing of good cause, specifically violates the deadline set in the scheduling order for adding parties. It also contends that granting the motion will prejudice it because of approaching deadlines to complete discovery and file summary judgment motions. Merrill Lynch maintains that Robinette can pursue a valid claim if he has one and that HC can file a separate lawsuit if it believes it has a valid claim.
II A
Robinette and HC move to substitute HC as plaintiff pursuant to Rule 17(a), which provides that "[e]very action shall be prosecuted in the name of the real party in interest." The Rule requires that "the action . . . be brought by the person who, according to the governing substantive law, is entitled to enforce the right." 6A Charles Alan Wright et al., Federal Practice and Procedure § 1543, at 334 (2d ed. 1990); see also Farrell Constr. Co. v. Jefferson Parish, 896 F.2d 136, 140 (5th Cir. 1990) ("The real party in interest is the person holding the substantive right sought to be enforced. . . ."); Wieburg v. GTE Southwest Inc., 272 F.3d 302, 306 (5th Cir. 2001) (quoting Farrell Constr. for same proposition). "A federal court sitting in diversity must look to state law to determine which party holds the substantive right." Farrell Constr., 896 F.2d at 140. Rule 17(a) provides that "[n]o action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest. . . ." The district court has discretion whether to allow substitution under Rule 17(a). See Wieburg, 272 F.3d at 308 (reviewing district court's determination regarding substitution of party under abuse of discretion standard). The Rule "should be applied only to cases `in which substitution of the real party in interest is necessary to avoid injustice.'" Automated Info. Processing, Inc. v. Genesys Solutions Group, Inc., 164 F.R.D. 1, 3 (E.D.N.Y. 1995) (quoting 6A Charles A. Wright et al., supra § 1555, at 415). "A Rule 17(a) substitution of plaintiffs should be liberally allowed when the change is merely formal and in no way alters the original complaint's factual allegations as to the events or the participants." Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 20 (2d Cir. 1997); Hilgraeve Corp. v. Symantec Corp., 212 F.R.D. 345, 347 (E.D. Mich. 2003) (quoting Advanced Magnetics, 106 F.3d at 20). Courts have granted motions to substitute plaintiffs when they have determined that it would not be unfair to the defendants to do so. See Advanced Magnetics, 106 F.3d at 21 (holding that substitution of plaintiffs should have been allowed under Rule 17(a) where court found that substitution would not be unfair to defendants, because "the original complaint plainly gave defendants the particulars of the [proposed plaintiffs'] claims, and the attempt to substitute [them] was made within a reasonable time."); Cont'l Ins. Co. v. N.A.D., Inc., 16 Fed. Appx. 659, 662 (9th Cir. 2001) (unpublished opinion) (reversing and remanding district court's dismissal of case to allow proper party in interest to be substituted where court found no indication that defendants were prejudiced by less than two month delay in substituting correct party after defendant objected); Nagle v. Commercial Credit Bus. Loans, Inc., 102 F.R.D. 27, 32 (E.D. Pa. 1983) (holding that substitution did not prejudice defendant where "the claims of the [proposed plaintiff] are identical to those of the stockholders and concern the very same conduct of the defendant."); cf. Intown Props. Mgmt., Inc. v. Wheaton Van Lines, Inc., 271 F.3d 164, 171 (4th Cir. 2001) ("Courts have not permitted Rule 17 to be used late in the course of litigation if the opposing party would suffer undue prejudice.").
Merrill Lynch does not contend that any other procedural rule governs the motion to substitute, and the court need only analyze the motion under Rule 17(a).
III
Before turning to the specific grounds on which Merrill Lynch relies to challenge the motion to substitute, the court will set out reasons for granting the motion that, while responsive in principle to Merrill Lynch's contention that the motion is untimely, provide a separate rationale for allowing substitution.A
Merrill Lynch has consistently challenged Robinette's right to assert claims that belong to HC. In support of its argument, it has relied on several Texas decisions, including El T. Mexican Restaurants, Inc. v. Bacon, 921 S.W.2d 247 (Tex.App. 1995, writ denied), Wingate v. Hajdik, 795 S.W.2d 717 (Tex. 1990), and White v. Independence Bank, N.A., 794 S.W.2d 895 (Tex.App. 1990, writ denied). In the court's June 11, 1998 order, it cited El T. Mexican Restaurants to support the conclusion that Robinette could only sue in his own name if he did so in a derivative capacity or in an individual capacity for injuries he sustained personally. The court cited Wingate and White for the proposition that a plaintiff cannot allege directly in his own name claims that belong only to a corporation. Robinette was entitled to rely on the court's June 11, 1998 order to conclude that he could only assert HC's claims derivatively. In an apparent effort to comply with the order, he amended his complaint in an attempt to plead the facts necessary to properly allege a derivative suit.
In an April 12, 2004 memorandum opinion and order, the court held that Robinette could not bring a derivative suit under Rule 23.1 because, as a shareholder of a corporation that was barred from using the courts, he was also precluded from maintaining a derivative action under Rule 23.1. Robinette was entitled to rely on this opinion to conclude that he was foreclosed from litigating derivatively the causes of action that belong to HC and that he should seek reinstatement of HC's corporate charter so that HC could prosecute the claims.
As the court explains below, after revisiting Texas law, it now concludes that Robinette could have brought HC's claims in his individual capacity as a shareholder, but that the reinstatement of HC's charter precludes him from now doing so. Under these circumstances, where Robinette has reasonably relied on decisions that could redound to his detriment, the court concludes that he should be permitted to substitute HC as the party-plaintiff so that it can prosecute the claims that belong to it.
HC forfeited its corporate charter in 1996 for failing to pay franchise taxes. Texas law provides that "[i]f the corporate privileges of a corporation are forfeited . . . the corporation shall be denied the right to sue or defend in a court of this state. . . ." Tex. Tax Code Ann. § 171.252 (Vernon 2004). This prohibition has also been applied to preclude litigating in a federal court sitting in diversity, as is this court. See Farris v. Sambo's Rests., Inc., 498 F. Supp. 143, 147-48 (N.D. Tex. 1980) (Sanders, J.).
B 1
Rule 17(b) states that "[t]he capacity of an individual, other than one acting in a representative capacity, to sue or be sued shall be determined by the law of the individual's domicile," and that "[i]n all other cases capacity to sue or be sued shall be determined by the law of the state in which the district court is held[.]" See also 7547 Corp. v. Parker Parsley Dev. Partners, L.P., 38 F.3d 211, 221 (5th Cir. 1994) ("[S]tate law determines whether a shareholder may maintain a non-derivative action.") (citing Crocker v. FDIC, 826 F.2d 347, 349 (5th Cir. 1987)). Because Robinette is a domiciliary of Texas, Texas law controls, regardless whether he attempts to sue in an individual or representative capacity. The court first examines decisions of the Supreme Court of Texas to determine the controlling law. See Tex. Dep't of Hous. Cmty. Affairs v. Verex Assurance, Inc., 68 F.3d 922, 928 (5th Cir. 1995) ("In ascertaining the law of the forum state, a federal court `is bound to apply the law as interpreted by the state's highest court.'" (quoting Ladue v. Chevron U.S.A., Inc., 920 F.2d 272, 274 (5th Cir. 1991)).
In Pratt-Hewit Oil Corp. v. Hewit, 122 Tex. 38, 52 S.W.2d 64 (1932), the court addressed an action by the stockholder of an incapacitated corporation who brought suit "for himself and other stockholders, for the benefit of the Pratt-Hewit Oil Corporation" against Pratt-Hewit Oil Corporation ("Pratt-Hewit"), its board of directors, and another company that had entered into a contract with Pratt-Hewit. Id. at 64-65. The stockholder-plaintiff alleged that the contract was fraudulent as to the stockholders and that the directors had acted collusively with the other company to defraud the stockholders of their rights in the corporate property. Id. at 65. Pratt-Hewit (and its directors and the other company) challenged the stockholder's capacity to sue, contending that, because it was a foreign corporation that had not taken out a permit to do business in Texas and was thus legally barred from bringing the suit, the stockholder could not maintain the suit for its benefit. Id. Other stockholders later intervened as plaintiffs. Id. The trial court sustained the challenge, but the court of civil appeals reversed. On appeal to the Supreme Court, the question presented was whether the stockholders were entitled to prosecute the suit "for the benefit of said corporation which it could not maintain in its own behalf." Id.
The court began by dividing into three classes wrongs against stockholders that affect their interest in corporate properties that arise from a breach of trust by corporate directors or a majority of stockholders: those that arise from fraudulent acts, ultra vires acts, and negligent acts. Id. It observed that such injuries are to the corporation, which is ordinarily the one to bring suit to rectify them. The court recognized that, although the acts are not directly against the stockholders, they affect "the interests represented by their stock through a decrease of the corporate assets, thus affecting the value and benefits incident to stock ownership." Id. The corporation therefore has the duty to bring suit to remedy these wrongs. Id. The court noted that, when the corporation is unable or unwilling to do so, a stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to all the stockholders. Id. at 65-66.
In response to the contention that, because Pratt-Hewit was barred by statute from maintaining this cause of action, its agents, assignees, or stockholders could not maintain a suit for its benefit, the court observed that the statutory purpose of compelling corporate obedience to state laws regulating the transaction of business was not to aid managing officers of such corporations to dispose of corporate property in fraud of the rights of stockholders. Id. at 66. The statute therefore did not prohibit stockholders from obtaining relief from fraudulent and oppressive acts of corporate directors or prevent stockholders from redressing wrongs that injuriously affected their rights and interests in corporate assets. Id. The court distinguished cases brought by stockholders for the benefit of the corporation in which no claim was made for breach of trust, ultra vires act, or negligent act by the corporation's directors. Id. It emphasized that a corporation that had failed to comply with a state statute that obligated it to take out a permit to do business could not "evade the statute denying it access to the courts by the simple expedient of clothing itself in the garb of a stockholder." Id. But it concluded that the case before it involved a complaint that corporate directors had acted fraudulently and collusively in making a contract with another corporation through which it had parted with title to valuable properties, substantially injuring the stockholders. Id. It reasoned that
[c]ourts of equity have found little difficulty in affording stockholders of a corporation a remedy where it is shown that the directors, who are charged with the exercise of the utmost good faith in dealing with the corporate property as trustees for the stockholders have breached such trust and injury to the corporate property and the stockholders has resulted therefrom.Id. Responding to the contention that the shareholders could not sue since the corporation was statutorily barred from doing so, the court held that the statute did not bar suits of the type involved in this case. Id. The purpose of the statute was to compel corporations to obey state laws that required a permit before transacting business in the state. Id. The statute should not be construed, however, to enable those in charge of the corporation to defraud stockholders. See id. Such a construction "would tend to encourage many corporations to fail to comply with the terms of the statute[,]" because directors who desired to defraud stockholders could accomplish this purpose merely by failing to comply with laws that required permits to do business. Id. at 66-67. Because the cause of action based upon fraudulent conduct of the directors was the corporation's, if it was unable or unwilling to assert the claim, only the stockholders would remain to prosecute it. Id. at 67. If they were not permitted to bring the claim, the directors could deal with corporate property as they pleased and with impunity, because the courts would be closed to the stockholders in any effort to set aside a fraudulent disposition of the corporate property. Id.
The court rejected the premise that a foreign or domestic corporation could avoid the effect of the statute merely by having a stockholder bring suit for its benefit. It concluded that
[a] suit can only be maintained by a stockholder for the benefit of such corporation when the cause of action sought to be asserted falls within one of the three classes which we have described; that is, where the directors are guilty of fraud, ultra vires acts, or negligence resulting in injury to the stockholder. If the cause of action sought to be asserted is merely the ordinary one which accrues to the corporation in the due course of its business, it is of course barred from bringing the same, nor can such a suit be maintained for its benefit by its agent, assignee, or stockholder.Id. (citing authorities). It held that
when a corporation, domestic or foreign, has been denied the right to use our courts as a penalty for its failure to comply with the laws of this state, the property the corporation holds in trust for its stockholders is not subject to appropriation by third parties. In such cases, the suit must be brought, not for the benefit of the corporation, but by the individual stockholders, suing in their own right. A court of equity, in such case, possesses full power and authority to take such action as is necessary and proper to protect the interests of the stockholders in the corporate property.Id. (emphasis added) (citing authorities).
In another case decided the same day, Federal Crude Oil Co. v. Yount-Lee Oil Co., 122 Tex. 21, 52 S.W.2d 56 (1932), the court addressed whether a corporation that was in good standing when it acquired certain land, later allowed its right to do business to lapse, and later revived that right, was precluded from bringing suit concerning the land. See id. at 58-59. Federal Crude Oil Company ("Federal Crude") paid all the franchise taxes due up to the year 1905, forfeiting the right to do business on July 1, 1905. Id. at 58. Before it relinquished that right, it acquired certain land on which it drilled a non-producing well. See id. In 1928 it revived its right to do business and thereafter filed an action for trespass to try title to recover the land in controversy, alleging that in July 1926 the defendant had entered the land and ejected it. The defendant challenged Federal Crude's right to prosecute the suit, and the trial court sustained the challenge. Id.
On appeal, the court of civil appeals certified two questions to the Supreme Court. Id. at 57-58. The second was essentially this: assuming Federal Crude's revival of its right to do business did not entitle it to maintain the lawsuit, was it nevertheless entitled to maintain the suit to recover the land because it acquired the land at a time when its current franchise taxes were fully paid and when it was lawfully transacting business? Id. at 58-59. In answering this question, the court addressed the state's power to eliminate the right of a corporation, as a legal entity, to sue or defend in state court. Id. at 59. It stated:
It is true that the forfeiture of a corporate charter by legislative act would not operate to destroy or forfeit the property of the corporation. Under such circumstances, the stockholders, who are the beneficial owners of such property, would be fully authorized to prosecute or defend such actions in the courts as might be necessary to protect their property rights.Id. (citing Fid. Bldg. Loan Ass'n v. Thompson, 51 S.W.2d 578 (Tex. Comm'n App. 1932) (on rehearing)). In addressing the question whether a corporation could revive its right to do business, and, consequently, its right to sue by paying past-due taxes, the court distinguished two cases on which Federal Crude relied: Favorite Oil Co. v. Jef Chaison Townsite Co., 162 S.W. 423 (Tex.Civ.App. 1913, no writ), and Canadian Country Club v. Johnson, 176 S.W. 835 (Tex.Civ.App. 1915, no writ). Id. a 61-63. The court held, inter alia, that in both cases suit was not brought by the corporation whose right to do business had been forfeited, but by the stockholders. In each case the plaintiff asserted that the officers of the corporation had failed and refused to pay the franchise tax, and the stockholders sued to protect their interest in the corporate property. Id. at 63. The court explained:
The real question presented for decision in these cases was the right of the stockholders to bring a suit to protect the corporate property when the corporations were disabled from bringing such suit by having failed to pay their franchise tax. The court properly held in these cases that, since the corporations were barred from bringing the suits, the stockholders, the beneficial owners of the corporate property, were entitled to prosecute a suit to protect their interest in such property.Id. (citing Pratt-Hewit Oil for a more complete discussion of the question).
In Humble Oil Refining Co. v. Blankenburg, 149 Tex. 498, 235 S.W.2d 891 (1951), Humble Oil Refining Co. ("Humble Oil") sued to obtain title and possession to certain realty. Id. at 892. Its interest in the property arose from its ownership of shares in Franklin Development Company, a corporation that had forfeited its right to do business because it had failed to pay its franchise taxes. Id. at 893. In addressing the effect of the forfeiture on Humble Oil's ownership interest in the company, the court cited several cases, including Pratt-Hewit Oil and Federal Crude Oil, and held:
The effect of such a forfeiture is to prohibit the corporation from doing business in the state and to deny to it the right to sue or defend in any court of the state except in a suit to forfeit its charter. The legal title to the assets remains in the corporation, but the beneficial title to the assets of the corporation is in the stockholders. This being true, and since the right to sue has been denied to the corporation by the forfeiture under Article 7091, the stockholders as beneficial owners of the assets of the corporation may prosecute or defend such actions in the courts as may be necessary to protect their property rights.Id. at 894.
The court also addressed and rejected the defendants' contention that Humble Oil, as the owner of part of the stock of the Franklin Development Company, could not maintain suit against them for the recovery of the entire title to the property. Id. at 895-96. Addressing the effect of Franklin Development Company's loss of the right to do business, the court held that it was unnecessary for Humble Oil to allege that the suit was brought for all of the corporation's stockholders. Id. at 896. It quoted Pratt-Hewit Oil for the principle that, in cases where the corporation has been denied the right to use the courts, "`the suit must be brought, not for the benefit of the corporation, but by the individual stockholders, suing in their own right.'" Id. (quoting Pratt-Hewit Oil, 52 S.W.2d at 67). The court explained that the judgment in favor of Humble Oil for the entire title did not "impair the rights of the other stockholders who were not parties to the suit" and that "[t]he recovery inures to their benefit." Id.
The court now turns to decisions of Texas intermediate courts. Pratt-Hewit Oil, Federal Crude Oil, and Humble Oil Refining each cited Favorite Oil. In Favorite Oil nine directors and shareholders of Favorite Oil sued to set aside a judgment rendered against the company for title and possession of certain land. Id. at 423-24. They sued for themselves and as trustees for the stockholders and creditors of the company, which had lost the right to do business due to nonpayment of franchise taxes. Id. at 424. The defendant raised by demurrer the argument that Favorite Oil only forfeited its right to do business, and the forfeiture only suspended its corporate powers, it did not operate to dissolve the company and confer the legal title to the property in controversy on the plaintiffs "`as trustees for the stockholders and creditors, and thereby enable them to sue as trustees.'" Id. The trial court agreed with the defendant, and the court of civil appeals reversed, holding that the shareholders had the right to sue. Id. at 424-25.
The court cited Texas cases that held that a forfeiture of a company's right to do business did not of itself dissolve a company. Id. at 424. But it also reasoned that, even if Favorite Oil was not dissolved and the shareholder directors were not made trustees with the power to settle the affairs of the corporation, they still had the right to prosecute the suit in their capacity as stockholders. Id. at 424. They were necessarily prosecuting the suit for themselves and the other stockholders, even though they did not specifically allege that they were doing so. Id. In explaining the rationale for allowing such suits by shareholders when a corporation is incapacitated, the court reasoned that, if shareholders were not able to bring suit to recover and preserve corporate property, the property could "be appropriated by the first person who should choose to grab it." Id. at 425. "The corporation might have no creditors, might not care to continue business, and in such case there would be no power in the courts to protect its property from spoliation." Id. Therefore, when a corporation is unable to sue, "a court of equity should entertain a suit by stockholders when necessary to prevent a failure of justice." Id.
More recently, a Texas court of appeals decided Regal Construction Co. v. Hansel, 596 S.W.2d 150 (Tex.Civ.App. 1979, writ ref'd n.r.e.). In that case a sole shareholder of a company that had forfeited its corporate charter intervened in a lawsuit by the company to recover the unpaid balance on an oral contract to perform remodeling. Id. at 152. The court held that, as the beneficial owner of the company's assets, the shareholder was entitled to take this action. Id. at 153. It also pointed out that there was no sworn denial, as required by Texas rule, that the shareholder lacked the legal capacity to prosecute the suit as sole stockholder for the benefit of the corporation. Id. In a motion for rehearing, the defendants argued that the court had erred in holding that the stockholder had standing to prosecute the suit after the company's corporate charter had been forfeited. Id. at 156. They contended the court had not addressed the holding of Pratt-Hewit Oil that, if a cause of action is merely the ordinary one that accrues to the corporation in the due course of its business, it is barred from bringing the same, nor can such suit be maintained for its benefit by its agent, assignee, or stockholder. Id. The court rejected the argument, pointing out that Pratt-Hewit Oil also held that, when a corporation has been denied the right to use the courts, the property the corporation holds in trust for its stockholders is not subject to appropriation by third parties, and the suit must be brought, not for the benefit of the corporation, but by the individual stockholders, suing in their own right. Id. at 156-57. The court also relied on Humble Oil Refining and Pratt-Hewit Oil to hold that the stockholder could prosecute the case "in his individual capacity as a stockholder[.]" Id. at 157.
In El T. Mexican Restaurants the court rejected a sole shareholder's claim that he could recover individually as the successor in interest to a corporation that had forfeited its charter for failure to pay franchise taxes, but that had not been dissolved. El T. Mexican Restaurants, 921 S.W.2d at 248. J. Roland Bacon ("Bacon"), an independent insurance agent, was the sole shareholder of J. Roland Bacon, Inc. ("JRB"). Id. at 249. El T. Mexican Restaurants, Inc. ("El T.") orally agreed to obtain insurance coverage through JRB for a commission. Id. JRB obtained the coverage and advanced premium payments to the carriers on El T.'s behalf, and Bacon sued El T. for unpaid premium payments. El T. asserted at trial that it had already paid JRB. The jury found in favor of Bacon, individually, and the trial court rendered judgment in favor of Bacon in his individual capacity. Id.
The pertinent question on appeal was whether Bacon could recover as successor in interest to JRB, which had forfeited its corporate charter. See id. at 250. Bacon argued that he was the successor in interest by reason of the forfeiture of JRB's charter, that he had thereby acquired beneficial title to the corporate assets, including the claim against El T., and that this beneficial title was sufficient to entitle him to prosecute the lawsuit to protect his property rights and to recover the judgment in his own name. Id. at 251. The court of appeals disagreed. It reasoned that, although Bacon owned all of JRB's stock, the corporation held the assets, including the causes of action. The court cited Wingate and White for the proposition that "[a] shareholder may not sue in his own name and for his own benefit on a cause of action belonging to a corporation, even if that shareholder is indirectly injured." Id. The court concluded that this principle applied equally to sole shareholders. Id. Recognizing that Wingate and White did not involve incapacitated corporations, the court next considered whether corporate incapacity affects the application of the principle. Id.
The court held that, when JRB forfeited its privilege to sue in court, title to its assets bifurcated; legal title remained in JRB and beneficial title vested in Bacon. Id. As the holder of the beneficial title to JRB's assets, Bacon was entitled to "`prosecute or defend such actions in the courts as may be necessary to protect [his] property rights.'" Id. (quoting Humble Oil Ref. Co., 235 S.W.2d at 894). Although he had the capacity to sue, he did not have standing to do so. See id. at 253. Because standing remained with JRB, Bacon was required to sue "as representative of the corporation[.]" Id. at 253 n. 9. The court rejected the notion that entitlement to go into court for the corporation amounts to a right to recover individually on a corporate cause of action, distinguishing on several grounds its earlier decision in Regal Construction. Id. at 251-52. Ultimately, the court concluded that Bacon could not recover on JRB's cause of action by suing as successor in interest because he did not have legal title to JRB's assets and therefore lacked standing to sue. See id. at 253-54 253 n. 9. The most that Bacon could have done with the cause of action was assert it on JRB's behalf, as the representative of the corporation, which he did not do. Id. at 253 ("He did not allege that he was suing in a representative capacity on behalf of the corporation for the corporate cause of action."). Therefore, he could not recover individually from El T. Id. at 253-54.
The court distinguished on several grounds its earlier decision in Regal Construction. See El T. Mexican Restaurants, 921 S.W.2d at 251-52.
2
With the exception of El T. Mexican Restaurants, these cases appear to establish the following principles: first, the forfeiture of a corporation's charter does not prohibit stockholders from obtaining relief from fraudulent and oppressive acts of corporate directors or prevent stockholders from redressing wrongs that injuriously affect their right and interest in corporate assets; second, suit can only be maintained by a stockholder for the benefit of a corporation when the cause of action sought to be asserted falls within one of three classes: where the directors are guilty of fraud, ultra vires acts, or negligence resulting in injury to the stockholder; third, if a cause of action is merely the ordinary one that accrues to the corporation in the due course of its business, an incapacitated corporation cannot bring the action, and suit cannot be maintained for its benefit by its agent, assignee, or stockholder; fourth, when a corporation has been denied the right to use the courts, property the corporation holds in trust for its stockholders is not subject to appropriation by third parties, and suit must be brought, not for the benefit of the corporation, but by the individual stockholders, suing in their own right; and fifth, forfeiture of a corporate charter does not destroy or forfeit the property of the corporation, and the company's stockholders, who are the beneficial owners of the property, are authorized to prosecute or defend such actions in the courts as necessary to protect their property rights. El T. Mexican Restaurants appears to stand alone in its suggestion that a stockholder of an incapacitated corporation can only pursue a corporate cause of action in a representative capacity on the corporation's behalf.
Applied to the circumstances of the present case, these decisions support Robinette's right as an HC shareholder to sue Merrill Lynch in his individual capacity to recover on HC's claims. To the extent the court has relied previously on El T. Mexican Restaurants to support its conclusion that Robinette could not sue individually unless he did so derivatively or for injuries he sustained personally, the court concludes that its reliance was misplaced.
The court's earlier reliance on Wingate and White to hold that Robinette could not sue in an individual capacity because the claims he alleged were for injuries sustained by HC, and that claims that belong to a corporation cannot be alleged directly by a plaintiff in his own name, was also misplaced. Although Wingate and White unequivocally hold that "[a] corporate stockholder cannot recover damages personally for a wrong done solely to the corporation, even though he may be injured by that wrong," the courts' analysis arose in the context of suits by shareholders where the corporation's ability to sue was not questioned. See Wingate, 795 S.W.2d at 718-19; White, 794 S.W.2d at 896-98.
Robinette could reasonably have relied on the court's invocation of these decisions to conclude that, in order to pursue the claims in his own name, he would have to do so through a derivative action. Although the court cannot say with certainty whether Robinette would have attempted to replead in a manner consistent with Humble Oil Refining and the other cases discussed above, the court's order likely deterred him from considering this to be a fruitful option. When the opportunity to maintain a derivative suit was extinguished by the court's April 12, 2004 memorandum opinion and order, he may have thought he had no other choice than to seek HC's reinstatement so that it could pursue its own claims.
HC's reinstatement, however, presents another problem, because it precludes Robinette, who is currently the sole plaintiff, from individually litigating the claims in his complaint. Wingate and White apply in cases when a corporation is capable of prosecuting its own claims. As already discussed, the rule in these cases precludes an individual shareholder from litigating corporate claims in an individual capacity. See Wingate, 795 S.W.2d at 718-19 (holding that "[a] corporate stockholder cannot recover damages personally for a wrong done solely to the corporation, even though he may be injured by that wrong" in a context where the corporation's eligibility to sue was not in question); White, 794 S.W.2d at 896-98 (same). Additionally, Jones v. Central States, Southeast and Southwest Areas Pension Fund, 552 S.W.2d 578 (Tex.Civ.App. 1977, no writ), suggests that HC's reinstatement has mooted Robinette's suit. In Jones the court dismissed as moot an individual shareholder's motion to substitute as plaintiff in a case originally brought by a corporation that had lost its right to sue because it had failed to pay franchise taxes. Id. at 579. The trial court had dismissed the incapacitated corporation's suit and had denied the shareholder's motion to substitute himself for the corporation as plaintiff. Id. The corporation later paid its franchise taxes, reviving its right to sue. Id. Dismissing as moot the shareholder's motion for substitution, the court reasoned that "[a]ny right of shareholder action is contingent upon a showing of corporate disability, and when that disability is removed, the shareholder's suit is necessarily mooted." Id. (citation omitted). Now that HC has been successfully reinstated and has the right to sue, Robinette, in accordance with Jones, no longer has the right to pursue HC's claims in his name.
The result of the court's conclusions today is that, unless it allows the substitution of HC in place of Robinette, the claims of HC will be dismissed on the basis of prior decisions that incorrectly reflect Texas law. Had the rulings been correct when issued, Robinette could have taken proper steps to litigate HC's claims individually, as a corporate shareholder. Under these circumstances, substitution of the proper party should be permitted.
IV
The court now turns to the grounds on which Merrill Lynch relies to oppose the motion to substitute.
A
Merrill Lynch argues that the court should deny substitution because the motion is untimely when viewed in the context of this long-pending case, and because the motion violates the deadline set in the scheduling order for adding parties.
Assuming arguendo that the deadline in the scheduling order for adding parties applies to a motion to substitute a party, it is appropriate to allow substitution in this case. Merrill Lynch argues that Robinette and HC have failed to show good cause to modify the scheduling order and have not explained why they failed to adhere to the deadline prescribed in the order. The court has explained, however, why Robinette was entitled to rely on the court's rulings in this case. Robinette and HC should not, in these circumstances, be denied the opportunity to have HC's claims considered on the merits.
B
Merrill Lynch rests its assertion of prejudice on the impending discovery and summary judgment deadlines that have now expired during the pendency of this motion. It has already filed a summary judgment motion and, if the substitution of HC requires that it be granted leave to file a second motion, the court can grant such leave to ameliorate any prejudice. Additionally, the court can extend the discovery deadline to permit needed discovery.
Moreover, contrary to Merrill Lynch's concerns about the amount of time that has elapsed since this case was filed, the claims in this case have not changed, and the substitution of HC as a party does not alter them. What has changed is that HC will now be asserting its own causes of action directly rather than through Robinette.
While the court recognizes that Merrill Lynch's objections flow largely from concerns about the age of this case, both sides recognize that the delays were due to Robinette's imprisonment, and Merrill Lynch agreed at one point to continue the case until Robinette was released. Now that he has been released, the case can be expected to progress to resolution on the merits.
For the foregoing reasons, Robinette's June 10, 2004 motion to substitute parties plaintiff is granted.
SO ORDERED.