Look Out: A Lawsuit Against a Terminated Entity May Be Quickly Terminated

David Stockel, Molly Hust

April 19, 2017

The filing of a certificate of business termination in Texas doesn’t mean the business actually ceases to exist right away. The Texas legislature allows a three-year period for the company to pursue claims, or for claims to be pursued against the company. That means that filing a certificate of termination is not a strategy to avoiding possible litigation.

Under the Texas Business and Commerce Code Sections 11.351, the Texas legislature states that the entity continues to exist until the third anniversary of the date of its termination for a few reasons. Essentially, the entity can continue to prosecute or defend an action or proceeding brought by or against the company. Additionally, an existing claim by or against the terminated company can also be continued.

The three-year timeline is significant for business owners. There is a four-year statute of limitations for breach of contract and other claims that are typical in commercial litigation. So a person who seeks to file suit against a terminated business has a shorter window of opportunity. Failure to abide by the shorter window may result in most, if not all, of those claims being extinguished.

The three-year timeline can also be significantly shortened if the terminated company takes some simple steps. Basically, the company must give notice by registered or certified mail that the claim against it must be resolved under section 11.358 and specific steps must be followed. The claim is extinguished unless written presentation about it is received by a certain date. If the party does not respond to the notice within the timeframe identified in the letter, the party’s claim will be extinguished.

Even if a party presents a claim to a terminated entity within the required time period, the terminated company has the ability to reject the claim under section 11.358(e) with specific instructions about when it can file suit—not later than the 180th day after receiving rejection notice and not later than the third anniversary of the entity’s termination.

These timelines can be extremely important for both terminated entities and those with claims against entities that have recently terminated. For example, a party that does not timely assert its claim against the terminated company may have some or its entire claim extinguished. Additionally, if a terminated entity follows the steps under section 11.358, it may accelerate the extinguishment of claims against it if the party fails to assert its claim.

These accelerated timelines can serve to significantly impact, both positively and negatively, those with claims by or against a terminated entity in Texas.