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Legislative updates

House Bill 1957, effective September 1, 2023, amends the Business Organizations Code relating to the type of documents that must be kept and made available to the public by nonprofit corporations.

Senate Bill 1514, effective September 1, 2023 amends provisions of the Business Organizations Code on issues including, but not limited to, protected series, definition of office, doctrine of independent legal significance, signatures on a certificate of ownership, LLC dissolution, reinstatement, restated certificates of formation, filing of certificates of merger, conversion, and exchange, dissenters’ rights, rights and options, ratification of void or voidable acts or transactions, and examination of records.

Senate Bill 2314, effective September 1, 2023, clarifies that the section of the Business Organizations Code governing charging orders and LLCs applies to both single member LLCs and multiple member LLCs.

House Bill 19, effective September 1, 2023, with changes to the law applicable to civil actions commenced on or after September 1, 2024, creates a new business court. The new business court will have jurisdiction over certain cases including those in which the issue arises out of the Texas Business Organizations Code or securities laws, derivative suits, suits alleging breaches of fiduciary duties, and other actions involving governance, governing documents and internal affairs. The amount in controversy must exceed $5 million unless a publicly traded company is a party, in which case there is no amount in controversy limitation. The court will also have jurisdiction over actions involving certain transactions where the amount in controversy exceeds $10 million.

The business courts will be composed of 11 divisions. Five of the divisions (which include the metropolitan areas of Dallas, San Antonio, Forth Worth, Houston, and Austin) will begin operating on September 1, 2024. Each of these five courts will have two judges, appointed by the governor, who must meet certain requirements set forth in the bill. An action may be originally filed in the business court or it may be removed if filed in another court. Parties have a right to a jury trial where required by the Constitution. Appeals will be heard by a newly created 15th Court of Appeals.

Senate Bill 1523 (Laws of 2021), effective June 1, 2022, amends provisions of the Business Organizations Code governing Series LLCs to permit the formation of registered series. A certificate of registered series must be filed with the Secretary of State to form a registered series. A series established in the company agreement without the filing of a certificate of registered series is now referred to as a protected series. The registered series’ name must contain the phrase “registered series” or abbreviation RS or R.S. The certificate of registered series may be amended by filing a certificate of amendment and terminated by filing a certificate of termination. A protected series may convert to a registered series by filing a certificate of conversion and certificate of registered series.

SB 1523 also amends Texas’ UCC law to amend the definition of “person” in Article 1 to include protected series or registered series of a for-profit entity and amends the definition of “registered organization” in Article 9 to include a series of a registered organization if the series is formed or organized under the laws of a single state and the statute of the state governing the series requires that the public organic record of the series be filed with the state.

House Bill 3131, effective January 1, 2022, amends the Business Organizations Code to provide that a certificate of formation of a filing entity filed on or after January 1, 2022 include an initial mailing address.

Senate Bill 938, effective January 1, 2022, (1) requires the Secretary of State to waive certain filing fees for a new veteran-owned business until the earlier of the fifth anniversary of the date on which the entity was formed or the date the entity ceases to qualify as a new veteran-owned business and (2) exempts from the franchise tax a taxable entity that qualifies as a new veteran-owned entity until the earlier of the fifth anniversary of the date on which the taxable entity begins doing business in the state or the date the entity ceases to qualify as a new veteran-owned business. A new veteran-owned business is defined as a new business in which each owner is a natural person who served in and was honorably discharged from a branch of the US armed forces and provides verification to the comptroller of the person’s service and discharge. A new business is an entity chartered or organized or otherwise formed in Texas and first begins doing business in the state on or after January 1, 2022. SB 938 also provides that the provisions granting the exemptions are repealed January 1, 2026.

House Bill 1578, effective September 1, 2021, amends the Civil Practice and Remedies Code to provide that an individual and an organization (as defined by Sec. 1.002 of the Business Organizations Code) may recover attorney's fees in certain civil cases. Sec. 1.002 includes a corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization. A quasi-governmental entity authorized to perform a function by state law, a religious organization, a charitable organization, and a charitable trust are not entitled to attorney fees under the amended section. Formerly, the section referred to an individual and a corporation as being able to recover attorney’s fees.

Senate Bill 1203, effective September 1, 2021, amends various sections of the Business Organizations Code on issues including the following: (1) definitions of general partner, limited partner, and member, (2) permitting the governing documents of a domestic entity to include a forum selection clause for internal entity claims, (3) providing that the certificate of formation of an LLC set forth whether it initially has or does not have managers, (4) contents of restatements of a certificate of formation, (5) emergency actions that can be taken during a period of emergency, (6) actions by written consent, (7) indemnification against negligence, (8) activities that do not constitute transacting business, (9) effect of reinstatement of a filing entity’s certificate of formation, (10) determination of a corporation’s solvency or an LLC or LP’s liabilities or value of assets, (11) shareholder meetings by remote communication, and (12) governing authority of an LLC.

House Bill 3794, effective September 1, 2021, amends the law relating to oil and gas liens by repealing Sec. 9.343 of the Texas Business and Commerce Code and enacting a new Chapter 67 of the Texas Property Code (titled “Oil and Gas Liens”). In addition to repealing Sec. 9.343 (a non-uniform UCC provision which provided for the perfection of a security interest in certain oil and gas proceeds without the filing of a financing statement), H.B. 3794 amends Texas’ UCC law to provide that Chapter 9 (Secured Transactions) does not apply to certain liens, assignments, sales, and transfers, including an oil and gas lien arising under new Chapter 67 of the Property Code. New Chapter 67 of the Property Code provides, in part, that to secure the obligations of a first purchaser to pay the sales price, each interest owner has an oil and gas lien to the extent of the interest owner's interest in oil and gas rights and that the oil and gas lien exists as part of and incident to the ownership of oil and gas rights. It also provides that an oil and gas lien of an interest owner is perfected automatically without the need to file a financing statement or any other type of documentation, and that, except for a permitted lien, an oil and gas lien takes priority over any other lien, whether arising by contract, law, equity, or otherwise, or any security interest.

The bill was enacted in response to In re First River Energy, LLC, 986 F.3d 914 (5th Cir. 2021) in which the U.S. Court of Appeals for the Fifth Circuit found that the UCC law of Delaware, the jurisdiction where the debtor was located, governed the priority of liens on the proceeds of oil. Delaware’s UCC law does not recognize the priority of a security interest perfected pursuant to a non-uniform UCC provision. Because Sec. 9.343 - a non-uniform UCC provision – established the Texas producers’ security interests the court found that a bank, which had perfected its interest in the oil proceeds by filing a financing statement with the Delaware Secretary of State, had priority over the Texas producers who did not file a financing statement and claimed priority under Sec. 9.343. In contrast, the court held that Oklahoma producers were entitled to a first-priority statutory lien in the proceeds because they perfected under the Oklahoma Lien Act and the Delaware UCC does not preempt statutory liens created by other states.

House Bill 4474, effective September 1, 2021, amends the law relating to the control of virtual currency and the rights of purchasers who obtain control of virtual currency for purposes of the Uniform Commercial Code. Among other things H.B. 4474 amends various sections of the Business & Commerce Code including the following: Sec. 9.102 (regarding the definition of "virtual currency"), Sec. 9.1071 (a new section regarding a secured party’s control over virtual currency), Secs. 9.310, 9.312, and 9.314 (regarding the perfection of a security interest in virtual currencies), and Sec. 9.331 (regarding the rights of certain holders or purchasers of a virtual currency). H.B. 4474 also adds a new chapter 12 (titled “Virtual Currency”), addressing among other things, the definition of virtual currency and the control of and rights in virtual currency.

Senate Bill 1971, effective September 1, 2019, amends the Texas Business Organizations Code provisions governing corporations regarding, among other things, voting agreements, two-step offer-mergers, ratification of defective acts, notices of redemption, shareholder lists, and nonprofit corporation directors.

Senate Bill 1969, effective September 1, 2019, amends the Texas Business Organizations Code to provide for the ratification of defective corporate acts of a nonprofit corporation.

Case summaries

Discovery of Secured Party’s Records
In Re Texas Dow Employees Credit Union, No. 13-24-00053, decided March 26, 2024. The Texas Court of Appeals held that the request for documents from a financial institution is governed by Sec. 59.006 of the Texas Finance Code, which governs discovery of customer records from a financial institution and not Sec. 9.210 of Texas’ UCC law, which allows a debtor to request an accounting, list of collateral or statement of account from a secured party. A credit union filed a suit claiming to have a superior claim to a vehicle for which it had filed a financing statement. The defendants made a request pursuant Sec. 9.210 of the UCC law for loan and other documents and the credit union moved for an order of protection from discovery. The court ruled that the trial court erred in rejecting the credit union’s motion because the defendants failed to comply with the requirement of Sec. 59.006.

Service of Process
Huffman Asset Management, LLC v. Colter, No. 05-22-00779, decided November 7, 2023. The Texas Court of Appeals affirmed the default judgment against two LLCs, finding that service of process on the Texas Secretary of State was valid where the plaintiff’s process server was unable to serve the individual listed as the LLCs’ registered agent because he was no longer located at the address listed on the state’s records. The Texas Business Organizations Code provides that if a registered agent cannot with reasonable diligence be found at the registered office, the Secretary of State is deemed agent for service of process. Furthermore, the Secretary of State complied with the law by forwarding process to the registered office address it had on file. The LLCs failed to articulate any excuse for their failure to update their registered office information as they were required by statute to do and it was their own negligence that caused their failure to respond to the lawsuit.

Purchase Money Security Interest
Agrifund, LLC v. First State Bank of Shallowater, No. 07-22-00025, decided December 9, 2022. The Texas Court of Appeals, in a dispute between two creditors (an LLC and a bank) over the priority of their security interests in crops, held that the LLC had priority because it filed a UCC-1 perfecting its interest before the bank filed its UCC-1. The bank had argued, and the trial court had found, that the bank’s interest had priority because it was a purchase money security interest (PMSI). The bank claimed it was a PMSI because the borrowers had pledged as security supplies to be used in growing the crops and the loans enabled the borrowers to acquire seeds and chemicals needed to grow the crops. However, the court noted that a creditor may obtain a PMSI when the loan enables the debtor to acquire the goods. Here, the bank’s loan did not enable the borrowers to purchase a crop. It enabled them to produce one. Therefore the bank did not have a PMSI and the court reversed the trial court’s grant of summary judgment for the bank ad denial of summary judgment for the LLC.

Director’s Fiduciary Duties
In re Estate of Poe, No. 20-0178, decided June 17, 2022. The Texas Supreme Court held that the probate court erred in submitting a question to the jury about whether an informal fiduciary duty existed that required the sole director to manage the corporation in the sole shareholder’s best interest. The court held that as a matter of law, a corporation's director cannot owe an informal duty to operate or manage the corporation in the best interest of or for the benefit of an individual shareholder. A director's fiduciary duty in the management of a corporation is solely for the benefit of the corporation.

Service of Process
U.S. Bank, N.A. v. Moss, No. 20-0517, decided February 25, 2022. The Texas Supreme Court held that service of process on a foreign financial institution acting as a fiduciary by serving the Secretary of State pursuant to Sec. 505 of the Estates Code was not valid service. Sec. 17.028 of the Civil Practice and Remedies Code provides that service on a financial institution may be made by serving its registered agent. A close examination of all relevant statutes—not only in the Civil Practice and Remedies Code and Estates Code, but also in the Finance Code and Business Organizations Code—reveals that service on the Secretary as a foreign corporate fiduciary's “agent” under Chapter 505 does not constitute service on a financial institution's “registered agent” for purposes of Sec. 17.028.

Forfeiture and Reinstatement
G Force Framing LLC v. MacSouth Forest Prods, LLC, No. 05-20-00835, decided February 18, 2022. The Texas Court of Appeals held that a Texas LLC that was forfeited under the Tax Code for failing to pay its franchise tax was not a terminated entity under the Business Organizations Code (BOC). BOC provides that the Secretary of State can terminate an entity for failing to file a report or pay a fee when due or maintaining a registered agent or registered office, but not for failing to pay franchise taxes. Furthermore, the LLC did not have to be reinstated within three years of forfeiture. BOC has a three year time limit but the Tax Code does not. Therefore, the trial court erred in dismissing the LLC’s claims on the grounds it was terminated, not reinstated within three years, and its claims expired.

Internal Affairs Doctrine
Hartman Income Reit, Inc. v. Mackenzie Blue Ridge Fund III, L.P., No. 01-20-00218, decided January 27, 2022. The Texas Court of Appeals held that the right to inspect a corporation’s shareholder list is an internal affair, and under the Business Organizations Code, a foreign corporation’s internal affairs are governed by the state of formation. Therefore the court held that the plaintiff, a shareholder in a Maryland corporation, did not have the right to inspect the shareholder list because it did not own 5% of the corporation’s shares as required under Maryland law. The court therefore reversed the trial court’s order granting the shareholder’s request to inspect.

Piercing the Corporate Veil
Ledford v. Keen, No 20-50650, decided August 17, 2021. The U.S. Court of Appeals, Fifth Circuit, affirmed dismissal of the plaintiff’s attempt to pierce the corporate veil based solely on evidence that the corporation was undercapitalized. The plaintiff, who was run over by a barrel-racing horse at a Texas rodeo, sued the company that operated the rodeo and then sought to add its directors as defendants. The court noted that the Texas Supreme Court had not ruled on whether undercapitalization alone was sufficient to pierce the corporate veil but in light of the intermediate courts’ decision the Fifth Circuit concluded that the Texas Supreme Court would not conclude that undercapitalization alone justifies piercing the corporate veil.

Service of Process on the Secretary of State
Acadian Properties Austin, LLC v. KJMonte Investments, LLC, No. 08-20-00048, decided July 30, 2021. The Texas Court of Appeals upheld a default judgment, finding that service of process on the Secretary of State was valid service. The defendant was a foreign LLC that had designated a registered agent and registered office. The plaintiff’s process server learned that the registered office address did not exist and concluded that he could not, with reasonable diligence, serve the registered agent at the office. The plaintiff then served the Secretary of State. The Secretary of State forwarded process to the defendant at the address listed on its records for the registered office. Process was returned as undeliverable.

In upholding service the court noted that under the Texas Business Organizations Code, service on the Secretary of State is permitted where the registered agent cannot with reasonable diligence be found at the registered office. The court rejected the plaintiff’s argument that service was not proper because no attempt was made to serve at the registered office. The court stated such an attempt was not necessary because it would be futile. In addition, the process server was not required to attempt to serve the registered agent at a location other than the registered office. Finally the court rejected the argument that service was not valid because it never received notice of the lawsuit from the Secretary of State. The court pointed out that the only duty of the Secretary of State was to forward process to the address of the registered agent on file. It was the defendant’s own negligence in not complying with its statutory duty to have a current registered office address on file that led to its not receiving notice.

Service of Process
WWLC Investment, LP v. Miraki, No. 20-0173, decided June 18, 2021. The Texas Supreme Court held that a Texas limited partnership was not properly served with process and vacated a default judgment taken against it. The court noted that a Texas LP’s agents for service of process are its general partner and its registered agent. The plaintiff attempted to serve a person who was described as its owner, president and CEO and when the process server could not serve her the plaintiff received an order permitting substituted service by attaching a copy to the front door of her house. The plaintiff made no effort to serve the corporation that was both the LP’s registered agent and general partner. The trial court upheld service, finding that the person served must have been the general partner because she was the only one involved with the LP. The court of appeals affirmed, finding that service was proper because the corporate general partner’s charter was forfeited. The court noted that the fact that the person served established that she was the only person involved with the LP did not make her a general partner. In fact she admitted the corporation was the general partner and filings with the Secretary of State also indicated the corporation was the general partner. In addition, the plaintiff attempted service before the general partner’s charter was forfeited and moreover a corporate general partner that loses its certificate of formation remains the LP’s general partner for at least 90 days and substituted service was accomplished before that period lapsed.

LLC – Right to Arbitration
CDIC of NC Protected Cell-A600 LLC v. Judge, No. 4:18-cv-04142 decided June 1, 2021. The U.S. District Court, Southern District of Texas, ruled that the defendant, a manager of an LLC, waived his right to invoke arbitration under a provision of the LLC’s operating agreement stating that any dispute arising out of the agreement or the breach thereof shall be decided by arbitration. He waived his right by proceeding with the court action for over two years before seeking to compel arbitration.

Pro Se Representation
1 Fox 2 Productions, LLC v. Mercedes-Benz USA, LLC, No. 03-20-00101, decided January 4, 2021. The Texas Court of Appeals held that an officer of an LLC, although not a licensed attorney, could file a notice of appeal on behalf of the LLC because the Texas Supreme Court has held that the prohibition against non-attorneys representing business entities does not apply to ministerial tasks such as perfecting an appeal.

Limited Partner’s Standing to Sue
Lipshy v. Burk, No. 05-19-00493, decided November 12, 2020. The Texas Court of Appeals held that limited partners do not lack constitutional standing to assert claims individually for damages based on the reduction in value to their limited partnership interests.

Standing to Sue
Pike v. Texas EMC Management, LLC, No. 17-0557, decided June 19, 2020. The Texas Supreme Court held that a limited partner has constitutional standing to sue for an alleged loss in the value of its interest in the limited partnership. A challenge to a limited partner’s ability to recover the lost value of its interest in the limited partnership is a challenge to capacity, not standing.

Assumed Name Filing Requirement
Pennington v. Cypress Aviation, LLC, No. 05-19-00345, decided April 19, 2020. Although a Texas corporation that failed to file a certificate of assumed name lacked capacity to sue, the defendant waived the right to claim the failure to file as a defense by failing to file a plea in abatement or obtain a ruling regarding the corporation’s lack of capacity prior to trial. The court also ruled the trial court erred in concluding the corporation lacked standing to sue rather than lacking capacity to sue.

Forfeited Corporation
Donica Group, LP v. Thompson Excavating, Inc., No. 05-19-00235, decided January 6, 2020. The Texas Court of Appeals held that a corporation whose charter was forfeited and not reinstated lacked standing to file a bill of review challenging a default judgment.

Other notices

On January 25, 2024, the Texas Comptroller’s office posted a Fraud and Consumer Alert stating that some taxpayers have received fraudulent letters claiming Texas will seize their assets and property for unpaid taxes unless payment is made within seven days. The alert states that these letters did not originate from the Comptroller’s office and no one should give the sender personal information or money. The alert, which includes a sample letter, can be read on the Comptroller’s website.

Effective September 1, 2023, the Texas Secretary of State’s business lobby hours (hours in which the office will be open to the public) are changing. The new lobby hours will be 9:00 am to 4:00 pm (Central). (Currently, 8:00 am to 5:00 pm (Central)).

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