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June 2016

Texas Team Persuades Texas Supreme Court to Deny Petition for Review

Gordon & Rees Houston partner Barry G. Flynn and senior counsel Mark W. Thayer secured a Final Summary Judgment on February 12, 2014 for their client, a mid-size local accounting firm, in the face of allegations that the client negligently performed audits during a four year period.

The Fourteenth Court of Appeals affirmed the trial court’s decision on May 19, 2015. The plaintiff/petitioner filed a Petition for Review with the Texas Supreme Court on September 11, 2015, and after both sides submitted their respective brief on the merits earlier this year, the Texas Supreme Court denied the Petition for Review on June 24, 2016.

The plaintiff/petitioner was a corporate shareholder that paid for the audit of its parent corporation, and sued the client following the president’s confession in 2011 that he had embezzled approximately $4,000,000.00 from the parent, seeking recovery of all accounting fees that had been paid as well actual damages allegedly sustained as a result of the alleged negligence and breach of audit agreements.

The opportunity for summary judgment arose when Gordon & Rees counsel discovered that the plaintiff had allowed its charter to be forfeited for three years and 48 days before filing suit, thereby prohibiting it from conducting business in Texas or prosecuting a claim.

The lawsuit was filed on February 14, 2013, with the plaintiff alleging embezzlement of funds during the audit period that was not discovered until late February 2011. The audits were performed for calendar years 2004 through 2008, with an incomplete audit for 2009. The plaintiff’s charter was forfeited from February 8, 2008 through March 28, 2011.

The Texas Business Corporation Act (“Act”), which was in effect through December 31, 2009, and the Texas Business Organization Code (“Code”), which became fully effective for all Texas entities on January 1, 2010, require all “existing claims” to be filed by no later than three years after forfeiture, or they are forever extinguished.

The operative facts covered the transition from the Act to the Code, and the time frame within which the “existing claims” arose included the pre and post forfeiture time period. The plaintiff admitted in written discovery that it discovered the alleged negligence a month before the charter was reinstated in March 2011. By so doing, the alleged post forfeiture claims occurred when the plaintiff was no longer in existence.

The plaintiff argued the “discovery rule,” as well as application of certain statutory provisions that result in reinstatement “as if the termination had not occurred.” However, the Code provision relied upon by the plaintiff excluded forfeitures under the Texas Tax Code, which is what occurred in this instance by the plaintiff’s failure to file the required annual franchise tax report.

The Gordon & Rees attorneys argued that the statutory provision at issue was a statute of repose in their Brief on the Merits, that cut off the discovery rule, and any cause of action, even if it had not accrued.

The Motion for Summary Judgment was filed before the plaintiff submitted their expert report, but argued after the report issued. The firm's client obtained an extension for their expert designation and report until after the court ruled on the Motion. Final Summary Judgment was entered before lengthy depositions were scheduled to be taken. As a result, the Gordon & Rees team was able to put an end to the lawsuit before substantial expert witness fees were incurred and the client’s personnel were required to invest considerable time preparing for and giving their depositions.


Barry G. Flynn