economic development corporation dissolution development corporation dissolution by: leonard v....

Economic Development Corporation Dissolution

by: Leonard V. Schneider, JD, MBA Ross, Banks, May, Cron & Cavin, P.C.

Texas City Attorneys Association’s 2004 Summer Conference Radisson Resort

South Padre Island, Texas

June 10, 2004

___________________________

Acknowledgments

In writing this paper, this author wants to acknowledge his reliance upon and use of the excellent publication by the Attorney General, the 2002 “Handbook on Economic Development Laws for Texas Cities.” Further, thanks to Joy Brady for her editing, to J. Grady Randle, Bob Bearden at the Comptroller’s office and Jeff Moore of Brown & Hofmeister, L.L.P. for their comments and review. It is important to note that this paper is not intended to be specific legal advice or to be acted upon as legal advice. This paper is an overview of the statute authorizing Economic Development Corporations and the Non-Profit Corporation Act and some of the issues faced by the EDC Board of Directors and Municipal Attorneys.

Copr. © Leonard Schneider 2004

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Table of Contents

Page Introduction..........................................................................................................................1 I. WE WANT TO DISSOLVE .................................................................................1 A. How and Why ....................................................................................................1 B. Brief Background on the Byzantine Act ............................................................2 II. WAYS TO DISSOLVE..........................................................................................2

A. Dissolution by Resolution of City Council ........................................................2 B. Dissolution upon Completion of Purpose ..........................................................3

C. Dissolution by Election called by the Voters.....................................................4 D. City Dissolution v. Voter Dissolution................................................................4

(1) 4B Corporation.......................................................................................4 (2) 4A Corporation.......................................................................................5 E. What about the Tax Code? .................................................................................5 F. What is the Answer?...........................................................................................6 III. STATUTORY STEPS TO HAVE DISSOLUTION APPROVED.......................7

A. Determine if there are any Pre-existing Obligations..........................................7 B. Pre-existing Bond Obligations or Projects.........................................................7 C. Steps for Dissolution ..........................................................................................7

(1) Resolution by the City............................................................................7 (2) Resolution by the EDC...........................................................................8 (3) Prepare and Adopt Plan of Dissolution..................................................8

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(4) Prepare and File Articles of Dissolution............................................. ..9 (5) Continued Existence after Dissolution for Three Years......................11

IV. DISCONTINUING THE SALES AND USE TAX ..............................................11

A. Mont Belvieu 4B Corporation .........................................................................11 (1) Ballot Language to Abolish the Tax....................................................12 (2) Documents Required by Comptroller from Mont Belvieu..................13 B. Documents Required When Dissolved by City Council under Section 34......13 C. Documents Required When Dissolved by Election called by the Voters ........13

V. WHAT TO DO NEXT .........................................................................................14

A. EDC has Sufficient Funds

on Hand to Pay all Debts or Provide for Pending Suits.............................14 B. EDC needs to keep Collecting Taxes to Pay off Existing Debt .......................14

VI. LITIGATION CONCERNS ...............................................................................14

A. Notice of Dissolution .......................................................................................15

B. Notices after Secretary of State Issues Certificate of Dissolution ..................15

VII. EPILOGUE .........................................................................................................16

APPENDIX Secretary of State Form Articles of Dissolution Non-Profit Organization..................... A-1

Articles of Dissolution filed by the Mont Belvieu EDC..................................................A-2

Letter sent to Secretary of State with Articles of Dissolution......................................... A-3

Letter sent to Comptroller Request Discontinuance of Tax............................................ A-4

Selected Sections of Article 5190.6.................................................................................A-5

ROSS, BANKS, MAY, CRON & CAVIN, P.C. LEONARD V. SCHNEIDER

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Economic Development Corporation Dissolution

Introduction Dissolution:

“1 : the act or process of dissolving : as a : separation into component parts b (1) : DECAY, DISINTEGRATION (2) : DEATH c : termination or destruction by breaking down, disrupting, or dispersing the dissolution of the republic” Merriam-Webster Online Dictionary (2004)

Dissolve:

“1 a : to cause to disperse or disappear : DESTROY b : to separate into component parts : DISINTEGRATE c : to bring to an end : TERMINATE <dissolve parliament> Merriam-Webster Online Dictionary (2004)

I recently had the opportunity and challenge to assist in the dissolution of the Mont Belvieu 4B Economic Development Corporation. For purposes of this paper, only the dissolution of 4A and 4B economic development corporations (“EDC”) will be discussed. I. WE WANT TO DISSOLVE A. How and Why

A city council or EDC board asks you how to cause the disintegration and termination of its EDC. It would be correct to assume this is a question not often asked. Prior to writing this paper, the Comptroller’s Office and the Secretary of State, combined, gave information that approximately seven (7) EDC’s had been dissolved by election or resolution. My research indicates that the dissolution of a Section 4B EDC has been caused less than five times in the State of Texas.

As the question of how to dissolve an EDC is unique, it makes sense to determine: (i) why the dissolution of an EDC is sought; (ii) by what method an EDC can be dissolved; (iii) when an EDC can be dissolved; and (iv) what are the possible consequences of dissolution.

The “why” normally involves politics and money. In all cities, there are pro-growth and non-growth factions and different views on how to use public money. The more difficult determinations are the “how,” “when” and the “potential consequences.” The answers to these questions require the review of two primary statutes:


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(i) The Development Corporation Act of 1979, Vernon’s Ann. Texas Civil Statutes,

Art. 5190.6 and its amendments (hereinafter referred to as “the Act”); and (ii) The Texas Non-Profit Corporation Act (hereinafter the “Non-profit Act.”)

This sounds simple enough, except when the realization hits that: (i) you have to

reconcile two separate legislative acts; (ii) review the Act which is 38 pages long with numerous amendments1; (iii) possibly deal with conflicting interpretations of the Act by the offices of Texas Attorney General (“AG”), Secretary of State and the Comptroller; and, (iv) worst of all, review the Tax Code. Further, the AG has made the following realistic statements concerning the Act in two of its written Opinions:

(i) “Given the numerous and rather selective changes to the Act since it was first adopted in 1979, it is less than a coherent or consistent statute.” 2; and

(ii) “We begin our analysis of your question with a brief review of the somewhat

Byzantine provisions of the Act.” 3

B. Brief Background on the Byzantine Act

The Act became law in 1979, however, it did not contain Sections 4A and 4B and the importance of this distinction will be discussed later. Section 4A was added in 1989 by 71st Leg., and became effective on June 14, 1989. The 72nd Legislature added Section 4B in 1991 and became effective on March 28, 1991. The popularity of the Section 4B sales tax was the impetus for the 1993 amendment making a Section 4B sales tax available to any city also eligible to adopt a Section 4A sales tax. According to the AG, more than 475 cities have either a Section 4A or a Section 4B sales tax for economic development. II. WAYS TO DISSOLVE

A. Dissolution by Resolution of City Council

The authority for a city council to unilaterally dissolve an EDC by resolution is provided by Section 34 of the Act, which preceded both Sections 4A and 4B. Section 34 states:

Sec. 34. At any time the unit may in its sole discretion alter the structure, organization, programs, or activities of the corporation or terminate and dissolve the corporation, subject only to any limitation provided by the constitution and laws of the state on the impairment of contracts entered into by the corporation. Such alteration or dissolution shall be made by written resolution of the governing body of the unit and as hereinafter provided.4


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A literal reading of Section 34 states the city, for any reason, may terminate and dissolve a Section 4A or 4B corporation subject to any limitation provided by the constitution and laws of the state on the impairment of contracts entered into by the corporation.

When dealing with legal questions and what actions can be taken, it is important to note that when the Act is in conflict with other laws, the Act prevails. This is stated both in Section 23 and Section 37 of the Act. These sections are shown below:

Sec. 23. (a) The corporation shall have and exercise all of the rights, powers, privileges, authority, and functions given by the general laws of this state to nonprofit corporations incorporated under the Texas Non-Profit Corporation Act, as amended (Article 1396-1.01 et seq., Vernon's Texas Civil Statutes); but to the extent that the provisions of the general laws are in conflict or inconsistent with this Act, this Act prevails. 5

Section 37; [a]nd in any case, to the extent of any conflict or inconsistency between any provisions of this Act and any other provisions of law, this Act shall prevail and control; provided, however, any unit and any corporation shall have the right to use the provisions of any other laws not in conflict with the provisions hereof to the extent convenient or necessary to carry out any power or authority, express or implied, granted by this Act.

Without going into a lot of detail and a whole other sub-topic, this author believes that if

an EDC does not have enough money on hand to satisfy any outstanding debts, then a city should not unilaterally terminate the EDC. The termination of the EDC will not stop the sales and use tax until all debts have been paid off. 6 Further, the dissolution of the EDC by city council in all probability may cause a breach by the EDC of any lending agreements for projects or bond issuance. That will invite litigation. On the other hand, if the EDC has sufficient cash available, then arguably the city may dissolve the corporation as the Non-Profit Act provides that as part of the dissolution process, funds should be set aside to pay off any outstanding claims or obligations. 7 Section 4B(i) of the Act also provides that notice can be sent to the Comptroller to discontinue the sales and use tax after all obligations and bonds have been paid or a sufficient amount of money has been set aside in a trust fund dedicated to the payment of the bonds and other obligations. 8 For 4A corporations the Texas Attorney General has concluded that an EDC may set up an escrow account to set aside monies to pay off future obligations and thereafter notify the Comptroller to discontinue the sales and use tax. 9 B. Dissolution upon Completion of Purpose

Section 35 of the Act provides that the Board of Directors of the EDC may by resolution dissolve the EDC if the board finds that the purposes for which the corporation was formed have been substantially complied with and that all bonds theretofore issued by the corporation have been fully paid. However, the EDC is not dissolved unless the governing body of the city which created the corporation approves by written resolution. 10


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C. Dissolution by Election called by the Voters

Both Section 4A and 4B of the Act provide that a city shall order an election on whether or not to dissolve an EDC upon receipt of a petition of 10 percent or more of the registered voters of the city requesting an election on said issue. 11 The ballot language to use to dissolve a corporation is found in Sections 4A(k) and 4B(o)(2) of the Act.

Both Sections 4A and 4B generally provide that if the majority of voters approve the

dissolution, the EDC shall continue to operate only as necessary to pay any principal and interest on bonds and to meet any obligations incurred before the date of the election. To the extent practicable, the EDC should dispose of its assets and apply proceeds to any outstanding obligations. When all obligations are satisfied, then the remaining assets, if any, are transferred to the City and the corporation is formally dissolved and the sales tax is only discontinued after the Comptroller is notified that all obligations are satisfied.12 There are some important provisions in the Non-Profit Act on dissolution procedures that will be covered later. D. City Dissolution v. Voter Dissolution

Sections 4A and 4B were enacted after Section 34 (and Section 35). Section 4A(k) gives the voters the right to call an election to dissolve by petition. Section 4B(o), gives the voters the right to call an election to dissolve by petition and was added to the Act in 1999. 13 Consequently, some will argue that the “Equal Dignity” rule applies and that a city cannot unilaterally dissolve an EDC created after the enactment of 4(A)(k) and 4B(o) under Section 34.14 This rule states that it takes a law to repeal a law, and that an act which destroys should be of equal dignity with that which established the procedure.15 Additionally, the provisions of Sections 4A and 4B provide that each section respectively prevails to the extent of any conflict between each section and other sections of the Act, such as Section 34. 16 (1) 4B Corporation

Prior to 1999, the voters did not have a right to call an election to dissolve the corporation. This is different than abolishing the tax, but has the same net effect. If the voters properly call for an election and vote to dissolve the EDC, the end result is the dissolution of the EDC and the eventual discontinuance of sales tax.

It is fair to say that most people agree that 4B corporations that were created before

September 1, 1999 may be dissolved unilaterally by resolution of the city council pursuant to Section 34.17 It is also fair to say (due to “Byzantine” provisions) that people disagree how a 4B corporation may be dissolved after September 1, 1999. One argument is that 4B corporations formed after September 1, 1999 can only be dissolved by election called by petition (or possibly election unilaterally called by council in a home rule city) and therefore, the “Equal Dignity” rule applies.18 Further rationale for this argument is that any vote of the people to institute a sales tax should only be repealed by a vote of the same people.


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The counter-argument by a city attorney (who is asked by council why they cannot dissolve the EDC) is that Section 34, in conjunction with the city’s right to supervise and authorize all expenditures of public money,19 would seem to give the city the right to unilaterally move to abolish a 4B EDC. Further, there are no Texas cases or opinions of the Attorney General, that hold a city cannot use Section 34 to unilaterally dissolve a post-1999 4B corporation.

(2) 4A Corporation

Conceivably, the same argument that can be applied to a 4B corporation may be applicable to a Section 4A corporation, with the difference being the dates. Section 4A corporations were authorized in 1989 and the relevant parts of Section 4A(k) were in effect at that time. The “Equal Dignity” rule could be applied to the question of whether or not a city may unilaterally pass a resolution to dissolve a 4A corporation under Section 34. The Attorney General does not address a city’s ability to unilaterally dissolve a 4A corporation in its Handbook. 20 E. What about the Tax Code?

Section 4B(f) of the Act states in part:

(f) [C]hapter 321, Tax Code, governs the imposition, computation, administration, collection, and remittance of the tax except as inconsistent with this section.

This section is silent as to the abolishment of taxes being governed by the Tax Code.

However, Section 4A(e) of the Act states in part:

(e) The Municipal Sales and Use Tax Act (Chapter 321, Tax Code) governs an election to authorize the imposition of the sales and use tax under this section and governs the imposition, computation, administration, governance, abolition, and use of the tax except as inconsistent with this section.

Section 4A(e) states the Tax Code governs the “abolition” of the tax “except as

inconsistent with this section,” which appears to refer to Section 4A. This particular section may have an impact on how the Comptroller reacts to a letter from a city to discontinue a tax if the city has unilaterally dissolved the 4A corporation. It may be determined that Section 4A(e) is in conflict with Section 34. If so, Section 4A(b) provides that Section 4A controls to the extent of a conflict between 4A and the rest of the Act. Consequently, it is possible the Comptroller may not discontinue a 4A sales and use tax if there was no election to abolish the tax. It is recommended that the city attorney contact the Comptroller’s office prior to a city council unilaterally dissolving a 4A corporation pursuant to Section 34.


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F. What is the Answer?

Now that we truly know the Act, “it is less than a coherent or consistent statute,” and has “Byzantine provisions,” we can look to past actions of the Comptroller’s office for some guidance. The Comptroller’s office has received letters to stop the collection of the sales and use tax from cities that have unilaterally dissolved a 4B corporation. Upon proper proof, documentation and representation that all obligations of the 4B corporation have been satisfied and/or sufficient provision has been made for any outstanding debts, the Comptroller’s office has stopped the collection of the sales and use tax in regard to a 4B corporation. 21

The Comptroller’s office verified it has never received a letter to discontinue a sales and use tax from a city which has unilaterally dissolved a 4A corporation. 22 The Comptroller’s office has received two letters, one from the City of Lubbock and another from the City of Pampa, to discontinue a sales and use tax because the voters had elected to dissolve the corporation. The elections were held after the voters of each city presented a proper petition according to Section 4A(k) of the Act. 23

It is this author’s opinion that a city may unilaterally dissolve a 4B corporation under Section 34 of the Act until a court or the Attorney General holds otherwise. After performance of all the statutorily required steps, the city can send a letter to the Comptroller with proper documentation requesting the sales and use tax be discontinued. This author also believes that Section 34 and Section 4B(o) are not in conflict with each other. It is recommended that the city attorney call the Comptroller’s office to determine what the Comptroller needs from the city to stop the collection of the tax. 24 The practice of the Comptroller’s office has been to follow the directives of a city if all requirements have been met. If there is a challenge contesting the ability and/or legality of a city to unilaterally dissolve a corporation, then the practice of the Comptroller’s office is to make its own determination or seek an Attorney General opinion in that type of situation.25 A challenge is rare and probably has not been done before in regard to 4A or 4B tax according to the Comptroller’s office. 26

Regarding a 4A corporation, this author still believes that a city may unilaterally dissolve a 4A Corporation until some authority states you cannot. However, this is a more risky proposition since the Comptroller has never been requested to stop the collection of a tax in this situation and, therefore, no precedent exists. As noted earlier, Section 4A(e) states the Tax Code governs the imposition of a sales and use tax and the “abolishment” of the same. This is important because the Tax Code provides that in any municipality in which an additional sales and use tax has been imposed, in the same manner and by the same procedure, the qualified voters of the municipality, in an election held for that purpose, may reduce, increase, or abolish the additional sales and use tax. 27


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III. STATUTORY STEPS TO HAVE DISSOLUTION APPROVED

A. Determine if there are any Pre-existing Obligations

First, it must be determined if there are any pre-existing bond obligations or obligations that pre-date either the date of the election or the date the city council by resolution voted to dissolve the EDC. Although the EDC may technically be dissolved, the sales and use tax will continue to be collected until all pre-existing bond debt is paid. 28 In addition to the statutory requirement that the tax continue, banks and other lending entities will put in the note or loan agreements that discontinuance of the EDC tax is a breach of the agreement and may accelerate the payment obligation under the agreements.

The EDC’s existing obligations in the form of incentives and other properly approved current projects involving use of sales tax funds have to be reviewed. Any debt that is part of pre-existing obligations will have to be paid in full before the EDC sales and use tax is discontinued. Remember that Section 34 states that a city may unilaterally dissolve an EDC “subject only to any limitation provided by the constitution and laws of the state on the impairment of contracts entered into by the corporation.” 29

B. Pre-existing Bond Obligations or Projects

It is this author’s recommendation that if the EDC has sufficient cash reserves to pay off any existing debt, or potential claims, then the city may go forward with the unilateral dissolution of the EDC. As stated earlier, the Non-Profit Act provides that as part of the dissolution process, funds should be set aside to pay off any outstanding claims or obligations. 30

If the dissolution occurs because of an election called by the city in response to a petition by the voters, the tax will continue until all obligations are met and the Comptroller is notified of such.

C. Steps for Dissolution

Both the Act and the Non-Profit Act require the filing of “Articles of Dissolution” (“Articles”) with the Secretary of State (“SOS”). The Non-Profit Act has a form that requires a statement that a resolution to dissolve was adopted by the corporation and/or the city, or both.

(1) Resolution by the City

If the dissolution is unilaterally done by city council, then a resolution of such is required by Section 34 of the Act. If the dissolution is requested by the Board of Directors under Section 35, the city is still required to pass a resolution. If the dissolution is by election through petition, the city should pass a resolution reflecting the election results. The Articles require a statement


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that a resolution has been passed concerning dissolution of the EDC.

(2) Resolution by the EDC

It is recommended that the EDC Board of Directors pass a resolution: (i) to reflect the city has dissolved the EDC under Section 34; (ii) if the Board wishes to dissolve under Section 35; and (iii) if dissolution by election, pass a resolution reflecting the election results and intent to dissolve.

(3) Prepare and Adopt Plan of Dissolution

A Plan of Dissolution should be drafted and approved by the EDC Board of Directors and the city council to comply with Sections 4A(k), 4B(o) and 36 of the Act and Sections 1396-6.02 & 6.03 of the Non-Profit Act. In the Appendix is the copy of the Plan adopted by the Mont Belvieu 4B Corporation.

A Plan should: (i) provide a listing of the EDC’s current obligations and debts; (ii) state

action is required to collect its assets; (iii) provide for the liquidation of non-cash assets if necessary to apply to debt, or if sufficient cash is on hand, list non-cash assets for eventual transfer to the city; (iv) list all claims and potential claims and any obligations based upon future events; (v) recommend to the city an amount sufficient to satisfy all claims and potential claims and obligations based upon future events; and (vi) provide that upon approval of the city, the corporation shall proceed to place said amount in a separate escrow account with specific instructions and procedures as to any payments from the said escrow account.

The Plan should also provide that the corporation, after setting aside sufficient assets to satisfy all obligations, debts, claims and potential claims, shall set aside any remaining assets for transfer to the city.

Further, the Plan shall state the EDC shall formally dissolve by filing Articles of Dissolution with the SOS in compliance with the provisions of the Texas Non-Profit Corporation Act and the Development Corporation Act of 1979.

Finally, the Plan will provide that the EDC will continue its corporate existence for a period of three (3) years from the date the Certificate of Dissolution is issued by the SOS, or as required by law, for the following purposes:

(i) prosecuting or defending in its corporate name any action or proceeding by or against the corporation;

(ii) permitting the survival of any remedy not otherwise barred by limitations

available to or against the corporation, its officers, directors, members, or creditors, for any right or claim existing, or any liability incurred, before the dissolution;


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(iii) hold title to and liquidate any assets or property that remain in the corporation at the time of dissolution, or assets/property that is collected by the corporation after its dissolution, and apply those assets or properties to any outstanding debts, obligations, claims or potential claims, and as soon as practicable, transfer the remaining assets or properties thereof, or the proceeds thereof, to the city; and

(iv) settling any other affairs not completed before its dissolution.31

(4) Prepare and File Articles of Dissolution

Both Sections 23(a) and 36 of the Act and Section 1396-6.05 of the Non-Profit Act require that Articles of Dissolution (“Articles”) be prepared and forwarded to the SOS. A form is provided in the Non-Profit Act and a copy of the form is attached in the Appendix along with a modified form that was approved by the SOS for the Mont Belvieu 4B Corporation.

The Articles advise the SOS of the following items: (i) name and charter number of the

corporation; (ii) the fact that a resolution to dissolve was properly adopted; (iii) that all the debts, obligations and liabilities of the corporation have been paid and discharged or adequate provision has been made for such; (iv) that the remaining assets of the corporation have been transferred and advise the date when the sales and use tax will be discontinued and how these funds will be used or if they will be transferred to the city; and (v) whether or not there are any pending or contemplated lawsuits and if so, that adequate provision(s) have been made for such.

The Act is not specific on when to file the Articles. The Non-Profit Act states the

following:

“[w]hen all debts, liabilities and obligations of the corporation have been paid and discharged, or adequate provision has been made therefor, or, in case its property and assets are not sufficient to satisfy and discharge all the corporation's liabilities and obligations, then when all the property and assets have been applied so far as they will go to the just and equitable payment of the corporation's liabilities and obligations, and all of the remaining property and assets of the corporation have been transferred, conveyed or distributed in accordance with the provisions of this Act, articles of dissolution shall be signed on behalf of the corporation by an officer and shall set forth...”32

A 4B or 4A corporation will always have sufficient assets to pay its debts as the tax cannot be discontinued until all debts are discharged.

Prior to filing the Articles, the EDC should have the non-cash assets either converted to cash to apply to debt or in the alternative, transferred to the city by resolution. Non-Cash assets include personal property such as office equipment and may include any real property that has been purchased by the EDC. Further, all debts should have been paid or adequate provision


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made to pay any outstanding debts or to handle any potential or contemplated litigation. One procedure is to set up a separate account and transfer to that account sufficient funds needed to pay off debt or to provide for any potential litigation. It is recommended the EDC adopt a resolution that states these funds are to only be spent for the designated debt(s) or litigation. The resolution should state that any funds left will be transferred to the city.

If the EDC foresees that it will have to function for up to three years after the SOS issues

a Certificate of Dissolution, it can adopt a resolution or budget to set aside sufficient funds in an operating account to allow it to meet any operating expenses during that time frame. Any unused funds will have to be transferred to the city.

Section 36(b) & (c) of the Act provide that:

(b) [U]pon the issuance of such Certificate of Dissolution, the existence of the

corporation shall cease, except for the purpose of suits, other proceedings, and appropriate corporate action by members, directors, and officers as provided in this Act.

(c) Whenever dissolution occurs, whether instituted by the governing body

unit or by the board of directors of the corporation, the dissolution proceedings shall transfer the title to all funds and properties then owned by the corporation to the unit under whose auspices the corporation was created.

A section in the Articles allows the explanation of the distribution of funds. The form

provided by the SOS can be modified to fit an EDC. The EDC can advise that all remaining property and assets of the corporation are being transferred or have been transferred, conveyed or distributed in accordance with the provisions of the Texas Non-Profit Corporation Act and Section 36(c) of the Act. If the sales and use tax will continue until a certain date after dissolution, the EDC should advise the Secretary of State of this fact and that the corporation will receive these monies and if applicable, transfer the necessary amounts to the city pursuant to Article 5190.6.

The EDC files the Articles with the SOS in accordance with Section 36(a) of the Act

which provides that: (a) Articles of dissolution shall be executed in triplicate by the corporation by

its president or a vice-president and by its secretary or an assistant secretary or by the presiding officer and secretary or clerk of the governing body under whose auspices the corporation was created. Triplicate originals of such articles of dissolution shall be delivered to the secretary of state. If the secretary of state finds that such articles of dissolution conform to the requirements of this Act, he shall, when a fee of $25 has been paid:


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(1) endorse on each of such originals the word "Filed" and the month, day, and year of the filing thereof;

(2) file one of such originals in his office; and (3) issue two certificates of dissolution to each of which he

shall affix an original. Once the SOS approves the Articles, it will issue the Certificate of Dissolution and forward two copies, one for the EDC and one for the city. At this time, the EDC is formally dissolved. This date is important as it triggers deadlines that can shorten the statute of limitations to file suit against an EDC to one year. 33

(5) Continued Existence after Dissolution for Three Years

An EDC may have to wait before filing the Articles if the EDC has bond debt or other debt where it will take more than three (3) years of tax collection to pay off that debt. This is important to consider because once the SOS approves the Articles of Dissolution, the corporation will remain in existence for a period of three years as required by the Non-Profit Act for the purposes listed in the Plan of Dissolution as discussed in the above Sections (3) and (4). 34

IV. DISCONTINUING THE SALES AND USE TAX

As noted previously, the Act provides that when an EDC is dissolved, either by election or by unilateral action of the city, notification must be sent at the proper time to the Comptroller with proper documentation and a request made to discontinue the tax.

A. Mont Belvieu 4B Corporation The Mont Belvieu 4B corporation was unilaterally dissolved by city council in March of

2003. However, the city council took the additional step of calling an election to abolish the sales and use tax for the EDC. A second proposition was added to the ballot to adopt a new sales tax (equal to the EDC sales tax) to offset property taxes.

The EDC sales and use tax would have been discontinued whether or not there was an

election because the corporation had been dissolved and the Comptroller would have been eventually asked to discontinue the tax. The EDC tax is discontinued after the last day of the first calendar quarter that begins after the city provides notice to the Comptroller. 35 For example, in the Mont Belvieu dissolution, if the city notified the Comptroller to discontinue the EDC tax on or before June 30, 2003, then the tax would stop being collected on September 30, 2003.


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The city council wanted to take the extra step of calling an election to prevent the EDC sales and use tax from being captured by another taxing entity. According to Section 321.002(b) of the Tax Code, the Comptroller can only implement a voter approved additional sales and use tax for a reduction of ad valorem taxes in the month of October of each calendar year. Mont Belvieu called the election in May of 2003 and the voters abolished the EDC tax and approved the new tax. The Comptroller had to be notified before June 30, 2003 to discontinue the EDC tax for the new tax to begin on October 1, 2003. If the City failed to meet the June 30, 2003 deadline, then the new tax could not be implemented until October 1, 2004.

(1) Ballot Language to Abolish the Tax Regarding the language to put on a ballot to abolish the sales and use tax, the Tax Code

has two relevant sections. Section 321.101(d) provides that “in any municipality in which an additional sales and use tax has been imposed, in the same manner and by the same procedure the municipality by majority vote of the qualified voters of the municipality voting in an election held for that purpose may reduce, increase, or abolish the additional sales and use tax.”(emphasis added)

Section 321.404, subsection (b), of the Tax Code states as follows: “In an election to

repeal the tax, the ballot should be printed to provide for voting for or against the proposition: “the local sales and use tax within the city is abolished,” or “the abolition of the additional sales and use tax within the city.””

After consulting with the Comptroller’s office, the above two tax code provisions were

used to guide in drafting appropriate ballot language to abolish the 4b sales tax. The original ballot language to impose the tax was:

" Proposition Number 1. The adoption of an additional 1/2 of 1% sales and use tax for economic development and expenditures as permitted and authorized under the provisions of Article 5190.6 Section 4b, Vernon's Annotated Civil Statutes."

The original ballot was modified to fit the Tax Code provisions cited above and stated:

" Proposition No. ____. The abolition of the additional 1/2 of 1% sales and use tax for economic development and expenditures as permitted and authorized under the provisions of Article 5190.6 Section 4b, Vernon's Annotated Civil Statutes."

The ballot language was approved and the election results were accepted.

As noted the voters abolished the EDC tax and adopted the new tax. Before and after the

election in May of 2003, the Mont Belvieu EDC took the necessary steps: (i) to adopt a plan of dissolution; (ii) transfer assets; (iii) set up an escrow account to transfer money to adequately provide for possible debt or liabilities; and (iv) prepare a three year operating budget. The EDC took these actions to be able to send a letter to the Comptroller to request the EDC tax be discontinued before the June 30, 2003 deadline.


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(2) Documents Required by Comptroller from Mont Belvieu In this unique situation, the Comptroller requested the following items to be sent to it

since there had been an election to discontinue the tax: (i) certified copy of the resolution by the city council stating that it was dissolving

the MBEDC; (ii) a certified copy of the resolution of the MBEDC to voluntarily dissolve; (iii) certified copy of the ballot with the two propositions; (iv) certified copy of the resolution adopting the canvas results, showing the date of

the election, the number of votes for and against each proposition, and a separate letter from the city secretary showing the number of votes by which each proposition passed; and

(v) a copy of the city map showing the city boundaries. These items were sent to the Comptroller on June 6, 2003. The Comptroller confirmed it would discontinue the EDC tax on September 30, 2003 and would implement the new tax to reduce the property taxes on October 1, 2003. B. Documents Required When Dissolved by City Council under Section 34 If the EDC has been unilaterally dissolved by city council and no election to abolish the sales and use tax was called, the Comptroller requires a copy of the ordinance the city council adopted directing the Comptroller to stop the tax. 36 C. Documents Required When Dissolved by Election called by the Voters If the EDC has been dissolved by an election called as a result of a petition by voters (or possibly called by city council in a home rule city), then the Comptroller requires the following: (i) the date of the election; (ii) a certified copy of the proposition on which the vote was held; (iii) a certification of the total number of votes case for and against the

proposition; and (iv) a certification of the number of votes by which the proposition was

approved. 37


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V. WHAT TO DO NEXT A. EDC has Sufficient Funds on Hand to Pay all Debts or Provide for Pending Suits

After the Comptroller has approved the discontinuance of the 4A or 4B tax, it will still be collected for a minimum of three months. The EDC should have already:

(i) transferred money to its escrow account if necessary to make adequate

provision for debts or possible claims; (ii) transferred assets and cash to the city; and (iii) set up an operating account for three years.

The additional taxes that are collected after notification to the Comptroller must be either transferred to the city upon receipt or transferred to the escrow account to ensure adequate provision that current debt and/or potential liability will be met. The tax cannot be used for any new business.

The EDC should then file its Articles of Dissolution with the SOS. It is recommended to

file the Articles after the Comptroller approves the discontinuance of the tax. The discontinuance of the tax should be stated in the Articles. Thereafter, the EDC will continue operations for three years for the purposes outlined in Section 1396-7.12(A) of the Non-Profit Act.

B. EDC needs to keep Collecting Taxes to Pay Off Existing Debt If the EDC is dissolved by council or by the voters, and the EDC has to keep collecting

the tax for three or more years to pay off an existing debt or bond obligation, then Sections 4A(k) and 4B(o) of the Act both provide that the Corporation may only continue for the limited purpose to take care of any remaining obligations. In this situation, arguably the city and EDC can put off filing Articles of Dissolution until all the debt has been paid. However, there may be some other factors, such as potential litigation, that may cause the city or EDC to go ahead and attempt to file Articles of Dissolution with the SOS, explaining that the taxes will continue until a certain date and how those taxes will be used.

VI. LITIGATION CONCERNS

The Non-Profit Act provides a procedure for a non-profit corporation to notify creditors and potential claimants: (i) that it has been dissolved; (ii) request that all claims be submitted to the corporation with reasons why the claim is valid; and (iii) allow the corporation to deny the claims. 38 This procedure, if done properly, will reduce the normal two and four year statute of limitations to one year.


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A. Notice of Dissolution Once a resolution for dissolution has been done (either by the city or by the voters) Section 1396-6.01B of the Non-Profit Act provides the following:

B. Upon the adoption of such resolution by the members, or by the board of directors where there are no members or no members having voting rights, the corporation shall cease to conduct its affairs except in so far as may be necessary for the winding up thereof, shall immediately cause a notice of the proposed dissolution to be mailed to each known creditor of and claimant against the corporation, and shall proceed to collect its assets and apply and distribute them as provided in this Act.

When an EDC dissolves, it is recommended the above notice of dissolution should be sent to all creditors and to all entities that have had dealings with the EDC. Any responses to this notice will assist the EDC to determine if any claims may be asserted. This also helps the EDC to plan to make adequate provision for any claims. These letters are sent out before the Articles are filed with the Secretary of State. B. Notices after Secretary of State Issues Certificate of Dissolution

The Non-Profit Act defines the term “dissolved corporation” as one that was dissolved “by the issuance of a Certificate of Dissolution or other action by the Secretary of State”. 39 When the EDC receives its Certificate of Dissolution from the SOS, it is formally dissolved and for purposes of the Non-Profit Act, the EDC can now be proactive in determining if there are any claims against it and force those claims to be filed as a lawsuit within one year.

After formal dissolution by the Secretary of State, the Non-Profit Act provides a procedure to force potential claimants to respond to letters from the EDC within certain time periods. The EDC may send out a first written notice to identified potential claimants requiring that their claim must be presented in writing to the dissolved corporation on or before the date stated in the notice, which shall be not earlier than 120 days after the date the notice is sent. The written claim must be in sufficient detail to reasonably inform the dissolved corporation of the identity of the claimant and the nature and amount of the claim. If the claimant fails to send a written presentation of the claim as required before the expiration of 120 days, then the claim will be extinguished. 40

If a claimant timely responds to the first notice letter, then the EDC may send out a

second letter rejecting the claim. The rejection letter must state that the claim will be extinguished unless an action or proceeding on the claim is brought within 180 days after the date the notice of rejection was sent to the claimant and before the third anniversary of the date of dissolution. The rejection letter must also state the date it was sent and the date of dissolution. 41


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This procedure forces the claimant to file a lawsuit if they wish to preserve their claim and allows the EDC to appropriately plan for the provision of adequate funds to handle any potential claim or lawsuit. If no claims are asserted, then the EDC after paying off any debts or liabilities, will adopt a resolution stating such and formally stop operating. This may be done before the three years to continue operations expire. VII. EPILOGUE

Litigation did occur as a result of the dissolution of the Mont Belvieu EDC. The EDC

was able to identify potential liability after the letter was sent out. The EDC had sufficient cash reserves to set aside an amount of funds to cover the potential liability. After the Secretary of State issued the Certificate for Dissolution, the EDC sent a notice requiring written presentation of any claims. Two claimants not only filed a written response, but they also filed lawsuits before the EDC could send a written rejection. The Mont Belvieu EDC was able to proceed with dissolution because it did have sufficient cash reserves and it did not require the tax to continue to handle the potential liability from the lawsuits.

The litigation against the EDC is ongoing at the time of this paper; however, summary

judgments against the Plaintiffs are set to be heard. Both actions have asserted breach of contract claims and promissory estoppel claims against the EDC. One action is based on a non-binding letter of intent to purchase property to develop into an industrial park that expired on its own terms after the dissolution by city council. The other action involved a project adopted to provide cash incentives to a corporation; however, a public hearing had not been held before the EDC was dissolved by city council.

For you litigators, Sections 4A(j) and 4B(m) provide statutory immunity from liability for

the actions of an EDC and this arguably can be applied to contract actions. One court of Appeals has recognized this immunity for a contract involving a 4A corporation.42

Hopefully, this author will be able to report the summary judgments were granted.

Forms and relevant portions of the Act and Non-Profit Act mentioned in the Paper are reproduced in the Appendix.

1 That is 8 ½ x 11 Pages in small print. 2 Tex. Att’y Gen. Op. No. JC-0494 (2002) at 3. 3 Tex. Att’y Gen. Op. No. JC-0362 (2001) at 2. 4 Article 5190.6 (hereinafter the “Act”), § 34. 5 The Act, § 23.


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6 The Act, §§ 4A(k), 4B(o) & (i). 7 Article 1396-6.05(4)(6)(hereinafter the “Non-Profit Act”). 8 The Act, § 4B(i). 9 See Att’y. Gen. Op. JC-0553 (2002) at 4-5. 10 The Act, § 35. 11 The Act, §§ 4A(k), 4B(o). 12 Id., see also 4B(o)(3)(4) & 4B(i). 13 See also Texas Senate Bill 269, Section 2, 76th Legislature, Regular Session (1999). This

uncodified portion of the bill provides that section 4B(o) applies to corporations created on or after September 1, 1999.

14 For explanation of Equal Dignity rule, see generally, City of Hutchins v. Prasifka, 450

S.W.2d 829 (Tex.1970). 15 Id. 16 See the Act §§: 4A(b)(1): “[To] the extent of a conflict between this section and another

provision of this Act, this section prevails. ” Section 4B(b): “[To] the extent of a conflict between this section and another provision of this Act, this section prevails. ”

17 2002 Handbook on Economic Development Law for Texas Cities (hereinafter the “Handbook”) at pg. 46. See also endnote 13 above.

18 See generally the Handbook at pg. 47. 19 Section 23(a)(13) of the Act; prior to 9/1/03 section (13) was labeled as section (12). 20 Handbook, at pp. 21-22. 21 April 26, 2004 conference with Local Government Assistance section of the Texas

Comptroller of Public Accounts. 22 Id. 23 Id. 24 This author recommends contacting Bob Bearden in the Local Government Assistance

Section of the Comptroller’s office at 1-800-531-5441. Mr. Bearden has taught and continues to instruct TEDC certification classes required by the Act.

25 A challenge to a request to discontinue a tax because of an election to dissolve is governed by Section 321.407 of the Tax Code. When a city council dissolves a


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corporation and requests the tax to be discontinued, the Comptroller may consider a challenge from a bank or creditor who states there is an outstanding debt. In this situation, the Comptroller may make its own decision or request an Attorney General opinion. If a challenge is made to the courts, the Comptroller would comply with the court’s directive.

26 The Comptroller’s office answered my question without doing a formal search or review,

therefore, although not likely, it is possible a challenge has been made to the Comptroller in regards to the discontinuance of a sales and use tax.

27 Tax Code, § 321.101(d). 28 See §§: 4A(k) and 4B(o)(3)(4) of the Act. 29 Section 34, the Act. 30 Non-Profit Act, 1396-6.05(4)(6), see also Att’y. Gen. Op. No. JC-0553 (2002) at 4-5. 31 Non-Profit Act, 1396-7.12(A). 32 Non-Profit Act, 1396-6.05(A). 33 Non-Profit Act, 1396-7.12(D)(E) 34 Non-Profit Act, 1396-7.12(A). 35 See §§: 4A(k) and 4B(o)(4) of the Act. 36 As advised by the Comptroller’s Office to this author on 4/27/04; see also the Act, §

4B(i). 37 Id. Documentation should be sent to: Tax Allocation Section, Revenue Accounting

Division, P.O. Box 13528, Austin, Texas 78711 38 Non-Profit Act, §§ 1396-6.01B, 1396-7.12D-F 39 Non-Profit Act, § 1396-7.12H(1)(a) 40 Non-Profit Act, § 1396-7.12D. 41 Non-Profit Act, § 1396-7.12E & F. 42 Rayl v. Borger Economic Development Corp., 963 S.W.2d 109, 114 (Tex.App.-Amarillo

1998, no writ)