Texas Supreme Court Reaffirms the Principle That Ownership of an Entity Does Not Automatically Equate to Liability for that Entity’s Acts or Omissions

July 26 2023| News| | By Jim Bartlett

In a recent Texas Supreme Court (the “Court”) opinion in the case styled In re First Reserve Mgmt., L.P., the court reaffirmed and clarified the pleading and substantive standards for holding an investor in an entity liability for the entity’s acts or omissions. No. 22-0227, 2023 Tex. LEXIS 675, at *1 (Tex. June 23, 2023).

In the context of a series of legal disputes following a plant explosion, TPC, the owner of the plant, filed for bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware in June 2022. The bankruptcy court approved a reorganization plan that included a global settlement. As part of this settlement, TPC relinquished any potential claims its estate might have had against First Reserve, an investment firm with interests in TPC. The central issue that arose was whether certain claims the plaintiffs intended to levy against First Reserve were the domain of TPC’s estate (and thus barred from prosecution due to the settlement) or belonged to the plaintiffs themselves.

The bankruptcy court determined that while the plaintiffs’ veil-piercing and alter ego claims against First Reserve fell under the domain of TPC’s estate and were thus released and enjoined from prosecution under the confirmed plan of reorganization (the “Plan”), it recognized a distinct, separate claim alleged by plaintiffs. This claim, termed “negligent undertaking,” posited that First Reserve had significant involvement in TPC’s operations to the extent that it was responsible for safety measures and had negligently managed this responsibility. The bankruptcy court required the plaintiffs to revise their claims to comply with the Plan injunction.

The In re First Reserve Mgmt., L.P. case focused on the “negligent undertaking” claim pled in plaintiffs’ third amended petition in the MDL court. Under Texas law, if a person takes on a responsibility it knows or should know is necessary for protection of another’s person or things, it is generally required to exercise reasonable care in that endeavor. However, the duty is only implicated by an affirmative course of action; liability for negligent undertaking cannot be predicated on an omission.

The Court grappled with whether First Reserve (its catch-all term for all of the Relators), in its capacity as an investor with an ability to appoint board members, could be held liable for the operational decisions of TPC, especially those that may have led to the explosion. Texas Rule of Civil Procedure Rule 91a, a key legal provision discussed in the opinion, allows for the dismissal of a claim if, when taken as true, the allegations do not provide a basis for the relief sought. The Court determined that simply because First Reserve had an ownership interest in TPC and could appoint board members, it did not inherently bear liability for TPC’s decisions and actions. Thus, the Court found that the plaintiffs’ allegations did not sufficiently demonstrate that First Reserve directly controlled TPC’s safety operations or was negligent in such a capacity.

The case underscores the complexity of corporate structures and responsibilities. Even though First Reserve had ties to TPC and some influence over its board, the Court found that this did not necessarily translate into direct operational control or responsibility. Moreover, the plaintiffs’ allegations were found wanting, as they could not factually demonstrate First Reserve’s direct and negligent involvement in TPC’s safety protocols and decisions leading to the explosion.

However, complicating the matter was the ongoing bankruptcy proceedings and the amended claims submitted by the plaintiffs. Even as the Court ruled on the sufficiency of the plaintiffs’ allegations in the third amended petition, the backdrop of the bankruptcy court’s injunctions and the potential for new claims in future amendments loomed large.

Concluding its discussion, the Court opted for a cautious approach. While it provided clarity on the issues surrounding the third amended petition, it chose not to direct the MDL court on further action. Given the complexities and the evolving nature of the bankruptcy court litigation, the Court deemed it appropriate to leave certain decisions to the MDL court, while still offering its judgment on the central issues raised by the case.