New Case Re Transacting Business in Texas

Strange but true, how “Door Closing” statutes can affect you:

Many States including Texas have “Door Closing” statutes. Texas’ statute is T.B.O.C. § 9.051.  These provisions restrict foreign entities that: 1) are required to register and 2) have failed to register, from maintaining an action in a court of that state.  That is, these entities may not be plaintiffs until they comply with the statute.  The foreign entities may, of course, defend themselves if sued, but may be denied the opportunity to make counterclaims until they are in compliance.

Of course, the tricky part of the statute is that entities are only required to register if the entity “transacts business in this state.”  While a seemingly innocuous definition, the legislature has deemed it necessary to define it in the negative, by listing a non-exclusive set of activities deemed not to be “transacting business in this state.”  See T.B.O.C. §9.251 for the full list.

You might say, “Hey Mike, why are you talking about this?  Aren’t you a bankruptcy lawyer silly?  Why does this concern you?”  Well, I’ll tell you.  It seems to me that these state law provisions could exclude plaintiffs in bankruptcy court from either maintaining an adversary or perhaps even being deemed to have an allowed claim in a bankruptcy case.

It is long accepted by case law that these “Door Closing” statutes are valid as precluding foreign entities from filing in federal district court as an end run around the registration requirements. See Baxter v. Aguilar, 2007 U.S. Dist. LEXIS 72053 (W.D. Tex. 2007); Kutka, 568 F.Supp. 1527 (S.D. Tex. 1983); Normandie Oil Corp. v. Oil Trading Co., 139 Tex. 402 (1942); Motor Supply Co. v. General Outdoor Advertising Co., 44 S.W.2d 507 (Tex. Civ. App. – Texarkana 1931, no writ).  The question then, is would this also apply in bankruptcy court?  It does.  As you may imagine, there is very little case law on the topic.  A case styled In re Cutler-Owens International LTD., 55 B.R. 291 (Bankr. S.D.N.Y. 1985) well illustrates how to use a failure to register as a shield or a weapon in bankruptcy court.  That case holds that construing § 558 (which preserves all defenses to the estate) and § 502(b) (which governs allowance or disallowance of a claim) of the Bankruptcy Code together mean that a “Door Closing” statute is a personal defense which may be asserted and that the “Door Closing” statute renders the entities claims unenforceable.  That means the court is precluded from determining even if the claim ought to be treated as an allowed claim.

With the case law on this topic still developing it seems to be a ripe area for argument should the right facts and parties present themselves.

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