What is Discharge by Operation of Law?
Discharge by operation of law is essentially when you no longer are bound by the terms of a contract due to the occurrence of a condition. This condition typically occurs when one party to the contract is no longer able to perform their contractual rights/responsibilities, without breaching the contract. Discharge by operation of law can occur in many ways, but it usually occurs when a party to a contract files for bankruptcy or upon the death of an individual involved in a contract. In the context of a divorce, discharge by operation of law occurs when a property settlement agreement becomes a final judgment from the court, in essence, converting what was once a contract into a legally enforceable judgment.
The import of discharge by operation of law is that the obligation in contract may no longer be enforced. For example, in HD Supply Facilities v. Green Environmental, [2011] NCCA 51, the North Carolina Court of Appeals held that a corporation’s payment obligations under the terms of the contract became unenforceable, when the buyer was dissolved. In the fact pattern of this case, HD Supply sold certain products to RWT. RWT then April 12, 2005, a Certificate of Dissolution was duly filed with the Arkansas Secretary of State and subsequently became effective. HD Supply made a claim against RWT for amounts owed, following which RWT sought DNAI’s indemnification. DNAI responded that RWT’s payment obligations were "discharged by operation of law" when RWT was dissolved and that DNAI had no obligation to indemnify RWT. Following a trial, the court held that the company’s dissolution extinguished the company’s debts .
Evidence submitted by the parties established that on April 11, 2005, RWT was voluntarily dissolved by its members pursuant to Ark.Code Ann.§ 4-27-1401. The next day, RWT filed a Certificate of Cancellation with the Secretary of State reflecting RWT’s decision to voluntarily dissolve. Under Arkansas law, a dissolved limited liability company continues its existence until August 15th of the fifth year following the filing of its certificate of cancellation or August 15th of the year the company filed on, whichever later, to wind up its business affairs. Ark.Code Ann.§ 4-27-1406; Ark.Code Ann.§ 4-27-804. This termination date is known as the LLC’s "winding up period." Ark.Code Ann.§ 4-27-801 (6). Therefore, the endorsement states that if the certificate of cancellation was filed on April 12, 2005, the LLC would have had six years, or until April 12, 2011, to wind up affairs, cure all outstanding obligations and legally terminate its existence. Thus, the court found that the obligation to pay any debts does not survive or bind the LLC after the April 12, 2011 termination date.
In the context of divorce, discharge by operation of law applies to the circumstances where the property settlement agreement becomes a final agreement and divorce decree which is then incorporated into the final decree of divorce. In the context of a final judgment, the fact that a party to a contract has been discharged from or tends to have been discharged from the obligations contained therein means that the court will excuse that party from performance of the obligation in question. However, there is an important caveat in that the contract must still be within the statute of limitations. If it is not, the discharge by operation of law may not be sufficient.
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