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CALIFORNIA CORPORATE & SECURITIES LAW

Court Allows An Exhausted FTC To Serve Summons On The California Secretary Of State

The Federal Trade Commission is not pleased with Discountmetalbrokers, Inc.  In fact, the FTC is so unhappy with the company that it filed a complaint alleging that the company held itself out as a legitimate seller of gold and silver but would often fail to deliver product.  According to the the FTC, the company has “scammed consumers out of more than $33 million”.

Filing a lawsuit, however, is only the first step in a civil enforcement action. For a lawsuit to proceed, it must be served and that is where the FTC ran into problems.

The California Code of Civil Procedure establishes four ways to effect service of a summons on a corporation.  Under Section 416.10, service may be effected by delivering the summons:

  • To the person designated as agent for service of process as provided by any provision in Section 202, 1502, 2105, or 2107 of the Corporations Code (or Sections 3301 to 3303, inclusive, or Sections 6500 to 6504, inclusive, of the Corporations Code, as in effect on December 31, 1976, with respect to corporations to which they remain applicable).
  • To the president, chief executive officer, or other head of the corporation, a vice president, a secretary or assistant secretary, a treasurer or assistant treasurer, a controller or chief financial officer, a general manager, or a person authorized by the corporation to receive service of process.
  • If the corporation is a bank, to a cashier or assistant cashier or to a person specified above.
  • If authorized by any provision in Section 1701, 1702, 2110, or 2111 of the Corporations Code (or Sections 3301 to 3303, inclusive, or Sections 6500 to 6504, inclusive, of the Corporations Code, as in effect on December 31, 1976, with respect to corporations to which they remain applicable), as provided by that provision.

Corporations Code Section 1702 provides that when summons “cannot be served with reasonable diligence”, a court may order that the service be made upon the corporation by delivering by hand to the Secretary of State, or to any person employed in the Secretary of State’s office in the capacity of assistant or deputy, one copy of the process for each defendant to be served, together with a copy of the order authorizing such service.  In FTC v. Discountmetalbrokers, Inc., 2016 U.S. Dist. LEXIS 91136 (C.D. Cal. July 13, 2016), Judge Otis D. Wright II found that the FTC was entitled to such an order, having exhausted all methods of effecting service.

The procedure established by Section 1702 doesn’t appear to be particularly unusual, but it does give rise to an interesting question.  Subdivision (d) of the statute provides that the court order may be issued by a court of another state, or any federal court if the suit, action, or proceeding has been filed in that court.  My question is how can a state statute confer authority on the court of another state or the federal courts?

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