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CALIFORNIA CORPORATE & SECURITIES LAW

Suspended And Dissolved Corporation Still Defaulted

The story is straightforward; the legal ramifications are not:

The plaintiff sued a corporation.  Before the lawsuit was filed, the Secretary of State had suspended the corporation and then the corporation was voluntarily dissolved.  The plaintiff effected service on the designated agent who happened to be an attorney.  The attorney didn’t notify either his erstwhile client or his client’s insurer.  When the corporation failed to respond, the plaintiff obtained a default judgment.  The plaintiff then contacts the defendant’s insurer who retains counsel to represent the corporation in an attempt to set aside the default.

A key question is whether the dissolved corporation was properly served. If the corporation was not given actual notice of service, then the default judgment could be set aside pursuant to Section 473.5(a) of the California Code of Civil Procedure.  It was undisputed that the attorney was actually served and that the attorney was the corporation’s agent for service of process when it dissolved.  The answer therefore turns on the answer to another question: does service on the agent for a dissolved principal constitutes actual notice?  The California Court of Appeal concluded that it does:

Here, however, Williams [the corporation] dissolved in 2012 and has been wound up; presumably it no longer has any directors, officers, agents or employees.  At least under these circumstances, we believe that notice to the person designated by the corporation as its agent for service of process is actual notice.  An agent for service of process has the necessary authority because the corporation has expressly held that person out to the world as authorized to receive notice of actions.  Indeed, in the case before us, if actual notice to Morris was not sufficient to make a default judgment stick, who else was there?

Pulte Homes Corp. v. Williams Mech., 2016 Cal. App. LEXIS 658, 9-10 (Aug. 9, 2016).

There are other, and perhaps more difficult, questions, including:

  • Did the attorney/agent for service have an obligation to notify the corporation or its insurer?
  • If the attorney/agent for service had notified a former director or officer, what could, or should, the former officer or director have done, if anything?
  • How much diligence, if any, was required on the part of the attorney/agent for service?

The Court of Appeal touched on, but explicitly did not answer, some of these questions:

We need not decide whether Morris [the attorney] owed a duty to either Williams or First [the insurer] to make an effort to notify them. We recognize that he was no longer Williams’s attorney. Also, it is at least arguable that Williams’s dissolution terminated his authority to act as its agent for service of process. He had no past or present relationship whatsoever with First. (Certainly he was not likely to get paid for his efforts.) Still, in light of the statutory directive that a dissolved corporation may be served by serving its agent for service of process at the time of dissolution, anybody who steps up to be a corporation’s agent for service of process faces at least the possibility of being served on behalf of the corporation after it has dissolved. We therefore hold that a dissolved corporation cannot claim excusable neglect when its agent for service of process at the time of dissolution has not made any effort to notify it and has not shown that an effort, if made, would have failed.

In a portion of the opinion not certified for publication, the Court of Appeal also explored, but did not answer, the question of when a corporation has been first suspended and then dissolved, should it still be treated as a suspended corporation, so that it cannot defend an action?

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