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CALIFORNIA SUPREME COURT HOLDS THAT CALIFORNIA’S SURVIVAL STATUTE DOES NOT APPLY TO FOREIGN CORPORATIONS

CALIFORNIA SUPREME COURT HOLDS THAT CALIFORNIA’S SURVIVAL STATUTE DOES NOT APPLY TO FOREIGN CORPORATIONS FOR PURPOSES OF THE APPLICABLE STATUTE OF LIMITATIONS FOR CLAIMS AGAINST DISSOLVED FOREIGN CORPORATIONS

In Greb v. Diamond International Corp. (2013) 56 Cal.4th 243, the plaintiffs filed a complaint in California for personal injuries and loss of consortium arising from exposure to asbestos against defendant Diamond International Corporation (“Defendant”), a Delaware corporation, and several other entities. Although Defendant had been dissolved for many years prior to plaintiffs’ suit, the plaintiffs sought to recover from unexhausted liability insurance that covered Defendant during the decades it did business in California.  (See Cal. Corp. Code § 2011(a)(1)(A) [permitting recovery against dissolved corporations from “undistributed assets, including…any insurance assets”].)  Defendant then demurred to the plaintiffs’ complaint, alleging that it had dissolved more than three years prior pursuant to the laws of Delaware, Defendant’s state of incorporation; thus, under Delaware’s three-year survival statute, Defendant lacked the capacity to be sued.  (Del. Code Ann. Tit. 8, § 278.)  The plaintiffs opposed the motion, arguing that their action was permitted under California’s survival statute, Cal. Corp. Code, § 2010, which sets no time limit on lawsuits brought against dissolved corporations.  (Id. at subd. (a) & (b) [“(a) A corporation which is dissolved…continues to exist for the purpose of winding up its affairs, prosecuting and defending actions by or against it and enabling it to collect and discharge obligations….(b) No action or proceeding to which a corporation is a party abates by the dissolution of the corporation or by reason of proceedings for for winding up and dissolution thereof.”].)

The California Supreme Court in Greb held that California’s survival statute did not apply to foreign corporations transacting business in California.  The Court rejected the plaintiffs’ argument that foreign corporations, such as Defendant, that have engaged in “repeated and successive” business transactions in California are deemed “organized” under California law (i.e. subject to all of California’s General Corporation Law) and, instead, found that the plaintiffs “provide no basis to pluck out particular sections” of California’s Corporations Code, and hold that the particular survival statute applies but the rest of California’s General Corporation Law does not.  Accordingly, because section 2010 applies only to California corporations, Defendant’s capacity to be sued was governed by Delaware’s corresponding survival statute which barred the plaintiffs’ claims against Defendant.

The implications of Greb are particularly important in the construction industry, as construction defect actions in California are often brought immediately before the expiration of California’s 10-year statute of repose for suing on latent construction defects.  By that time, the corporations for several potentially responsible parties, including the subcontractors involved in the project’s construction, could have been dissolved years ago, leaving the developer with the only remaining option of attempting to pursue the insurance proceeds for such corporations.   Consequently, because other states’ corporate wind-up and survival laws can be very different than California’s, it is important to determine at the outset of any lawsuit that may potentially involve an out of state corporation whether the corporation is still active in its home state.  If not, finding out what that home state’s laws are with respect to corporate dissolution, wind up and the applicable statutes of limitations for inactive or dissolved corporations will be critical.

Finally, while it may often times be impractical to refuse to do business with a corporation simply because it was not incorporated in California, one sign that may alert developers to a potential issue down the road is if the subject corporation has only been in existence for a short period of time.  Corporations that have been in existence for several years and that have a proven track record for quality work or services may be a better option in the long term, even though their bid may be a little higher than their competitors.  Another potential tell tale sign of trouble is if the subject corporation has been through multiple different, but similar corporate entities.  This may be especially true if the corporations have all engaged in the same or nearly identical businesses.  This could mean that the people who formed the corporations have attempted to avoid corporate liability in the past by abandoning their old corporation in favor of forming a new one.  If developers nevertheless decide to transact business with an out-of-state corporation despite some of these potential red flags, they should take heed of the possibility that the laws of another state may preclude them from recovering against the out-of-state corporation if a lawsuit arises after the out-of-state corporation has been dissolved or is no longer active.

 

Blog by: Beth Obra-White

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