In December 2018, AB Concrete (AB) discovered that Amber Clark, AB’s former volunteer bookkeeper, had been writing company checks made payable to herself and her husband, Kai Clark. The Clarks allegedly forged the signature of AB’s owner, Brian Fenno, and then cashed the checks at various Wells Fargo branches located in Placer County, California. In all, Ms. Clark cashed checks totaling \($482,244.76,\) while her husband cashed checks totaling an additional \($32,939.66.\) In January 2019, Plaintiff notified Defendant that forged company checks had been cashed at its branches. Wells Fargo allegedly responded by informing AB it should seek reimbursement from the Clarks. AB sued Wells Fargo, alleging numerous claims including conversion, fraud, and negligence. Wells Fargo moved to dismiss the claims, arguing that AB is a dissolved corporation and lacks the capacity to sue.
JUDGE BRENNAN Defendant’s argument that a dissolved corporation lacks the capacity to bring suit is predicated on its contention that under California law a corporation may only bring an action related to winding up its affairs. According to defendant, because plaintiff’s certificate of dissolution, executed prior to commencement of this action, verified that the corporation was completely wound up, California law precludes plaintiff from bringing this action.
A corporation’s capacity to bring suit in federal court is determined “by the law under which it was organized.” Under California law, a dissolved corporation “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, dispose of and convey its property and collect and divide its assets, but not for the purpose of continuing business except so far as necessary for the winding up thereof.” “Thus, a corporation’s dissolution is best understood not as its death, but merely as its retirement from active business.”
Here, plaintiff filed a certificate of dissolution with the California Secretary of State in April 2019, prior to commencing this action. As required by California law, plaintiff’s certificate of dissolution verified that all known assets had been distributed and the corporation was completely wound up. In light of that verification, defendant contends that plaintiff cannot reasonably claim this action is brought for the purpose of winding up the corporation’s affairs. This is especially true, according to defendant, because the plaintiff knew of the alleged forgeries in December 2018, several months prior to filing its certificate of dissolution.
Defendant’s reliance on the verification in plaintiff’s certificate of dissolution is misplaced. For a corporation to voluntarily dissolve, it is required to file with the California Secretary of State a certificate of dissolution verifying “the corporation has been fully wound up.” After filing a certificate of dissolution, a corporation’s existence ceases “except for the limited purpose of further winding up of its affairs.” Thus, the filing of the certificate of dissolution only marked the end of plaintiff’s normal business activities, not the completion of its winding-up process, as defendant contends. Indeed, the California Corporations Code specifically provides that “[a]ny assets inadvertently or otherwise omitted from the winding up continue in the dissolved corporation for the benefit of the persons entitled thereto. …”
Through this action plaintiff seeks to recover damages for injuries it sustained prior to dissolution and, thus, it is part of the winding-up process (“a claim for damages based on the corporation’s predissolution activities is an affair of the corporation needing to be wound up after the corporation’s normal business activities have ceased. Participating in a judicial resolution of such claims is part of the winding-up process for which section 2010 expressly requires the dissolved corporation’s existence to continue.”). Accordingly, plaintiff has the capacity to bring this case.
CRITICAL THINKING:
When states fail to specify how long a dissolved corporation can be reincarnated for purposes of a tort action against them, the states create a scenario in which ambiguity about the length of the extended life leads to extended litigation; these disagreements need to be resolved in court. In the decision, there were references to states that avoid the ambiguity. How do they do so?
ETHICAL DECISION MAKING:
There are many possible reasons for a voluntary dissolution of a corporation. What ethical problem potentially surrounding a voluntary dissolution is avoided when a court permits life after death?