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It is black letter law that dissolution “kills” a California corporation and cuts off its ability to conduct business or employ workers. The corporation thus gently passes into history, and its former officers and directors may believe that they can wash their hands of the company forever. However, the dissolved corporation may be resurrected for purposes of distributing residual insurance assets. Thus, the dissolved corporation is amenable to suit for torts that occurred prior to dissolution, provided there is applicable insurance coverage.

Defending a corporation without ongoing operations or employees poses unique issues for a defense attorney, especially if a long time has passed between the alleged tort and assignment of the case to counsel, as may occur in toxic tort cases involving diseases with long latencies. This article discusses some legal and ethical concerns raised by a case involving the alleged tort of a dissolved corporation.

First Step: Was the Corporation Dissolved or Suspended?

The first step is to determine the status of the corporation. Is it a going concern, suspended or dissolved? The status of the corporation will determine not only the corporation’s rights but also the attorney’s capacity to represent the corporation. It is good practice to check the applicable state’s website for the status of the company.

A California corporation can be involuntarily suspended by the Secretary of State for its failure to abide by all applicable laws, including failure to file tax returns for five years or pay sales or income taxes. A suspended corporation has no legal capacity to sue or defend itself.

However, if the shareholders vote to voluntarily end the corporation and all legal obligations of the corporation have been met (including filing all franchise and income tax returns and paying any owed taxes), then the corporation “dissolves.” Although dissolved corporations cannot conduct business, they continue to exist for purposes of discharging obligations and distributing insurance assets. Former officers, directors and shareholders of a dissolved corporation retain the protections against personal liability for the corporation. The dissolved corporation can answer a complaint in its own right, and the defense attorneys are free to appear on behalf of the dissolved corporation.

Initial Tactical Considerations

If the file is assigned such that a response to the complaint may be filed without leave of court, then the dissolved corporation can appear as “XYZ Company, Inc., a dissolved corporation.”

However, because there is no time limit to sue a dissolved corporation (other than statute of limitations, laches, etc.), the case may not reach the defense attorney’s desk until after the case is well underway.

There are several reasons why the attorney may not be assigned a file until after significant litigation has occurred in the case, and roadblocks to responding to the complaint may exist.

For instance, if a long time has passed since dissolution, the agent for service of process listed in the Secretary of State’s database may not be updated, and a former officer, director or employee may not be locatable. The plaintiff may have requested leave to serve notice to the Secretary of State. Thus, the complaint may not have ever reached an appropriate former employee.

Or, the former officer listed as the agent of process may believe he or she has no duty to the corporation or insurance carriers, because he or she has “washed his or her hands” of the corporation due to its dissolution. In fact, the officers and directors of the dissolved corporation have a continuing duty of “cooperation” under any insurance policy written in California. This includes promptly informing its insurance carrier of any notice of suit.

Even if the agent wishes to cooperate, the agent may not recall and may never have known the identities of the applicable insurance carriers, especially if the claim involves a tort allegedly committed many decades ago. This problem may be compounded if there are no extant historical records of the corporation available. The insurance company may have been served notice by the plaintiff, circumventing any agent of service of process.

Strategies for Dealing with a Default Judgment

The delays described above may result in significant roadblocks to answering the complaint. For instance, a default judgment may have already been taken against the dissolved corporation. This judgment must be set aside before the dissolved corporation can answer in the case.

The attorney faced with a default judgment against a dissolved corporation should work closely with the insurance company and its coverage counsel to determine the relative merits of attacking the default judgment through a motion to set it aside or to let it stand.

In California, a plaintiff cannot execute a judgment obtained against an insured against the insurance company itself. Instead, the plaintiff will need to mount an Insurance Code Section 11580 action to enforce the judgment against the carrier. In an 11580 action, the plaintiff has the burden to prove coverage and that the default judgment is based on competent evidence and is not unreasonable given the evidence. On the other hand, the insurance company has many defenses, including denial of coverage and the ability to argue that it did not get notice of suit due to the negligence of others. But if it had notice and had actually defended the insured, defenses would have been asserted to the underlying liability or damages, which would have materially affected the amount of the default judgment. In effect, the insurance company retains all of the defenses to enforcement and coverage in the Section 11580 action, whereas the burden of proving entitlement lies with the plaintiff.

The insurance company may thus decline to take any action as to the default judgment, because the insurer would decline coverage anyway due to non-cooperation, policy exclusions or the like. The judgment and underlying evidence presented in support thereof should be carefully analyzed. If the judgment is not supported by any or sufficient evidence or the amount of the default is grossly misstated given the evidence presented, the insurance company may decide to forgo setting aside the default judgment.

If the attorney is instructed to move to set aside the default judgment, at least two avenues are available to accomplish this goal. First, the insurance companies may attack the default judgment through the “complaint in intervention” process (the process that must be used for a suspended corporation). In effect, the insurance company appears on its own behalf, as a defendant, to protect the interests of the residual insurance assets, which cannot be protected by the corporation itself since it is not allowed to appear until the process properly winds down. The insurance company itself therefore becomes a party to the case.

A downside to intervention may be that the plaintiff is put on notice of the identities of the insurance companies with coverage, providing the plaintiff with the name of the defendant in an Insurance Code Section 11580 action. Insurance companies are also obligated to respond to written discovery and produce a person most knowledgeable (PMK). Further, there is a lack of attorney-client privilege between the insurer and the corporation, and any witnesses associated with the former company given the adversarial status between the insurers and insured. All rulings, awards of sanctions and judgments will be directly enforceable against the insurance company.

However, if dissolved, the insurance companies have a second option: to move to set aside the default judgment directly by specially appearing as “XYZ Company, Inc., a dissolved corporation.” In this scenario, the dissolved corporation remains the real party in interest, protecting the identity of insurers. The motion will be based on any evidence that can be developed showing that through no fault of its own, the dissolved corporation — and in turn its insurance carriers — were not given notice of the suit due to the neglect or negligence of the served individuals.

A benefit of setting aside the default directly is that later-identified insurance carriers do not have to reveal themselves by personally appearing. Discovery will be directed to the dissolved corporation itself. Unless in extenuating circumstances, the plaintiff is not entitled to discovery against the insurance company itself. Attorney-client and work-product privileges can be developed and maintained between the insurer and former employees and officers of the dissolved corporation.

Responding to Discovery and Developing the Defense

Once the above roadblocks have been overcome and the complaint has been successfully answered by the dissolved corporation, the corporation defendant is free to serve and respond to discovery in its own right.

By definition, a dissolved corporation is not going to have any currently employed officers, directors or others. There may be no repository of historical documents — or any available documents at all. Even if documents are available, there may be no witness to authenticate them or to testify as to a reliable chain of custody.

Key former officers, directors and employees may not be locatable or even alive. They might also be uncooperative — at least at first. The defense attorney should employ good sleuthing skills, including perhaps employing a private investigator, to identify, interview and potentially defend former employees at deposition and to develop substantive responses to discovery. If no such employees can be found or they are not cooperative, a third-party witness may have to be hired or an attorney representative may testify. Of course, if one of the defense team testifies, ethical and privilege issues will be raised.

Conclusion

Defending a dissolved corporation may involve interesting motion work and the opportunity to use forensic and investigative techniques to develop affirmative evidence on behalf of the client.