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Walter Greb et al v. Diamond International

February 21, 2013


Original Appeal Original Proceeding Review Granted XXX 184 Cal.App.4th 15 Rehearing Granted Opinion No. S183365 Date Filed: February 21, 2013 Court: Superior County: San Francisco Judge: Peter J. Busch Ct.App. 1/1 A125472 Super. Ct. No. CGC-08-274989

The opinion of the court was delivered by: Cantil-sakauye, C. J.

We granted review to resolve a conflict in the Courts of Appeal concerning interpretation of Corporations Code section 2010,*fn1 which governs the winding-up and survival of dissolved corporations. We consider whether the statute applies to foreign corporations -- those formed in states other than California -- and conclude, consistently with the appellate court below, that it does not.

I. Facts and procedure

In December 2008, plaintiffs Walter Greb (now deceased) and his wife Karen Greb filed a complaint for personal injuries and loss of consortium against defendant Diamond International Corporation (defendant) and several other entities. Plaintiffs' complaint alleged injuries from exposure to asbestos. Although defendant has been dissolved for many years, plaintiffs sought recovery from unexhausted liability insurance that covered defendant during the decades when it did business in California. (See § 2011, subd. (a)(1)(A) [permitting recovery against dissolved corporations from "undistributed assets, including . . . any insurance assets"].)

Defendant demurred to plaintiffs' complaint, alleging that more than three years earlier, in July 2005, it had obtained a corporate dissolution pursuant to the laws of Delaware, defendant's state of incorporation. Accordingly, defendant argued, pursuant to Delaware's three-year survival statute,*fn2 when plaintiffs filed their complaint in December 2008, defendant lacked the capacity to be sued. Plaintiffs opposed the motion, arguing their action was permitted under California's own survival statute, section 2010, which they asserted takes precedence over Delaware law in this setting.

The trial court ruled that California's survival statute did not apply to foreign corporations, and hence that Delaware's corresponding statute applied to defendant. Accordingly, the trial court sustained the demurrer without leave to amend, and dismissed plaintiffs' complaint with prejudice. On review, the Court of Appeal affirmed. It followed the interpretation of section 2010 set out in dicta in two prior appellate court decisions -- North American Asbestos Corp. v. Superior Court (1982) 128 Cal.App.3d 138 (North American I), and Riley v. Fitzgerald (1986) 178 Cal.App.3d 871 (Riley) -- and disagreed with the holding concerning that statute set out in a third appellate court decision, North American Asbestos Corp. v. Superior Court (1986) 180 Cal.App.3d 902 (North American II). As noted, we granted review to resolve the conflict.*fn3

II. Discussion

Section 2010 provides in relevant part: "(a) A corporation which is dissolved nevertheless 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."*fn4 Like the law in a few other states, the section sets no time limitation for suing a dissolved corporation for injuries arising from its predissolution conduct; the sole temporal limitation to such a suit is found in the applicable statute of limitations relating to each cause of action. As we explained in Penasquitos, Inc. v. Superior Court (1991) 53 Cal.3d 1180, 1190 (Penasquitos): "Under our statutory scheme, the effect of dissolution is not so much a change in the corporation's status as a change in its permitted scope of activity. . . . Thus, a corporation's dissolution is best understood not as its death, but merely as its retirement from active business."

The parties agree that if section 2010 does not apply to a dissolved foreign corporation, defendant's capacity to be sued would be governed solely by Delaware's corresponding survival statute -- and that law would bar plaintiffs' claims against defendant. (See, e.g., In re RegO Co. (Del.Ch. 1992) 623 A.2d 92, 96 [Del.'s three-year survival law precludes suit against a dissolved corporation even when the plaintiff did not know of the injury during that period].) If, on the other hand, California's section 2010 applies to a dissolved foreign corporation, a court would then be required to perform a choice-of-law analysis in order to determine which state's law should apply and govern defendant's capacity to be sued. (See Kearney v. Salomon Smith Barney, Inc. (2006) 39 Cal.4th 95, 107-108 (Kearney) [describing the traditional three-step choice-of-law inquiry].)*fn5

We proceed to describe the conflict in the appellate decisions concerning whether section 2010 applies to dissolved foreign corporations.

A. The conflicting appellate court decisions

1. North American I

In North American I, the plaintiffs, California residents, sued the defendant, an Illinois corporation, in California for asbestos-related personal injuries suffered in California. Under the corporate survival law of Illinois, a corporation can be sued for two years after it files for dissolution. The suit was filed more than two years after the defendant had dissolved. (North American I, supra, 128 Cal.App.3d at p. 141.)

The defendant moved to quash service of process, arguing it lacked the capacity to be sued under Illinois law. The trial court denied the motion, and the Court of Appeal denied the defendant's writ petition, holding that service was proper and the appropriate method for the defendant to assert its lack of capacity to be sued was by demurrer or motion for judgment on the pleadings. In dicta, the court stated that should the case go forward (and a court be required to determine whether the defendant had the capacity to be sued) it was "clear that the California survival law does not apply to suits against dissolved foreign corporations." (North American I, supra, 128 Cal.App.3d at p. 143.) The court based this conclusion on section 102, subdivision (a) (hereafter section 102(a)). (North American I, supra, at p. 144.)

Section 102(a) specifies that the provisions of division 1 (the General Corporation Law) apply to (1) all "corporations organized under this division"; (2) specified "domestic corporations"; and (3) "other" corporations only to the extent the provisions of the code "expressly include[]" them.*fn6

The court in North American I construed section 102(a) as providing that "with certain exceptions not applicable here the provisions of the Corporations Code apply only to domestic corporations and that application to other corporations is permitted only 'to the extent expressly included in a particular provision of this division.' " (North American I, supra, 128 Cal.App.3d at p. 144, italics added.) The court observed that the survival statute, section 2010, "is in chapter 20 of division 1, which is entitled 'General Provisions Relating to Dissolution.' Nowhere is there any mention that the provisions of that chapter or of section 2010 apply to foreign corporations. Foreign corporations are the subject of the entire next chapter, chapter 21." (North American I, supra, at p. 144.)

In addition, the court in North American I relied on a then decades-old law review note, Foreign Corporations: Continuance of Existence After Dissolution (1947) 35 Cal. L.Rev. 306. The note addressed the common law's treatment of dissolved corporations,*fn7 and California's then relatively new survival statue, enacted in 1929 -- Civil Code former section 399, the direct predecessor of current Corporations Code section 2010. The note observed that "some courts, relying on the general policy of their corporation statutes, have held that the [survival] law of the forum applies to foreign as well as domestic corporations" and that in view of high court authority "[i]t is settled that such an extension is valid." (35 Cal. L.Rev. at pp. 308-309, fns. omitted.) After analyzing the existing California statutes -- including Civil Code former section 278, which provided a narrow definition of the term "corporation" that expressly excluded foreign entities -- the note author concluded that because California's survival statue did not expressly provide that foreign corporations were included within its scope, the statute "could hardly be applied to foreign corporations." (35 Cal. L.Rev. at p. 309; see id., fn. 23.) The author proposed that "for the protection of the corporation, the public, and creditors" the statute should be amended to apply as well to foreign corporations. (35 Cal. L.Rev. at p. 309.) But, as the court in North American I observed, "[n]o such amendment has taken place." (North American I, supra, 128 Cal.App.3d at p. 144.)

The court in North American I reasoned that these statutory provisions and this history led to the conclusion that "the California survival law does not apply to suits against dissolved foreign corporations." (North American I, supra, 128 Cal.App.3d at p. 143.)

2. Riley

In Riley, supra, 178 Cal.App.3d 871, the plaintiffs, who were the sole shareholders of a dissolved Texas corporation and assignees of its assets, sued on behalf of themselves and the dissolved corporation, seeking to recover damages sustained by the Texas corporation prior to its dissolution. The plaintiffs charged the defendants, California and Texas residents, with fraud and breach of fiduciary duty. Prior to the action, the parties had stipulated that the plaintiffs' capacity to sue would be the same as that of the Texas corporation under that state's corporate survival law. Texas law provides that a corporation continues to exist for three years after dissolution for the purpose of winding up its affairs, suing, and being sued. The suit was filed more than three years after the Texas corporation dissolved. (Id., at p. 874.)

The defendants in Riley moved for judgment on the pleadings, asserting that the plaintiffs lacked capacity to sue under Texas law. The trial court granted the motion. The Court of Appeal affirmed, finding that the plaintiffs had agreed to be bound by Texas law, which applied and barred suit. (Riley, supra, 178 Cal.App.3d at pp. 877-883.) And in any event, the court stated in dicta, California's survival statute, section 2010, did not apply to foreign corporations. (Riley, supra, at pp. 875-877.)

Addressing that latter question, the court first cited case law from both California and Texas standing for the proposition that "the effect of corporate dissolution or expiration depends upon the law of [the corporation's] domicile." (Riley, supra, 178 Cal.App.3d at p. 876.)*fn8 The court found that "[n]othing in the California Corporations Code indicates that this long-held principle has been overruled or superseded by statute." (Riley, at p. 876.) In reaching its conclusion the court relied substantially on section 2115, located in chapter 21 (foreign corporations) of division 1, the General Corporation Law.

Section 2115 was enacted as part of a comprehensive revision of the Corporations Code in the mid-1970s. The section addressed so-called pseudo-foreign corporations -- entities incorporated outside California, but that meet two tests: (1) the corporation transacts more than half of its business (as measured by various objective criteria) in California, and (2) a majority of the voting securities are held by California residents. (See § 2115, subd. (a)(1) & (2).) Such foreign corporations must abide by numerous specified statutes within division 1, the General Corporation Law -- provisions that govern corporate "internal affairs" and would not otherwise apply to foreign entities.*fn9 This statute, which survived multiple challenges to its constitutionality in Wilson v. Louisiana-Pacific Resources, Inc. (1982) 138 Cal.App.3d 216,*fn10 further mandates adherence to these provisions "to the exclusion of the law of the jurisdiction in which it is incorporated." (§ 2115, subd. (b).)

In concluding that the survival statute did not apply to foreign corporations, the appellate court in Riley observed that the statute is part of chapter 20, which concerns dissolution, and is not listed in section 2115 of chapter 21, setting out the statutes that apply to the foreign corporations that have the most extensive contacts with California. (Riley, supra, 178 Cal.App.3d at p. 876.) Finally, the court in Riley also found ...

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