PENASQUITOS INC v. SUPERIOR COURT (1989)

PROCEEDINGS in mandate after overruling of general demurrers, Arthur W. Jones, Judge.   Petitions granted.

Penasquitos, Inc. and G.W.C. Development Corporation (the successor to named party Crow/Pacific Development Corporation) filed petitions for writ of mandate resulting from the overruling of their general demurrers, filed in the same proceeding of consolidated cases in the superior court.   The demurrers and the writ petitions resulting therefrom involve identical issues of law and we therefore consolidated them for this hearing.   The two writ petitioners will hereafter be referred to as “petitioners.”

 The exercise of trial court discretion in terms of ruling on demurrers is generally not reviewable by peremptory writ.  (See 8 Witkin, Cal.Procedure (3d ed. 1985) Extraordinary Writs § 86, pp. 725–726.)   Exceptions to this general rule are made, however, to prevent a long and costly trial where a defendant should not by law have been joined, and also to clarify a rule of significant legal impact.  (See Babb v. Superior Court (1971) 3 Cal.3d 841, 851, 92 Cal.Rptr. 179, 479 P.2d 379.)   The issue of these petitions is sharply focused and raises an important question concerning the amenability of dissolved corporations to suit.   We deem this to be one of those unusual situations in which review by writ is warranted, and therefore address the petitions on their merits.

Plaintiffs in these consolidated cases are homeowners who sue for construction defects.   It is not clear from the pleadings when the construction project was completed, but presumably this occurred sometime in the mid–1970's.   The corporate petitioners each completed a statutory dissolution in 1979.   The first of the complaints was filed in April of 1986.   As with the subsequently filed complaints which are joined herein, the homeowners allege that they discovered the defective construction of their homes within three years of the date of filing of the complaint.   The demurring petitioners contend the plaintiffs' causes of action could not arise before their discovery of same, and since the discovery was postdissolution the corporations cannot be joined as parties.   In considering this contention we accept as true the essential allegations of the complaints, namely that the corporations during the period of construction (and hence of course prior to their dissolution) breached some duty in contract or tort owed to the plaintiffs, which breach caused damage incurred after dissolution.

 The issue is thus framed as follows:  Can a dissolved corporation be joined as a defendant in a suit based upon actions of the corporation before its dissolution when the cause of action arose after dissolution?

A more basic and perhaps preliminary question is:  When if ever can a dissolved corporation be joined as a defendant in a lawsuit?  Corporations Code 2 section 1905 provides that upon filing of the certificate of dissolution “the corporate existence shall cease․”  Under common law principles, the dissolution of a corporation ended its existence for all purposes, including defending lawsuits and responding to claims for damages based on corporate wrongs committed before dissolution.

The unqualified nature of this principle was expressed by the California Supreme Court in Crossman v. Vivienda Water Co. (1907) 150 Cal. 575, 580, 89 P. 335:  “It is settled beyond question that, except as otherwise provided by statute, the effect of the dissolution of a corporation is to terminate its existence as a legal entity, and render it incapable of suing or being sued as a corporate body or in its corporate name.   It is dead, and can no more be proceeded against as an existing corporation than could a natural person after his death.   There is no one who can appear or act for it, and all actions pending against it are abated, and any judgment attempted to be given against it is void.”  (See also Sharp v. Eagle Lake Lumber Co. (1923) 60 Cal.App. 386, 389–390, 212 P. 933.)

Statutory exceptions to this broad rule have, however, been adopted.   Section 2010, subdivision (a) preserves corporate existence “for the purpose of ․ prosecuting and defending actions by or against it․”  This provision continues the corporate entity in terms of its amenability to technical joinder, but does not address the issue of which “actions by or against it” survive the dissolution.   Section 2010, subdivision (b) provides for the nonabatement of actions to which a corporation was a party before its dissolution.   No specific statute addresses, however, the issue of actions against the corporation which were not commenced before dissolution, except for actions pursuant to the objective of “winding up” corporate affairs, as provided by section 2010, subdivision (a).   Dissolution results, under sections 2004 and 1905, in the distribution of all net assets to shareholders, thus rendering the corporation from a practical point of view immune to claims.

In terms of potential shareholder liability, section 2009, subdivision (a) permits recovery from shareholders of assets distributed “without prior payment or adequate provision for payment of any of the debts and liabilities of the corporation, ․”  This does not necessarily provide for an action postdissolution for a claim not known by the claimant, and presumably also unknown by the shareholders, prior to dissolution.   The final statutory remedy is contained in section 2011, subdivision (a).   This provides that the shareholders of the dissolved corporation may be sued by action brought “in the corporate name.”   The remedy is available, however, only for causes of action “arising prior to ․ dissolution.”

Section 2011, subdivision (a) was given in-depth analysis by the Supreme Court in Pacific Scene, Inc. v. Penasquitos, Inc. (1988) 46 Cal.3d 407, 250 Cal.Rptr. 651, 758 P.2d 1182.   The case involved an action brought on factual grounds identical to those of these petitions:  causes of action becoming known and hence “arising” after dissolution but resulting from corporate activities predissolution.   The Court of Appeal had ruled that the action could not be brought under the authority of section 2011, subdivision (a), because it did not “arise” prior to dissolution.   The lower court nevertheless upheld the action on the theory of an equitable suit against shareholders under the “trust fund” theory.   The reversal by the Supreme Court was based upon its review of the purpose and intent of the legislative plan for actions against dissolved corporations.

The court concluded that the present provisions for corporate dissolution constitute a “broad and detailed scheme regulating virtually every aspect of corporate dissolution.”  (Pacific Scene, Inc. v. Penasquitos, Inc., supra, 46 Cal.3d at p. 411, 250 Cal.Rptr. 651, 758 P.2d 1182.)   Finding a legislative objective of “certainty and finality undergirding the dissolution provisions of the Corporations Code” (id. at p. 415, 250 Cal.Rptr. 651, 758 P.2d 1182), the Supreme Court concluded that only those remedies specifically enumerated in the Corporations Code could be utilized against shareholders of a dissolved corporation.   The narrow ruling was the rejection of the Court of Appeal's approval of the “trust fund” theory of recovery.   The clear message, however, was that no action could be brought against shareholders of a dissolved corporation absent specific authorization by statute.

The plaintiffs reply to this seemingly insurmountable obstacle to their action by stating that they are not suing shareholders—they are simply suing the defunct corporation, asserting its continued existence for litigation purposes under section 2010.³  Both section 2011, subdivision (a) and Pacific Scene deal with actions against shareholders.   They are therefore not, it is contended, authority for the proposition that the corporation itself is not subject to suit.   We acknowledge that section 2010, subdivision (a) preserves corporate existence “for the purpose of ․ prosecuting and defending actions by or against it,” and hence an action existing prior to dissolution can be commenced postdissolution.   The most recent authority confirming this conclusion is Allen v. Southland Plumbing, Inc. (1988) 201 Cal.App.3d 60, 246 Cal.Rptr. 860, in which this court confirmed the right of a contractor to join a subcontractor in a construction defect case on a cross-complaint for indemnification.   This was possible notwithstanding the intervening dissolution of the subcontractor because the subcontractor's negligence was discovered prior to its dissolution and hence the action “arose” predissolution.  (Id. at pp. 63, 64, 246 Cal.Rptr. 860.)

There is no direct authority, however, supporting plaintiffs' contention that section 2010, subdivision (a) permits an action which did not exist predissolution.   The two North American Asbestos cases cited by plaintiffs (North American Asbestos Corp. v. Superior Court (1982) 128 Cal.App.3d 138, 179 Cal.Rptr. 889;  and North American Asbestos Corp. v. Superior Court (1986) 180 Cal.App.3d 902, 225 Cal.Rptr. 877) do not stand for this proposition.   In resolving conflicts of law issues pertaining to a dissolved Illinois corporation the court ruled that section 2010, subdivision (a) preserved actions against corporations postdissolution “for injuries arising out of ․ predissolution activities.”  (North American Asbestos Corp. v. Superior Court, supra, 128 Cal.App.3d at p. 143, 179 Cal.Rptr. 889.)   In neither of the North American Asbestos cases, however, was it specified whether the action in question “arose” pre or postdissolution.   In Levin Metals Corp. v. Parr–Richmond Terminal Co. (9th Cir.1987) 817 F.2d 1448, 1450, it was concluded that the North American Asbestos  cases did not involve causes of action arising postdissolution.⁴  We believe this conclusion is warranted and join therein.

It could be contended that the Levin Metals case is authority for the conclusion that a dissolved corporation may not be sued for actions arising postdissolution.   The case is not clearly controlling, however, on two grounds.   First, it was brought in the corporate name but as an action against shareholders under section 2011, subdivision (a).  (Levin Metals Corp. v. Parr–Richmond Terminal Co., supra, 817 F.2d at p. 1449.)   Second, the statutory authority upon which the action was based was the Comprehensive Environmental Response, Compensation and Liability Act of 1980, which was enacted after the corporation's dissolution.   We conceive this to distinguish the case from that before us, in which the ground upon which a claim could have been made was created before dissolution, the “arising” of the claim being delayed because of deferral of both damage and knowledge of the claim until after dissolution.⁵

We rule against plaintiffs not on the basis of directly controlling case precedent, but by adherence to the statutory analysis so painstakingly developed in Pacific Scene.   There the Supreme Court found a legislative intent to shield shareholders—and we believe corporations as well—from all postdissolution claims except those specifically set forth.   As we have indicated above, there is no specific or literal statutory basis for survival, postdissolution, of a claim which did not arise until after completion of dissolution.

We have heard argument to the effect that affirming this proposition creates an easy mechanism for avoidance of liability for latent construction defects.   The developer need only create a new corporation for each development project, dissolving the corporation at the end of the project and thereby terminating what otherwise would be potential liability lasting for as long as ten years.⁶  Similar considerations were heard and rejected by the Supreme Court in Pacific Scene.   The court recognized that there was an inherent conflict between the interests of creditors and the “final and certain conclusion of a corporation's affairs.”  (Pacific Scene, Inc. v. Penasquitos, Inc., supra, 46 Cal.3d at p. 416, 250 Cal.Rptr. 651, 758 P.2d 1182.)   It chose to favor a statutory interpretation consistent with the objectives of certainty and finality in corporate terminations.   Certainly the objective of finality in terms of actions against the corporate entity itself is at least as important as the objective of finality in terms of actions against former shareholders.   We conclude, therefore, that the statutory framework created for the regulation of actions against dissolved corporations should be construed as precluding actions which did not arise until after dissolution—not only as to shareholders but also as to the corporate entity itself.

An alternative writ or order to show cause would add nothing to the presentation.   A peremptory writ is proper.  (Code of Civ.Proc., § 1088;  United Nuclear Corp. v. Superior Court (1980) 113 Cal.App.3d 359, 169 Cal.Rptr. 827;  Goodenough v. Superior Court (1971) 18 Cal.App.3d 692, 697, 96 Cal.Rptr. 165.)

Let a peremptory writ issue requiring the superior court to grant petitioners' motions for judgment on the pleadings and ordering the dismissal of petitioners as defendants.   Petitioners' request for an award of costs incurred by this petition is granted.

FOOTNOTES

FN2. All statutory references are to the Corporations Code unless otherwise specified..  FN2. All statutory references are to the Corporations Code unless otherwise specified.

3.   One might speculate at this point as to what benefit is to be derived by suing, and obtaining a judgment against, a dissolved corporation.   We apprehend that the broad ruling of Pacific Scene would preclude attempts to assert such judgment against the shareholders of the corporation.   Perhaps recourse might be made to insurance protection afforded before dissolution.   We must assume, however, based upon the vigor with which the plaintiffs prosecute their action, that there is potential value to any recovered judgment and that the matter is not completely mooted by the dissolution of the corporation.

4.   At page 1450, referring to the second North American Asbestos case, the Ninth Circuit states:  “However, these cases did not consider the issue presented here, i.e., whether a dissolved corporation may be sued for injuries arising out of its pre-dissolution activities, even though the cause of action was not created until after its dissolution.”

5.   Plaintiffs argue a cause of action may “arise” when a defect is created in realty, or when the realty is sold, even though the cause of action does not “accrue” for statute of limitations purposes until the later date that the damage occurs or is discovered.   We disagree.   As the Supreme Court noted in Budd v. Nixen (1971) 6 Cal.3d 195, 200, 98 Cal.Rptr. 849, 491 P.2d 433:  “If the allegedly negligent conduct does not cause damage, it generates no cause of action in tort.  [Citation.]  The mere breach of a professional duty, causing only ․ the threat of future harm—not yet realized—does not suffice to create a cause of action for negligence.  [Citations.]  Hence, until the [plaintiff] suffers appreciable harm as a consequence of [defendants] negligence, [plaintiff] cannot establish a cause of action․  (Italics added.)  (See also Veterans' Welfare Bd. v. City of Oakland (1946) 74 Cal.App.2d 818, 830, 169 P.2d 1000;  Pierpont Inn, Inc. v. State of California (1969) 70 Cal.2d 282, 289, 74 Cal.Rptr. 521, 449 P.2d 737.)   The issue is the date on which the plaintiff becomes vested with a cause of action.   The date may be the date he suffers damage from the allegedly negligent conduct, or may be postponed until the later date when he becomes aware of the damage.   The cause of action vests (i.e., it both “arises,” under section 2011, subdivision (a), and “accrues” for statute of limitations purposes) at such time, and not at some earlier date when the alleged wrong causes only “the threat of future harm—not yet realized.”

6.   We refer to Code of Civil Procedure section 337.15 which, in recognition of the potential of an unlimited time within which actions could be brought for latent construction defects, puts a ten-year cap on such claims, measured from the date of “substantial completion of the development or improvement.”

FROEHLICH, Associate Justice.

TODD, Acting P.J., and HUFFMAN, J., concur.