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IT’S ALIVE! A Corporate Defendant’s Life After Dissolution

In our legal system where corporate entities are deemed to be “persons,” it has become relevant and wise to ask: Is this corporation alive or dead? Your determination will greatly influence your litigation strategy and may be significantly affected by a filing of corporate bankruptcy or other dissolution of the corporation. While bankruptcy and dissolution are often seen as the nail in a corporation’s coffin, a corporate defendant may just find life after death, for better or for worse.

Whether by Chapter 7 or Chapter 11, a corporate bankruptcy filing is typically intended to discharge pre-petition debts owed by the corporation. Of course, a lawsuit against the corporation is considered a debt, even if liability has yet to be proven. As with any other debt, the corporate defendant seeks to get out from under the threat of the lawsuit and potential impact of an adverse judgment. So, what does post-bankruptcy dissolution mean for a corporate defendant, its counsel, its carrier and its opponents?

While in the process of winding up its affairs, a dissolved corporation maintains the capacity to sue and to be sued. Corps. Code § 2010(a); Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 215; Penasquitos, Inc. v. Sup. Ct. (Barbee) (1991) 53 Cal.3d 1180, 1185. That is all well and good when thinking about a dissolved corporation filing an action to recover monies due to it and its shareholders, but the matter becomes more complicated when considering a lawsuit against a dissolved corporation.

In order for a potential judgment to be worth something, there need to be assets, which are difficult to uncover among corporate bankruptcy debtors. In light of this fact, the law provides for a suit to be maintained against a dissolved corporation to the extent any undistributed assets exist. Corps. Code § 2011(a). The truth is, undistributed assets may be scant, and other creditors may hold superior claims, leaving you and your client nothing.

An even more tempting target than potentially undistributed assets is the insurance policy or policies covering the dissolved corporation. The law specifically provides that insurance policies are available to satisfy legal actions against a dissolved corporation, particularly where there are no other available assets. Corps. Code § 2011(a). Although the corporation is as good as dead, its carrier is very much alive.

The insurance policy is not only an asset of the dissolved corporation, but is one that is very difficult to reach by most creditors outside of legal claims implicating coverage under the policy. Accordingly, creditors sometimes create clever avenues to reach the policy proceeds in satisfaction of their debts. And insurance carriers are left holding the bag while defending a dissolved corporate insured.

The takeaway: If you represent a dissolved corporation, determine the existence of any insurance policies and coverage thereunder for any claims against the insured corporation. If you are seeking to assert claims against a dissolved corporation, go for it, and pray the undead entity has an insurance policy that lives on.

ABOUT THE AUTHOR: Mr. Fallon specializes in civil litigation in the areas of professional liability. He has significant experience executing litigation strategies to the benefit of his individual and corporate clients. Contact Dan at 858.263.4132 or dfallon@tysonmendes.com

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