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Due Process No Bar To Alter Ego Action – Shareholders

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In a decision published on Wednesday, the California Court of
Appeal held that a defendant’s due process rights do not
protect the sole shareholder of a corporation from an alter ego
action.  Lopez v. Escamilla,  Cal. Ct.
Appeal Case No. B316800 (June 7, 2022).  The basic factual and
procedural background of the case are straightforward:

The creditor of a corporation obtains a default judgment against
the corporation for $157,370. The corporation has no funds or
assets and has been suspended by the Department of
Corporations.  The creditor then sues the sole shareholder of
the corporation for $157,370.

It is important to note that this case did not involve a
proceeding in which a judgment creditor moved to summarily add
someone to a previously entered default judgment.  The
creditor in this case filed a complaint against the alleged alter
ego in which he will have the opportunity to answer, engage in
discovery and file pre-trial motions.  

There is one rather glaring error in the Court’s opinion (at
least to my eye).   The Department of Corporations does
not have the authority to “suspend” corporations.  A
corporation may be suspended or forfeited for three reasons:

  • By the Secretary of State failure to file a Statement of
    Information;

  • By the Secretary of State in the case of a domestic or foreign
    corporation, for failure to reimburse the Victims
    of Corporate Fraud Compensation Fund (VCFCF)
     for
    a paid claim; and/or

  • By the Franchise Tax Board for failure to meet tax requirements
    (e.g., file a return, pay taxes, penalties, interest).

None of these involve the Department of Corporations which is
now known as the Department of Financial Protection &
Innovation).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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