August 12, 2022

Volume XII, Number 224

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Due Process No Bar To Alter Ego Action

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's 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).

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XII, Number 161
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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