Opinion ID: 821505
Heading Depth: 2
Heading Rank: 1

Heading: The conflicting appellate court decisions

Text: 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.6 6 Before quoting section 102(a) in full, it is useful to briefly describe the structure of the Corporations Code. The code is divided into various titles — title 1 (corporations), title 2 (partnerships), title 3 (limited liability companies), etc. Within title 1, there are four divisions: division 1 (General Corporation Law), division 1.5 (the Corporate Flexibility Act of 2011), division 2 (nonprofit corporations) and division 3 (corporations (footnote continued on next page) 5 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,7 (footnote continued from previous page) for specific purposes). Each division is subdivided into chapters and articles; divisions 2 and 3 are further divided into designated parts. Chapter 1 (general provisions and definitions) of title 1, division 1, includes section 102(a), which provides in full: “Subject to Chapter 23 (commencing with Section 2300) (transition provisions), this division applies to corporations organized under this division and to domestic corporations that are not subject to Division 1.5 (commencing with Section 2500), and to domestic corporations that are not subject to Division 2 (commencing with Section 5000) or Part 1 (commencing with Section 12000), 2 (commencing with Section 12200), 3 (commencing with Section 13200), or 5 (commencing with Section 14000) of Division 3 on December 31, 1976, and that are not organized or existing under any statute of this state other than this code; this division applies to any other corporation only to the extent expressly included in a particular provision of this division.” (Italics added.) 7 Under the common law, as with a deceased person, a dissolved corporation could not sue or be sued. (Crossman v. Vivienda Water Co. (1907) 150 Cal. 575, 580; see Comment, Corporations — Dissolution — Directors as Trustees (1913) 1 Cal. L.Rev. 266 [describing the common law rule and the practical problems it caused, and proposing a statute like those then in other states, “forfeiting the right of [a dissolved] corporation to (footnote continued on next page) 6 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.)
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 (footnote continued from previous page) do business, but preserving its existence for two years at least, for the sole purpose of suing and being sued”].) 7 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.)8 The court found that “[n]othing in the California Corporations 8 The court cited three appellate court decisions, Fidelity Metals Corp. v. Risley (1946) 77 Cal.App.2d 377, 381, J.C. Peacock, Inc. v. Hasko (1960) 184 Cal.App.2d 142, 150, and Lewis v. LeBaron (1967) 254 Cal.App.2d 270, 278-279. It further signaled, “[s]ee also” two older decisions of this court, Anderson v. Derrick (1934) 220 Cal. 770, 775, and Crossman v. Vivienda Water Co., supra, 150 Cal. at page 580. All of these cases reflect the common law rule, which in turn is generally echoed in the Restatement Second of Conflict of Laws (1971), section 299 (“(1) Whether the existence of a corporation has been terminated or suspended is determined by the local law of the state of incorporation. [¶] (2) The termination or suspension of a corporation‟s existence by the state of incorporation will be recognized for most purposes by other states.”). But as (footnote continued on next page) 8 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.9 This statute, which survived multiple challenges to its constitutionality in Wilson v. Louisiana-Pacific Resources, Inc. (1982) 138 Cal.App.3d 216,10 further mandates (footnote continued from previous page) we will see, this deferential approach has been eroded by statutes and judicial construction. 9 Section 2115, subdivision (b) subjects such foreign corporations to governance by the following provisions of division 1, the General Corporation Law. Chapter 1 “(general provisions and definitions), to the extent applicable to the following provisions”: portions of chapters 3 (directors and management), 5 (dividends and reacquisitions of shares), 6 (shareholders‟ meetings and consents), 7 (voting of shares), 10 (sales of assets), and 11 (merger); all of chapters 12 (reorganizations) and 13 (dissenters‟ rights); portions of chapter 15 (records and reports); and all of chapter 16 (rights of inspection). 10 The court considered and rejected federal and state constitutional challenges to the statute based on claims including the full faith and credit clause, the commerce clause, the due process clauses, the contract clauses, and the equal protection clauses. (Wilson v. Louisiana-Pacific Resources, Inc., supra, 138 Cal.App.3d at pp. 222-231.) 9 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 support for its conclusion in North American I‟s analysis, described earlier. (Riley, supra, at pp. 876-877.)
North American II involved the same defendant as North American I. And as in that earlier case, the plaintiff, a California resident, filed a personal injury action against the dissolved Illinois corporation, seeking compensation for asbestos-related injuries. Again, suit was filed more than two years after the defendant had dissolved. The defendant moved for summary judgment, asserting it lacked the capacity to be sued under the Illinois two-year survival law. The trial court denied the motion, ruling that California‟s survival statute, section 2010, applied to the defendant. (North American II, supra, 180 Cal.App.3d at p. 905.) The Court of Appeal, First Appellate District, Division Three — the same division that had decided North American I — affirmed in a two-to-one decision, with Justice Scott, the author of North American I, in dissent. In concluding that section 2010 applied to foreign corporations, the majority in North American II did not address Riley, supra, 178 Cal.App.3d 871, which had been filed almost two months earlier. It acknowledged that its new conclusion “deviates from the dicta in [North American I], where this court said that Corporations Code section 2010 applied only to domestic corporations.” (North American II, supra, 180 Cal.App.3d at p. 908.) The court explained that “[o]n further reflection and examination of some of 10 the history behind Corporations Code section 2010 and related provisions of corporation law, we have concluded that section 2010 should not be so read under the circumstances of the case at bench, but should be read to protect the interests of California.” (Ibid.) The majority in North American II observed that in 1929, when the predecessor to section 2010 was enacted, the state Constitution contained a since-repealed clause — included in the California Constitution of 1879 — providing that “[n]o corporation organized outside the limits of this State shall be allowed to transact business within this State on more favorable conditions than are prescribed by law to similar corporations organized under the laws of this State.” (Cal. Const., art. XII, former § 15 [repealed in 1972], italics added.) The majority stated that pursuant to this former constitutional provision “a statute placing an obligation on a domestic corporation, such as one permitting suit against it long after its dissolution, would be read as placing a similar burden on a foreign corporation licensed to transact intrastate business in California . . . .” (North American II, supra, 180 Cal.App.3d at p. 908.) The majority in North American II reasoned, “Article XII, section 15, was in effect when the original version of Corporations Code section 2010, applying survival law to „[all] corporations,‟ was adopted . . . . [A]t that time Civil Code section 283 . . . stated that the provisos of its title were applicable to „every private corporation,‟ ” and “[m]any other sections [of the statutory scheme as originally adopted in 1929] specified „domestic corporation‟ or „foreign corporation‟ when such a limitation was intended [citations]. Thus, in 1929 it was clear that California’s survival law applied to both foreign and domestic corporations.” (North American II, supra, 180 Cal.App.3d at p. 908, italics added.) The appellate court majority acknowledged that very soon after enactment of the survival statute in 1929, the Legislature in 1931 narrowly defined the term “corporation” as meaning — unless expressly provided otherwise — “only a domestic corporation.” (North American II, supra, 180 Cal.App.3d at p. 908 [referring to Civ. Code, former 11 § 278, as added by Stats. 1931, ch. 862, § 2, p. 1764, & amended by Stats. 1933, ch. 533, § 1, p. 1358].) This definition continued in force until 1977, when the existing Corporations Code was repealed and replaced with the current code, which included corresponding new sections 102(a) (quoted ante, fn. 6) and 16211 — each of which similarly limits the applicability of the various statutes set out in division 1 of the new Corporations Code, and the term “corporation” as used in that new code. The majority in North American II conceded that in light of these various provisions, “the term „corporation‟ used in [the survival statute,] . . . section 2010 could arguably have come to mean only a domestic corporation.” (North American II, supra, 180 Cal.App.3d at p. 908, italics added.) The appellate court found, however, that the “circumstances of the repeal of article XII, section 15, show that no such change in the law was intended and that ‘corporation’ as used in section 2010 [and its predecessors] still has its original meaning, covering both domestic and foreign corporations to the extent that foreign corporations will not receive more favorable treatment than domestic corporations.” (Id., at pp. 908-909, italics added.)12 11 Section 162 defines the term “corporation,” “unless otherwise expressly provided,” to mean “only . . . a corporation organized under this division or a corporation subject to this division under the provisions of subdivision (a) of Section 102.” Section 167 provides, “ „Domestic corporation‟ means a corporation formed under the laws of this state”; correspondingly, section 171 provides, “ „Foreign corporation‟ means any corporation other than a domestic corporation” but does “not include a corporation . . . chartered under the laws of the United States.” 12 The majority in North American II explained the basis for this conclusion: “Repeal of article XII, section 15, was first proposed in 1967 by the Article XII Committee of the Constitution Revision Commission (Minutes of the Meeting of the Constitution Revision Commission, February 16, 1967 [at p. 2]). The committee suggested deletion of section 15 because „[t]he section can be dealt with by statute. The committee recommended deletion of the entire section.‟ (Ibid.) The report of the California Constitution Revision Commission, dated 1968, page 92, proposed repeal of section 15 with the following comment: „Equal treatment of foreign and domestic (footnote continued on next page) 12 The majority in North American II continued: “Because the electorate did not intend to change the law by repeal of article XII, section 15, we read the term „corporation‟ in Corporations Code section 2010 to have its original meaning when we are dealing with the question of whether a foreign corporation will receive more favorable treatment than a domestic corporation, that is, to include both domestic and foreign corporations. Though the Legislature added definitional sections in 1931 [citation] and took other steps to tighten up the language of the corporation laws, it never took deliberate action to abrogate the original policy of treating foreign corporations no more favorably than domestic corporations with respect to their capacity to be sued. Nor did the electorate take action intended to exempt foreign corporations from the California survival law. We read section 2010 in accordance with the intentions of both the Legislature and the electorate.” (North American II, supra, 180 Cal.App.3d at p. 909, italics added.) The majority in North American II next addressed and rejected the suggestion that section 2115 — which, as observed earlier, had been relied upon by the court in Riley — should lead to a different conclusion. (North American II, supra, 180 Cal.App.3d at pp. 909-910.)13 In closing, the majority observed that there is no constitutional (footnote continued from previous page) corporations is assured by other provisions of the California and Federal Constitutions. The transaction of business in California by foreign corporations also is governed by extensive statutes. This Section therefore is deleted as unnecessary.‟ After being defeated twice at the polls, the proposal to repeal article XII, section 15 (along with several other provisions), was approved at the primary election held June 6, 1972. The ballot argument supporting repeal stated only that the proposition approved was „basically a housekeeping measure to eliminate obsolete and unnecessary words from the Constitution. No new material is added to the Constitution, and there is no change in law or policy.‟ ” (North American II, supra, 180 Cal.App.3d at p. 909.) 13 The majority reasoned: “Section 2115 subjects certain foreign corporations with extensive property, payroll, sales, and shareholders in California to a panoply of (footnote continued on next page) 13 impediment to a state‟s subjecting foreign corporations to the burdens of its own survival statue. (North American II, at p. 910.)14 (footnote continued from previous page) provisions of the California Corporations Code. Missing from the list is Corporations Code section 2010. Petitioner contends that this omission mandates a finding that section 2010 applies only to domestic corporations and not to either purely foreign corporations or to the „quasi-foreign‟ corporations targeted by Corporations Code section 2115. However, petitioner[‟]s reasoning is flawed, and we read no significance from section 2115‟s silence about section 2010. It is evident from scrutiny of the list of provisions applied to „quasi-foreign‟ corporations that they cover the mechanics of corporate life” — so-called “internal affairs” — “which would ordinarily be directed just to domestic corporations. Stated in general terms, section 2115 merely provides that when a foreign corporation conducts more than one-half of its business in California and has more than one-half of its shareholders in the state, it will be subject to certain statutory provisions usually reserved for domestic corporations. There is no indication that in enacting section 2115 the Legislature even considered the question of whether a foreign corporation should survive for purposes of suit. It is apparent that the Legislature felt that the provisions encompassed in section 2115 should only apply to foreign corporations if the specified percentages for business and share holdings in our state were reached, but this does not indicate any intention on the part of our lawmakers that other provisions of the law may not be applicable to foreign corporations. There are a myriad of statutory provisions that apply to foreign corporations that are not included in section 2115. And the absence of these statutory provisions from section 2115 is for a good reason, because they apply to all foreign corporations, not just to corporations which meet the percentage figures prescribed in section 2115.” (North American II, supra, 180 Cal.App.3d at pp. 909-910.) 14 The court stated: “This question was answered by the United States Supreme Court in Clark v. Williard [(1934)] 292 U.S. 112. In circumstances similar to these, the court considered an argument that the corporation‟s capacity for suit should be determined by application of the law of its domicile. The court found, however, that the cited cases expressed a rule that was „to be applied when there is no statute or public policy to the contrary in the state where the foreign corporation has been licensed to do business. They do not delimit the capacity of a state, when granting such a license, to subject it to conditions.‟ (Id., at p. 119.)” (North American II, supra, 180 Cal.App.3d at p. 910.) The majority observed that the foreign corporation in the matter before it had been licensed to conduct business in California when its activities within the state gave rise to the lawsuit, and concluded that section 2010, as construed, could properly govern suits against the foreign corporation. (North American II, supra, at p. 910.) 14