California Corporations Code Section 2011 provides that causes of action against a dissolved corporation, whether arising before or after dissolution, may be enforced against its shareholders if any of the assets of the corporation have been distributed to the shareholders. Enforcement is limited to the extent of the shareholders’ pro rata share of the claim or to the extent of the corporate assets distributed to them upon dissolution of the corporation, whichever is less.  Given the statute’s specific reference to a dissolved corporation, is a creditor of a defunct, but not dissolved corporation, simply out of luck?  That was the question answered by U.S. District Court Judge Susan Y. Illston in a ruling issued last week.

In Pension Plan for Pension Trust Fund for Operating Eng’rs v. Giacalone Elec. Servs., Inc., 2015 U.S. Dist. LEXIS 84140 (N.D. Cal. June 29, 2015), the plaintiffs invoked Section 2011 as grounds for recovering amounts that they alleged constituted equity distributions rather than repayment of a debt.  There was no question that the corporation was no longer conducting business.  The shareholders argued that Section 2011 was inapplicable because the corporation had not dissolved.  Judge Illston ruled that “a cause of action under section 2011 may lie against the shareholders of a corporation that is dissolved “de facto.”

Judge Illston based her ruling on the notion that shareholders would otherwise avoid liability by the simple expedient of delaying dissolution. She therefore concluded that application of Section 2011 advanced the legislative policy behind the statute.  This ignores the fact that the legislature has separately provided for the liability of shareholders for distributions made before dissolution.  Chapter 5 of the General Corporation Law establishes several tests for the propriety of distributions.  Section 506 imposes liability on shareholders who receive prohibited distributions.  The legislature drew a clear line between pre-dissolution and post-dissolution liability in Section 508 which provides that “This chapter [5] does not apply in connection with any proceeding for winding up and dissolution under Chapter 18 or 19.”  Rather than advance legislative intent, Judge Illston’s ruling frustrates the legislature’s clear demarcation of liability in the existing statutes.  The concept of “de facto” dissolution, moreover, is likely to foment litigation on just when and how a corporation has dissolved de facto.