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).