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When Companies Dissolve
When an entity dissolves just to stymie a judgment creditor, there is a possibility for that creditor to eventually get repaid. As a creditor, how fast you can respond to this tricky situation may be very important. Sometimes a suspended/dissolved company may still have bank accounts. If so, they can be garnished and the company cannot do anything, because they cannot appear or defend themselves in court if they are suspended/dissolved, you might be able to add the people behind it as a DBA of the entity, an expensive longshot, but it is occasionally successful.
Sometimes suspended corporate entities still remain in business. When this happens, the owners are probably running their business as a DBA. In California, a creditor could file an Affidavit of Identity in court to perhaps help change this by stating that the corporation is now suspended/dissolved and not able to do business under that name. However, you can point out that because the business has not physically shut down and is still in daily operation, the owner(s) have taken the place of the corporation as a DBA of it, and are the legals owner until such time as the corporation is re-instated. Of course a certified copy from the secretary of state showing the suspended/dissolved status is the first step in doing this.
When a corporation is suspended, they means they are still considered an entity, they just cannot legally transact any business, and will have their corporate powers suspended until they file for revival of their entity. (Revenue and Tax code 22305 and Corporation code 2205(d)). Service of process is still proper on a suspended corporation under California's CCP 416.10 upon the Agent for Service or any officer listed in CCP 416.10 (See Gibble v. Car-lene 67 Cal. App. 4th 295).
A "suspended" corporation is not a "defunct" corporation. The suspended corporation is not formally dissolved and could be a in a state of suspension, in the process of clearing up the problem that led to its suspension, subject to proceedings to forfeit its charter, in the process of voluntary or involuntary dissolution, in the process of appointing a trustee, in the process of distributing its assets, etc.
Mailings must be to the judgment debtor's current address, if known, or their last known address (See CCP 684.120). In the case of a corporate entity, it does not hurt to mail to both the corporate address and the Agent's address, as listed on the Secretary of State's website, but it is not a requirement.
Revenue and Taxation Code 23303 says "Notwithstanding the provisions of Section 23301 or 23301.5, any corporation that transacts business or receives income within the period of its suspension or forfeiture shall be subject to tax under the provisions of this chapter". Not being a lawyer, I think there is no longer a priority with the "taxation police" to check defunct companies; so they can do what they want, however they probably will have to account for any income on their tax returns.
You can check the status of an entity on the web site of your local state's Secretary Of State office. Many Secretary Of State (SOS) office no longer offer counter service any more. They have a drop off box, and you can pay them (e.g.) $5 to fax the information to you. Make sure to include your fax number in the requestor information area. Often, you can request a statement of information over the counter for viewing purposes only. Also available for viewing are the articles of incorporation on both microfiche or paper. The SOS will not let you take sample copies with you. They require that you order certified or non-certified copies and wait the 5-7 days or longer it takes to pick them up or mail them out. They do allow individuals to take a picture of the statement of information or any other documents, regardless of whether or not certified documents are ordered.
Defunct corporate entities are not the same as suspended ones. In California, when a "defunct" corporation is served a summons, they are served under CCP 416.20. However, a "suspended" corporation is not "defunct" and is still served under CCP 416.10. A "suspended" corporation can be revived by curing the deficiency that caused the suspension (Revenue and Tax codes 23301 and 23305, and Corporation code 2205). Only a "suspended" corporation can revive their own corporate powers, rights, and privileges (Not any third-parties).
State laws, or the state's business corporation laws, usually specify how an entity is formed, and the duties of all of its directors, officers, and shareholders. It also specifies how an entity is formally dissolved, the possible liabilities, and its responsibilities to its shareholders and to its creditors, after dissolution. See California Corporation Code section 2114.
In California, SUSPENDED is when an entity is involuntarily shut down, and all other entity status types are voluntary. Dissolved means the officers closed down the company properly. Forfeited and Suspended mean almost the same thing, the company failed to make the proper reports or pay their taxes.
Merged Out - means the entity merged with another entity (usually with a different name). Surrender - means when an out-of-state corporation notices the secretary of state they are no longer doing business in this state, but are still liable for any debts.
When an entity dissolves, it can become important to determine the reason it became dissolved.
One reason could be the entity had enough money, but forgot or decided not to pay the required fees, and becomes administratively dissolved by a state's Secretary of State office. Other times, the entity runs out of money and fails to pay the fees, and gets dissolved. In California, this is covered by the California Revenue and Taxation code 23301. Note that if a lawyer defends a dissolved company that owes taxes, for any other reason than to re-activate the company, California Revenue and Taxation code 19719 provides for possible criminal penalties for that lawyer.
Another reason an entity dissolves could be the entity voluntarily agreed to dissolution by following the State statutes to apply for, and be granted a certificate of dissolution.
How long an entity can remain in business, after being administratively dissolved, varies by state. Some states have a statute of limitation and others do not. The dissolution procedures and laws sometimes vary, depending on whether the dissolution was voluntary or not.
Entity dissolutions are either defined by state laws, or the state's business corporation laws. In the laws, are often ways for a diligent and persistent creditor to perform discovery to see what really is going on.
When an entity is administratively dissolved, that does not mean it is no longer in business. It can still accept payments, and have bank accounts. A creditor can no longer go after any possible assets of that dissolved entity. Even when an entity becomes administratively dissolved, that does not mean it is no longer in business.
If the suspended/defunct entity is getting paid by clients, the checks are payable to the corporation may be deposited into a corporate bank account. That bank account can be levied. An ORAP (debtor examination) can be done on the officer and perhaps a turnover order issued at the conclusion of the exam for all the corporate shares (or any other available assets they may have).
Businesses can go on for years without applying for reinstatement. Becoming administratively dissolved does not mean the entity has no responsibility to pay its creditors, or that a legal action cannot be brought against it (and/or its officers) in a court.
If you have a judgment against a Suspended Corporation that is still doing business, see if you can locate their bank. If you levy their bank account, they cannot claim an exemption or use any other attempt to block you, until they reinstate their corporate standing, even if they have an attorney that says they can, so know your State laws and have some case law handy.
Any action you take in court against the corporation can not be defended as long as the suspension is in effect. You can have the Sheriff seize cars, office equipment, or anything else. They can squawk all they want, however they will not be able to get the ear of the judge. All a suspended corporate entity can do is announce in court the debtor principals are re-instating their company and ask for a continuance.
A voluntarily dissolved entity is one that decided it no longer wanted to remain in business for any one of many reasons. It then followed all state and business corporation laws to properly shut down the entity. After this is done, the former officers or their legal representatives, will apply to the Secretary of State for, and be granted a certificate of dissolution. It is easier to form an entity than it is to voluntarily dissolve one.
FindLaw.com has a very handy state-by-state link to corporation laws and codes: http://smallbusiness.findlaw.com/business-structures/business-structures-resources/biz-links-corporation-laws.html
Too many times, attorneys name entities in lawsuits without naming the individual shareholder or managing member that was responsible for the actions that caused a lawsuit to be filed against the entity.
Making an individual ex-officer personally liable as an additional debtor to the judgment against the entity is not trivial. One must provide a lot of proof that the individual committed acts that made them liable, and persuade a judge to sign the judgment.
Once it is proven to a judge the corporate veil and protection that an entity offers, are now evaporated due to actions of an officer, that individual officer may be named and added to the cause of action, and become a judgment debtor in the resulting judgment. During a lawsuit, assets may be frozen, by the use of preliminary injunctions, and other prejudgment remedies. Posting a bond might be required to this.
Once a judgment is awarded, adding the individual officer responsible is not an easy task. Often times, the expenses involved make it discouraging. At other times, all previous assets are long gone, and the individual involved makes themselves judgment-proof.
Absent a court order to the contrary, or a personal guarantee, an individual is never liable for an entity's debt, either in or out of business.
You might be able to file a noticed motion to add a successor owner to a judgment with successor liability, which could be cheaper than a new creditor's lawsuit. Generally, successor corporations are not liable for the debts of the purchased company, however there are many loopholes creditors can use, especially when the new company continues in the same kind of business.
What is you suspect fraudulent transfer (and the judgment is big enough and you know enough and/or have the funds to hire a lawyer)? If you are in Small Claims court, the Corporation can not defend an action without a lawyer, in post-judgment Small Claims recovery actions. (See CCP § 116.530)
A judgment debtor exam is usually the best way to start to find evidence. If you are going to subpoena records, be sure to demand the corporate minute book and calendar of meetings. Did the minutes include the authorization to transfer money to them to clean out the treasury? I doubt you will find such and without that authorization, the transfer smacks of fraud. If there was such an authorization, then the officers of the corporation were negligent in not holding sufficient funds to pay off all their outstanding debts.
Professional Corporations are specific under Corp Code § 13400 et seq. Corporations have assets and liabilities. All affairs have to be wound up of corporation and whatever remains is the net assets of the corporation. Looking at the bank records of the corporation since judgment was entered is prudent, to understand where the money is/was going and to see if anything improper has been happening. Be careful ordering bank records as banks charge a lot, so be careful not to order records you do not need.
If you decide to bring any company in for a judgment debtor examination (JDX) you must name a person, that might be an attorney. Subpoena third-party banking records, documents, and records for assets. If any transfers look funny or unusually large transfers went to the company's attorney, they might be involved. If you suspect the attorney is in cahoots with the debtor to defraud creditors, check the state bar web site in their state to see if there are any problems with that attorney. If the attorney is part of the company's fraud, a motion for alter-ego might be you goal. Another possible tool that is useful is the Single Enterprise Theory, if the judgment debtor plays with several "sister" companies to hide assets. Alter-ego motions are usually a last resort
Many times, you cannot just "add" a person to a judgment, because they are a separate entity from the corporation. If the corporation that is named on the judgment (make sure it is correctly spelled) is suspended, then you may proceed to get the directors or shareholders named (who received assets as corporate successors). If the corporation is not suspended then you will have to prove alter ego and bring a motion to "pierce the corporate veil" and prove to a judge your case. See the "Pierce or Protect" book by Jaime Holms. Alter-ego attempts need alter-ego debtorss with sufficient assets to be worth attempting.
If the company is suspended but still operating, their assets can be seized. Also, in the state of California, if they are suspended as a corporation, but yet operating full on daily, their bank account can be levied. If you have a judgment against a Suspended Corporation who is still doing business, see if you can locate the bank. If you hit it they cannot claim an exemption or any other attempt to block you until they reinstate their corporate standing. Any action you take in court against the entity can not be defended as long as the suspension is in effect, so think about what you can do such as seize cars, office equipment or anything else; and they can squawk all they want but cannot get the ear of the judge.
You will probably need to file a motion to designate a successor-in-liability. This requires a noticed motion where you show the court that the new company has (a) same clients; (b) same phone number (or other goodwill); (c) same accounts receivable; (d) same personnel; (e) same vendors; (f) same mailing or physical address, etc.
An entity while under suspension or forfeiture cannot legally transact business, defend or initiate an action in court, protest assessment, or file a claim for refund of amounts paid. Additionally, the entity forfeits its rights to use the entity name. If the new entity does not care, it is sometimes because it has "moved" all of its business to the "new" entity. All of this, taken together, should allow the court to make an order designating the new company as a successor-in-liability to the old company.
Just because the entity is suspended or has been forfeited, doesn't mean they don't have one or more bank accounts in the name of the entity. If you find one and levy on the account, they will have a hard time getting any money back in general, because entities do not have exemptions, but also because they cannot defend or initiate any actions in court.
Attacking the corporate veil is not for the weak of heart. First, look at the bank records. You will have to understand the laws in your state about 3rd-party subpoenas. In California, you have to go through a process of informing the judgment debtor of your intent, wait 15 days if you noticed them by mail, then issue the subpoena with proof that you followed the proper process. This is true of any 3rd-party discoveries.
Bank records can be very revealing, but if the company had a credit card, you can often find many abuses of the separation of the entity and the owner(s)
Other good evidence is if the owner ever signed a personal guarantee for any services or credit. You state the original judgment stated that they used the corporate money to pay a personal debt, and this might be enough to get the same judge to add them to the judgment so you could go after both the personal assets as well as the corporate assets.
Now, the question is, what do you do with the information when you get it? Do you have to file a creditors suit? Also, you have to understand the rules of evidence to make sure what you have discovered can be used in court.
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