CaliforniaHow long should the insurance carriers of a dissolved foreign corporation (one formed in another state) expect to have to defend a lawsuit against the defunct entity in California? Dissolved corporations are frequently sued, even though they have no assets other than old insurance policies, in order to trigger coverage under those policies.

In California, there is almost no limit to the length of time that carriers can be required to defend dissolved California corporations. Until recently, the rule was the same in the state for dissolved foreign corporations. That rule was overturned, however, by the California Supreme Court in the case of Greb v. Diamond International Corp.

Greb involved a Delaware corporation that had been dissolved for many years. Plaintiffs sought recovery from unexhausted liability insurance that had covered the corporation during the time when it had conducted business in California.

In Greb, the Supreme Court considered the question of whether Corporations Code section 2010, which governs the winding down and survival of dissolved corporations, applies to foreign corporations.

Diamond International Corporation had been incorporated pursuant to the laws of Delaware and was dissolved in Delaware more than three years before the lawsuit. The corporation argued, pursuant to the laws of Delaware, that a three year limitations period applied and it therefore lacked the capacity to be sued. Thus, plaintiffs' lawsuit was time barred.

Corporations Code section 2010 sets no time limit for suing a dissolved corporation for injuries arising from its pre-dissolution conduct; the only time limit being the applicable statute of limitations specific to each cause of action. Thus, liability depends on when the causes of action accrue and can be extended by tolling provisions (such as minority or disability of a plaintiff) or the fact that injury had not occurred before the corporation dissolved. Plaintiffs, in an attempt to recover from the liability insurance, argued that California's law takes precedence over Delaware.

The California Supreme Court, after reviewing earlier decisions in the State, rejected the plaintiffs' arguments and held that the question is to be determined under the law of the state in which the foreign corporation was incorporated. Thus, Delaware law prevailed.

The Court's opinion turns on an interpretation of statutory law. Therefore, the California legislature could change the law to make California's almost limitless claims period applicable even to dissolved foreign corporations.

Unless and until that happens, however, the law of the state of incorporation (which is likely to be more restrictive than California law) will apply.

 Randy J. LeeGreg A. Alvarez  
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Randall J. Lee at
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Gregory A. Alvarez at
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