Alliance for Fair Board Recruitment v. Weber, No. 2:21-cv-01951, decided May 16, 2023. The U.S. District Court, Eastern District of California granted the plaintiff’s motion for summary judgment against the California Secretary of State, holding that A.B. 979, which requires the board of directors of publicly held corporations located in California to have a minimum number of directors from designated underrepresented racial, ethnic and LGBTQ backgrounds, violates the Equal Protection Clause and 42 USC Sec. 1981.
Transacting Business without Registration
Johnson v. Johnson, C094348, decided April 13, 2023. The California Court of Appeal rejected the appellant’s claim that the trial court lacked jurisdiction to hear a partition action because the respondents’ law firm was a Nevada LLC, not registered to transact business in California. The court noted that a foreign LLC must be registered to transact business to bring a lawsuit, not its law firm. Furthermore, bringing a lawsuit does not constitute transacting business in the state.
Decentralized Autonomous Organizations
Sarcuni v. bZx DAO, Case No. 22-cv-618-LAB-DEB, decided March 27, 2023. The U.S. District Court, Southern District of California, held that the plaintiffs’ amended complaint sufficiently pled facts to demonstrate that the defendant decentralized autonomous organizations (DAOs) were general partnerships under California law and that all persons holding the DAOs tokens were partners and therefore could be held jointly and severally liable for the DAOs’ alleged torts. The court thus denied the defendants’ motion to dismiss.
Suit by Unregistered LLC
Debonne v. Debonne, No. E074972, decided November 10, 2022. The California Court of Appeal declined to address on appeal the issue raised by the defendant of whether the trial court lacked subject matter jurisdiction over the plaintiff, a foreign LLC not registered to conduct business in California. The court noted that a California court does not lack subject matter jurisdiction over an unregistered corporation. Instead, the corporation lacks the capacity to prosecute the case, even though it may commence the action. In addition, the court noted that a defendant challenging a foreign corporation’s capacity to sue must do so at the earliest opportunity, either in its answer or in a demurrer. Here the defendant did not raise the issue to the trial court. Instead, the issue was raised for the first time on appeal. Thus, the defendant forfeited the argument.
Perfection of Security Interest in Insurance Proceeds
Carmel Financing, LLC v. Schoenmann, CA No. 3:21-cv-07387, decided August 23, 2022. The U.S. District Court, Northern District of California held that the debtor’s bankruptcy trustee could avoid the lender’s security interest in insurance proceeds paid to the debtor. The court noted that California law requires that a security interest in insurance proceeds can be perfected only by giving written notice of the security interest to the insurer. In this case there was a written communication asking that the lender be added to the policy but there was no explicit notice that the lender had a security interest in the proceeds.
Friend of Camden, Inc. v. Brandt, B309746, decided August 2, 2022. The California Court of Appeal held that defendant members could vote to dissolve an LLC as provided in the LLC law even though the plaintiff member had filed for judicial dissolution and the defendant members had filed a buyout motion. The mere filing for a buyout did not prevent the members from voting to dissolve the LLC.
Director’s Right of Inspection
Fowler v. Golden Pacific Bancorp, Inc., C092179, decided June 23, 2022. The California Court of Appeal held that the mere possibility that information could be used to harm a corporation is not sufficient to defeat a director’s otherwise absolute inspection rights. An inspection may be curtailed when there is evidence that a director intends to use inspection rights to violate his or her fiduciary duties or commit a tort against the corporation. However, the court was not persuaded a director’s right of inspection must be denied solely because the director has a conflict of interest or is embroiled in litigation with the corporation.
Arbitration of Claims
Viking River Cruises, Inc. v. Moriana, No. 20-1573, decided June 15, 2022. The U.S. Supreme Court held that the Federal Arbitration Act (FAA) preempts a rule of California law that invalidates contractual waivers of the right to assert representative claims under California’s Private Attorneys General Act (PAGA). The Court held that claims brought by employees under PAGA can be split into individual and representative claims, that the individual’s clams may be compelled to arbitration, and that once split, the representative claims must be dismissed because the employee lacks standing.
The plaintiff filed a court action against her former corporate employer alleging violations of labor laws against her and other employees. PAGA allows an aggrieved employee to sue for alleged violations of labor law that the employee suffered individually as well as to sue in a representative capacity, as an agent or proxy of the state, for alleged violations that may have been suffered by employees other than the PAGA litigant his or herself. The California Supreme Court had held that, under PAGA, an employee could not agree to arbitrate only his or her individual claims without also being permitted to arbitrate the representative claims. According to the U.S. Supreme Court, the FAA, which grants parties the right to decide what issues they will agree to arbitrate, preempted that holding. The Court stated that the California court’s ruling expands the scope of the arbitration agreement by requiring employers to arbitrate claims (the representative claims) that they did not agree to arbitrate. The Court therefore reversed the lower courts’ rulings which denied the corporation’s motions to compel arbitration of the individual claim and dismiss the representative claims.
Lopez v. Escamilla, No. B316800, decided June 7, 2022. The California Court of Appeal held that due process did not protect a sole shareholder from an action in which the plaintiff sought to hold him liable on an alter ego basis for a default judgment rendered against the corporation. The court rejected the shareholder’s argument that because the judgment was by default he did not have the opportunity to defend the action. The court noted that he has an opportunity to defend the alter ego claim and that he controlled the corporation’s litigation decisions and was responsible for it not providing a defense.
Forum Selection Clause
Lee v. Fisher, No. 21-15923, decided May 13, 2022. The U.S. Court of Appeals, Ninth Circuit, upheld the enforceability of a forum selection clause in a Delaware corporation’s bylaws that required derivative actions to be adjudicated by the Delaware Chancery Court. The plaintiff filed a derivative action in a federal court in California alleging a violation of Sec. 14(a) of the Securities Exchange Act and various state law claims. The plaintiff claimed enforcing the clause violated public policy because federal courts have exclusive jurisdiction over Sec. 14(a) claims, meaning enforcing the clause would prevent her from asserting her Sec. 14(a) claim. However, the court found that she had not met her burden of proving that enforcing the forum selection clause would violate public policy.
LLC Derivative Suit
Sirott v. Superior Court, A164037, decided May 5, 2022. The California Court of Appeal held that a party must maintain continuous membership in an LLC to represent it derivatively and that the statutory discretion conferred on trial courts to permit a member who does not otherwise meet the requirements to maintain a derivative suit does not excuse a former member from the continuous membership requirement.
UCC – Priority of Liens
Rice v. Downs, B307780, 2021 Cal. App. LEXIS 1091, decided December 27, 2021. The California Court of Appeal, in a case involving a lien priority issue, held that a security agreement perfected by the filing of a financing statement had priority over a charging order obtained after the financing statement was filed. The court noted that it had not found, nor had the parties identified, a statute specifically addressing the priority of charging orders in relation to other liens and security interests. In the absence of a statute specifically addressing the priority of charging orders, the court had to rely on the rule stated in Civil Code Sec. 2897 that “other things being equal, different liens upon the same property have priority according to the time of their creation”.
Reverse Veil Piercing
Blizzard Energy Inc. v. Schaefers, No. B305774, decided November 18, 2021. The California Court of Appeal reversed a California trial court’s decision to add two limited liability companies as judgment debtors at the request of the plaintiff, who had obtained a $3.825 million judgment in Kansas against an individual who owned 50 percent of the LLCs. His wife owned the other 50 percent. The court added the LLCs based on the outside reverse veil piercing doctrine. The wife was not a judgment debtor and claimed to be an innocent third party. The court held that California law applied and that California permits reverse veil piercing. However, the court remanded back to the trial court with directions to conduct a noticed hearing on whether it would be inequitable to the wife to add the LLCs because of her 50 percent membership interest.
Fictitious Business Name
Smith v Financial Pacific Insurance Co., B302014, decided November 15, 2021. The California Court of Appeal stated that California law regarding fictitious business names in insurance policies is that a fictitious business name is not a legal entity and cannot be an insured; the owner of the fictitious business is the insured. However, courts must consider the policy as a whole; specific exclusion or endorsement language could limit the coverage to the activities of the named business.
Doing Business Without Authority
Harmon v. Dirubio
, No. G060137, decided July 29, 2021. The California Court of Appeal affirmed the trial court’s dismissal of a Nevada corporation’s suit alleging breach of fiduciary duty. The court agreed that the corporation could not maintain its action because it was doing intrastate business in California without having qualified to do business. The corporation was in the business of producing concerts, movies, and TV shows and the plaintiff claimed the defendant’s actions related to concerts it put on in California caused it harm.
Revival of Corporate Powers
Info Tech Corp. v. California Lawyers Group, LLP, B303468, decided August 4, 2021. The California Court of Appeal affirmed the trial court’s judgment in favor of a corporation despite the fact its corporate powers had been suspended. The court acknowledged the trial court should not have permitted the corporation to continue litigating the case while its corporate status was forfeited. That did not require reversal of the trial court's judgment, however, because the corporation subsequently cured the forfeiture and the judgment and all other acts that took place during the forfeiture are vindicated.
Alter Ego Liability
Greenlight Systems, LLC v. Breckenfelder, No. 19-cv-06658, decided June 28, 2021. The U.S. District Court, Northern District of California, held that an Ohio LLC and a California corporation were the alter egos of their president/CEO and granted a default judgment in favor of a former employee on his claims of conversion and fraud. The court ruled that the state of formation applied to the alter ego issue and therefore applied Ohio law to the LLC and California law to the corporation. In finding they were alter egos the court emphasized the president/CEO’s ownership interest in each, that he failed to follow formalities, used entity assets for personal purposes, committed fraud by misrepresenting the LLC’s product and work condition in order to get the former employee to work for the LLC and invest in it, and that his misrepresentations caused the former employee’s injuries.
UCC – Unauthorized Financing Statements
Lightstorm Entertainment, Inc. v. Cummings, 2021 U.S. Dist. LEXIS 80720, decided April 27, 2021. The U.S. District Court, Central District of California granted the defendants’ motion for summary judgment declaring UCC-1 financing statements filed by the plaintiff false and void and ordering the California Secretary of State to remove them from their official records. The plaintiff had claimed the move Titanic was based on his life and that the defendants – which included several movie studios – owed him more than $400 million. He filed the UCC-1s identifying the defendants as debtors and placing liens on their assets. In granting the defendants injunctive and declaratory relief the court noted that the plaintiff filed the financing statements without authority from the defendants in clear violation of the California Commercial Code which states that a party can file a UCC-1 only if the debtor authorizes the filing.
Revival of Status; Change of Name
Asphalt Professionals v. Fairland Liquidating Corp., No. B307394, decided April 19, 2021. The California Court of Appeal held that the trial court properly lifted the stay that prevented the plaintiff corporation from enforcing its judgment against the defendant. The stay was issued because the plaintiff was suspended. However, the plaintiff provided a certificate of status proving that its corporate status had been revived. The court also rejected the defendant’s argument that the plaintiff lacked standing because it had a different name than when the judgment was rendered. The plaintiff provided evidence that it filed a certificate of amendment to change its name and that the Secretary of State recognized it was the same corporation as before, only with a different name. The court also rejected the defendant’s argument that the plaintiff lacked the power to change its name while it was suspended, noting that both statutory and case law allow a suspended corporation to change its name.
Suit by LLC Member
Holistic Supplement, LLC v. Stark, B300711, decided March 2, 2021. The California Court of Appeal held that an LLC member had standing to personally sue another member in a suit alleging the defendant, without the plaintiff’s knowledge, transferred her LLC membership interest to himself and converted the LLC to a corporation. The suit was direct, not derivative, because the plaintiff was claiming the defendant took her membership interest. and she could sue the defendant personally because he was alleged to have participated in tortious conduct.
Ukoha v. REGR, LLC, B295158, decided February 25, 2021. The California Court of Appeal held that the trial court had no choice but to dismiss an action filed against two individuals the plaintiff claimed to be alter egos of an LLC the plaintiff sued five years earlier. The plaintiff substituted the alter egos for the LLC but never served them with process. The court rejected the plaintiff’s argument that an alter ego need not be named as defendant or individually served for the court to have jurisdiction. The court also rejected the argument that the alter egos’ filing pleadings on the LLC’s behalf constituted a general appearance.
Classification of Independent Contractors
Vazquez v. Jan-Pro Franchising International, Inc., S258191, decided January 14, 2021. The California Supreme Court, in answering a question at the request of the U.S. Court of Appeals, 9th Circuit, held that its decision in Dynamex Operations West, Inc. v. Superior Court, 416 P.3d 1 (2018), which created a three part test for determining when independent contractors should be classified as employees for the purpose of the obligations imposed by wage orders, applies retroactively.
Capra v. Capra, C084032, decided December 22, 2020. The California Court of Appeal affirmed denial of the plaintiffs’ motion to dismiss the defendants’ attorney because he had been corporate counsel for a corporation of which the plaintiffs were shareholders. The court noted that the plaintiffs were not suing on the corporation’s behalf so there was no concurrent representation. In addition, the court rejected the plaintiffs’ contention that corporate counsel necessarily represents its shareholders. And in the absence of evidence the attorney ever represented the plaintiffs, there was no continuous representation.
Choy v. Ribeiro, C080715, decided November 3, 2020. The California Court of Appeal ruled the trial court erred in holding a corporation’s president and owner personally liable for severance pay to an employee. They could not be considered alter egos based on the fact they jointly filed papers contesting the plaintiff’s allegations or that the president recruited employees. The president and owner also could not be liable as successors or assignees as that relates to separate companies buying assets and not to shareholders and officers.
Mueller v. Clarke, SACV 20-01401, decided September 28, 2020. The U.S. District Court, Central District of California held that a Texas professional corporation was not a citizen of California for diversity purposes because it qualified to do business in California as foreign professional corporation. The court noted that this is a registration requirement for foreign corporations and “to state the obvious, because they are foreign to California they are not citizens of the state”.
Suspension and Revival
Granny Purps, Inc. v. County of Santa Cruz, H045387, decided August 5, 2020. The California Court of Appeal ruled that the plaintiff’s causes of action were time barred by the statute of limitations. The plaintiff filed within the limitations period but its corporate status was suspended at the time and it was not revived until after the limitations period. According to the court the statute of limitations is a substantive defense and a corporation’s revivor does not retroactively validate a lawsuit filed during suspension.
Right to Jury
Nationwide Biweekly Administration, Inc. v. Superior Court, No. S250047, decided April 30, 2020. The California Supreme Court held that civil actions brought by the Attorney General or local prosecuting authorities against a business under the state’s unfair competition law and false advertising law seeking civil penalties as well an injunction or other equitable remedies are equitable in nature and are properly tried by the court rather than a jury. The legislative history and legislative purpose of both statutes convincingly establish that the Legislature intended that such causes of action under these statutes would be tried by the court, exercising the traditional flexible discretion and judicial expertise of a court of equity, and not by a jury, including when civil penalties as well as injunctive relief and restitution are sought.
Applicability of Securities Laws to Direct Listings
Pirani v. Slack Technologies, Inc., No. 19-cv-05857, decided April 21, 2020. The U.S. District Court, Northern District of California held, in a case of first impression, that an investor who purchased stock in a direct listing in which registered and unregistered shares were made publicly tradeable at the same time has standing to bring an action under Sec. 11 of the Securities Act of 1933 claiming losses due to misstatements and omissions in the offering documents.
Wanke Industrial, Commercial, Residential, Inc. v. AV Builder Corp., D074392, decided February 19, 2020. The California Court of Appeal held that a judgment creditor could bring a creditor’s suit against a third party that owed the judgment debtor money even though the judgment debtor was a suspended corporation that lacked the capacity to sue the third party. The creditor’s suit statute considers whether the judgment debtor is owed a debt by the third party, not whether it has the capacity to collect the debt.