Zombie Corporations in California: Personal Liability Lives on for Four Years After Corporate Dissolution

In most states, once a corporation is dissolved, its shareholders may not be held personally liable in connection with claims that arise after the dissolution. In California, however, the rule is different, thanks to Cal. Corp. Code §2011. Under that statute, personal liability lives on, despite the fact that dissolution has effectively put a stake through the corporation’s heart: shareholders can be held personally liable for corporate obligations arising before or after dissolution.

The Prequel

Before 1992, §2011(a) explicitly allowed claims against shareholders following dissolution, but only if the cause of action arose before the corporation’s dissolution. Despite this clear language, the plaintiffs in a case called Pacific Scene, Inc. v. Penasquitos argued that the shareholders of the corporate defendant could be held liable for injuries, caused by the defendant’s product, that occurred after the defendant’s dissolution. The plaintiffs argued that liability should be imposed under an old common law doctrine that predated the enactment of §2011, known as the “trust fund” theory. The California Supreme Court rejected application of the “trust fund” theory, and refused to impose liability on shareholders of a dissolved corporation for a claim that arose after the corporation’s dissolution

In response to Pacific Scene, Inc., v. Penasquitos, the California Legislature amended §2011 to allow shareholders to be held personally liable in connection with claims arising after the corporation’s dissolution.

Will Our Heroes Escape Liability?

Luckily for shareholders, there are a few limitations on the personal liability that can be imposed under §2011. First, the shareholders can be held personally liable only if they have received distributions of corporate assets upon dissolution. Second, the amount of each shareholder’s liability is capped at the lesser of (1) the shareholder’s pro rata share of the claim or (2) the amount of the corporate assets the shareholder received upon dissolution. Third, the deadline for suing individual shareholders expires on the earlier of (1) the expiration of the statute of limitations applicable to the cause of action or (2) four years after the effective date of the corporation’s dissolution.

The Curse Spreads to Limited Liability Companies

Two years after amending §2011, the California Legislature enacted Cal. Corp. Code §17355. That section imposes the same post-dissolution liabilities on LLC members as §2011 imposes on corporate shareholders. (Partners of limited partnerships, however, are not subject to any similar post-dissolution liabilities.)