MINNEAPOLIS – In Core Distrib. v. Xtreme Power (USA) Inc., a case filed in a Minnesota court, a judge there wrestled with whether or not a California corporation's former directors or officers were properly served with a court summons to appear, and a California securities attorney says this leads to problems of accountability.
The individual served with a copy of the summons and complaint by the plaintiff in the case was "believed to be" the CEO of the company; however, it wasn't exactly clear to the plaintiff who the actual directors or officers are (or were) for the dissolved company, according to court documents.
Keith Paul Bishop, an attorney for Allen Matkins who specializes in California corporate securities law, said the decision leaves unanswered questions about how to apply this legal standard.
Judge Donovan W. Frank of the U.S. District Court in Minnesota considered whether a plaintiff in Minnesota had properly served a dissolved California corporation by personally delivering a copy of the summons and complaint on an individual who the plaintiff “believed to be” the chief executive officer of the corporation. The corporation argued that it no longer had any directors and officers. Frank, however, concluded that the corporation had been validly served.
Bishop wrote about the case in the National Law Review. He detailed how in California, the General Corporation Law assumes that companies that are dissolved continue to have directors and/or officers for the corporation, even if the business is not active.
"It's a real problem," Bishop told the Northern California Record. "Even though the company is dissolved, someone who was an officer or director at the time can be served, and if no one responds, then a default judgment can be made by a judge."
He pointed out how this can create a problem of uncertainty in accountability and transparency for the process.
"This creates a problem because there is nothing indicative of what they are supposed to do," he said. "Who represents the company? What are the fiduciary responsibilities of this individual, if any? It's these kind of practical problems that come with this decision."
The problem, as Bishop sees it, is identifying who exactly can act as the directors and officers of a dissolved corporation, and how does that information make its way to someone trying to get it?
Bishop provided a hypothetical scenario of serving such a dissolved California corporation:
"Suppose we're talking about a company that is 10 years old," Bishop said. "Who are you going to tell? What happens if there is no answer? The court's decision raises more questions than it answers."