California Court Of Appeal Holds That Shareholders Have Standing To Pursue Derivative Actions After Dissolution Of A Corporation

In Favila v. Katten Muchin Rosenman LLP, 188 Cal. App. 4th 189 (2d Dist. 2010), the California Court of Appeal reversed the trial court’s denial of plaintiff’s motion for leave to amend its complaint and dismissal of plaintiff’s derivative action, holding, in part, that a shareholder’s estate may maintain a derivative action on behalf of a corporation even after the corporation has been dissolved. The holding clarifies that although a corporation is dissolved, it continues to exist for the purpose of winding up its affairs, and its shareholders retain the right to bring shareholder derivative actions.

Richard Corrales was the founder of Motion Graphix. He originally owned 51 percent of its shares, while another individual, Raleigh Souther, owned 49 percent. Following a dispute between Corrales and Souther, Corrales agreed to sell 80 percent of his shares to Motion Graphix and resign from his positions with the company. After Corrales’s death, Souther, with the help of Motion Graphix’s attorneys, arranged for the assets of Motion Graphix to be sold to Get Flipped, a company fully owned by Souther. Motion Graphix was subsequently dissolved.

After Motion Graphix’s dissolution, Corrales’ Estate filed a complaint against Souther, Get Flipped and Motion Graphix’ attorneys for conversion, breach of fiduciary duty, fraud and breach of contract. The trial court sustained defendants’ demurrer on the grounds that the Estate failed to obtain a court order before filing a complaint for conspiracy between an attorney and its client as required by Section 1714.10(a) of the California Civil Code. The trial court also denied the Estate’s petition to file an amended complaint. Ultimately, the Court of Appeal reversed the trial court’s denial of the Estate’s petition.

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