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.

Please see full article below for more information.

LOADING PDF: If there are any problems, click here to download the file.

Written by:

Published In:

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »

All the intelligence you need, in one easy email:

Great! Your first step to building an email digest of JD Supra authors and topics. Log in with LinkedIn so we can start sending your digest...

Sign up for your custom alerts now, using LinkedIn ›

* With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name.