Pacific Scene, Inc. v. Penasquitos, Inc., S003256

• Decision Date: 25 August 1988
• Docket Number: No. S003256,S003256
• Citation: 46 Cal.3d 407,250 Cal.Rptr. 651,758 P.2d 1182
• Court: California Supreme Court
• Parties: , 758 P.2d 1182, 57 USLW 2194 PACIFIC SCENE, INC., et al., Cross-complainants and Appellants, v. PENASQUITOS, INC., et al., Cross-defendants and Respondents.

Page 651

250 Cal.Rptr. 651

46 Cal.3d 407, 758 P.2d 1182, 57 USLW 2194

PACIFIC SCENE, INC., et al., Cross-complainants and Appellants, v. PENASQUITOS, INC., et al., Cross-defendants and Respondents.

No. S003256.

Supreme Court of California In Bank.

Aug. 25, 1988.

Bacalski, Holdway & Prindle, Patrick L. Prindle, A. Daniel Bacalski, and Randall D. Gustafson, San Diego, for cross-complainants and appellants.

Gary L. Wollberg and Jenkins & Perry, San Diego, as amici curiae on behalf of cross-complainants and appellants.

Wright & L'Estrange, Robert C. Wright, Christopher D. McIntire, Sternberg, Eggers, Kidder & Fox and Lawrence T. Dougherty, San Diego, for cross-defendants and respondents.

MOSK, Justice.

We are called upon in this case to determine whether an action under the equitable "trust fund" theory can be maintained against the former shareholders of a dissolved corporation, to the extent of their distribution of corporate assets, when a defective product manufactured by the corporation causes injury after dissolution. We conclude that the Legislature has barred such an action.

Pacific Scene, Inc. (hereafter Pacific) is a corporation producing tract homes. Prior to its dissolution in 1979, Penasquitos, Inc., was a California corporation in the business of developing and finishing residential lots suitable for tract home construction. Pacific purchased a number of lots from Penasquitos in 1974, and in 1975 sold tract homes constructed thereon. In 1982 nine homeowners discovered damage caused by the subsidence of lots sold by Penasquitos. They sued Pacific on various theories, including strict products liability, negligence, and breach of warranty.

Pacific cross-claimed against Penasquitos, which demurred. The court sustained the demurrer without leave to amend and dismissed the cross-complaint, concluding that Corporations Code section 2011 barred suits against dissolved corporations on claims arising after dissolution. Pacific appealed. The Court of Appeal agreed that the corporation itself could not be sued, but reversed with directions to grant Pacific leave to cross-complain against the former shareholders of Penasquitos under the equitable "trust fund" theory. We granted the shareholders' petition for review.

As will appear, we conclude that the Legislature has generally occupied the field with respect to the remedies available against the former shareholders of dissolved corporations, thus preempting antecedent common law causes of action, and that the trust fund theory furthermore conflicts with specific provisions of the Corporations Code. Pacific's postdissolution claim under the trust fund theory therefore is barred.

Discussion

Dissolution of a corporation under the common law "terminate[d] its existence as a legal entity and render[ed] it incapable of suing or being sued as a corporate body or in its corporate name." (Crossman v. Vivienda Water Co. (1907) 150 Cal. 575, 580, 89 P. 335.) The trust fund theory was developed to ameliorate the harsh result of this common law rule, which allowed corporations to shield their assets from the reach of creditors through distribution to shareholders pursuant to dissolution. (Wallach, Products Liability: A Remedy in Search of a Defendant--The Effect of a Sale of Assets and Subsequent Dissolution on Product Dissatisfaction Claims (1976) 41 Mo.L.Rev. 321, 328 (hereafter Wallach).) The doctrine traces its roots to Justice Story's opinion in Mumma v. The Potomac Co. (1834) 33 U.S. (8 Pet.) 281, 8 L.Ed. 945, in which the high court held that the assets of a dissolved corporation were subject to equitable distribution among creditors. (Id. at pp. 286-287; see Note, Continuing Corporate Existence for Post-Dissolution Claims: The Defective Products Dilemma (1982) 13 Pacific L.J. 1227, 1233, fn. 42.)

Under the equitable theory, "a creditor of the dissolved corporation may follow [the distributed assets] as in the nature of a trust fund into the hands of stockholders. The creditors have the right to subject such assets to their debts and for that purpose the stockholders hold them as though they were trustees. In other words, the assets of the dissolved corporation are a trust fund against which the corporate creditors have a claim superior to that of the stockholders. A stockholder who receives only a portion of the assets is liable to respond only for that portion. Where the assets coming into the hands of a stockholder suffer a change in value, the creditor must take the trust fund as he finds it, securing the advantage of any increase and suffering any decrease, unless the stockholder is responsible for the decrease. Where the trust property has been used by the stockholder for his own purpose, or disposed of by him, he may be held personally liable for the full value thereof." (Koch v. United States (10th Cir.1943) 138 F.2d 850, 852.) The existence of the trust fund doctrine was first acknowledged by this court more than 80 years ago. ( Crossman v. Vivienda Water Co., supra, 150 Cal. at p. 579, 89 P. 335; see also Dominguez Land Corp. v. Daugherty (1925) 196 Cal. 468, 480-481, 238 P. 703, and Trubowitch v. Riverbank Canning Co. (1947) 30 Cal.2d 335, 345, 182 P.2d 182.)

I.

The shareholders first contend that the Legislature has completely occupied the field concerning the rights and remedies attending corporate dissolution, thus preempting antecedent common law remedies such as the trust fund theory. We observed in I.E. Associates v. Safeco Title Insurance Co. (1985) 39 Cal.3d 281, 216 Cal.Rptr. 438, 702 P.2d 596, that " 'general and comprehensive legislation, where course of conduct, parties, things affected, limitations and exceptions are minutely described, indicates a legislative intent that the statute should totally supersede and replace the common law dealing with the subject matter.' " (Id. at p. 285, 216 Cal.Rptr. 438, 702 P.2d 596.) The shareholders maintain that statutory provisions now comprehensively define the remedies available with respect to assets distributed pursuant to a corporate dissolution, and therefore that the trust fund theory has been supplanted in its entirety.

Sections 1800 to 2011 of the Corporations Code, enacted as part of a comprehensive statutory revision in 1977, comprise a broad and detailed scheme regulating virtually every aspect of corporate dissolution. (See Stats. 1975, ch. 682, § 7.) ¹ Included therein are two sections specifically governing claims asserted by creditors against former shareholders for the recovery of distributed corporate assets. Section 2009 provides: "(a) Whenever in the process of winding up a corporation any distribution of assets has been made ... without prior payment or adequate provision for payment of any of the debts and liabilities of the corporation, any amount so improperly distributed to any shareholder may be recovered by the corporation.... [p] (b) Suit may be brought in the name of the corporation to enforce the liability under subdivision (a) against any or all shareholders receiving the distribution by any one or more creditors of the corporation, whether or not they have reduced their claims to judgment." Section 2011, subdivision (a) (hereafter section 2011(a)), provides: "In all cases where a corporation has been dissolved, the shareholders may be sued in the corporate name of such corporation upon any cause of action against the corporation arising prior to its dissolution."

Section 2009 traces its origins to former section 402 of the Civil Code, enacted as part of the 1931 General Corporation Law. The predecessor statute provided that "After final distribution of the corporate assets by the directors, any creditor, whose claim has not been paid in full may sue the corporation, its directors, and any or all of its shareholders in one proceeding and compel the corporation either to pay any amount due or to set aside the distribution and recover from the shareholders ratably ... so far as needed to satisfy the liabilities of the corporation and the costs of the proceeding." (Stats.1931, ch. 862, p. 1825.) However, a 1933 revision of Civil Code section 402 deleted the direct statutory remedy afforded creditors in the initial version of the provision. As amended, the section read: "Whenever in the process of winding up a corporation any distribution of assets has been made ... without prior payment or adequate provision for payment of any of the debts and liabilities of the corporation, any amount so improperly distributed ... may be recovered by the corporation or by its receiver, liquidator or trustee in bankruptcy." (Stats.1933, ch. 533, p. 1408.) In 1947 the statute was recodified without substantial modification as Corporations Code section 5012. (Stats.1947, ch. 1038, p. 2396.) Because section 5012 exclusively authorized dissolving corporations to bring actions against shareholders for the recovery of improperly distributed assets, the court in Zinn v. Bright (1970) 9 Cal.App.3d 188, 87 Cal.Rptr. 736, held that a creditor's sole cause of action for the recovery of such assets was pursuant to the equitable "trust fund" theory. (Id. at pp. 192-193, 87 Cal.Rptr. 736.)

As enacted in 1977, section 2009 superseded section 5012 and restored to creditors a direct remedy against the former shareholders of dissolved corporations. ( § 2009, subd. (b).) At the same time the Legislature enacted section 2011(a), authorizing suits against former shareholders in the corporate name on claims arising prior to dissolution. (Cf. § 3305.2 added by Stats.1969, ch. 1610, § 26, p. 3374.) Sections 2009 and 2011(a) thus created causes of action encompassing precisely the kinds of claims previously asserted under the trust fund theory. Wallach explains their potential effect on the availability of equitable relief: "Equitable remedies exist to supply relief where no legal remedy exists, or where the existing legal remedy is inadequate under the circumstances of a particular case. The...