Penasquitos, Inc. v. Superior Court

• Decision Date: 11 July 1991
• Docket Number: No. S013292,S013292
• Citation: 283 Cal.Rptr. 135,53 Cal.3d 1180,812 P.2d 154
• Parties: , 812 P.2d 154 PENASQUITOS, INC., Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent; William BARBEE et al., Real Parties in Interest. CROW PACIFIC DEVELOPMENT CORPORATION et al. Petitioners, v. The SUPERIOR COURT of San Diego County, Respondent; Andres B. BISMONTE et al., Real Parties in Interest.
• Court: California Supreme Court

Page 135

283 Cal.Rptr. 135

53 Cal.3d 1180, 812 P.2d 154

PENASQUITOS, INC., Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent;

William BARBEE et al., Real Parties in Interest.

CROW PACIFIC DEVELOPMENT CORPORATION et al. Petitioners, v. The SUPERIOR COURT of San Diego County, Respondent;

Andres B. BISMONTE et al., Real Parties in Interest.

No. S013292.

Supreme Court of California.

July 11, 1991.

Wright & L'Estrange, Robert C. Wright, Theresa L. Osterman, Timothy C. Stutler, Joseph T. Ergastolo, Ronald L. Donahoo, Higgs, Fletcher & Mack and John M. Morris, for petitioner.

No appearance for respondent.

Virginia R. Gilson, Melissa K. Seifer, Robert B. Gerard and Michael T. Pines, for real parties in interest.

KENNARD, Associate Justice.

A California corporation may dissolve by following the procedure set forth in the Corporations Code. After it has dissolved, a corporation, although no longer permitted to do business as a going concern, continues to exist for purposes of winding up its affairs and, in particular, for discharging obligations and defending lawsuits. The question we face in this case is whether homeowners may bring suit for construction defects against the corporations that graded the lots and built the homes, when those corporations had dissolved before the homeowners' discovery of the construction defects.

Although a party may not sue the shareholders of a dissolved corporation on a claim that arose after the dissolution (Corp.Code, § 2011, subd. (a) [all further statutory references are to this code unless otherwise stated]; Pacific Scene, Inc. v. Penasquitos, Inc. (1988) 46 Cal.3d 407, 417, 250 Cal.Rptr. 651, 758 P.2d 1182), analysis of the statutory scheme discloses a legislative intent to permit parties to bring suit against dissolved corporations for damages that occur or are discovered after dissolution.

I. FACTS

Owners of single-family homes in San Diego County brought the underlying actions against Penasquitos, Inc., (Penasquitos) and Crow Pacific Development Corporation (Crow Pacific) ¹ to recover damages, on a variety of legal theories, for construction defects. Crow Pacific built the homes on lots graded and prepared by Penasquitos; the homes are all located within a subdivision commonly known as "Penasquitos Bluffs, Unit No. 4." Because the actions have many facts and issues in common, they were consolidated in July 1988.

In each of these actions, the earliest of which was filed in April 1986, the plaintiff homeowners alleged discovery of the construction defects within three years of commencing suit. Under their own allegations, therefore, plaintiffs must have discovered the defects no sooner than April 1983. Penasquitos and Crow Pacific had each completed a statutory dissolution in 1979, more than three years before discovery of the construction defects.

Penasquitos demurred to the complaints and Crow Pacific moved for judgment on the pleadings, each arguing that because the causes of action arose only on discovery, and because discovery occurred after it had dissolved as a corporation, it was not subject to suit. The trial court overruled the demurrer and denied the motion for judgment on the pleadings.

Penasquitos and Crow Pacific each petitioned the Court of Appeal for a writ of mandate. Penasquitos sought a writ directing the trial court to sustain its demurrer; Crow Pacific sought a writ directing the trial court to grant its motion for judgment on the pleadings. The Court of Appeal consolidated the two writ matters and granted the petitions, holding that a dissolved corporation could not be sued on a cause of action that arose after dissolution. We granted review.

II. DISCUSSION

At common law, the dissolution of a corporation was treated like the death of a natural person: Once it had dissolved, a corporation ceased to exist and could not sue or be sued, and any actions pending against it abated. (Oklahoma Gas Co. v. Oklahoma (1927) 273 U.S. 257, 259, 47 S.Ct. 391, 392, 71 L.Ed. 634; Crossman v. Vivienda Water Co. (1907) 150 Cal. 575, 580, 89 P. 335; Riley v. Fitzgerald (1986) 178 Cal.App.3d 871, 878, 223 Cal.Rptr. 889; Hartman v. Hollingsworth (1967) 255 Cal.App.2d 579, 581, 63 Cal.Rptr. 563; Stubbs v. Jones (1953) 121 Cal.App.2d 218, 223, 263 P.2d 100.)

California no longer follows the common law rules with respect to either the death of a natural person or the dissolution of a corporation. Except as provided by statute, "no cause of action is lost by reason of the death of any person, but may be maintained by or against the person's personal representative." (Prob.Code, § 573.) If the decedent had liability insurance, the action may be maintained against the decedent's estate, with service upon an agent of the insurer. (Id., §§ 550-555.) ²

California abandoned the common law rule governing the effect of a corporation's dissolution by the enactment of former Civil Code section 399 in 1929. ³ The nature of the change has been described in these terms: " 'The policy was adopted in 1929 of providing for the continuation of the corporate existence indefinitely for the purpose of winding up and settling the affairs of corporations which had been dissolved, rather than extinguishing the corporate existence and giving the administration of the surviving assets and liabilities to trustees. Similar provisions are found in the statutes of New Jersey, New York and Ohio. By these sections provision is made that a corporation after dissolution, voluntary or involuntary, shall nevertheless continue to exist for an indefinite period as a legal entity for the purpose of winding up its affairs.' " (J.C. Peacock, Inc. v. Hasko (1961) 196 Cal.App.2d 363, 368, 16 Cal.Rptr. 525, quoting Ballantine & Sterling, Cal. Corporation Laws (1949 ed.), pp. 477-478; see also, Note, Foreign Corporations: Continuance of Existence After Dissolution (1947) 35 Cal.L.Rev. 306, 309 ["California Civil Code section 399 extends the life of a dissolved corporation indefinitely for purposes of winding up."].)

The statutory scheme enacted in 1929 for the postdissolution survival of corporations has endured with relatively few changes. Section 1905, subdivision (b), now provides that when the certificate of dissolution is filed, "the corporate existence shall cease, except for the purpose of further winding up if needed." (Italics added.) Section 2010, subdivision (a), further explains the purposes for which the corporate existence continues after dissolution: "A corporation which is dissolved nevertheless continues to exist for the purpose of winding up its affairs, prosecuting and defending actions by or against it and enabling it to collect and discharge obligations, dispose of and convey its property and collect and divide its assets, but not for the purpose of continuing business except so far as necessary for the winding up thereof." (Italics added.)

Penasquitos and Crow Pacific appear to argue that continued existence for the purpose of "defending actions" is not equivalent to existence for the purpose of being sued. If, for example, a party filed suit against a dissolved corporation, the corporation might appear and defend precisely on the ground that as a dissolved corporation it could not be sued.

Although facially plausible, this construction is vulnerable to a number of telling objections. One objection is that the proposed construction cannot be reconciled with section 2011, subdivision (b), which provides for service of summons on a dissolved corporation. ⁴ If a dissolved corporation could not be sued, this provision would serve no useful role in the statutory scheme. ⁵ Thus, the proposed construction would violate the rule of statutory construction that every word, phrase, and sentence in a statute should, if possible, be given significance. (Steinberg v. Amplica, Inc. (1986) 42 Cal.3d 1198, 1205, 233 Cal.Rptr. 249, 729 P.2d 683.)

Further, the proposed construction is analytically incoherent. At common law, dissolution extinguished the corporation's existence; this corporate "death" explained why the corporation could not be sued and why any judgment taken against it was void. Not only would it be unfair to sue an entity that was incapable of defending itself, it would also be senseless to render judgment against an entity that had become nonexistent. The modern survival statutes render these rationales inapplicable. It would be incongruous to allow a corporation that exists for purposes of defending actions and discharging obligations to defend a lawsuit on the basis that it did not exist.

Finally, courts have repeatedly construed section 2010, its predecessors, and similar language in the statutes of other jurisdictions, as permitting parties to bring suit against dissolved corporations.

In an early case, the New Jersey Supreme Court held that a statute continuing the existence of dissolved corporations for the purpose of "defending suits against them" meant that parties could maintain suits against dissolved corporations "at law or in equity, in contract or tort, or of what nature soever, and whether begun before or after dissolution." (Hould v. John P. Squire & Co. (1911) 81 N.J.L. 103, 79 A. 282, 283.) This case has been often cited and followed. (See Newmark v. Abeel (S.D.N.Y.1952) 102 F.Supp. 993, 993, fn. 1; Sisk v. Old Hickory Motor Freight (N.C.1943) 222 N.C. 631, 24 S.E.2d 488, 489-490; Floerchinger v. Sioux Falls Gas Co. (S.D.1942) 68 S.D. 543, 5 N.W.2d 55, 56; Lynchburg Colliery Co. v. Gauley & E. Ry. Co. (W.Va.1922) 92 W.Va. 144, 114 S.E. 462, 463-464.)

The same interpretation has been adopted for our California statutes. In 1959, a federal district court construed former section 5400, the predecessor of section 2010, to permit a California corporation to be sued after its dissolution for violation of the Sherman Act (15 U.S.C. § 1). (United States v. San Diego Grocers Association, Inc. (S.D.Cal.1959) 177 F.Supp. 352, 354.) In 1971, a ...