Dissolved Corporation sued along with a shareholder as an individual. Only Shareholder answered. Default against corporation.

Asked over 1 year ago - Poway, CA

Dissolved Corporation and Shareholder as individual were sued for business credit card debt. I answered pro se (fee waiver) as the shareholder/individual but did not have enough money to hire attorney as required by law to answer for corporation. Plaintiff got default judgment against Corporation. Ultimately shareholder beat Plaintiff and had case dismissed without prejudice against shareholder. Now Plaintiff is sending letters and scheduling debtors exam for Corporation claiming shareholder is personally liable for corporate judgment and will pursue wage garnishment. Since shareholder beats lawsuit as individual how can I be liable for Corporate Judgment on the same case? Corporation and individual have no assets and Corporation had no assets before dissolving. Thank you in advance.

Additional information

Case is in California

Attorney answers (4)

  1. Peter Collins Freeman

    Contributor Level 10

    6

    Lawyers agree

    Answered . Mr. Alexander's answer, above, is excellent and suggests what is likely the best, and least expensive route.
    As to the claim against the shareholder for the corporate debt, that is based on the legal theory of 'alter ego', and it differs from the shareholder's personal liability as an individual. Under the alter ego theory, a shareholder can be liable for a corporation's debt upon a showing of certain circumstances, which include the 'personal' use of corporate assets, the mixing (or 'commingling') of personal and corporate assets, the undercapitalization of the corporation, etc. This is a typical move from a creditor in a small business setting, and can often be effective because individuals in small businesses fail to maintain the separation between themselves as an individual and their corporation, leading to potential liability as an alter ego. The threats of a wage garnishment are just that, threats, and are intended to intimidate you into immediate action to pay the debt, well before the creditor has gotten a determination from the court for alter ego liability and judgment against the individual on that basis. The creditor is also forcing you to spend time and/or money fighting this potential liability.
    If you kept the corporate and personal accounts separate, did not take money from the corporation without properly accounting for it, and did not take assets from the corporation so that it could not pay its bills, it is unlikely that the creditor will establish alter ego liability for the corporate debt, but they are permitted to try.
    While you indicate your economic status is not good, there are some technical issues here that may be difficult to handle on your own - I recommend that you seek legal assistance, even if to contact your local county bar association for a referral to a volunteer attorney, if you qualify.
    Best of luck.

  2. Ryan Steve Alexander

    Contributor Level 10

    5

    Lawyers agree

    Answered . The issue is whether the corporation performed the appropriate steps to wind-up and dissolve according to the California requirements for dissolution. If done so propertly, the corporation may have no liability to the credit card company, and the dissolution documentation would suffice as evidence that no debt exists in the debtor's examination.

    Find out what happened in the dissolution process, whether this was an administrative dissolution for the failure to file fees to the California Secretary of State, or whether the corporation actually filed for dissolution with an allocation of assets to the remaining creditors as part of the wind-up process. If you have the dissolution documentation, and things were done properly, the debtor's exam is nothing to fear. If there is some deficiency with the proper paper work, you may want to consult a bankruptcy specialist to help you finish the issue, which shouldn't be too expensive, e.g. a flat rate legal fee.

    Best of luck.

    For legal advice and representation, consult an attorney. This response was provided for informational and... more
  3. Richard Scott Lysle

    Contributor Level 17

    Answered . The issues in an "alter ego" situation is whether the corporation had assets at the time when the debt was incurred and whether you co-mingles personal assets and debts with corporate assets and debts. You really don't have to talk with the debt collector.

    As to a judgment debtor examination of the corporation, if you are not presently an officer or director of the corporation, you may not need to attend. You should get a second opinion on your situation before evading service if you are properly served. An attorney should review the actual Order to Appear.

    If you are subpoenaed or ordered to appear as a third party witness, you are entitled to statutory witness fees.

    Is the creditor the original creditor or a debt buyer?

    In so far as saying that you "beat" the case and that the case was dismissed without prejudice, your statements are mutually exclusive.

  4. Glenn R Reiser

    Pro

    Contributor Level 10

    Answered . If you were sued individually and got the case thrown out then there shouldn't be any other avenues for the plaintiff to attempt to collect from you personally. The plaintiff had their shot and lost. There is a doctrine known as "law of the case". If the judge has determined that you don't have personal liability for the debt, then that constitutes a binding ruling throughout the case. There is also the doctrine of res judicata that applies to bar relitigation of the same issue that already has been decided. If the corporation is insolvent then just answer the post-judgment discovery - which may require that you appear and give testimony in a post-judgment enforcement action against the corporation.

    This answer does not constitute specific legal advice or create an attorney-client relationship between Glenn R.... more

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