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California law: Lost Profits

Posted: Tue Oct 18, 2005 5:20 pm
by David A. Szwak
Davis v. Maryland Bank,
Not Reported in F.Supp.2d
2002 WestLaw 32713429
N.D.Cal., Jun 19, 2002

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d. Davis' Claim for Lost Profits

Finally, Defendant moves to dismiss Davis' claims of lost profits. MBNA contends that Davis lacks standing to claim lost profits on behalf of Ace. The Court concurs. Under California law, a shareholder owns only stock in a corporation, not the corporation's property. See United States v. Stone, 83 F.3d 1156, 1160-61 (9th Cir.1996) ("Well-established principles of corporate law prevent a shareholder from bringing an individual direct cause of action for an injury done to the corporation or its property by a third party.") (citations omitted); Miller v. McColgan, 17 Cal.2d 432, 436, 110 P.2d 419 (1941) ("It is fundamental ... that the corporation has a personality distinct from that of its shareholders, and that the latter neither own the corporate property nor the corporate earnings. The shareholder simply has an expectancy in each...."). Similarly, Delaware recognizes that where the injury is suffered by the corporation through lost earnings, a shareholder may only maintain derivative shareholder suit. See Parnes v. Bally Entertainment Corp., 722 A.2d 1243 (Del.1999). Indeed, a California appellate court has recently found that a single minority shareholder in a two-shareholder corporation lacked standing to seek economic damages based upon lost capital investment, lost earnings, and lost opportunities resulting from the corporation's lost profits. See Nelson v. Anderson, 72 Cal.App.4th 111, 126, 84 Cal.Rptr.2d 753 (1999). "Here, the corporation lost earnings, profits, and opportunities, rendering all the shares valueless. When the injury is to the 'whole body of stock,' the action must be derivative." Id. at 127, 84 Cal.Rptr.2d 753. The appellate court acknowledged that requiring a minority shareholder file a derivative suit might give the appearance of form over substance. See id. However, the court found that the law required such a suit in that situation. See id.
Davis counters that because he is the sole shareholder and President and Chief Executive Officer of Ace, he would be entitled to a salary, bonus, or dividends if the company made a profit. On this basis, he contends he would be entitled to seek compensation based upon Ace's lost profits. While Davis is correct that the dividends become property once they have been issued, Plaintiff provides no authority that lost opportunities for Ace translate into compensable damages for Davis. Indeed, at base, Davis espouses a general policy argument that "American business would be far different" if Defendant's theory was the law. Unfortunately for Plaintiff, Defendant's theory is correct as a matter of law; a shareholder cannot sue for injury suffered by the corporation even if this results in incidental injury to the shareholder. See Parnes, 722 A.2d 1243; Nelson, 72 Cal.App.4th at 126, 84 Cal.Rptr.2d 753. As such, Plaintiff lacks standing to seek damages based upon Ace's alleged lost profits. Accordingly, the Court GRANTS Defendant's motion to dismiss Davis' claims for damages arising from the lost profits allegedly suffered by Ace. Further, Plaintiff does not seek leave to amend nor does the Court find a basis to sua sponte grant leave. For all of the reasons stated above, the Court GRANTS Defendant MBNA's motion to dismiss without leave to Plaintiff to amend his complaint.