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Case Study: Individual Registered Agent’s Lack of Knowledge Results in Default Judgment

A recent California Court of Appeals case illustrates the importance of selecting a registered agent who fully understands the law and the registered agent’s obligations. Nearly every limited liability company (LLC) and corporation must have a registered agent that it has authorized to receive legal papers (such as a summons and complaint) and official communications on its behalf. The states consider the requirement to appoint a registered agent so important that most of them have laws that allow them to administratively dissolve a company that fails to comply.

Every company has the opportunity to appoint a professional registered agent. This is a company in the business of providing registered agent services, with personnel familiar with service of process laws and trained on the proper handling of the documents served on them on behalf of their corporate and LLC customers.

Ironically, considering the states clearly understand the importance of the registered agent, they do not require the appointment of a professional registered agent. In fact, most allow a company to choose any individual who is at least 18 years old. As a result, many small businesses appoint the business’s owner or the lawyer who assisted in the formation rather than a professional registered agent company.

CTs white paper What Counsel Should Know about the Risk to Clients of Choosing an Individual Registered Agent points out several reasons why the appointment of the lawyer or owner may not be the best choice, and it provides several examples of court decisions that drive home those points.

Pulte Homes Corp. v. Williams Mechanical, Inc. No. E064710, Cal. App. 4th Dist., decided by the California Court of Appeal on August 9, 2016, provides an example of another reason. The individual appointed may not be sufficiently familiar with the service of process laws, which can lead to costly mistakes in handling the documents served upon him or her. In Pulte Homes Corp, a lawsuit was filed against a corporation for defective performance of a plumbing subcontract. By the time the suit was filed the corporation had filed for voluntary dissolution. The corporation’s registered agent at the time of dissolution was its lawyer.

California, like other states, provides that dissolved corporations continue to exist for the purposes of winding up and can defend suits brought against them. California law also provides a dissolved corporation may be served by serving an an agent authorized to receive service of process at the time of dissolution. Consequently, the lawyer was still an authorized agent for service of process.

The lawyer admitted he received the summons and complaint. However, he believed he was no longer an authorized process agent because the corporation was dissolved. He failed to inform anyone associated with the corporation about the lawsuit. Of course, the corporation never appeared and the plaintiff received a default judgment, which was upheld on appeal.

In rejecting the corporation’s request that the default be vacated on the equitable ground that there was “excusable neglect,” the court said:

“[I]n light of the statutory directive that a dissolved corporation may be served by serving its agent for service of process at the time of dissolution, anybody who steps up to be a corporation's agent for service of process faces at least the possibility of being served on behalf of the corporation after it has dissolved. We therefore hold that a dissolved corporation cannot claim excusable neglect when its agent for service of process at the time of dissolution has not made any effort to notify it and has not shown that an effort, if made, would have failed.”

The judge’s words are a clear reminder that choosing a registered agent is an important decision. And if a small business is considering appointing anyone other than a professional registered agent company, careful consideration should be made by both that small business and the individual who will be accepting the appointment.

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