Corporate Entities are Legally Separate and Distinct From Their Owners

If you are operating a business in San Diego, it is important that you form a corporate entity for that purpose. The main reason for using a corporate entity — like a corporation or a limited liability company or a California professional corporation — is to obtain the shield provided by the corporation that protects your personal and family financial assets. If the corporate entity undertakes a business obligation, then the business creditors can only seize business assets if there is a judgment; your personal and family assets are protected.

Why is this true? Because, under California law, once formed, a corporate entity becomes a separate legal entity that is distinct from its owners. If it is time for you to incorporate, an experienced San Diego corporate attorney can help and can provide other essential legal advice and counsel.

A recently decided case underscores the legal distinction between a corporate entity and its owners. See Orozco v. WPV San Jose, LLC, Case Nos. H044014, H044062 (Cal. App. 6th Dist. June 17, 2019). In Orozco, the issue involved a lease signed by a restaurant with the owner of a shopping center. The lease was signed by a corporate entity — a limited liability company (“LLC”). But the lease was also guarantied by the owners of the LLC. As the court explained, the lease and the guaranty were signed by two distinct legal “persons” and, as such, gave rise to two distinct legal causes of action.

The facts of the case were these: Paul Orozco operated a restaurant chain called Pauly’s Famous Franks N Fries (“Pauly’s”). Orozco formed an LLC called Solid Restaurant Ventures, LLC through which to operate his restaurants. In 2011 or so, Orozco wanted to open a Pauly’s restaurant in a shopping mall called The Plant. He investigated the other restaurants at the shopping center and made various inquiries with the owner of the shopping mall about possible competitors. Orozco’s restaurant sold fast-food hot dogs, french fries, and related foods.

Unbeknownst to Orozco, while Orozco was negotiating a 10-year lease, the shopping center was also negotiating a lease with a restaurant called Al’s Beef. Al’s Beef is a competitor of Pauly’s which offers beef sandwiches, hot dogs, and french fries. Despite being asked about competitors, the owners of the shopping center did not tell Orozco about the negotiations with Al’s Beef.

In late 2011, Orozco agreed to lease space at the shopping center. Solid Restaurant Ventures, LLC signed the lease and Orozco signed a personal guaranty of the lease. Eventually, Orozco learned that an Al’s Beef franchise was going to open in the shopping center. Indeed, the Al’s Beef franchise opened only two doors down from Pauly’s. When it opened, Al’s Beef severely cut into the sales and profitability of the newly-opened Pauly’s restaurant. Pauly’s was forced to close less than a year after opening.

Thereafter, Solid Restaurant Ventures, LLC and Orozco sued the shopping center for fraud and failure to disclose the negotiations with Al’s Beef. The LLC sought damages including lost profits. Orozco also sued separately to have the personal guaranty canceled. There was plenty of evidence that the shopping center did, in fact, commit fraud. Indeed, after a jury trial, the jury held in favor of the LLC and awarded more than $870,000 in damages. However, the trial court refused to cancel the personal guaranty signed by Orozco. The court asserted that since the LLC had chosen to pursue lost profit damages, Orozco could not also seek the remedy of rescission/cancellation of the guaranty.

On appeal, the trial court was reversed with respect to the cancellation of the guaranty. The Court of Appeals faulted the trial court for not recognizing that the LLC and Orozco were two separate distinct “persons” under California law. The LLC could properly seek to recover lost profits and other damages while the owner of the LLC — Orozco — could properly seek to cancel the personal guaranty. Being distinct and separate, the two could seek distinct and separate legal remedies against the owners of the shopping center. The important quote is this: “It is settled [law in California] that one who has suffered injury both as an owner of a corporate entity and in an individual capacity is entitled to pursue remedies in both capacities.”

Contact San Diego Corporate Law

For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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