An insured’s “unclean hands” in denying the authenticity of a certificate of cancellation filed with the California Secretary of State prevented the insured from continuing to pursue a lawsuit against its insurer. (DD Hair Lounge, LLC v. State Farm General Insurance Co. (2018) 20 Cal.App.5th 1238)
Facts
In August 2013, Uche Umeagukwu formed a limited liability company called DD Hair Lounge, LLC. Shortly after DD Hair was formed, DD Hair allegedly suffered a burglary loss. DD Hair submitted a claim to its insurer, State Farm General Insurance Company, but State Farm denied the claim.
In January 2014, DD Hair sued State Farm based on State Farm’s refusal to pay the burglary claim. In November 2014, DD Hair, acting through Ms. Umeagukwu, filed a certificate of cancellation with the California Secretary of State. At the time DD Hair filed the certificate of cancellation (i.e., November 2014), California Corporations Code section 17707.06 provided that upon filing a certificate of cancellation, an LLC’s “powers, rights, and privileges shall cease.” The certificate of cancellation itself contained a similar statement (i.e., that upon filing the certificate of cancellation, DD Hair’s “powers, rights and privileges will cease…”). DD Hair did not inform either State Farm or the court that DD Hair had filed the certificate of cancellation.
In September 2015, State Farm discovered that DD Hair had filed the certificate of cancellation. State Farm thus filed a motion for judgment on the pleadings, arguing that once DD Hair cancelled its LLC status in November 2014, Corporations Code section 17707.06 deprived DD Hair of the power to pursue its case against State Farm. DD Hair opposed the motion, arguing that Ms. Umeagukwu’s signature on the certificate of cancellation was “forged.” Because of the dispute concerning the authenticity of Ms. Umeagukwu’s signature on the certificate of cancellation, the trial court denied State Farm’s motion for judgment on the pleadings. The trial court then scheduled an evidentiary hearing for mid-January 2016 to resolve the issue regarding authenticity of the certificate of cancellation.
Effective January 1, 2016, Corporations Code section 17707.06 was amended to provide that when an LLC files a certificate of cancellation, the LLC still retains its powers of “prosecuting and defending actions by or against it in order to collect and discharge obligations.” In mid-January 2016, the trial court held the evidentiary hearing to determine whether the November 2014 certificate of cancellation was authentic. After the hearing, the court ruled that Ms. Umeagukwu’s signature was genuine, that the certificate of cancellation was validly filed, and that as a result DD Hair could not maintain the lawsuit against State Farm. The trial court thus dismissed DD Hair’s lawsuit against State Farm.
DD Hair appealed, arguing that although DD Hair had filed the certificate of cancellation in November 2014, the January 2016 amendment to section 17707.06 was retroactive and gave DD Hair authority to continue pursuing its case against State Farm.
Holding
The Court of Appeal affirmed the dismissal of DD Hair’s lawsuit against State Farm.
The appellate court agreed with DD Hair that the January 1, 2016 amendment of section 17707.06 was intended to be retroactive. Thus, under normal circumstances, the amended statute would apply to the November 2014 notice of cancellation and would give DD Hair authority to continue prosecuting its case against State Farm.
Nevertheless, relying on the doctrine of “unclean hands,” the appellate court declined to apply amended section 17707.06 to reinvigorate DD Hair’s right to pursue a lawsuit against State Farm. The appellate court emphasized that DD Hair’s principal, Ms. Umeagukwu, had concealed the November 2014 certificate of cancellation for almost a year before State Farm discovered it in September 2015. Thereafter, Ms. Umeagukwu claimed that the certificate was forged, forcing the trial court to hold an evidentiary hearing which prolonged the proceedings into 2016, after the amendment to section 17707.06 became effective. Had Ms. Umeagukwu been forthright, DD Hair’s case would have been swiftly dismissed and judgment entered based on the version of section 17707.06 then in effect. Thus, Ms. Umeagukwu’s “delays and denials positioned DD Hair to raise the argument that the newly revised section 17707.06 preserved its rights.” As such, the doctrine of unclean hands prevented DD Hair from relying on the amended version of section 17707.06, and the trial court had correctly dismissed DD Hair’s lawsuit.
Comment
The doctrine of “unclean hands,” which applies to both law and equity, requires that “a plaintiff act fairly in the matter for which he seeks a remedy. He must come into court with clean hands, and keep them clean, or he will be denied relief, regardless of the merits of his claim.” (Kendall-Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970, 978.) The primary requirement for application of the unclean hands doctrine is that the misconduct must relate directly to the cause at issue.
Here, by “concealing the certificate of cancellation for nearly a year” and then “engaging in the time-consuming charade of disingenuously challenging that certificate’s authenticity,” DD Hair had effectively stalled the case to a point where DD Hair could arguably have obtained relief under the amended version of section 17707.06. Had DD Hair acted with “clean hands,” its claim would have properly been extinguished long before the effective date of the amendment to section 17707.06.