Suspended Corporations Risk Losing Their Claims Due to Passage of the Statute of Limitations

The case V&P Trading Co., Inc. v. United Charter, LLC (Opinion filed December 19, 2012), Case No. C070571, Third Appellate District, 2012 Cal.App. Lexis 1285, deals with the rules regarding suspended corporations in California.  While this is not a construction law case, it has importance in the construction industry, since so many businesses in the construction arena choose to use the corporate form of business. 

In V&P Trading, the plaintiff's corporate status was suspended pursuant to California Revenue and Taxation Code section 23301 because it failed to pay certain taxes, penalties or interest.  Because of this, the Court of Appeal explained that the corporation was then without capacity to prosecute a civil action.  The Court further explained that once the corporation obtained a Certificate of Revivor from the California Franchise Tax Board, its status would be reinstated.  Most importantly, the Court of Appeal held that while procedural rights in a lawsuit could be retroactively validated once the corporation is reinstated, the same is not true for substantive rights and defenses, including the statute of limitations.  In V&P Trading, the plaintiff was in a suspended corporate status when it filed the lawsuit, and unfortunately for the plaintiff, the statute of limitations passed before it was able to get reinstated. 

The Court of Appeal upheld the trial court's granting of defendant's motion for summary judgment based upon the passing of the statute of limitations while the plaintiff's corporate status was suspended.  This was true even though the defendant did not plead the lack of capacity of the plaintiff in defendant's answer to the lawsuit.  However, the defendant did plead the statute of limitations as an affirmative defense, and this was enough for the defendant to succeed in its motion.

The Court further explained that a defendant must raise the defense of the lack of capacity of the plaintiff due to the suspension of its corporate status at the earliest possible time in the litigation, or else that defense is waived.  The Court characterized this defense as a "plea in abatement" and stated that "[T]he proper time to raise a plea in abatement is in the original answer or by demurrer at the time of the answer."

The lessons to be gleaned from this case for those in the construction industry (though they are applicable to all businesses) are that corporations must be careful to ensure the validity of their corporate status at all times.  In the construction business, there are too many short deadlines that can easily pass before a suspended corporation can be revived, namely the statutes of limitation regarding mechanics liens, stop payment notices and claims against surety bonds.  In addition, for those being sued, such as property owners being liened, public entity owners served with a stop payment notice, or surety bond bond companies being sued on a payment or performance bond, license bond or lien or stop payment notice release bond, it is always important to check the plaintiff's corporate status before filing an answer to the lawsuit.  This can easily be done by looking on the California Secretary of State's website.  In this manner, the defense of a plea in abatement can be raised at the appropriate time, as well as any possible statute of limitations defense.