First Family Mortg. Corp. of Florida v. Durham

CourtUnited States State Supreme Court (New Jersey)
Citation108 N.J. 277,528 A.2d 1288
PartiesFIRST FAMILY MORTGAGE CORPORATION OF FLORIDA, Plaintiff-Appellant, v. Linda A. DURHAM and Mr. Linda Durham, Defendants, and Attorney General of New Jersey, Intervenor-Respondent.
Decision Date04 August 1987

William M.E. Powers, III, for plaintiff-appellant (William M.E. Powers, Jr., Medford, attorney).

Harry Z. Haushalter, Deputy Atty. Gen., for intervenor-respondent (W. Cary Edwards, Atty. Gen., attorney; James J. Ciancia, Asst. Atty. Gen., of counsel).

The opinion of the Court was delivered by


The sole issue in this case is whether the Corporation Business Activities Reporting Act (the Reporting Act), N.J.S.A. 14A:13-14 to -23, violates the commerce clause, U.S. Const art. I, p 8, cl. 3, or the supremacy clause, U.S. Const. art. VI, p 2.

Plaintiff, First Family Mortgage Corporation of Florida, a Florida Corporation whose principal place of business is in Illinois, violated the Reporting Act by failing to file a Notice of Business Activities Report (Activities Report) as required by N.J.S.A. 14A:13-15. Failure to file a timely Activities Report bars a foreign corporation from maintaining any action or proceeding in any state or federal court in New Jersey to enforce any cause of action accruing during an accounting period in which the corporation failed to file an Activities Report. N.J.S.A. 14A:13-20b. Pursuant to N.J.S.A. 14A:13-20b, the trial court dismissed plaintiff's mortgage foreclosure suit. The Appellate Division affirmed. 205 N.J.Super. 251, 500 A.2d 746 (1985). We granted plaintiff's motion for leave to appeal, 103 N.J. 507, 511 A.2d 675 (1986).

We now sustain the constitutionality of N.J.S.A. 14A:13-20 and hold that the State can require a foreign corporation to file an Activities Report and can withhold access to courts until the corporation complies. However, once a foreign corporation files an Activities Report and meets the requirements of N.J.S.A. 14A:13-20c(2), the commerce clause requires that the corporation be allowed to pursue any cause of action existing at the time of the filing (or accruing during that accounting period) regardless of when it arose.


Plaintiff invests in and services mortgages guaranteed by the Veteran's Administration and Farmer's Home Administration, and acts as a servicing custodian for Government National Mortgage Association (GNMA) loans. Plaintiff does not have a certificate of authority to do business in this state, does not file a New Jersey corporation business tax return or a New Jersey corporation income tax return, and has no officers, employees, or representatives in New Jersey. While plaintiff does not originate any loans in New Jersey, it does own loans secured by New Jersey real estate. Such loans provide plaintiff with more than $25,000 per year in interest income.

On July 24, 1980, plaintiff acquired fifty-four GNMA home mortgages secured by New Jersey real estate from Midstate Mortgage and Service Company, an Illinois corporation. Defendants, Mrs. and Mr. Linda A. Durham, were the mortgagors on one of these mortgages. On January 1, 1983, defendants defaulted on their monthly payment to plaintiff. Plaintiff's representatives communicated with defendants by mail and telephone in an attempt to collect on the delinquent account. When these efforts failed, plaintiff instituted a mortgage foreclosure action in the Chancery Division.

The trial court dismissed plaintiff's action because plaintiff had failed to comply with the Reporting Act. The court based its ruling on Associates Consumer Discount Co. v. Bozzarello, 149 N.J.Super. 358, 373 A.2d 1016 (App.Div.1977), which upheld the constitutionality of the Act. Nonetheless, the court opined that the Reporting Act, as applied to plaintiff, violated the commerce clause. This view was based upon the court's interpretation of Allenberg Cotton Co., Inc. v. Pittman, 419 U.S. 20, 95 S.Ct. 260, 42 L.Ed.2d 195 (1974), and related Supreme Court decisions holding that a state cannot require a foreign corporation engaged solely in interstate commerce to obtain a license to do business within that state.

The Appellate Division affirmed, distinguishing this case from the licensing cases on the ground that the Reporting Act, unlike the typical licensing statute, "does not expose foreign corporations engaged solely in interstate commerce to lawsuits in this state. It merely requires that foreign corporations receiving substantial annual payments from New Jersey residents file information that will enable New Jersey to determine whether they are exempt from taxation." 205 N.J.Super. at 255, 500 A.2d 746. The court also rejected plaintiff's argument that the Reporting Act violates the supremacy clause by undermining the policy of the National Housing Act: "The slight inconvenience of filing the notice [Activities Report] will not destroy the market for GNMA mortgages on homes in New Jersey and in other states having a similar requirement." 1 Id.


N.J.S.A. 14A:13-15 provides in pertinent part:

Every foreign corporation which during any calendar or fiscal accounting year ending after December 31, 1973, carried on any activity or owned or maintained any property in this State, unless specifically exempted under section 3 of this act, shall be required to file a notice of business activities report, as hereinafter provided.

Activities or property maintenance in this State which require corporations to file this report are:

* * *

* * *

e. receiving payments from persons residing in this State, or businesses located in this State, aggregating in excess of $25,000 regardless of any other connections with this State;

* * *

* * *

Every foreign corporation subject to the Reporting Act must file an Activities Report with the Director of the Division of Taxation of the State of New Jersey, on or before the fifteenth day of the fourth month after the close of the corporation's calendar or fiscal accounting year. N.J.S.A. 14A:13-18a. Pursuant to N.J.S.A. 14A:13-16b, a foreign corporation is not required to file, if it has received either a certificate of authority to do business in this state or has filed a timely tax return under the Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -40, or the Corporation Income Tax Act, N.J.S.A. 54:10E-1 to -24 (the Second Tier Income Tax). 2 N.J.S.A. 14A:13-20a and b set forth sanctions for a foreign corporation's failure to file an Activities Report:

a. No foreign corporation carrying on any activity or owning or maintaining any property in this State which has not obtained a certificate of authority to do business in this State and disclaims liability for the corporation business tax and the corporation income tax shall maintain any action or proceeding in any State or Federal court in New Jersey, until such corporation shall have filed a timely notice of business activities report.

b. The failure of a foreign corporation to file a timely report shall prevent the use of the courts in this State for all contracts executed and all causes of action that arose at any time prior to the end of the last accounting period for which the corporation failed to file a required timely report.

However, a court may excuse a corporation's failure to file an Activities Report

where the court finds the corporation has sustained the burden of establishing that

(1) the failure to file a timely report was done in ignorance of the requirement to file, such ignorance was reasonable in all circumstances;

(2) all taxes, interest and civil penalties due the State for all periods have been paid, or provided for by adequate security or bond approved by the director, before the suit may proceed. [ N.J.S.A. 14A:13-20c.]

The Reporting Act was recommended in the Report of the New Jersey Tax Policy Committee, Vol. V, at 32-34 (Report ) submitted to Governor William T. Cahill on February 23, 1972. The Report recommended that New Jersey do as many other states had done, "by adding to their corporate franchise taxes, or by substituting for them, an income tax levied, not on the privilege, or the doing of business in the State, but on income derived from sources within the State." Id. at 20. It explained that "equity demands business carrying on activities in the State and exploiting the New Jersey market make some contribution to the costs of maintaining governmental operations and the services provided by the State...." Id. at 22. The Report recommended the enactment of a "second tier" income tax to impose a tax on foreign corporations neither qualified nor doing business within the state in the traditional franchise tax sense (who do not maintain an office or employ or own property or capital in the state), but who, nevertheless, derive income from sources in the state and have an adequate due process nexus with New Jersey to give the state jurisdiction to tax. 3 The Tax Policy Committee recognized that for the Second Tier Income Tax to be effective, the state had to be able to locate those foreign corporations that would be subject to the new proposed tax:

[I]t is important, in order to safeguard the State's revenues and reduce unfair taxfree competition with businesses that pay taxes to this State, that the Legislature adopt a more effective technique for discovering foreign corporations that may be taxable, but that are now paying no taxes, and would otherwise escape the broadened jurisdiction of the proposed second tier tax. To seek to accomplish that objective, we propose that a statutory provision be adopted requiring certain non-qualified foreign corporations to file with the Division of Taxation a Notice of Business Activities. [Report, supra, at 33].

Moreover, the Report specifically stated the reason for N.J.S.A. 14A:13-15e:

It would also appear desirable, in order to establish a simple, objective quantitative test for the filing of the Notice to require any foreign corporation that...

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