U.S. Aerospace, LLC v. KMJ/Corbin

• Decision Date: 07 April 2016
• Docket Number: B258421
• Court: California Court of Appeals Court of Appeals
• Parties: US AEROSPACE, LLC, Plaintiff and Appellant, v. KMJ/CORBIN & COMPANY, LLP, et al., Defendants and Respondents.

US AEROSPACE, LLC, Plaintiff and Appellant, v. KMJ/CORBIN & COMPANY, LLP, et al., Defendants and Respondents.

B258421

COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION FIVE

April 7, 2016

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Los Angeles County Super. Ct. No. BC477764)

APPEAL from a judgment of the Superior Court of Los Angeles County, Richard L. Fruin, Jr., Judge. Affirmed.

Balonick Law Office, Barney H. Balonick, for Plaintiff and Appellant.

Chapman, Glucksman, Dean, Roeb & Barger, Randall J. Dean and Mark E. DiMaria, for Defendant and Respondent KMJ/Corbin & Company, LLP.

Kendall, Brill & Kelly, Alan Jay Weil and Nicholas F. Daum, for Defendants and Respondents Akin Gump Strauss Hauer & Feld, LLP, David C. Allen, Wilson C. Meeks, III, and Douglas A. Rappaport.

Kinsella Weitzman Iser Kump & Aldisert, Alan Kossoff; Bracewell & Giuliani, Michael C. Hefter, Ryan M. Philp and David A. Shargel for Defendants and Respondents Richard L. Smithline, Michael Loew, Dan Ly, Centrecourt Asset Management LLC, CAMOFI Master LDC and CAMHNZ Master LDC.

U.S. Aerospace, Inc., a Delaware corporation (Aerospace-DE), and Precision Aerostructures, Inc., a California corporation (Precision), sued certain of their officers, board members, and attorneys for breach of fiduciary duty, malpractice, and fraud. Aerospace-DE was not qualified by the California Secretary of State to transact intrastate business when it initiated the lawsuit, and several months later, Precision had its corporate powers, rights, and privileges suspended. Aerospace-DE thereafter became a Minnesota corporation via a merger (Aerospace-MN), and Aerospace-MN and Precision later filed a second amended complaint that included defendant and respondent KMJ/Corbin & Company LLP (KMJ) as a named defendant. When the second amended complaint was filed, Aerospace-MN was not qualified to transact intrastate business in California and Precision's corporate powers remained suspended. We are asked to decide whether the trial court correctly sustained a special demurrer based on provisions of California law that forbid domestic corporations (Precision) from prosecuting civil actions while suspended and forbid foreign corporations (Aerospace-MN) from maintaining lawsuits based upon intrastate business transactions without filing proof of payment of requisite fees, penalties, and taxes.¹

I. BACKGROUND

A. Legal Background

A defendant may demur to a complaint on the ground that the plaintiff "does not have the legal capacity to sue." (Code Civ. Proc., § 430.10, subd. (b).) The assertion that a plaintiff lacks capacity to sue is a "plea in abatement," which challenges the "'place, mode, or time of asserting'" a claim as opposed to its merits. (V & P Trading Co., Inc. v. United Charter, LLC (2012) 212 Cal.App.4th 126, 133 (V & P), citations omitted.) A plea in abatement ordinarily results only in a stay of the action until the basis forabatement is removed. (See County of Santa Clara v. Escobar (2016) 244 Cal.App.4th 555, 565 (Santa Clara); United Medical Management Ltd. v. Gatto (1996) 49 Cal.App.4th 1732, 1740 (United Medical).) However, a court is entitled to dismiss the action without prejudice if the plaintiff is unable to remedy the defect. (United Medical, supra, 49 Cal.App.4th at p. 1740.)

A domestic corporation whose powers have been suspended because it failed to pay taxes or file tax returns lacks legal capacity to sue during its suspension. (Rev. & Tax. Code, §§ 23301, 23301.5; V & P, supra, 212 Cal.App.4th at p. 132.) In order to restore its corporate status and, consequently, its ability to prosecute claims, the suspended corporation must pay all taxes, penalties, and other amounts owed, file an application for relief, and obtain a certificate of revivor from the Franchise Tax Board. (Rev. & Tax. Code, § 23305.)

As to foreign corporations, California law deprives them of legal capacity to sue on claims arising from intrastate business transactions if they do not possess a certificate of qualification to transact business in California from the Secretary of State and satisfy other requirements. Specifically, Corporations Code section 2203 provides as follows: "A foreign corporation . . . which transacts intrastate business without complying with Section 2105 shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this state, commenced prior to compliance with Section 2105, until it has complied with the provisions thereof and has paid to the Secretary of State a penalty of two hundred fifty dollars ($250) in addition to the fees due for filing the statement and designation required by Section 2105 and has filed with the clerk of the court in which the action is pending receipts showing the payment of the fees and penalty and all franchise taxes and any other taxes on business or property in this state that should have been paid for the period during which it transacted intrastate business." (Corp. Code,² § 2203, subd. (c).) In other words, under section 2203, a corporation that commences a lawsuit without holding a certificate of qualification must, among otherthings, file proof of payment of taxes due with the court clerk in order to maintain the action.

Section 2105, the statute referenced in the above-quoted provision in section 2203, establishes the requirements for obtaining a certificate of qualification from the Secretary of State. To do so, a corporation must submit a "statement and designation" listing corporate identity and contact information, consent to service of process in California, designate an agent for service of process, and submit proof of good standing in its foreign state of incorporation. (§ 2105.) The statement and designation section 2105 requires does not compel a corporation to provide information about any of its predecessor entities or to indicate whether the corporation previously conducted intrastate business without being qualified to do so.³

B. The Lawsuit and KMJ's Special Demurrer

New Century Companies, Inc., a Delaware corporation (New Century), was a publicly traded aerospace and defense contractor. New Century acquired Precision, a parts manufacturer, in 2009. In the spring of 2010, New Century became Aerospace-DE.

Precision and Aerospace-DE filed their original complaint alleging breach of fiduciary duty, malpractice, and fraud in January 2012. Precision and Aerospace-DE subsequently filed a first amended complaint in which they named additional defendants, including KMJ, and added a claim for unfair business practices. KMJ is a public accounting firm that provided independent auditing services to Aerospace-DE and/or New Century for approximately one year. Various defendants in the suit demurred to the first amended complaint, and the trial court sustained demurrers with leave to amend.

Precision and Aerospace-MN then filed a second amended complaint in which they added new defendants and causes of action. The second amended complaint alleged that from 2009 to early 2011, all named defendants damaged Aerospace-DE, New Century, and Precision through usurping control for personal benefit, self-serving and conflicted transactions, fraud, and incompetence. Because the outcome of this appeal turns partly on the corporate status and business locations of the entities involved, we quote the relevant allegations in the second amended complaint: "Plaintiff [Aerospace-MN] is a Minnesota corporation, with its principal place of business in Minneapolis, Minnesota. At the time of the operative events alleged below, [Aerospace-MN] was a Delaware corporation, with its principal place of business in Rancho Cucamonga, California. [Aerospace-DE] was previously known as [New Century], and its principal place of business was previously in Santa Fe Springs, California, and it previously did business in Victorville, California." The complaint further alleged KMJ was a limited liability company doing business in Costa Mesa, California.

On December 4, 2013, KMJ filed a special demurrer to the second amended complaint. KMJ asserted that neither Precision nor Aerospace-MN possessed "the legal capacity to bring suit in [California] on the matters alleged in the [second amended complaint]" because Precision had been suspended as a California corporation and Aerospace was a foreign corporation not qualified to transact business in California.⁴ In support of its demurrer, KMJ submitted copies of documents from the California Secretary of State showing (1) the California Franchise Tax Board had suspended Precision as a domestic corporation on April 2, 2012, "pursuant to the provisions of the California Revenue and Taxation Code," and (2) the state had no corporate record ofNew Century, Aerospace-DE, or Aerospace-MN. KMJ argued the allegations of the second amended complaint demonstrated the claims arose from transactions and events that occurred "in California, among and between California-based individuals." KMJ further contended California was Aerospace-DE and New Century's place of business at the time of the events alleged in the complaint, and that all of the defendants' alleged misconduct took place in California.

C. Hearings on KMJ's Special Demurrer

At an initial hearing held on KMJ's demurrer, counsel for Precision and Aerospace-MN acknowledged his clients lacked capacity to maintain suit. The court continued the hearing and issued an order to show cause why the case should not be dismissed. In the meantime, the court stayed the action.

Precision thereafter filed a statement of information⁵ with the Secretary of State but it included no evidence, such as a certificate of revivor or...