Administratively Dissolved California LLC May Not Appeal Adverse Tax Ruling

Administratively Dissolved California LLC May Not Appeal Adverse Tax Ruling

      In a recent decision, a California State Court of Appeal rejected an effort by an administratively dissolved LLC to appeal an adverse decision against it. Creditors Adjustment Bureau, Inc. v. Big Valley Cold Storage LLC, 2017 WL 1076371 (Cal. App. 5^th Dist. Feb. 22, 2017).

      Creditors Adjustment Bureau, Inc. (“CAA”) was awarded a default judgment against Big Valley Cold Storage LLC (“Big Valley”). Initially, after CAA filed its complaint, Big Valley Cold Storage sought to answer, but it's response to the complaint was rejected on the basis that it had not paid a filing fee and as well filed an answer without representation by an attorney. Ultimately, a default judgment was entered against Big Valley. Some six months later, Big Valley would retain counsel, who was unsuccessful in seeking to have the default judgment set aside. Specifically, CAA alleged that as the Franchise Tax Board had suspended Big Valley’s status as an LLC, it lacked the capacity to defend the action or to prosecute an appeal. From there, the appeal followed.

      On appeal, Creditors Adjustment was successful in arguing that, as Big Valley had been administratively dissolved consequent to its failure to pay taxes, it lacked the capacity to bring an appeal of the default judgment. Specifically, under California law:

In support of its request for dismissal of the appeal, plaintiff presented a printout from the Secretary of State’s Web site, showing that Big Valley is currently suspended by the Franchise Tax Board (the Board) and the Secretary of State.  The Board may suspend the powers, rights and privileges of a limited liability company that fails to pay its taxes or fails to file a required tax return.  (Rev. & Tax. Code, §§ 23301, 23301.5, 23302, 23305.5, subd. (a)(2).) The Secretary of State may suspend the company’s powers, rights and privileges if the company fails to file the required statement of information with the Secretary of State. (Corp. Code, §§ 17702.09, 17713.10.)

A corporation or other entity that has had its powers suspended for failure to pay its taxes lacks the legal capacity to prosecute or defend a civil action, or to appeal from an adverse judgment.  (Bourhis v. Lord 92013) 56 Cal.4^th 320, 324; Tabarrejo v. Superior Court (2014) 232 Cal.App.4^th 849, 861-862.) “The same rule applies when a corporation fails to file the required statement of information.” (Friends of Shingle Springs Interchange, Inc. v. County of El Dorado (2011) 200 Cal.App.4^th 1470, 1486 (Friends).) The suspended entity may, however, be sued and have a default judgment entered against it. (Grell v. Laci Le Beau Corp. (1999) 73 Cal.App.4^th 1300, 1306.)

The policy underlying the statutory provisions regarding failure to comply with the tax statutes is “ ‘to prohibit the delinquent corporation from enjoying the ordinary privileges of a going concern, in order that some pressure will be brought to bear to force the payment of taxes.’ ” (Peacock Hill Assn. v. Peacock Lagoon Constr. Co. (1972) 8 Cal.3d 369, 371.) The delinquent entity may revive its powers by complying with the applicable statutory requirements and, in the case of the failure to pay taxes or file a tax return, obtaining a certificate of reviver from the Board. (Rev. & Tax Code, § 23305; Corp. Code, § 17713.10, subd. (d).) Once its powers are revived, the corporation or other entity may again sue and defend in court. (Friends, supra, 200 Cal.App.4^th at p. 1486.)

      Of course, similar result would not happen in Kentucky. Initially, the Kentucky Department of Revenue does not have the authority to effect the administrative dissolution of a business organization. Rather, that capacity is reserved exclusively to the Secretary of State. Second, under Kentucky law, a company that has been dissolved, whether voluntarily, administratively or judicially, continues to be a business organization with the capacity to initiate and defend all legal actions. See, e.g., KRS § 275.300(4)(a)-(b).