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United Medical Management Ltd. v. Gatto
49 Cal. App. 4th 1732, 57 Cal. Rptr. 2d 600 (1996 2nd District)
Decision As Published:
UNITED MEDICAL MANAGEMENT LIMITED, Plaintiff and Appellant, v.
LUCIANO R. GATTO et al., Defendants and Respondents.
No. B099882.
COURT OF APPEAL OF CALIFORNIA, SECOND APPELLATE DISTRICT, DIVISION
FIVE
49 Cal. App. 4th 1732; 1996 Cal. App. LEXIS 980; 57 Cal. Rptr. 2d
600; 96 Cal. Daily Op. Service 7692; 96 Daily Journal DAR 12609
October 16, 1996, Decided
SUBSEQUENT HISTORY: Rehearing Denied November 13, 1996. Respondent's
Review by the Supreme Court was denied January 28, 1997, Reported
at: 1997 Cal. LEXIS 561.
Subsequent History Amended December 31, 1997.
PRIOR HISTORY: Appeal from a judgment of the Superior Court of Los
Angeles County. Super. Ct. No. BC117254. Hon. Loren Miller, Judge.
DISPOSITION: The judgment of dismissal is reversed. The sanctions
award is vacated. UMML is awarded its costs on appeal.
COUNSEL:
Scott D. Myer for Plaintiff and Appellant.
Robert Poyourow for Defendants and Respondents.
JUDGES: Opinion by Grignon, Acting P. J., with Armstrong, J., and
Godoy Perez, J., concurring.
OPINION BY: GRIGNON
OPINION: [*1736] [***601] GRIGNON, Acting P. J.
Without qualifying to transact intrastate business pursuant to
Corporations Code section 2105, n1 a foreign corporation enters into
a contract with a California corporation to transact intrastate
business. The California corporation breaches the contract. The
foreign corporation thereafter qualifies to transact intrastate
business and brings an action for breach of contract. The question
presented is whether the foreign corporation may maintain the breach
of contract action without complying with section 2203, subdivision
(c), which requires the foreign corporation to provide proof of
payment of state taxes. We conclude that a foreign corporation which
qualifies to transact intrastate business after [**2] transacting,
but prior to commencing an action on, intrastate business may
maintain the action without complying with section 2203, subdivision
(c). Accordingly, we reverse the judgment of dismissal entered on
the ground of noncompliance with section 2203, subdivision (c).
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n1 All further statutory references are to the Corporations Code
unless otherwise indicated.
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STATUTORY BACKGROUND
Because the statutory background is necessary for an understanding
of the facts and procedure in this case, we begin with the [***602]
relevant statutes. A foreign corporation is prohibited from
transacting intrastate business without first obtaining from the
Secretary of State a certificate of qualification. (§ 2105, subd.
(a).) In order to obtain the certificate, the foreign corporation
[*1737] must file a statement including its name, state of
incorporation, address of its principal executive office, address of
its principal office within the state, agent for service of process
in the state and consent to service of process. [**3] (Ibid.) It
must also file a statement from its state of incorporation that it
is an existing corporation in good standing. (Id., subd. (b).)
If a foreign corporation transacts intrastate business without
qualifying, it is subject to a number of penalties. It is subject to
a penalty of $ 20 for each day it transacts unauthorized intrastate
business. (§ 2203, subd. (a).) n2 It is deemed to have consented to
California's jurisdiction. (Id., subd. (a).) The foreign corporation
and its agents may also be guilty of misdemeanors. (§ 2258, 2259.)
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n2 Section 2203, subdivisions (a) and (b) provide: "(a) Any foreign
corporation which transacts intrastate business and which does not
hold a valid certificate from the Secretary of State may be subject
to a penalty of twenty dollars ($ 20) for each day that unauthorized
intrastate business is transacted; and the foreign corporation, by
transacting unauthorized intrastate business, shall be deemed to
consent to the jurisdiction of the courts of California in any civil
action arising in this state in which the corporation is named a
party defendant. [P] (b) The penalty established by subdivision (a)
of this section shall be assessed according to the number of days it
is found that the corporation has been willfully doing unauthorized
intrastate business. Prosecution under this section may be brought,
and the money penalty recovered thereby shall be paid, in the manner
provided by [s]ection 2258 for a prosecution brought under that
section. The amount of the penalty assessed shall be determined by
the court based upon the circumstances, including the size of the
corporation and the willfulness of the violation."
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[**4] In addition, "[a] foreign corporation . . . which transacts
intrastate business without complying with [s]ection 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 [s]ection 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 [s]ection 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." (§ 2203, subd. (c).)
A foreign corporation which qualifies to transact intrastate
business may also be subject to penalties for failure to pay state
taxes. The corporate powers, rights and privileges of a foreign
corporation may be forfeited for failure to pay state taxes. (Rev. &
Tax. Code, § 23301.) A foreign corporation whose rights have been
forfeited for failure to [**5] pay state taxes may not prosecute or
defend an action, nor appeal from an adverse judgment. (Reed v.
Norman (1957) 48 Cal. 2d 338, 343 [309 P.2d 809].) A [*1738] foreign
corporation whose rights have been forfeited for failure to pay
state taxes may be reinstated upon application to the Franchise Tax
Board and payment of outstanding taxes, penalties and interest.
(Rev. & Tax. Code, § 23305.) Upon payment, the Franchise Tax Board
issues a certificate of revivor reinstating the corporation. (Rev. &
Tax. Code, § 23305a.) The reinstatement of the corporation is
without prejudice to any action, defense or right which accrued by
reason of the forfeiture. (Ibid.) "If it pays its taxes and obtains
a certificate of revivor during the pendency of an action, the
corporation may be allowed to carry on litigation, even to the
extent of validating otherwise invalid prior proceedings." (Benton
v. County of Napa (1991) 226 Cal. App. 3d 1485, 1490 [277 Cal. Rptr.
541].) The revival of corporate powers validates any procedural act
n3 taken on behalf of the corporation while its rights were
forfeited. (Id. at p. 1490.) Substantive defenses, such as the
statute of [***603] limitations, [**6] are not revived. ( Id. at p.
1491.)
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n3 Procedural acts include obtaining a judgment, filing a
cross-complaint, filing an appeal, obtaining an attachment,
undertaking discovery, appearing on and filing motions, and
defending an action. (Benton v. County of Napa, supra, 226 Cal. App.
3d at pp. 1490-1491.)
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FACTS AND PROCEDURAL BACKGROUND
Plaintiff and appellant United Medical Management Limited (UMML), a
Nevada corporation, is in the business of providing management and
other health care related services to physicians. It did not qualify
to transact intrastate business in California. On March 17, 1992,
UMML entered into a contract with defendants and respondents Luciano
R. Gatto and Long Beach Trauma and Physio Therapy, Inc., a
California corporation (collectively, Long Beach Trauma). UMML
agreed to provide $ 200,000 in capital to Long Beach Trauma to open
a medical facility in Long Beach. Long Beach Trauma defaulted on the
payments due from November 1992 through April 1994.
UMML filed a complaint [**7] for breach of contract on April 22,
1994. On June 23, 1994, Long Beach Trauma moved to dismiss the
complaint on the ground that UMML was a foreign corporation
transacting intrastate business and had failed to qualify to do
business. Long Beach Trauma supported its motion with a certificate
from the Secretary of State stating that as of May 23, 1994, UMML
had not qualified to transact intrastate business. On June 29, 1994,
UMML qualified to transact intrastate business and was so certified
by the Secretary of State on July 11, 1994. UMML did not provide to
the trial court receipts for payment of fees, penalties or taxes. On
September 22, 1994, the trial court dismissed the complaint without
prejudice for failure to comply with section 2203, subdivision (c).
[*1739]
UMML filed the instant complaint for breach of contract against Long
Beach Trauma on November 30, 1994. On March 3, 1995, Long Beach
Trauma moved to dismiss the complaint for failure to comply with
section 2203, subdivision (c) in that UMML had failed to provide
receipts for payment of fees, penalties and taxes. UMML filed the
certificate of qualification with the trial court but did not submit
receipts for payment [**8] of fees, penalties and taxes. On March
29, 1995, the trial court granted the motion to dismiss. A judgment
of dismissal was entered and sanctions in the amount of $ 378 were
awarded against UMML and its attorney. UMML appeals.
DISCUSSION
Statutory Interpretation
The purpose of statutory interpretation is to ascertain and
effectuate legislative intent. (Burden v. Snowden (1992) 2 Cal. 4th
556, 562 [7 Cal. Rptr. 2d 531, 828 P.2d 672].) Statutory
interpretation is guided by the so-called "plain meaning" rule.
"Words used in a statute . . . should be given the meaning they bear
in ordinary use. [Citations.] If the language is clear and
unambiguous there is no need for construction, nor is it necessary
to resort to indicia of the intent of the Legislature (in the case
of a statute) . . . . [Citations.] [P] But the 'plain meaning' rule
does not prohibit a court from determining whether the literal
meaning of a statute comports with its purpose or whether such a
construction of one provision is consistent with other provisions of
the statute. The meaning of a statute may not be determined from a
single word or sentence; the words must be construed in context, and
provisions [**9] relating to the same subject matter must be
harmonized to the extent possible. [Citation.]." (Lungren v.
Deukmejian (1988) 45 Cal. 3d 727, 735 [248 Cal. Rptr. 115, 755 P.2d
299].)
Sections 2105 and 2203
A foreign corporation transacting intrastate business which has
failed to qualify with the Secretary of State may nevertheless
defend an action brought against it in state court. (American etc.
Wireless v. Superior Court (1908) 153 Cal. 533, 536 [96 P. 15];
Mediterranean Exports, Inc. v. Superior Court (1981) 119 Cal. App.
3d 605, 614 [174 Cal. Rptr. 169].) A foreign corporation transacting
intrastate business which has failed to qualify with the Secretary
of State may also commence an action in state court. (Ward Land etc.
Co. v. Mapes (1905) 147 Cal. 747, 753 [82 P. 426].) A foreign
corporation transacting intrastate business which has failed to
qualify may not, however, maintain an action [***604] commenced
prior to qualification, except upon the satisfaction of certain
conditions. (§ 2203, subd. (c).)
[*1740] The failure of a foreign corporation to qualify to transact
business prior to commencing an action is a matter of abatement of
[**10] the action. (O'Connell Gold Mines, Ltd. v. Baker (1944) 63
Cal. App. 2d 384, 389-390 [146 P.2d 967].) Once a nonqualified
foreign corporation commences an action regarding intrastate
business, the defendant may assert by demurrer or as an affirmative
defense in the answer the lack of capacity to maintain an action
arising out of intrastate business. (Id. at p. 390.) This abatement
procedure enables the foreign corporation to obtain a judicial
determination as to whether it is in fact transacting intrastate
business. The defendant bears the burden of proving: (1) the action
arises out of the transaction of intrastate business by a foreign
corporation; and (2) the action was commenced by the foreign
corporation prior to qualifying to transact intrastate business.
(Cf. Thorner v. Selective Cam Transmission Co. (1960) 180 Cal. App.
2d 89, 90 [4 Cal. Rptr. 409].) If the defendant establishes the bar
of the statute, then the foreign corporation plaintiff must comply
with section 2203, subdivision (c). Ordinarily, the matter should be
stayed to permit the foreign corporation to comply. If the foreign
corporation plaintiff complies with section 2203, subdivision (c),
by [**11] qualifying and paying fees, penalties and taxes, it may
maintain the action. If the foreign corporation fails to comply, the
matter should be dismissed without prejudice. A plaintiff whose
action is dismissed on procedural grounds, such as noncompliance
with statutory requirements, is not precluded by the doctrine of res
judicata from bringing a second action, subject to the applicable
statute of limitations, after compliance with the statute. (Cf.
Folden v. Lobrovich (1957) 153 Cal. App. 2d 32, 35 [314 P.2d 56]
[failure to file a fictitious business name certificate].) Thus, a
plaintiff, whose first action upon intrastate business is dismissed
for failure to qualify to transact intrastate business prior to
commencing the action, may, subject to the applicable statutes of
limitations, bring a second action after so qualifying.
Section 2203, subdivision (c) is clear and unambiguous on its face.
It provides for the abatement of an action brought by a foreign
corporation upon intrastate business if the action is commenced
prior to qualifying to transact intrastate business. "A foreign
corporation . . . shall not maintain any action or proceeding . . .
commenced prior to compliance [**12] with [s]ection 2105 . . . ." (§
2203, subd. (c).) Section 2203, subdivision (c) is literally and
unambiguously inapplicable to actions commenced after compliance
with section 2105. (Cf. O'Connell Gold Mines, Ltd. v. Baker, supra,
63 Cal. App. 2d at p. 389.) The statute has no application to
actions commenced following qualification. (Ibid.)
Section 2203, subdivision (c) is to be narrowly construed to effect
its remedial purpose. (American etc. Wireless v. Superior Court,
supra, 153 Cal. [*1741] at p. 536.) Section 2203, subdivision (c)
imposes a penalty upon the foreign corporation which does not
qualify to transact intrastate business as required by section 2105
and merely provides that until it does so, it shall not maintain any
suit or action in any court of this state; it simply forbids the
exercise of a small part of the corporate powers, except on the
specified conditions. (Cf. People v. Alaska Pacific S. S. Co. (1920)
182 Cal. 202, 206 [187 P. 742].) "A nonqualified corporation subject
to a misdemeanor prosecution and on conviction to a heavy fine for
doing business without complying with the law, is permitted to
qualify, be restored to full [**13] legal competency and have its
prior transactions given full effect." (Tucker v. Cave Springs Min.
Corp. (1934) 139 Cal. App. 213, 217 [33 P.2d 871].)
The purpose of the certificate of qualification is to facilitate
service of process and to protect against state tax evasion.
(Neogard Corp. v. Malott & Peterson-Grundy (1980) 106 Cal. App. 3d
213, 219 [164 Cal. Rptr. 813].) The qualification statute assures
responsible and fair dealing by foreign corporations and equalizes
the regulation of foreign and domestic corporations. (Id. at p.
223.) The qualification statute is enforced, in part, by temporarily
halting lawsuits. The objective of the lawsuit suspension
enforcement mechanism is to encourage [***605] qualification, rather
than to penalize the failure to qualify earlier.
The qualification statute also serves the purpose of preventing tax
evasion by foreign corporations, but it is not primarily a taxation
measure. Revenue and Taxation Code section 23301 is a taxation
measure and precludes a foreign corporation which has failed to pay
its taxes from bringing or defending an action. A foreign
corporation which does not pay its taxes may have its corporate
powers forfeited [**14] by the Franchise Tax Board. (Rev. & Tax.
Code, § 23301.) However, a foreign corporation which has qualified
to do business does not forfeit its corporate powers merely because
it has not paid its taxes. The forfeit of corporate powers occurs
only at the time of the notice of forfeiture by the Franchise Tax
Board. (Mediterranean Exports, Inc. v. Superior Court, supra, 119
Cal. App. 3d at p. 617.) Thus, the mere failure to pay taxes does
not prevent a foreign corporation from bringing or defending an
action.
UMML's Complaints
UMML failed to qualify to transact intrastate business prior to
filing its first complaint on April 22, 1994. Long Beach Trauma
moved for dismissal and established that UMML was transacting
intrastate business and had not qualified to do so. UMML was given
an opportunity to comply with section [*1742] 2203, subdivision (c).
UMML qualified to transact intrastate business, but failed to pay
the necessary fees, penalties and taxes. The trial court correctly
dismissed the complaint without prejudice.
UMML then filed the instant action on November 30, 1994. Nothing
prohibited the refiling of the action after qualification. At this
point, UMML [**15] was required to do nothing more to maintain the
action. It had obtained the certificate prior to commencing the
action. Thus, the action was properly commenced and its maintenance
was not abated by section 2203, subdivision (c). That section
permits abatement of an action brought by a foreign corporation upon
intrastate business, only if the foreign corporation failed to
qualify before commencing the action. Here, the action was commenced
following qualification and was not subject to abatement pursuant to
section 2203, subdivision (c). UMML was therefore not required to
comply with section 2203, subdivision (c). UMML has not been
suspended by the Franchise Tax Board for failure to pay taxes, and
thus, abatement is not required on taxation grounds.
We conclude the trial court erred in dismissing the complaint. It
follows that the trial court also erred in awarding sanctions.
DISPOSITION
The judgment of dismissal is reversed. The sanctions award is
vacated. UMML is awarded its costs on appeal.
Armstrong, J., and Godoy Perez, J., concurred.
A petition for a rehearing was denied November 13, 1996, and
respondent's petition for review by the Supreme Court was denied
January 28, [**16] 1997.