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.
