Filed 4/7/16 US Aerospace, LLC v. KMJ/Corbin & Co., LLC CA2/5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
US AEROSPACE, LLC, B258421
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC477764)
v.
KMJ/CORBIN & COMPANY, LLP, et al.,
Defendants and Respondents.
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 for
1
Plaintiff and appellant US Aerospace, LLC, which is apparently the successor to
Aerospace-MN, takes this appeal from the trial court’s ruling. For purposes of this
opinion, we consider US Aerospace, LLC to be the same entity as Aerospace-MN.
2
abatement 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 other
2
Undesignated statutory references that follow are to the Corporations Code.
3
things, 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.
3
Foreign corporations that transact intrastate business without a certificate of
qualification are subject to a $20 penalty for each day of unauthorized business transacted
(§ 2203, subd. (a)), and such corporations may be prosecuted for a misdemeanor violation
punishable by at least $500 but no more than $1,000 (§ 2258). Foreign corporations that
transact intrastate business without being qualified are also deemed to consent to
jurisdiction in California if named as a defendant in a civil action. (§ 2203, subd. (a).)
4
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 of
4
A demurrer for lack of capacity typically must be brought as soon as possible;
otherwise it is deemed to be waived. (See, e.g., Color-Vue, Inc. v. Abrams (1996) 44
Cal.App.4th 1599, 1605.) KMJ was never served with the first amended complaint and
only became aware of the suit upon service of the second amended complaint in October
2013. Thus, it had no opportunity to challenge Aerospace’s legal capacity until it
received the second amended complaint.
5
New 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 certificate of good standing,
to indicate its corporate powers had been restored. Aerospace-MN did obtain a certificate
of qualification to transact intrastate business from the Secretary of State, effective March
14, 2014.6 Aerospace-MN did not, however, file any receipts or other documents with
the clerk of the court in which its lawsuit was pending “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).)
5
Domestic corporations and foreign corporations transacting interstate business
must file an annual statement of information which describes the location of the
corporation’s principal office; contact information for its officers, directors, and agent for
service of process; and the nature of its business. (§§ 1502, 2117.)
6
As we have explained, the statement and designation a corporation files to obtain a
certificate of qualification does not require the corporation to provide information about
predecessor entities or the date on which the corporation began transacting intrastate
business. Thus, it is possible, as it was here, that a qualification certificate will issue
where the corporation has not paid applicable taxes and other amounts due.
6
When the parties appeared for the continuation of the hearing on KMJ’s demurrer
and the court’s order to show cause, KMJ continued to argue that both Precision and
Aerospace-MN lacked capacity to sue: Precision, because its corporate powers remained
suspended, and Aerospace-MN, because, notwithstanding the certificate of qualification
it obtained, it had still failed to file proof of payment of fees, penalties, and taxes for the
period when it transacted intrastate business without being qualified. In addition, because
the claims in the lawsuit did not originally belong to Aerospace-MN, but rather to
Aerospace-DE and New Century, KMJ maintained that Aerospace-MN could not
continue to prosecute the action unless it showed that these two predecessors had the
requisite capacity to sue as well. KMJ argued the court should dismiss the entire action
without prejudice and refuse to provide either plaintiff (i.e., Aerospace-MN or Precision)
further time to comply.
The court found neither plaintiff had demonstrated capacity to maintain the
lawsuit and asked KMJ’s counsel to prepare an order “that would specify, with
authorities, what each of the plaintiffs have to do, and [the court will] set a date maybe 20
days from now to obtain a declaration from the plaintiffs that they will perform these
responsibilities, and that they have ascertained how long it will take them to complete
each of these steps, and then [the court will] consider setting a further period during
which they will actually accomplish these steps.” The court stated it would prefer to see
plaintiffs “elect not to proceed once they ascertain the taxes, and fees that are owed by
each corporation” rather than dismiss the case when plaintiffs could argue “that they
thought they were in compliance, and through inadvertence were not in compliance.”
The resulting court order, issued on March 28, 2014, required Aerospace-MN and
Precision to file declarations of corporate officers setting forth the precise actions they
would take to establish and document their legal capacity to maintain the lawsuit. The
order specified what steps needed to be taken by each plaintiff, with cites to relevant case
law and statutory provisions. Aerospace-MN, for example, was required to show how it
acquired the claims of Aerospace-DE and New Century, that all three entities were in
good standing in their states of incorporation, and that each had “satisfied all legal
7
requirements to establish its legal capacity to maintain [the] action as a foreign
corporation which was not qualified to do business in California at the time the action
was filed,” including payment of all taxes owed while the entities were transacting
intrastate business and the filing of receipts with the clerk of the court showing such
payments had been made.
On April 9, 2014, Aerospace-MN and Precision filed a declaration from Charles
Arnold, who purported to be “a properly qualified corporate officer of [Aerospace-MN]”
but did not further specify his position. Arnold stated that New Century changed its
name to Aerospace-DE on April 8, 2010, Aerospace-MN was formed on May 1, 2013,
and Aerospace-DE merged into that new company two days later. Arnold asserted that
Aerospace-MN was presently qualified to do business in California and in good standing
in both California and Minnesota. He further averred that Aerospace-MN “does not do
business in California, and is not delinquent in filing any tax returns or paying . . . any
taxes or fees in California.” With respect to predecessors Aerospace-DE and New
Century, Arnold stated he had conversations with unnamed persons at the California
Franchise Tax Board and on that basis believed those two entities were
“considered . . . holding compan[ies] under the holding company exception of California
Revenue and Taxation Code section 23102” and, consequently, owed no taxes or fees for
“any time relevant to the operative complaint . . . .” As for Precision, Arnold indicated
that a return to active status would require filing state tax returns for the years 2006
through 2013, paying $6,777.82 in taxes, and paying a $519 reinstatement fee. Arnold
estimated it would take 60 to 90 days to complete Precision’s returns, assuming it could
locate the necessary documents.
The trial court held a hearing after submission of the Arnold declaration and found
it defective because it was incomplete, conclusory, relied upon hearsay, and failed to
establish the declarant’s competence. The court ruled that Precision and Aerospace-
MN’s evidence was therefore inadequate to establish they would be able to demonstrate
capacity. But again wishing to avoid dismissing the matter given plaintiffs’ attempts to
proceed with the action, the court ordered Precision and Aerospace-MN to file new
8
declarations of persons with competent knowledge demonstrating that they understood
what was needed to establish legal capacity and stating whether and by when they could
do so.
Precision and Aerospace-MN thereupon filed a declaration signed by their
attorney acknowledging Precision had none of the documents necessary to file past
returns and regain active status. The two entities also resubmitted the same declaration
from Charles Arnold they had previously filed. Counsel for Precision and Aerospace-
MN asked the trial court to deem Aerospace-MN to have legal capacity to proceed and to
open discovery, which would allow Precision to request documents from various
defendants it could attempt to use in completing and filing tax returns in order to revive
its corporate status.
The court held another hearing after Precision and Aerospace-MN filed these
declarations. The court informed Precision that it must submit a declaration of a
corporate officer that would specify which documents it needed in order to file past
returns, why it did not have such documents, and why it believed someone else did. With
respect to Aerospace-MN, the court concluded that KMJ’s demurrer on the issue of
corporate capacity to sue was ripe for decision and accordingly set a date for hearing the
demurrer.
In advance of the hearing, Aerospace-MN filed an opposition to KMJ’s special
demurrer. Aerospace-MN argued it possessed legal capacity to maintain suit because it
was qualified to do business in California, it did not owe any franchise taxes, and its
predecessors did not owe any franchise taxes. In reply, KMJ maintained that Aerospace-
MN had failed to comply with section 2203, subdivision (c) of the Corporations Code
and failed to provide “competent foundational evidence to show what penalties, fees, and
taxes it actually does or does not owe . . . .” KMJ additionally argued Aerospace-MN
could not continue to prosecute the lawsuit because the suit advanced claims Aerospace-
MN acquired from foreign corporations that never qualified to do business in California
and that could not be considered mere holding companies based on the evidence
presented.
9
After hearing argument from both sides at the scheduled demurrer hearing, the
trial court sustained the demurrer without leave to amend and dismissed all of Aerospace-
MN’s claims in the second amended complaint against all defendants. The court
reasoned that Aerospace-MN’s current qualification to do business in California did not
“mean that [it] ha[d] legal capacity to bring suit based upon the earlier entities’ claims
based upon intrastate commerce.” The court referred to statements in the second
amended complaint indicating that at the time of the alleged misconduct, Aerospace-DE
and New Century’s principal places of business were in California. The court found that
the action, “as alleged in the [second amended complaint], [was] brought upon intrastate
business which allegedly was transacted by [New Century] and [Aerospace-DE] in the
State of California . . . .” Although New Century and Aerospace-DE engaged in
intrastate business, the court concluded neither entity obtained a certificate of
qualification to transact such business. In addition, the court concluded Aerospace-MN
was not qualified to transact intrastate business at the time it filed its claims and it had
not, since then, filed receipts with the clerk of court showing payments of fees or taxes
owed.
Based on these conclusions, the court found Aerospace-MN lacked capacity to
prosecute the lawsuit because of its own deficiencies, and because the lawsuit involved
claims of predecessor entities that also lacked capacity: “[Aerospace-MN] acquired the
claims it asserts in this action through the merger of [Aerospace-DE] into [Aerospace-
MN]. [Aerospace-MN] has not established that it is qualified under Corporations Code
section 2203(c) to prosecute claims based on intrastate transactions. Moreover,
[Aerospace-MN], as the assignee of claims once owned by [Aerospace-DE] and [New
Century], must establish that those predecessor corporations were qualified to do business
in California at the time of the intrastate transactions giving rise to the claims asserted by
[Aerospace-MN].” The court emphasized that Aerospace-MN had failed to comply with
the prerequisites to maintain suit despite the court’s efforts to provide “ample
opportunity” to demonstrate its legal capacity.
10
As for Precision, the company did not file any further documents in response to
the court’s previous order to submit a declaration from a corporate officer specifying the
documents it wanted to obtain from defendants. Consequently, the court also dismissed
all of Precision’s claims in the second amended complaint against all defendants which,
when combined with its ruling as to Aerospace-MN, resulted in dismissal of the second
amended complaint in its entirety, without prejudice.7 Aerospace-MN, but not Precision,
appeals the dismissal.
II. DISCUSSION
On appeal, Aerospace-MN continues to argue it could legally maintain the lawsuit
because the requirements of Corporations Code section 2203 were satisfied; the company
was qualified to do business in California and its predecessors were holding companies
not subject to state taxes. Aerospace-MN also raises a new argument for the first time in
its reply brief, namely, that KMJ did not prove the underlying action arose out of
intrastate business transactions, which is a condition for proving lack of capacity to sue
under section 2203. Finally, Aerospace-MN posits that if it needed to take additional
actions to establish capacity, the trial court should have granted leave to amend to give it
yet another opportunity to do so.
We hold Aerospace-MN’s arguments for reversal lack merit. Even if Aerospace-
MN had itself become qualified to maintain the lawsuit, it failed to demonstrate that the
7
The trial court expressly dismissed Precision’s claims without prejudice but did
not specify, either in open court or its written order, whether it was dismissing
Aerospace-MN’s claims with or without prejudice. We understand the dismissal to have
been without prejudice, however, for the following reasons. First, KMJ argued that the
complaint should be dismissed without prejudice. Second, the court based its decision to
dismiss on United Medical, supra, 49 Cal.App.4th at p. 1740, which states “[i]f the
foreign corporation fails to comply [with 2203, subdivision (c)], the matter should be
dismissed without prejudice.” Third, the court gave no indication why it would treat
Aerospace-MN’s lack of capacity to sue any differently from Precision’s lack of capacity
to sue.
11
original holders of the claims asserted in the suit—predecessors-in-interest Aerospace-
DE and New Century—were, or were likely to become, qualified to maintain the action.
A. Standard of Review
Aerospace-MN and KMJ dispute what standard of review we should employ.
Aerospace-MN asserts we should independently review (de novo) a demurrer sustained
without leave to amend, assuming the truth of all properly pleaded facts and reversing if
the plaintiff shows there is a reasonable possibility any defect identified by the defendant
can be cured by amendment. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967;
Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) KMJ, on the other hand, argues that we
should review the trial court’s decision for abuse of discretion because KMJ’s challenge
to Aerospace-MN’s capacity to sue was a plea in abatement, and a decision whether or
not to abate a proceeding is reviewed under that standard. (See, e.g., Ballard v. State Bar
(1982) 35 Cal.3d 274, 287, fn. 22 [State Bar’s decision not to abate an attorney
disciplinary proceeding based on the attorney’s ability to assist in his defense].) We find
it unnecessary to resolve the dispute because we are convinced, for reasons we shall
describe, that the trial court’s judgment should be affirmed even applying the more
permissive de novo standard of review.
B. Analysis
1. Aerospace-MN lacks capacity to prosecute the lawsuit
A defendant may demur to a complaint filed by a foreign corporation plaintiff that
has failed to comply with section 2203, subdivision (c). (United Medical, supra, 49
Cal.App.4th at p. 1740.) When a plaintiff acquires a claim from a corporation that itself
lacked capacity to sue under section 2203, the plaintiff effectively takes upon itself that
same lack of capacity. (See, e.g., Cal-Western Business Services, Inc. v. Corning Capital
Group (2013) 221 Cal.App.4th 304, 311 (Cal-Western) [when a plaintiff is assigned a
cause of action, “‘“[t]he assignee ‘stands in the shoes’ of the assignor, taking his rights
and remedies, subject to any defenses which the obligor has against the assignor prior to
12
notice of the assignment”’” (italics omitted)]; see also Thorner v. Selective Cam
Transmission Co. (1960) 180 Cal.App.2d 89, 93 (Thorner).)
In Cal-Western, a corporation whose powers were suspended for failure to pay
taxes assigned its right to enforce a judgment to the plaintiff, who filed suit on the
judgment four years later. (Cal-Western, supra, 221 Cal.App.4th at p. 306.) The
reviewing court affirmed the trial court’s dismissal of the case on the ground that the
plaintiff that inherited the suspended corporation’s lack of capacity had no intention of
paying the assignor’s taxes in order to revive its corporate status. (Id. at pp. 312-313.)
Additionally, in Thorner, the court explained that where a company that lacks capacity to
sue transfers its legal claims to another, allowing the latter to prosecute the transferred
claims would “so obviously frustrate the purpose of the statute [barring suit by the
original claim holder] that we are unwilling to place such a narrowly technical
construction upon it.” (Thorner, supra, 180 Cal.App.2d at p. 93.)
In this case, the claims Aerospace-MN seeks to prosecute are claims arising from
events that occurred from 2009 to 2011 involving Aerospace-DE and New Century
(before Aerospace-DE filed suit in 2012). Aerospace-MN was substituted as a plaintiff
for Aerospace-DE in 2013 and did not obtain a certificate of qualification until 2014.
Consequently, Aerospace-MN must have acquired the claims it seeks to prosecute from
Aerospace-DE, which itself acquired claims from New Century. Because neither
Aerospace-DE nor New Century had a certificate of qualification to transact business in
California at the time suit was commenced, those entities’ lack of legal capacity to sue
was assumed by Aerospace-MN. Even if, as Aerospace-MN contends, it obtained a
certificate of qualification (or did not need one because it does no business in California)
and each successor entity resulted from a mere “name change” from its predecessor,
Aerospace-MN was still obligated to show that the relevant predecessor was qualified to
transact business in California when the action was filed. (Cf. Capital Gold Group, Inc.
v. Nortier (2009) 176 Cal.App.4th 1119 [Nevada corporation plaintiff that converted to a
Delaware corporation and changed its name while action was pending did not lose its
ability to maintain suit in California because it was qualified to transact business in
13
California when it commenced the action and it duly obtained a new certificate of
qualification upon conversion].)
Aerospace-MN argues the two predecessor entities, New Century and Aerospace-
DE, need not provide receipts of payments of taxes and fees to the clerk of court in
accordance with section 2203, subdivision (c) because the predecessor entities were mere
holding companies and therefore exempt from the obligation to pay any taxes or fees for
transacting intrastate business. Thus, says Aerospace-MN, neither it nor its two
predecessors is obligated to perform any further actions in order to establish capacity to
sue. Aerospace-MN, however, is incorrect.
Revenue and Taxation Code section 23102 states that “[a]ny corporation holding
or organized to hold stock or bonds of any other corporation or corporations, and not
trading in stock or bonds or other securities held, and engaging in no activities other than
the receipt and disbursement of dividends from stock or interest from bonds, is not a
corporation doing business in [California] for the purposes of [the corporation franchise
tax].” If a holding company receives dividends and interest from California sources,
however, it remains subject to corporate income tax. (Rev. & Tax. Code, §§ 23101,
subd. (b), 23501, subd. (c).) And holding companies that are incorporated in California
or qualified to transact intrastate business are subject to a minimum franchise tax after
their first taxable year “even if they do not actually do business in [California].” (Rev. &
Tax. Code, §§ 23153, subd. (f)(1), 23501, subd. (c).)
While it is possible Aerospace-MN itself is a holding company, the record shows
otherwise for its predecessors Aerospace-DE and New Century. The allegations of
Aerospace-MN’s second amended complaint refer to activities of Aerospace-DE and
New Century going well beyond “the receipt and disbursement of dividends from stock
or interest from bonds . . . .”8 (Rev. & Tax. Code, § 23102.) In addition, Aerospace-MN
claimed that Aerospace-DE and New Century were holding companies based solely on
8
For example, the operative complaint states such companies were bidding on
government contracts, working on a joint venture with a Russian aircraft business,
receiving loans, maintaining accounts payable and payroll, and dealing with customers.
14
the deficient Charles Arnold declaration—specifically, his conversations with unnamed
employees of the Franchise Tax Board. As the trial court concluded, that is insufficient.
Not only has Aerospace-MN failed to show Aerospace-DE and Precision had legal
capacity to sue, Aerospace-MN has not established its own legal capacity to maintain
suit. Although Aerospace-MN acquired a certificate of qualification, it did not file
receipts with the clerk of court showing payment of all necessary fees, penalties, and
taxes. (See § 2203, subd. (c); United Medical, supra, 49 Cal.App.4th at p. 1738.) And
even if Aerospace-MN is a holding company that never transacted business of its own in
California, it would have at a minimum needed to pay and document payment of the $250
penalty under section 2203, subdivision (c) and the fees for filing the section 2105
statement and designation.
Aerospace-MN nonetheless counters with an argument—made for the first time in
its reply brief—that section 2203 is entirely inapplicable because its lawsuit is not based
upon the transaction of intrastate business, a matter it argues KMJ was obligated to
establish in its demurrer. (§ 2203, subd. (c) [foreign corporations unqualified to transact
intrastate business may not “maintain any action or proceeding upon any intrastate
business”]; United Medical, supra, 49 Cal.App.4th at p. 1740 [“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”].) By failing to raise this argument in its
opening brief, or in the trial court for that matter, the argument is forfeited. (See
Varjabedian v. City of Madera (1977) 20 Cal.3d 285, 295, fn. 11; Los Angeles Memorial
Coliseum Commission v. Insomniac, Inc. (2015) 233 Cal.App.4th 803, 822; Reichardt v.
Hoffman (1997) 52 Cal.App.4th 754, 764-765.)
Even if not waived, Aerospace-MN’s position is unconvincing. A “proceeding
upon any intrastate business,” as described in section 2203, means a claim arising from
an intrastate transaction or occurrence. (United Medical, supra, 49 Cal.App.4th at
pp. 1737, 1740.) Here, the second amended complaint reveals the claims arose from
intrastate transactions. The complaint specifies that Aerospace-DE, New Century, and
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Precision, the alleged victims in this case, all maintained their principal offices in
California. The complaint further alleges that all defendants, the alleged perpetrators of
fraud, malpractice, and breaches of fiduciary duty against Aerospace-DE, New Century,
and Precision, did business in California.9 Among the allegations are claims that various
defendants entered into self-dealing and fraudulent transactions with the corporate
plaintiffs and “stole company equipment, customers and revenues.” The complaint also
describes specific instances of misconduct that took place in Victorville, California.
Thus, the facts alleged in the complaint indicate the claims it presents arose from
intrastate business. This is true when considering KMJ in particular. KMJ was located in
Costa Mesa, California, and the claims against it relate to auditing services it provided to
Aerospace-DE and/or New Century, both of which had their principal places of business
in California. In addition, one of the specific allegations regarding KMJ refers to its
work on New Century’s acquisition of Precision, that is, the purchase of a California
corporation located in California by a corporation with its principal place of business in
California. The alleged facts therefore show that Aerospace-MN’s action is “upon [ ]
intrastate business.” (§ 2203, subd. (c).) That certain causes of action might be governed
by the substantive laws of a different state, such as Delaware corporate law, is unrelated
to whether the alleged misconduct arose from intrastate business.10
9
Some of the defendants were officers and directors of Aerospace-DE and
Precision. Others, including KMJ, were professional advisors with offices in California.
10
In its argument that KMJ failed to establish the lawsuit’s claims arose out of
intrastate business, Aerospace-MN makes an analytically distinct point, namely, the
argument KMJ failed to show that Aerospace-DE and New Century transacted intrastate
business. (§§ 191, 2203, subd. (c).) This argument, too, is forfeited and unavailing.
“‘[T]ransact[ing] intrastate business’ means entering into repeated and successive
transactions of its business in this state, other than interstate or foreign commerce.”
(§ 191, subd. (a).) A foreign corporation does not transact intrastate business “merely
because its subsidiary transacts intrastate business” (§ 191, subd. (b)) or “solely by reason
of” prosecuting or defending a lawsuit, holding board or shareholder meetings, or seeking
sales orders where the orders are accepted outside the state, among other activities (§ 191,
subd. (c)). The second amended complaint reveals that Aerospace-DE and New Century
performed business transactions beyond the activities described in section 191,
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2. The trial court properly denied Aerospace-MN leave to amend
“The burden of proving [a] reasonable possibility [of a curative amendment] is
squarely on the plaintiff.” (Blank v. Kirwan, supra, 39 Cal.3d at p. 318.) “To meet this
burden, a plaintiff must submit a proposed amended complaint or, on appeal, enumerate
the facts and demonstrate how those facts establish a cause of action. [Citations.] Absent
such a showing, the appellate court cannot assess whether or not the trial court abused its
discretion by denying leave to amend.” (Cantu v. Resolution Trust Corp. (1992) 4
Cal.App.4th 857, 890; accord, Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 [plaintiff
must show in what manner he can amend his complaint and how that amendment will
change the legal effect of the pleading].)
The trial court did not abuse its discretion by denying Aerospace-MN further
opportunity to cure its capacity defects. Aerospace-MN was aware of the deficiencies for
more than six months, and the court provided it repeated opportunities to establish
compliance, even going so far as to order defendants to provide guidance on what it must
do to comply. At no point did Aerospace-MN propose an amended complaint or describe
how it would use additional time to cure the defects. Indeed, Aerospace-MN’s position
both in the trial court and on appeal has been that it possessed capacity to sue and
therefore could do nothing more to cure any perceived defect. Under the circumstances,
the trial court properly concluded there was no reasonable likelihood of Aerospace-MN
curing the problem with additional time.
Permitting this lawsuit to proceed under the circumstances would have
undermined the purpose of section 2203. (See United Medical, supra, 49 Cal.App.4th at
p. 1741 [obligation to obtain a certificate of qualification, and the prohibition on
maintaining a lawsuit prior to receiving a certificate, are intended to prevent tax evasion
and to equalize the treatment of foreign and domestic corporations]; Neogard
Corporation v. Malott & Peterson-Grundy (1980) 106 Cal.App.3d 213, 215-216 [same
subdivision (c). For example, Aerospace-DE and New Century, at minimum, maintained
their principal offices in the state and engaged professional advisors like KMJ to provide
business services in the state.
17
Corporate Code provisions “designed to facilitate service of process on and to prevent tax
evasion by out-of-state corporations”].) We hold the trial court properly dismissed the
action and denied leave to amend.
DISPOSITION
The judgment is affirmed. Respondents are to recover their costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
BAKER, J.
We concur:
TURNER, P.J.
KUMAR, J.
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.
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