This case is cited as Donchi, Inc. v. Robdol, LLC, et. al., 2007 Ga. App. LEXIS 2, 2007 (Court of Appeals of Georgia, January 2007).

 

 

California Appellate Court Allows Suspended Corporation To Defend Action

 

             A recent case from California highlights the importance of verifying corporate records when a lending institution is involved in litigation with an entity.

 

             This action involves a breach of promissory note and breach of written guaranty and was filed by The Cadle Company against World Wide Rattan, Inc., World Wide Hospitality Furniture, Inc., and Isaac Gonshor. Cadle alleged that Gonshor, acting on behalf of Rattan as its president, executed a written loan and security agreement for a line of credit with Cadle’s predecessor in interest, Columbia National Bank, and signed a continuing guaranty in connection with the loan, personally guarantying all of Rattan’s debt to the Columbia National Bank. Also, Gonshor executed a change in terms agreement with the Bank to refinance Rattan’s remaining debt.

 

             After sending several acceleration letters to Gonshor and Rattan, Cadle filed an action against Rattan after receiving no response to its letters. An answer was filed on behalf of World Wide Hospitality Furniture, Inc., a defunct California corporation.

 

             At trial, Cadle moved to preclude World Wide Rattan, Inc. and World Wide Hospitality Furniture, Inc. from defending the action, asserting it had conducted a search of the records of the Secretary of State of California and found that their corporate powers had been suspended for failure to file statutorily required information statements.  The trial court precluded the two corporations from defending the action, which left the guarantor to defend the action alone. Subsequently, judgment was entered against each corporation and the guarantor. The defendants filed an appeal arguing, among other things, that the trial court erred in not granting a continuance to allow the suspended corporations to secure a reviver, and that a partial reversal of the judgment is required to allow the corporation to present a defense.

 

             The Appeals Court agreed that although neither Hospitality nor Rattan had a right to defend or participate in the lawsuit during the suspension of their corporate powers, disallowing the corporations to defend the action was too harsh a penalty and an abuse of discretion by the lower court.  The Court noted that the purpose of the statutes depriving a suspended entity of privileges enjoyed as a going concern, including the right to defend in litigation and capacity to sue, was to motivate delinquent corporations to pay back taxes or file missing statements, and not to be punitive.  The Court also noted that had the corporations notified the Court of its revived status, they should have been allowed to continue to defend the actions as all actions of the suspended corporations before or after judgment would have been validated by revival.

 

             This case illustrates the importance of the observance of state requirements affecting corporate status.  Although the California court ruled that a simple continuance would be sufficient to allow the defendant entities to revive their corporate powers, it acknowledged that the suspension of corporate powers could pose an obstacle for an entity involved in litigation.

 

             This case is cited as The Cadle Co. v World Wide Hospitality, Inc. No. SC079132 (CA. Ct. App. 10/21/06).