Failure to meet state requirements can have dire consequences
Most companies do a good job of understanding and complying with federal filing regulations, but it is important to remember that each state in the US requires corporations, limited liability companies and limited partnerships organized under its laws or doing business within its borders to file annual reports with the Secretary of State or taxing authority as well as pay an annual fee for the privilege of doing business. Usually the penalty for failure to file or pay is administrative dissolution or, for a foreign entity, revocation of the company’s certificate of authority to do business in the state. Although these penalties do not bear the full legal ramifications of judicial dissolution, two recent cases demonstrate the dire consequences that can arise from failure to satisfy annual state filing and fee obligations.
In Georgia, a court held that a company could not recover damages on a negligence claim because the company had been administratively dissolved more than two years before it brought the lawsuit. In Texas, a court held that officers and directors of a foreign company were personally liable for company debts that arose after the company’s certificate of authority was revoked. In both cases, the problems were caused by a failure to file annual reports and pay state fees.
In GC Quality Lubricants vs Doherty (Ga. App. July 1, 2010), the plaintiff (GC) was a Georgia corporation whose office equipment was damaged in an electrical storm on February 11, 2005. GC filed suit against the Georgia Power Company and its insurers on February 15, 2008 to recover for the damages GC sustained in the electrical storm three years earlier.
The defendants moved to dismiss the action because GC had been administratively dissolved by the Georgia Secretary of State on July 9, 2005 for failure to pay corporate dues. (In Georgia, the annual registration statement can be filed any time between January 1 and April 1 of each year, and the annual fee is $30.)
Under Georgia statutes, a corporation that has been dissolved may bring lawsuits for a period of two years after dissolution, which in this case would have been July 9, 2007 – more than seven months before GC actually filed suit.
Reinstatement not a defense
GC applied to the Georgia Secretary of State for reinstatement, which was granted on April 28, 2009. GC then argued that reinstatement cured the defect in its claim because under Georgia statutes, a reinstatement relates back to the date of administrative dissolution.The court disagreed, however, and dismissed GC’s claim because (i) GC had been administratively dissolved for more than two years at the time it filed its claim, and that fact could not be changed by reinstatement, and (ii) the statute of limitations on the claim had run out before GC was reinstated, so it could not refile the claim after reinstatement.
In Taylor vs Comm Credit (Tex. App. July 29, 2010), Texan Automotive (TA) was incorporated in Georgia in March 2003 and received a certificate of authority to do business in Texas as a foreign corporation in April 2003. On November 10, 2003, TA entered into a dealer agreement with Centrix Financial, and an agreement with First Community Credit Union for the purchase and servicing of auto loans.
In January 2005, Texas revoked TA’s certificate of authority for failure to pay its annual franchise tax. (Many corporations doing business in Texas must pay a franchise fee each year by May 15, calculated as a small percentage of adjusted revenues.)
Sometime thereafter, one of the loans that First Community had purchased went into default. Subsequently, First Community was unable to recover on the loan due to TA’s breach of the dealer agreement. In 2007, First Community brought suit on TA’s breach of the dealer agreement and won a judgment against TA and against TA’s president individually.
The judgment against the company’s president was upheld on appeal because Texas statutes provide that if a corporation loses its certificate of authority, the directors and officers are liable for any debts on the part of the corporation thereafter.
The (potentially harsh) reality of state corporate filings
The importance of state corporation filings is sometimes downplayed. It is frequently pointed out that administrative dissolution or disqualification does not really affect the dissolution of the company, and that there are simple mechanisms available for obtaining reinstatement. Further, it is often said that the only real penalty for administrative dissolution or disqualification is that the company cannot use state courts until it is reinstated. The reality, as these recent cases illustrate, is more complicated.
In the Georgia case, the company could not recover damages as a plaintiff in a lawsuit because of its administrative dissolution. Reinstatement was available, but it did not change the company’s status for the case. The company would have had to refile its lawsuit after reinstatement, but by that time the claim was time-barred. Even if the company had been able to refile, it would still have incurred substantial additional attorneys’ fees on procedural issues because of its failure to stay current with its state filings.
In the Texas case, the company’s directors and officers were held personally liable for the company’s debts because Texas revoked the company’s certificate of authority to do business as a foreign corporation. Many fail to consider this harsh result of a company’s failure to stay current on state filings. In this case the outcome was based on a particular Texas statute, but it is easy to understand why a corporation’s liability shield might be ignored in a state that no longer recognizes the company as a corporation.
In each of these cases, the problem was caused by delinquent annual filings and unpaid annual fees, and the harm suffered by the company or its managers was far worse than the cost and hassle of complying with the state’s annual filing requirements.
Lessons for corporate secretaries
The cases outlined above offer just two recent examples of the adverse consequences of administrative dissolution or revocation of a certificate of authority, but other consequences may include difficulties in trying to sell or finance a company that is no longer in good standing in its state of incorporation or is no longer qualified in states in which it does business. In fact, disqualification can create numerous problems for a company in many large transactions.
Therefore, it is incumbent on a firm’s corporate secretary to ensure that an appropriate charter is filed in the state of organization for the company and for each of its subsidiaries. The secretary should also see to it that the company and each of its subsidiaries is in possession of a certificate of authority to do business as a foreign entity in each of the other states in which the company does business. (The secretary should confer with counsel on the applicable definition of ‘doing business’ in order to determine whether a certificate of authority will be necessary.) Finally, the secretary should be sure to understand the annual filing and fee requirements for each state, and to have in place a reliable mechanism for satisfying those obligations in a timely and effective fashion.
