John H. Podesta and Nicholas P. Honkamp on “The Problem of Suspended Corporations in the Present Economic Downturn”

John H. Podesta and Nicholas P. Honkamp on “The Problem of Suspended Corporations in the Present Economic Downturn”

 By John H. Podesta and Nicholas P. Honkamp, Attorneys, Branson, Brinkop, Griffith & Strong

In their article appearing in the July/August 2010 issue of Coverage, the authors discuss issues that arise when corporations do not pay their state taxes in California and are subsequently suspended pursuant to California Revenue and Taxation Code Section 23301. Once suspended, a corporation cannot exercise corporate powers, rights and privileges, and, as a result, cannot defend or prosecute civil actions until the suspension is lifted. A suspended corporation may nevertheless find itself a party to a lawsuit, which creates issues that are addressed, in part, by this article. Initially, the article explains what a suspended corporation is and how suspended status differs from bankruptcy and dissolution. It discusses the effect the revival of corporate powers, upon the payment of taxes, has on the running of the statute of limitations and on a motion to dismiss. It identifies the risks involved in representing a suspended corporation, including potential criminal penalties and professional sanctions. Specifically, an attorney, other than one retained by an insurer on behalf of a suspended corporation, who knowingly advances the legal interests of a suspended corporation is potentially subject to criminal penalty under California Revenue and Taxation Code Section 19719 and jeopardizes his or her license to practice law in California.

While a suspended corporation may not defend or prosecute civil actions, the suspended corporation's insurer may, under some circumstances, intervene in a lawsuit against the suspended corporation. California Insurance Code Section 11580 allows a party obtaining a default judgment against a suspended corporation to enforce that judgment directly against the corporation's insurer. For this reason, a suspended corporation's insurer is likely to consider intervention when its insured has been named as a defendant or cross-defendant to a lawsuit. The article provides an extensive discussion of the issues that can arise when a suspended corporation's insurer intervenes in a lawsuit, including:

  • How should the court and the parties to the suit refer to the intervening insurer and its counsel in front of a jury so as not to prejudice the policyholder?
  • Does the lawyer retained by the intervening insurer represent the insurer or the suspended corporation policyholder?  
  • Is an intervening insurer that defends its interests to the detriment of its policyholder exposed to bad faith liability if the suspended corporation revives?
  • What effect does an intervening insurer have on the issues litigated and discovery conducted?
  • May an intervening insurer file a motion for summary judgment on an issue that is determinative of coverage under its policies?
  • May an intervening insurer pursue contribution from additional insured carriers?

The article concludes that there are currently more questions than answers when it comes to litigation involving suspended corporations, and emphasizes the importance of developing a strategy for effectively managing such litigation.

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