Judge: Kerry Bensinger, Case: 19STCV21725, Date: 2024-01-29 Tentative Ruling

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Case Number: 19STCV21725    Hearing Date: January 29, 2024    Dept: 31

Tentative Ruling

Judge Kerry Bensinger, Department 31

HEARING DATE:     January 29, 2024                               TRIAL DATE:  February 26, 2024

CASE:                                SG Blocks, Inc. v. EDI International, LC Which Will Do Business In California As EDI International California, et al.

CASE NO.:                 19STCV21725

MOTION TO DISMISS

MOVING PARTY:               Defendants EDI International, et al.

RESPONDING PARTY:     Plaintiff SG Blocks, Inc.

I.          BACKGROUND

            On June 21, 2019, Plaintiff, SG Blocks, Inc., filed a complaint against Defendants, EDI International, PC, DBA EDI International (“EDI”); PVE, LLC; and PVE Sheffler, LLC, for (1) Intentional Interference with Economic Advantage, (2) Negligent Interference with Economic Advantage, (3) Intentional Interference with Contractual Relations, (4) Professional Negligence, (5) Breach of Contract, (6) Express Indemnity, and (7) Implied Indemnity.  Plaintiff filed the operative First Amended Complaint on January 22, 2021. 

            As alleged, the parties entered into a consulting agreement for architectural and design services for the construction of the Heart of Los Angeles Youth, Inc. (HOLA) Community Center in Los Angeles.  During the project, disputes arose between Plaintiff and HOLA regarding delays and cost overruns.  Plaintiff and HOLA eventually reached an agreement in principle to resolve their disputes whereby HOLA agreed to pay Plaintiff and to perform other terms and conditions.  Thereafter, HOLA refused to finalize the agreement.  Defendants were aware of the disputes between HOLA and Plaintiff and intentionally engaged in surreptitious communications with HOLA with the purpose of intentionally interfering with the negotiations. 

            On January 10, 2024, EDI and PVE, LLC (hereafter, “Defendants”) filed this motion to dismiss the FAC on the grounds Plaintiff, a corporation, cannot maintain this action because they failed to comply with Corporations Code section 2203, subdivision (c).[1] 

            Plaintiff filed an opposition.  Defendants replied.

II.        DISCUSSION AND LEGAL STANDARD

            Defendants argue the FAC should be dismissed because Plaintiff has not complied with Corporations Code section 2203.  As such, Plaintiff lacks the capacity to maintain this action.

            “A foreign corporation ... shall not maintain any action or proceeding ... commenced prior to compliance with [s]ection 2105 ....” (§ 2203, subd. (c).)”  (United Med. Mgmt. Ltd. v. Gatto (1996) 49 Cal.App.4th 1732, 1740 (Gatto).)  A foreign corporation shall not transact intrastate business without having first obtained from the Secretary of State a certificate of qualification. To obtain that certificate it shall file, on a form prescribed by the Secretary of State, a statement and designation signed by a corporate officer.  (Corp. Code

§ 2105, subd. (a).)

Here, Plaintiff concedes that it commenced this action prior to obtaining a certification of qualification with the Secretary of State.  Plaintiff argues, however, that the motion is moot because it cured the defect when it registered with the California Secretary of State on January 10, 2024.  (Cesar Decl. at ¶¶ 7-8.) 

The motion is not moot.  “A foreign corporation transacting intrastate business which has failed to qualify may not, however, maintain an action commenced prior to qualification, except upon the satisfaction of certain conditions. (§ 2203, subd. (c).)”  (Gatto, at p. 1739.)  A foreign corporation subject to the provisions of Chapter 21 (commencing with Section 2100) 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 § 2203, subd. (c), emphasis added.)  “If the foreign corporation plaintiff complies with section 2203, subdivision (c), by qualifying and paying fees, penalties and taxes, it may maintain the action.”  (Id., emphasis added.)  As Defendants point out in their Reply, there is no proof that Plaintiff has made the payments required by Section 2203.  Plaintiff has demonstrated only partial compliance with Section 2203 by registering with the Secretary of State.  Obtaining the qualification alone does not defeat the motion.

Plaintiff makes two additional arguments: (1) the requirement to register with the Secretary of State does not apply when a foreign corporation does not transact a substantial part of its business within the state, and (2) Defendants cannot bring a motion to dismiss for lack of capacity to sue because Defendants waived the defense by not raising it sooner or as an affirmative defense.  

Intrastate Transactions

First, Plaintiff argues it has not engaged in substantial intrastate transactions in this state.  Corporations Code section 191 provides that “transact intrastate business” means entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.  Plaintiff relies on McMillan Process Co. v. Brown (1939) 33 Cal.App.2d 279 to support its “substantial transaction” argument.  In that case, the Court of Appeal quotes the California Jurisprudence as follows: “The general consensus of opinion is that a corporation must, to come within the provisions, transact within the state some substantial part of its ordinary business by its officers or agents selected for that purpose, and that the transaction of an isolated business act is not carrying on or doing business. If the corporation is engaged in a more or less continuous effort, not merely casual, sporadic or isolated, to conduct and carry on within the state some part of the business in which it is actually and generally engaged, it may be said to be doing business within the state.”  (McMillan Process Co., at p. 283.) 

In other words, Plaintiff argues that its business in this state amounts to engaging in casual, sporadic, or isolated business.  Defendants correctly demonstrate otherwise.  As Defendants point out, the HOLA project lasted more than three years.  HOLA paid Plaintiff over $5 million for Plaintiff’s services.  (Oberle Decl., ¶ 8.)  Plaintiff plainly engaged in intrastate business that was more than casual.  Moreover, Defendants also point out that Plaintiff has engaged in repeated and successive business in this state—indeed, no less than six construction projects since 2011.  (See Oberle Decl., ¶ 3.)  Plaintiff’s business in this state is hardly sporadic or isolated.

Lack of Capacity and Waiver

Plaintiff argues Defendants waived the argument that Plaintiff was not qualified to do business in California by failing to assert the affirmative defense of lack of capacity in their answers. 

In United Medical Management Ltd. V. Gatto (1996) 49 Cal.App.4^th 1732, the court of appeal states, in relevant part:

“The failure of a foreign corporation to qualify to transact business prior to commencing an action is a matter of abatement of 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, 146 P.2d 967.) 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 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.”

(Gatto, 49 Cal.App.4th at p. 1740, emphasis added.)

            Along the same lines, Plaintiff cites Color-Vue, Inc. v. Abrams (1996) 44 Cal.App.4th 1599, 1604 (Color-Vue).  In Color-Vue, the court of appeal stated, “Our Supreme Court has specifically stated that ‘a plea of lack of capacity of a corporation to maintain an action by reason of a suspension of corporate powers for nonpayment of its taxes 'is a plea in abatement which is not favored in law [and] is to be strictly construed ....' [Citation.]  ¶ The distinction is significant because a plea in abatement such as lack of capacity to sue ‘must be raised by defendant at the earliest opportunity or it is waived.... The proper time to raise a plea in abatement is in the original answer or by demurrer at the time of the answer. [Citation.] It is a technical objection and must be pleaded specifically. Thus an affirmative defense or demurrer which contains a general assertion that plaintiff has not stated a cause of action does not suffice to raise a plea in abatement. [Citations].”  

                In Color-Vue, the trial court granted the defendants’ motion to dismiss because of Color-Vue’s corporate suspension.  (Color-Vue, Inc., supra, 44 Cal.App.4th at p. 1602.)  Defendants brought the motion to dismiss on the day set for trial.[2]  The court of appeal reversed.  Importantly, the appellate court held that the trial court should have granted the defendant’s motion for a continuance to allow the defendant an opportunity to obtain a certificate of revivor.  Moreover, the appellate court stated that the defendants were required to raise a plea of abatement at the earliest opportunity.  The court went on to find that the defendants “had ample opportunity to raise the issue of Color-Vue’s suspension before the commence of trial.  They chose, however, to wait until May 11, 1994, after Color-Vue had announced that it was ready for trial, to make their motion to dismiss on the basis of Color-Vue’s suspension.  Their only explanation for the delay was that they had no duty to raise the issue before trial.  Their unnecessary delay waived the plea. Once a plea in abatement is waived ‘the court will be rarely justified in permitting the defense to be made later. [Citation.]’” (Id. at p. 1605.)[3]    

            Here, Defendant did not raise a plea in abatement in its answer or demurrer.  Plaintiff argues Defendants waived the disfavored plea.  In support, Plaintiff points to its responses to Defendants’ Form Interrogatories, served on February 2, 2021.  Plaintiff states in a conclusory fashion that its response informed Defendants that it was not qualified to do business in California.  Plaintiff also states that Defendants were “clued into the [lack-of-capacity] issue based on testimony elicited at the deposition of Alison Whalen.”  (Opposition, p. 7, fn. 3.)  These arguments fail.  First, a closer look at Plaintiff’s interrogatory responses reveals that the answers are incomplete.[4]  Indeed, Plaintiff did not respond to the Form Interrogatory which expressly asks whether Plaintiff is qualified to do business in California.  (See Cesar Decl., ¶ 4, Ex. C, Form Interrogatory No. 3.1(e) and Response to Form Interrogatory No. 3.1(e).)  Plaintiff’s discovery responses—or lack thereof—do not provide a conclusive answer.  Second, Plaintiff did not submit the transcript of the Whalen deposition which purportedly “clued” Defendants into the issue.  As such, the court cannot determine whether Defendants were alerted to Plaintiff’s non-compliance with Sections 2105 and 2203.  The court cannot find Defendants waived the lack-of-capacity defense.

            Given that Defendants carried their burden to show the action arises out of a transaction involving intrastate business by a foreign corporation and that Plaintiff commenced this action prior to qualifying to transact intrastate business, the court will stay the action to allow Plaintiff the opportunity to comply with Section 2203.  (See Gatto, at p. 1740 [“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 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”].)

IV.       CONCLUSION 

Based on the foregoing, the motion to dismiss is DENIED and the matter stayed for a reasonable period of time to allow Plaintiff to comply with Corporations Code section 2203, subdivision (c). 

The court will hear from the parties regarding timing.

Dated:   January 29, 2024