Judge: Mark C. Kim, Case: 19LBCV00693, Date: 2022-08-23 Tentative Ruling

Case Number: 19LBCV00693    Hearing Date: August 23, 2022    Dept: S27

1.     Background Facts

Plaintiff, Lex Funding, LLC filed this action against Defendants, FX Express, Inc. and Francisco Piche Morales for damages arising out of a series of contracts and guarantee agreements.  Plaintiff alleges Defendants entered into a series of Merchant Cash Advance agreements with Plaintiff, pursuant to which Defendants agreed to assign their future account receivables to Plaintiff.  Plaintiff alleges Defendants breached the agreements in a series of ways, including diverting funds to other accounts. 

2.     07/13/2022 Motion to Stay of Proceedings

Defendant filed this instant motion to stay or dismiss proceedings against Plaintiff Lex Funding, LLC pursuant California Corporation Code Section 2203(c), on the grounds that because Plaintiff failed to obtain a certificate to conduct business in California. Essentially, Defendants argue that because Lex Funding is a Delaware LLC, the absence of a  certificate to conduct business in California is somehow grounds for Plaintiff’s inability to maintain an action against Defendants. (Motion to Stay Proceedings, p. 2 at ¶2).

b.         Arguments in Opposition to Motion

            Plaintiff filed its opposition on August 8, 2022 arguing that Defendants’ motion does not apply to Defendants and that Plaintiff’s logic is flawed. Specifically, Plaintiff argues that Defendants conflate the terms “intrastate” and “interstate” in the case upon which Defendant rely, United Medical Management Ltd, [sic] v. Gatto (1996), and that this difference in meaning of the terms would make Plaintiff’s activity “exempt from the requirements researched by Defendants” (Opposition, p. 4, ¶2). Overall, Plaintiff argues that because “Defendant has no evidence to support his position that Plaintiff was engaged in anything other than interstate commerce,” that this Court deny Plaintiff’s request for this corporation to register with the Secretary of State in California before bringing a case against Defendants. (Id. at p. 6).

c.          Reply

            Defendants reiterates its request that Plaintiff  obtain a certificate to do business in California. Defendants cites California Corporation Code Section 17708.07 which allegedly “bars companies from prosecuting a case in [California] if they do not have a certificate to do business in California.

d.         Standard on Motion to Dismiss or Stay Proceedings

            Under the California Corporation Code Section 17708.07 (a) states, “A foreign limited liability company transacting intrastate business in this state shall not maintain an action or proceeding in this state unless it has a certification of registration to transact intrastate business in this state.

e.         Analysis

            Here, although the aforementioned legal standard to this motion is the California Corporation Code Section 17708.07(a), Defendants do not determine that this is the legal standard for this instant motion against Plaintiff until filing its reply papers. In the moving papers of this motion, Defendants cite California Corporations Code Section 2203(c) and Section 2105 as the fundamental authority by which this Court should grant this motion. After considering the opposition papers, Defendants concedes that Section 2203(c) is not the correct authority, and rather, it is Section 17708.07(a) is the correct legal authority. In Defendants’ reply papers, Defendants  argue that the holding in Gatto  should be applied in the instant case.

             In Gatto, plaintiff United Medical Management Limited 27 ("UMML") was a Nevada corporation that provided management and other health care related services to doctors. (Id 1738). UMML loaned the defendants Luciano R Gatto,  Long Beach Trauma and Physio Therapy, Inc. $200,000 in capital to open a medical facility in Long Beach. In 1994, Long Beach Trauma defaulted on payments due. (Id).  UMML then filed a suit for breach of contract. Long Beach Trauma filed a motion to dismiss based on the assertion that UMML did not have a license to conduct business in the state of California. (Id). Long Beach Trauma supported the motion by attaching a Secretary of State certification that as of  the motion date UMML had not qualified to do business to transact intrastate business  prior to filing suit. Subsequently, UMML obtained a certificate but did not provide the trial  court with receipts for payments of fees, penalties or taxes. (Id).

            According to Defendant, because the UMML was given the opportunity to comply with California Corporations Code Section 2203 and obtained the certificate, and the court of appeal approved of the trial court dismissing the first suit concluding: "The trial court correctly dismissed the complaint without prejudice," then similarly, this trial court should grant Defendants’ request that Plaintiff obtain a certificate before proceeding with this case.

            However, based on the facts presented, Defendants’ arguments are based on allegations without substantial evidence to support its claim. Defendants argue that based on their research, “ to provide additional evidence Lex Funding  transacts intrastate business in California, . . . Morales searched the Los Angeles County Superior Court website and determined that Lex Funding has filed actions to enforce  judgments against three California residents (and businesses) with whom Lex Funding  had provide funds to since 2018 in Los Angeles County alone. See attached declaration of John Sullivan ("Sullivan Deel."),  3-6. (Reply, p. 4, Section B). Even if the court were to accept these allegations as factual, Defendants have not provided the case law or support to determine that the enforcement of three judgments against three California residents is definitive that Plaintiff conducts or transacts intrastate as opposed to interstate. Additionally, even if this court accepts Defendants argument that “[t] he existence of  such suits establishes that Lex Funding has engaged in repeated and consistent  business transactions in California,” (Reply, p. 5) evidence that Plaintiff conducts business intrastate does not negate or disprove that Plaintiff also conducts business intrastate.

            In Plaintiff’s opposition, Plaintiff cites  the California Corporations Code, Title 2.6., California Revised Uniform Limited Liability Company Act, Article 8., Foreign Limited Liability Companies, §17708.03, which identifies what is, and is not, considered transacting intrastate business in California. In pertinent part, Section (b) states,

            “Without excluding other activities that may not be considered to be transacting intrastate business in this state within the meaning of this article, activities of a foreign limited liability       company that do not constitute transacting intrastate business in this state include all of the following:(1) Maintaining or defending any action or suit or any administrative or arbitration        proceeding, or effecting the settlement of those, or the settlement of claims or disputes.” (Cal. Corp. Code § 17708.03).

            Section (7) states, “Creating or acquiring indebtedness, evidences of indebtedness,         mortgages, liens, or security interests in real or personal property.” (Cal. Corp. Code §            17708.03).

            Defendants’ evidence that “. . . Plaintiff has filed actions to enforce judgments against three California residents (and businesses) with whom Lex Funding has provided funds to since 2018” could fall under Section §17708.03 (7) of “creating and acquiring indebtedness of . . .security interests,” which would not be defined as intrastate business in California. If this is the only evidence that Defendants have provided to demonstrate Plaintiff’s intrastate activities, then Defendants have not demonstrated to the court that it is necessary for Plaintiff to obtain a certificate to conduct business in California. Absent evidence to the contrary, because Defendants have not demonstrated that Plaintiff must obtain a certificate to file a suit against Defendants, the Court has no grounds to grant Defendants’ motion.

            Therefore, Defendants’ Motion to Dismiss or Stay Proceedings is DENIED without prejudice

Parties who intend to submit on this tentative must send an email to the court at gdcdepts27@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org.  If the department does not receive an email indicating the parties are submitting on the tentative and there are no appearances at the hearing, the motion may be placed off calendar.  If a party submits on the tentative, the party’s email must include the case number and must identify the party submitting on the tentative. If any party does not submit on the tentative, the party should make arrangements to appear remotely at the hearing on this matter.