Judge: Stephanie M. Bowick, Case: 22STCV21032, Date: 2025-02-26 Tentative Ruling

Case Number: 22STCV21032    Hearing Date: February 26, 2025    Dept: 19

02/26/2025

Dept. 19

Hon. Rolf Treu, Judge presiding 

H K AUTOMOTIVE, et al. v. SP COLLECTIONS LLC. (22STCV21032)

I.                    ORDER TO SHOW CAUSE RE: AS TO WHY THE PLAINTIFFS WHO ARE SUSPENDED ENTITIES SHOULD NOT BE DISMISSED AND STRICKEN FROM THE COMPLAINT

II.                 HEARING ON DEMURRER - WITHOUT MOTION TO STRIKE DEMURRER TO SECOND AMENDED COMPLAINT AT LAW BY DEFENDANT SP COLLECTIONS, LLC

REVISED TENTATIVE RULING

I.                    Background

On July 1, 2024, Plaintiff filed a Notice of FTB Suspension, indicating that four (4) of the ten (10) Plaintiffs (HK Automotive, Inc.; R&H Automotive Group, Inc.; Hooman Hyundai of Culver City, Inc.; and Hooman Automotive Group) are suspended and therefore lack capacity to sue.

As such, on October 4, 2024, the Court set the Order to Show Cause Re: As To Why The Plaintiffs Who Are Suspended Entities Should Not Be Dismissed And Stricken From The Complaint.

II.                  Legal Authority 

A corporation suspended by FTB (for failure to pay taxes) lacks the capacity (as opposed to standing) to prosecute/defend. (Color-Vue, Inc. v. Abrams (1996) 44 Cal.App.4th 1599, 1603–1604 [“Suspension of corporate powers results in a lack of capacity to sue, not a lack of standing to sue.”].) As explained by the Court of Appeal in Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc. (2006) 136 Cal.App.4th 212:

The suspension of the corporate powers, rights, and privileges means a suspended corporation cannot sue or defend a lawsuit while its taxes remain unpaid. (Gar–Lo, Inc. v. Prudential Sav. & Loan Assn. (1974) 41 Cal.App.3d 242, 244….) Once a suspended corporation pays its taxes and obtains a certificate of revivor, however, the corporation may be allowed to carry on the litigation. (Ibid.) Its revivor will validate most otherwise invalid prior proceedings in the case. (Ibid.) The underlying purpose of this statute is to induce the corporation to pay its taxes. (Ibid.)

(Id. at 217–218.)

Failure to pay FTB taxes is a plea in abatement; it is not a jurisdictional defect. As explained by the Court of Appeal in Center for Self-Improvement & Community Development v. Lennar Corp. (2009) 173 Cal.App.4th 1543:

Corporate incapacity is nothing more than a legal disability, depriving the party of the right to come into court and represent its own interests. As such, lack of capacity is not a jurisdictional defect and is waived if not properly raised. Not surprisingly, unless mandated by governing statute, the capacity of the plaintiff to sue is not an element of a cause of action and the plaintiff corporation need not allege it is qualified to do business in this state or that it has paid all state taxes. Thus, the suspended status of corporate powers at the time of filing suit does not impede the trial court's jurisdiction to proceed, nor does a suspension after suit commences but before rendition of judgment deprive the court of jurisdiction or render the judgment void.

(Id. at 1552-1553.)

Unless lack of capacity appears on the face of the complaint, it cannot be raised by demurrer, but is a special plea in abatement that must be raised by answer. (Advantec Group, Inc. v. Edwin's Plumbing Co., Inc. (2007) 153 Cal.App.4th 621, 628 (quoting Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 994, fn. 4 (internal citation omitted)) [“‘If lack of capacity does not appear on the face of the complaint, it cannot be raised by demurrer, but is a special plea in abatement.’”]; see Cal. Prac. Guide: Civ. Pro. Before Trial (The Rutter Group 2024) ¶ 2:138 (internal citations omitted) [“If plaintiff's lack of capacity appears on the face of the complaint (a rare case), defendant can raise the objection by special demurrer; alternatively, as an affirmative defense in the answer. More frequently, lack of capacity does not appear on the face of the complaint, and the objection therefore can only be raised as a defense in the answer. The affirmative defense is in the nature of a plea in abatement.”].)

Where, as here, a plaintiff's lack of capacity to sue arises or occurs after the time to demur or answer (e.g., corporation suspended for nonpayment of franchise tax), the defendant should move for leave to file an amended answer asserting the defense of lack of capacity. (Color-Vue, Inc., supra, 44 Cal.App.4th 1599, 1604; Rossdale Group, LLC v. Walton (2017) 12 Cal.App.5th 936, 943; see Cal. Prac. Guide: Civ. Pro. Before Trial (The Rutter Group 2024) ¶ 2:139.1.)

III.                Analysis

Given the legal import of a corporation suspended for nonpayment of franchise tax, the Court does not find dismissal is proper.

Accordingly, the Order to Show Cause Re: As To Why The Plaintiffs Who Are Suspended Entities Should Not Be Dismissed And Stricken From The Complaint set by the Court is ordered DISCHARGED.

On the Court’s own motion, the Hearing on Demurrer - without Motion to Strike DEMURRER TO SECOND AMENDED COMPLAINT AT LAW BY DEFENDANT SP COLLECTIONS, LLC is CONTINUED to April 15, 2025 at 8:30 A.M. in Department 19 of the Stanley Mosk Courthouse.

The Court needs additional time to analyze the arguments of the parties.

Clerk to give notice.