California has the ability to suspend corporations’ powers, rights, and privileges, which includes the ability to pursue and defend against legal claims in the courts. Several scenarios can suspend corporations. One scenario is the failure to file one or more tax returns. The authority for the state to suspend a corporation lies in California Revenue and Taxation Code section 23301. Another scenario exists when a corporation fails to pay its tax balance. A tax balance may arise if a corporation fails to file the annual Statement of Information with the California Secretary of State. The authority for the Secretary of State to suspend a corporation lies in California Corporations Code section 2205. In certain situations, the suspended corporation can remedy the problem by simply paying off its tax obligation and filing the necessary paperwork. After remedying the problem, the no longer suspended corporation can once again avail itself of the legal system.
However, the suspended corporation is often unable to pay the tax obligation. It is also the case that sometimes the principals of the suspended corporation are no longer around or have no desire to resurrect the corporation. A suspended corporation is very different from a bankrupt or dissolved corporation, as the latter entities can legally defend and prosecute claims. A suspended corporation can be sued and, unless it remedies its suspended status, the corporation can do nothing to defend itself. Because plaintiff can sue a suspended corporation in civil court, and because the suspended corporation cannot defend itself, the result is plaintiff obtains a default judgment.
Even if the suspended corporation found an attorney to represent the entity, if the corporation still has suspended status, that attorney can get in serious trouble for representing a suspended corporation. The penalty for anyone (including an attorney) who attempts to exercise the powers, rights, and privileges of a suspended corporation may be punished by a fine of not less than $250 and not exceeding $1,000, or by imprisonment not exceeding one year (California Revenue and Taxation Code Section 19719). Additionally, an attorney could be subject to face disbarment.
An Insurer’s Right to Intervene
If the suspended corporation had an insurance policy, plaintiff can go after the policy using the default judgment pursuant to California Insurance Code section 11580. Luckily for insurers, there is a mechanism to attempt to cut off a default judgment early in the process. An insurance carrier is permitted to intervene where preventing an entry of default judgment against its insured is necessary to protect the insurer’s own interests. Truck Insurance Exchange v. Superior Court (1997) 60 Cal.App.4th 341, 347-348. Per Kaufman & Broad Communities, Inc. v. Performance Plastering (2006) 136 Cal.App.4th 212, an insurer can intervene in a lawsuit to contest the insured’s liability and damages. The insured does not make an appearance in the case, but rather the insurer causes itself to become a party in the case by being an intervenor. The insurer at that point may retain counsel to defend the insurer’s interests, but not those of the suspended insured. In intervening in the case, the insurer cannot expand the scope of the issues in the lawsuit as a way to litigate coverage issues. Accordingly, the insurer must defend the case as if there are no coverage issues, and then deal with them afterward. The insurer can, however, in the course of discovery attempt to elicit evidence such as timing issues that would eventually prove useful in a subsequent coverage dispute.
Any time a corporation is sued, one of the first things the insurer (and outside counsel) should do is check the status of the corporation. If the corporation does in fact have suspended status with the state, the insurer should work quickly to determine if it could work with the insured to get the suspended status remedied. If that is not an option, the insurer should strongly consider seeking to intervene in the case to protect itself against a potential default judgment against the insured, which the insurer would almost certainly have to satisfy. Failing to intervene waives the insurer’s right to contest liability and damages.