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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Legal
Satisfied Customers: 89359
Experience:  JA Mentor -Attorney Labor/employment, corporate, sports law, admiralty/maritime and civil rights law
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Can an inactive corporation sue anybody? I find inconsistent

Resolved Question:

Can an inactive corporation sue anybody? I find inconsistent answers when I research this.
Submitted: 1 year ago.
Category: Legal
Expert:  Law Educator, Esq. replied 1 year ago.
When you say inactive, have they dissolved with the Secretary of State or not? That is the difference.
Customer: replied 1 year ago.

The Sec. of State search engine reports the corp as being "inactive". I think that means it has not been properly dissolved, is that correct?

Expert:  Law Educator, Esq. replied 1 year ago.
The NY courts hold that the general rule is that where a corporate term of existence has expired but the corporation carries on its affairs and exercises corporate powers as before, it is a de facto corporation. (Ludlum Corp. Pension Plan Trust v. Matty's Super service, Inc., 156 A.D.2d 339, 548 N.Y.S.2d 292 (2d Dept. 1989); Bruce Supply Corp v. New Wave Mechanical. Inc., 4 A.D.3d 444, 773 N.Y.S.2d 408 (2d Dept. 2004)).

The dissolution of a corporation does not entirely terminate corporate existence. (Camacho v. New York City Transit Authority, 115 A.D.2d 691, 496 N.Y.S.2d 516 (2d Dept. 1985)). It is well settled that a dissolved corporation "may sue or be sued...in its corporate name." (Bruce Supply Corp. v. New Wave Mechanical. Inc., 4 A.D.3d 444, 773 N.Y.S.2d 408 (2d Dept. 2004), quoting, Business Corporation Law § 1006(a)).

Furthermore, the NY courts hold that, parties who knowingly treat a dissolved entity as a corporation are estopped from asserting its nonexistence to avoid obligations made with and under the dissolved corporation. (Miot v. Miot, 24 Misc.3d 1224(A), 897 N.Y.S.2d 670 (N.Y. Sup. Ct. N.Y. Cty. 2009), aff'd, 78 A.D.3d 464, 910 N.Y.S.2d 436 (1st Dept. 2010); Metered Appliances, Inc. v. 75 Owners Corp., 225 A.D.2d 338, 638 N. Y.S.2d 63 1 (1st Dept. 1996); National Bank of North America v. Paskow, 75 A.D.2d 568, 427 N.Y.S.2d 262 (1st Dept. 1980)). Conversely, "'f neither of the parties [to a suit] is aware that corporate status has not been achieved, then corporation by estoppel may apply."' (Boslow Family Ltd. Partnership v. Glickenhaus & Co., 7 N.Y.3d 664, 860 N.B.2d 711 (2006)(holding that where defendant does not dispute that it derived a benefit from the agreement and that the investment services provided were not dependent in any way on the nature of the plaintiff as a limited partnership, defendant is estopped from denying the partnership's validity), quoting, 8 Fletcher, Cyclopedia of Corporations 3890 (2006)). The doctrine of corporation by estoppel has been applied in cases where a defendant seeks to avoid liability on a contract from which the defendant benefited. (Id.).


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Customer: replied 1 year ago.

Understood. But, is there a difference between 'dissolved' and 'inactive' ? I thought 'dissolved' meant properly wound down, and 'inactive' meant failure to pay state registration fees or to file proper forms (like a Statement of Info for example).

Expert:  Law Educator, Esq. replied 1 year ago.
Dissolved does mean properly wound down, but you said the corporate status was inactive. If articles of dissolution were filed with the Secretary of State together with proof all taxes were paid, it would be listed as dissolved and not inactive.
Customer: replied 1 year ago.

Ok. Your answer seems to address the case where the corporation has been dissolved, but not the case where the corporation is 'inactive.' Am I reading it right? I now understand that a dissolved corporation -can- sue, but what about an -inactive- corporation?


 


 


 


 

Expert:  Law Educator, Esq. replied 1 year ago.
Actually, as a dissolved corporate entity can be sued, an inactive one that has simply not functioned but not dissolved can sue or be sued because they are still an entity unlike the dissolved corporate entity that has closed.
Customer: replied 1 year ago.

Ok. It seems strange though. I mean, why bother paying upkeep fees to the state? For example, California has a yearly $800 tax for corporations -- why bother paying it? What does a corp lose by becoming 'inactive' ?

Expert:  Law Educator, Esq. replied 1 year ago.
CA's franchise tax is abusive, and actually the appeals circuits in CA are even split as to whether or not it is even constitutional under the CA constitution.

In NY if the company is still operating and has not paid its fees to the state, it is possible for not only the corporation to be sued as an "unincorporated corporation by estoppel" but it is also one factor considered in a court piercing a corporate veil and removing protection of the owners for debts of the corporation and thus the owners could end up personally liable for those debts where they would not in most cases be liable if it was a proper corporate entity
Law Educator, Esq., Attorney
Category: Legal
Satisfied Customers: 89359
Experience: JA Mentor -Attorney Labor/employment, corporate, sports law, admiralty/maritime and civil rights law
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