Metropolitan News-Enterprise

 

Thursday, December 20, 2012

 

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C.A. Reverses Discovery Sanctions Against Suspended Corporation

Panel Says Lack of Capacity Should Have Been Asserted in Answer to Complaint

 

By JACKIE FUCHS, Staff Writer

 

A defendant who didnít assert a plaintiff corporationís suspended status in its answer to that corporationís complaint against it is not entitled to discovery sanctions based on such status, the Third District Court of Appeal held yesterday.

The panel said that San Joaquin Superior Court Judge Barbara A. Kronlund properly granted summary judgment in favor of the defendant based on the statute of limitations, which had continued to run while the corporation was suspended, but erred when she granted monetary sanctions based on the corporationís motion to compel responses to interrogatories.

V & P Trading Co., Inc., is a closely-held California corporation whose powers, rights, and privileges were suspended by the Franchise Tax Board in 2007 due to V & Pís failure to file a tax return or to pay taxes, penalties, or interest.

In 2010 V & P sued United Charter, LLC, for damages for the loss of goods V & P had stored in a warehouse United Charter owned.

Statute of Limitations Defense

United Charter denied V & Pís allegations and in its answer to the complaint asserted, among other things, that the statute of limitations had run. It did not assert as a defense, however, that V & P lacked the capacity to prosecute the action because its corporate status had been suspended.

During discovery V & P served a set of special interrogatories on United Charter. When United Charter failed to respond to the interrogatories, V & P filed a motion to compel.

In its opposition to the motion United Charter said that since V & Pís corporate status was suspended it was ďsimply not allowed to proceed with litigation.Ē

It sought an award of $1,237.50 in sanctions on the ground that V & Pís motion to compel was a misuse of the discovery process and was without substantial justification because of V & Pís suspended status.

V & Pís attorney and Raeef Ohan, V & Pís sole shareholder and president, attested that they were unaware of the suspended status of the corporation until they received United Charterís opposition to the motion to compel.

They argued that United Charter could not use V & Pís suspended status as a defense to the motion because United Charter had not pleaded V & Pís lack of capacity to sue in the answer to the complaint. Under such circumstances, they said, an award of sanctions would be improper.

Kronlund denied the motion to compel without prejudice and awarded the requested sanctions to United Charter based on V & Pís suspended corporate status.

Approximately half a year afterwards the suspension of V & Pís corporate status was lifted. Shortly thereafter United Charter moved for summary judgment based on the statute of limitations, which it said had not been tolled by the complaint as a result of V & Pís suspended status.

In its opposition to the motion V & P argued that because United Charter had not pleaded V & Pís lack of capacity to sue in its answer to the complaint, it had waived that defense.

Kronlund disagreed and granted summary judgment, concluding that V & P was ďmischaracteriz[ing] the basis forĒ the motion:

ďWhether V & P currently has the capacity to sue and whether [United Charter] may raise its incapacity to sue as a defense are not at issue; V & Pís complaint for premises liability/negligence is time-barred because the limitations period expired before V & P revived its corporate powers.Ē

Contention Rejected

On appeal, V & P contended that Kronlund erred in granting United Charterís motion for summary judgment because United Charter never asserted the affirmative defense of lack of capacity to sue and therefore waived that defense, compelling the conclusion that V & Pís complaint was timely filed.

The panel disagreed, saying that United Charter did not have to plead the separate objection of V & Pís lack of capacity to sue in order to rely on the defense of the statute of limitations, which United Charter did plead.

Justice Ronald B. Robie, writing for the panel, explained:

ďEven when, as here, the statute of limitations defense relies on the fact that the plaintiff corporationís corporate powers were suspended when the complaint was filed and the suspension continued through the time the statute ran, the statute of limitations defense is distinct from an objection based on the lack of capacity to sue.Ē

Accordingly, Robie said, because Kronlundís grant of summary judgment was proper, the propriety of her ruling on the motion to compel United Charter to answer V & Pís special interrogatories would be moot but for the question of the propriety of the sanctions.

Such sanctions were not properly granted, Robie said, because:

ďUnlike its summary judgment motion, United Charterís opposition to the motion to compel was based entirely on V & Pís then-present lack of capacity to prosecute its action because of the suspension of its corporate powers.Ē

Since lack of capacity to sue must be raised in the answer or a demurrer to the answer, and defendants had not raised the issue ďuntil more than nine months after the action was commenced, and only then in opposition to V & Pís motion to compel answers to interrogatories,Ē United Charter had waived its right to raise V & Pís lack of capacity as a basis for opposing the motion to compel.

It followed, Robie wrote, that Kronlund ďshould have granted the motion to compel, and since V & P should have prevailed on the motion, the necessary predicate of an unsuccessful motion to compel does not exist to uphold the award of monetary sanctions against V & P and its attorney.Ē

Presiding Justice George Nicholson and Justice M. Kathleen Butz concurred in the opinion.

The case is V & P Trading Co., Inc. v. United Charter, LLC.

 

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