Suspended Corporation: Assignee Cannot Enforce Judgment

  Revenue and Taxation Code § 23301 provides that the corporate powers, rights and privileges of a domestic taxpayer may be suspended if it fails to pay any tax, penalty, or interest that is due and payable to the Franchise Tax Board.  Except for filing an application for tax-exempt status or amending the articles of incorporation to establish a new corporate name, a suspended corporation is disqualified from exercising any right, power or privilege.

  Consequently, during the period that a corporation is suspended for failure to pay taxes, it may not prosecute or defend an action, appeal from an adverse judgment, seek a writ of mandate, or renew a judgment obtained prior to suspension. In other words, a suspended corporation is disabled from participating in any litigation activities. The purpose of Revenue and Taxation Code § 23301 is to prohibit the delinquent corporation from enjoying the ordinary privileges of a going concern and to pressure it to pay its taxes.

  A judgment creditor may assign the right represented by the judgment to a third person. In doing so, the judgment creditor assigns the debt upon which the judgment is based and the assignee ordinarily acquires all the rights and remedies possessed by the assignor for the enforcement of the debt, subject to the defenses that the judgment debtor had against the assignor. It is frequently said that the assignee “stands in the shoes” of the assignor, subject to any defenses which the obligor has against the assignor prior to the assignment. This principle is codified in Code of Civil Procedure § 368 which provides “[i]n the case of an assignment of a thing in action, the action by the assignee is without prejudice to any set-off, or other defense existing at the time of, or before, notice of the assignment.”

  In cases where the assignor of a chose in action is a suspended corporation, California courts generally have recognized that the assignee is subject to the same defenses that could have been asserted against the assignor.

  In Cal-Western Business Services, Inc. v. Corning Capital Group plaintiff acquired, through assignment, a judgment obtained by its assignor and filed an action to enforce the judgment. However, at the time of the assignment and at all times since, plaintiff’s assignor had its corporate powers suspended for failure to pay taxes.

  The court held the trial court did not abuse its discretion in striking plaintiff’s complaint — plaintiff lacked capacity to file and maintain the action because its assignor’s powers and privileges had been suspected for failure to pay taxes and the assignor was thus barred from bringing an action to enforce the judgment. Since the  defense based on lack of capacity to sue existed at the time of notice of the assignment and could have been asserted against plaintiff’s assignor, plaintiff was subject to the same defense when it sued to enforce the judgment.

  Michael Daymude consults with clients and accepts cases involving assignments and suits to enforce a judgment, including those where corporate powers have been suspended before or after the assignment. For other types of cases accepted, please scroll the Home and My Practice pages. If you are seeking a legal consultation or representation, call Michael at 818.971.9409.

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