Tri Citrus v. Euclid GP Partners CA2/5

Filed 5/4/23 Tri Citrus v. Euclid GP Partners CA2/5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on
opinions not certified for publication or ordered published, except as specified by rule
8.1115(b). This opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
TRI CITRUS, INC., B319042
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No.
v. 21STCV22517)
EUCLID GP PARTNERS, LLC,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Holly J. Fujie, Judge. Affirmed.
Jassy Vick Carolan, William T. Um, and Jean-Paul Jassy
for Plaintiff and Appellant.
Baker Manock & Jensen, Joseph M. Marchini, and Michael
J. Fletcher for Defendant and Respondent.
Tri Citrus, Inc. (Tri Citrus), a limited partner in a business
venture, sued the venture’s general partner for failing to provide
yearly accountings of the partnership’s affairs. The general
partner demurred to the complaint because Tri Citrus was a
suspended corporation and accordingly lacked capacity to
prosecute its lawsuit. The trial court sustained the demurrer,
and when Tri Citrus agreed it could not revive its good corporate
standing and amend its pleading to so indicate, the court entered
judgment for the general partner. We consider whether the trial
court erred because Tri Citrus meets the criteria for a judicially-
created exception to the statute prohibiting a suspended
corporation from prosecuting a lawsuit (Rev. & Tax. Code,
§ 23301 (hereafter, “section 23301”)).
I. BACKGROUND1
A. The Parties’ Partnership Agreement and Tri Citrus’s
Complaint
In 2005, Tri Citrus, Euclid GP Partners, LLC (Euclid), and
nonparty Euclid Holdings LLC entered into an agreement
creating a limited partnership, Euclid Leasing Partners, L.P. (the
partnership). The primary purpose of the partnership was to
acquire an agricultural packing facility from Tri Citrus and then
1
Our factual recitation is drawn from the complaint’s
allegations, the parties’ partnership agreement which was
attached as an exhibit to the complaint, and public records
judicially noticed by the trial court. (See generally Yvanova v.
New Century Mortgage Corp. (2016) 62 Cal.4th 919, 924 & fn. 1
(Yvanova).)
2
lease the facility to a third party whose operations would
generate income for the partnership.
The partnership agreement designated Euclid as the sole
general partner. Under the terms of the agreement, the general
partner was required to keep “proper books of account.” In
addition, the partners were entitled to access the partnership’s
books at any time and a full and accurate accounting of the
partnership’s affairs was to be made at the conclusion of each
fiscal year.
Eight years after the partnership’s formation, in April
2013, the California Secretary of State suspended Tri Citrus.
Less than two years later, the California Franchise Tax Board
(FTB) suspended Tri Citrus too.
In June 2021, while Tri Citrus was still suspended, the
company sued Euclid and Evans AG GP, Inc. (Euclid’s alleged
successor as general partner) for breach of contract, breach of
fiduciary duty, accounting, and declaratory relief. Tri Citrus did
not sue the partnership or assert that it was acting on the
partnership’s behalf, and it sought relief for itself alone.
Tri Citrus’s primary contention in its lawsuit was that
defendants breached their duties under the partnership
agreement by failing to maintain proper partnership books and to
make available to Tri Citrus an accounting of partnership
activities. Tri Citrus averred that “[b]eginning in May 2020,” it
demanded without success that defendants provide it with
financial and tax records to which it was entitled under the
partnership agreement.2 Tri Citrus expressly acknowledged its
2
The complaint averred: “[T]ri Citrus has not received
authenticated financial documents or tax information for the
3
suspended corporate status and alleged that defendants’ alleged
breaches “caused [it] to fall out of good standing” and prevented it
from regaining its “good standing status.” A footnote in Tri
Citrus’s pleading maintained that, under Reed v. Norman (1957)
48 Cal.2d 338 (Reed), it was not barred by section 23301 from
bringing suit.
B. Defendants’ Demurrer and the Trial Court’s Ruling
Defendants demurred to the complaint, contending in the
main that Tri Citrus lacked the capacity to sue because it was a
suspended corporation. Defendants argued the exception
identified by our Supreme Court in Reed was limited and applied
only to shareholder derivative actions.3
Tri Citrus opposed the demurrer. Its opposition retreated
from the allegation that defendants’ breaches caused it to
initially fall out of good standing with the California Secretary of
State; instead, Tri Citrus maintained defendants’ liability arose
Partnership, or the full scope of the financial information
requested by Tri Citrus. To the extent they have provided
limited information to Tri Citrus, [d]efendants have not
authenticated the information, and Tri Citrus has reason to
believe it is not genuine.”
3
In support of their demurrer, defendants asked the trial
court to take judicial notice of two documents: a report from the
Secretary of State’s office faxed to Euclid’s counsel on July 16,
2021, indicting suspensions by the Secretary of State and FTB in
2013 and 2015, respectively; and a printed copy of a page from
the Secretary of State’s website, dated July 21, 2021, indicating
Tri Citrus had been suspended by both the Secretary of State and
FTB.
4
only from their failure to provide the requested accountings and
the absence of these accountings prevented Tri Citrus from
regaining its good standing. Tri Citrus further argued the
exception to section 23301 created by Reed was “not limited solely
[to] the context of a shareholder derivative action” because it read
Reed to “stand[ ] for the general principle that courts may craft
an equitable solution to avoid strict application of . . . section
23301 where warranted.”
In reply, defendants disputed Tri Citrus’s characterization
of Reed and argued the limited exception our Supreme Court
identified was inapplicable because, unlike the corporation in
Reed, Tri Citrus “stopped paying its own taxes and abandoned its
business 7 years before it ever allegedly asked for the documents
it supposedly needs to pay its taxes.”
In October 2021, the trial court granted defendants’
unopposed request for judicial notice and sustained the demurrer
with leave to amend—finding Tri Citrus lacked capacity to sue.
The parties then stipulated to entry of judgment in favor of
defendants because Tri Citrus could “not update its corporate
status and, therefore, . . . will not be able to amend its
Complaint,” and the court dismissed the action.
II. DISCUSSION
The trial court’s ruling was correct. Settled law requires
dismissal of an action where a plaintiff corporation has been
suspended, the defendant has promptly raised the plaintiff’s lack
of capacity to sue, and the plaintiff cannot revive its status as a
corporation in good standing. All three of these circumstances
are present here: it is undisputed Tri Citrus is a suspended
corporation (and has been one for years), Tri Citrus currently
5
lacks the ability to cure the suspension, and defendants did not
waive the issue of Tri Citrus’s suspended status because they
raised the matter in their initial response to Tri Citrus’s
complaint. Furthermore, the Reed exception to the statutory
corporate capacity to sue rules is unavailable because it applies
only to shareholder derivative actions and Tri Citrus’s complaint
was filed on the company’s own behalf in an attempt to exercise
directly its rights as a corporation and a party to the partnership
agreement.
A. Standard of Review
We review an order sustaining a demurrer de novo.
(Centinela Freeman Emergency Medical Associates v. Health Net
of California, Inc. (2016) 1 Cal.5th 994, 1010.) “[W]e accept the
truth of material facts properly pleaded in the operative
complaint, but not contentions, deductions, or conclusions of fact
or law. We may also consider matters subject to judicial notice.
[Citation.]” (Yvanova, supra, 62 Cal.4th at 924, fn. omitted.)
Matters subject to judicial notice include “admissions in
plaintiff’s opposition to the demurrer.” (Rodas v. Spiegel (2001)
87 Cal.App.4th 513, 518.) We also consider exhibits incorporated
into a complaint. (Holland v. Morse Diesel Internat., Inc. (2001)
86 Cal.App.4th 1443, 1447.)
B. Section 23301 and the Reed Exception
Section 23301 provides that “the corporate powers, rights
and privileges of a domestic taxpayer may be suspended” if any
tax, penalty, interest, or other liability due is not paid. (§ 23301,
subds. (a)-(c); see also Rev. & Tax Code, § 23301.5 [similar
provision regarding the failure to file a tax return].) Among other
6
things, section 23301 prohibits a corporation from prosecuting or
defending an action “while its corporate rights are suspended for
failure to pay taxes.” (Reed, supra, 48 Cal.2d at 343, accord, Grell
v. Laci Le Beau Corp. (1999) 73 Cal.App.4th 1300, 1306 [“During
the period that a corporation is suspended for failure to pay
taxes, it may not prosecute or defend an action”].) The purpose of
section 23301 and its predecessor statutes is “to put pressure on
the delinquent corporation to pay its taxes.” (Peacock Hill Assn.
v. Peacock Lagoon Constr. Co. (1972) 8 Cal.3d 369, 371 (Peacock).)
Although the impact of section 23301 can be “drastic” (4
Witkin, Cal. Procedure (6th ed. 2022) Pleading, § 87), the rule is
not absolute. A suspended corporation may, for instance,
validate actions taken during the suspension by paying the taxes
owed and obtaining a revival of its powers. (Peacock, supra, 8
Cal.3d at 371; see also Cadle Co. v. World Wide Hospitality
Furniture, Inc. (2006) 144 Cal.App.4th 504, 512-513 [“When a
corporation’s suspended status ‘comes to light during litigation,
the normal practice is for the trial court to permit a short
continuance to enable the suspended corporation to effect
reinstatement’”].) A lack of capacity to sue is also not a
jurisdictional bar. (Traub Co. v. Coffee Break Service, Inc. (1967)
66 Cal.2d 368, 371.) Rather, it gives rise to a plea in abatement
that may be waived if not raised at the earliest opportunity.
(Color-Vue, Inc. v. Abrams (1996) 44 Cal.App.4th 1599, 1604.)
In Reed, our high court created an equitable exception to
section 23301. Reed was a shareholder of Norman Decorating
Co., Inc., and filed a derivative suit alleging dissipation of
corporate assets and naming the corporation, another
shareholder (Norman), and the corporation’s officers and
directors as defendants. (Reed, supra, 48 Cal.2d at 340.) During
7
the course of the suit, the corporation’s right to engage in
litigation was suspended for failure to pay state taxes. (Id. at
341.) After judgment was entered against him, Reed appealed.
Defendants moved to dismiss the appeal on the ground that the
corporation’s right to engage in litigation was suspended and the
suspension extended to Reed because his action was derivative in
nature. (Id. at 340-341.)
Our Supreme Court denied the motion and distinguished
the position of a corporation in a shareholder derivative lawsuit
from other actions: “[I]n a stockholders derivative action, the
corporation is forced to be a party because any recovery goes
through the corporate channel and thus enhances the
stockholders’ interest therein. The corporation is not attempting
to exercise its rights as a corporation. It is being used as a
necessary channel by the shareholders.”4 (Reed, supra, 48 Cal.2d
at 343, 345.) The Reed Court went on to observe that in that
particular case “[t]he books and records of the corporation are in
the hands of the mismanaging officers according to plaintiff’s
complaints and thus the shareholders are not in a position to
make a return or compute the franchise tax. In such a case it is
not equitable to permit section 23301 . . . to stand as a shield for
protecting allegedly dishonest corporate officials.” (Id. at 343.)
Our highest court further held that Reed should be given an
opportunity to pay the taxes and have the corporation reinstated
4
In reaching its decision, Reed relied upon Weinert v. Kinkel
(N.Y. 1947) 296 N.Y. 151 [71 N.E.2d 445], which holds that a
“‘court may dispense with the presence of a defunct corporation in
a derivative action, if the circumstances warrant such exercise of
its equitable powers.’” (Reed, supra, at 343, emphasis added.)
8
because the defendants failed to raise the corporation’s
suspended status prior to filing the motion to dismiss. (Id. at 344
& fn. 3.)
C. Dismissal Was Required Because Tri Citrus Lacked
the Capacity to Sue and Was Not Acting on Behalf of
the Partnership, Making the Reed Exception to
Section 23301 Unavailable
Dismissal of Tri Citrus’s complaint was required because it
was undisputed Tri Citrus was a suspended corporation—Tri
Citrus admitted as much in its complaint and defendants
presented unchallenged evidence to the same effect. It was also
undisputed that Tri Citrus could not revive its good standing.5 As
a long-suspended corporation with no immediate prospects for
revival, Tri Citrus lacked the capacity to prosecute its claims.
(Friends of Shingle Springs Interchange, Inc. v. County of El
Dorado 200 Cal.App.4th 1470, 1474, 1478 & fn. 6 [affirming
dismissal of petition without leave to amend because petitioner’s
5
Tri Citrus alleges defendants’ failure to provide an
accounting prevents it from restoring its status as a corporation
in good standing, but we disregard the conclusory allegation.
Even if the absence of an accounting would hinder filing of what
the complaint calls “appropriate” tax returns (though neither the
complaint nor Tri Citrus’s opposition to the demurrer details why
that would be so, and Tri Citrus declined the opportunity to file
an amended pleading), there is still no apparent reason why the
absence of an accounting would prevent the company from
remedying at least the conditions that caused its initial
suspension years earlier—a cause that Tri Citrus concedes was
not attributable to defendants.
9
corporate powers, as raised in respondents’ demurrer and
established by judicially noticed public records, had been
suspended for two and a half years prior to the petition’s filing].)
Reed does not provide a basis for holding otherwise. Unlike
Reed, Tri Citrus was not suing on behalf of the corporate entity in
which the parties shared an interest (i.e., the partnership) or
otherwise claiming defendants’ alleged misconduct had injured
the partnership; indeed, the partnership was not even named as
a party. Instead, Tri Citrus was suing on its own behalf and, as
such, was attempting to exercise directly its rights as a
corporation and as a party to the partnership agreement. As a
result, Tri Citrus’s lawsuit, unlike the one in Reed, was an
individual action, not a derivative one. In addition, in contrast to
Reed where the defendant shareholder and officers sought to hide
behind a shield of corporate incapacity which they themselves
had created during the course of the litigation, defendants—by
Tri Citrus’s own admission in its demurrer opposition filed in the
trial court6—did not cause Tri Citrus’s suspension, which
occurred years before this action’s commencement. (Moore v. Hill
(2010) 188 Cal.App.4th 1267, 1271, fn. 3 [holding Reed
“inapposite” because “the inequity Reed sought to avoid—the
defensive use of the nonpayment of taxes in order to avoid
liability—does not exist here”].) Finally, unlike the defendants in
Reed, defendants here did not sit on their rights. Instead, at the
first opportunity to respond to Tri Citrus’s complaint, they raised
6
Tri Citrus conceded that it “does not allege, as Euclid GP
claims, that Euclid GP ‘caused’ Tri Citrus to initially fall out of
good standing with the California Secretary of State.”
10
Tri Citrus’s suspension as a bar to the initiation and prosecution
of the lawsuit.
Without the benefit of any supporting authority, Tri Citrus
contends Reed created a “general” equitable exception which
“easily extends beyond derivative actions.” We reject Tri Citrus’s
contention because it is contrary to the express language and
reasoning of Reed. Reed does not state or suggest that the
exception it created to section 23301 was general in nature. To
the contrary, Reed confined the basis for its exception to the
nature of shareholder derivative actions and the specific facts
before it. In view of the long-established policy prohibiting
delinquent corporations from having access to California courts,
the limited nature of the Reed exception has been recognized by
subsequent court decisions and legal treatises. (See, e.g.,
Casiopea Bovet, LLC v. Chiang (2017) 12 Cal.App.5th 656, 663
[citing Reed for the proposition that a “stockholder derivative
action does not exercise rights of a suspended corporation, but
uses the corporate channel to enhance stockholders’ interest in
enforcing fiduciary [duties] of the directors of the corporation”];
Lewis v. LeBaron (1967) 254 Cal.App.2d 270, 279-280 [construing
Reed as providing an exception for shareholder derivative actions
to the general rule prohibiting suspended corporations from
prosecuting or defending lawsuits]; 9 Witkin, Cal. Procedure (6th
2022) Appeal, § 88 [citing Reed for the proposition that “[t]he
general rule [prohibiting suspended corporations from
prosecuting or defending an action] will seldom apply to a
shareholder’s derivative suit”].) We reach the same conclusion.
11
DISPOSITION
The judgment is affirmed. Euclid shall recover its costs on
appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
BAKER, J.
We concur:
RUBIN, P. J.
KIM, J.
12