Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
American Sports Radio Network v. Krause (In re Krause)
9th Circuit Case No. 07-55131
October 10, 2008
This opinion has no holding, indeed it is merely a lengthy order certifying a question to the Nevada Supreme Court. And yet the 9th Circuit takes 13 pages to do this. Indeed the Court's discussion IS valuable from a bankruptcy litigation perspective both for its substantive issue--the capacity of an administratively dissolved corporation to file an adversary proceeding against a debtor, and the appellate procedural one--when is it appropriate for a bankruptcy appellate court to seek formal assistance from a state supreme court in interpreting that state's laws.
Oh, and by the way: "several million dollars" are at stake in this Chapter 7 nondischargeability adversary proceeding.
Dissolved Corporation's Capacity to Sue
The Court's discussion about the corporate capacity to sue is worthwhile not for the answers it provides--because it provides none, but rather for how it formulates the question. This ends up being more interesting and challenging than would first appear.
The threshold consideration is that corporate capacity to sue is determined "by the law under which it was organized," FRCP 17(b), FRBP 7017, so we look to the law of the state where the corporation is incorporated.
Then stating the question is simple: does a corporation, which was administratively dissolved by the state for failing to pay its annual fees and in that status files a timely adversary proceeding in bankruptcy court, and then has its corporate charter reinstated by the state within weeks after filing the adversary proceeding, have capacity to continue that adversary proceeding?
This question gets more interesting. If the administrative dissolution of a corporation results in a forfeiture of its "right to transact business," does this necessarily include the right to sue when transacting business is not defined in the state statute nor interpreted in its case law? The bankruptcy court and district court on appeal had determined that by a plain reading of the statute the right to sue is included in the right to transact business, but to the contrary the 9th Circuit decided that transacting business did not NECESSARILY include the right to sue.
What if the corporation did not have capacity to sue at the time it filed the adversary proceeding, which was just a day before the bar date, but the state statute provides that reinstating the corporate charter after dissolution "reinstates the corporation's right to transact business as if such right had at all times remained in full force and effect?" In contrast the bankruptcy court had dismissed the adversary proceeding WITH PREJUDICE, and the district court affirmed. The 9th Circuit held that the statute was ambiguous, had no state court precedent, and so determined that it needed to certify the question to the state supreme court.
And if the corporation did not have capacity to sue at the time it filed the adversary proceeding, did its directors have that capacity, since by state law they have some right to hold the dissolved corporation's assets in trust, including such assets as the claim against the debtor? And if so, should the bankruptcy court give the directors the opportunity to be substituted for the corporation as the plaintiff? The 9th Circuit did not address whether the bankruptcy court or district court looked at this question, but the Court decided that with no statute or case law directly on point, it again needed to certify the question to the state supreme court, as follows:
Without asserting that this is the procedure in all states, the 9th Circuit stated in the Order the two elements required under Nevada's Rules of Appellate Procedure for a federal or other state's highest court to certify a question to the Nevada Supreme Court: 1) that "the answer to this question will be determinative of the matter pending before this court, and [2) that] there is no clearly controlling precedent in the decisions of the Nevada Supreme
Court."
Compare this to the pertinent Oregon statute, ORS 28.200, which contains the same two elements:
Oh, and by the way: "several million dollars" are at stake in this Chapter 7 nondischargeability adversary proceeding.
Dissolved Corporation's Capacity to Sue
The Court's discussion about the corporate capacity to sue is worthwhile not for the answers it provides--because it provides none, but rather for how it formulates the question. This ends up being more interesting and challenging than would first appear.
The threshold consideration is that corporate capacity to sue is determined "by the law under which it was organized," FRCP 17(b), FRBP 7017, so we look to the law of the state where the corporation is incorporated.
Then stating the question is simple: does a corporation, which was administratively dissolved by the state for failing to pay its annual fees and in that status files a timely adversary proceeding in bankruptcy court, and then has its corporate charter reinstated by the state within weeks after filing the adversary proceeding, have capacity to continue that adversary proceeding?
This question gets more interesting. If the administrative dissolution of a corporation results in a forfeiture of its "right to transact business," does this necessarily include the right to sue when transacting business is not defined in the state statute nor interpreted in its case law? The bankruptcy court and district court on appeal had determined that by a plain reading of the statute the right to sue is included in the right to transact business, but to the contrary the 9th Circuit decided that transacting business did not NECESSARILY include the right to sue.
What if the corporation did not have capacity to sue at the time it filed the adversary proceeding, which was just a day before the bar date, but the state statute provides that reinstating the corporate charter after dissolution "reinstates the corporation's right to transact business as if such right had at all times remained in full force and effect?" In contrast the bankruptcy court had dismissed the adversary proceeding WITH PREJUDICE, and the district court affirmed. The 9th Circuit held that the statute was ambiguous, had no state court precedent, and so determined that it needed to certify the question to the state supreme court.
And if the corporation did not have capacity to sue at the time it filed the adversary proceeding, did its directors have that capacity, since by state law they have some right to hold the dissolved corporation's assets in trust, including such assets as the claim against the debtor? And if so, should the bankruptcy court give the directors the opportunity to be substituted for the corporation as the plaintiff? The 9th Circuit did not address whether the bankruptcy court or district court looked at this question, but the Court decided that with no statute or case law directly on point, it again needed to certify the question to the state supreme court, as follows:
Under Nevada law, may a domestic corporation whose charter has been revoked under Nevada Revised Statutes section 78.175(2) prosecute a lawsuit either (a) in its own corporate name or (b) through its directors? If not, is the defendant entitled to have such a lawsuit dismissed with prejudice, or must the plaintiff corporation first be given a reasonable opportunity to reinstate its charter? Cf. Executive Mgmt. Ltd. v. Ticor Title Ins. Co., 38 P.3d 872 (Nev. 2002).The Appellate Procedure of Certifying Questions to a State Supreme Court
Without asserting that this is the procedure in all states, the 9th Circuit stated in the Order the two elements required under Nevada's Rules of Appellate Procedure for a federal or other state's highest court to certify a question to the Nevada Supreme Court: 1) that "the answer to this question will be determinative of the matter pending before this court, and [2) that] there is no clearly controlling precedent in the decisions of the Nevada Supreme
Court."
Compare this to the pertinent Oregon statute, ORS 28.200, which contains the same two elements:
Supreme Court authorized to answer questions of law certified by other courts. The Supreme Court may answer questions of law certified to it by the Supreme Court of the United States, a Court of Appeals of the United States, a United States District Court, a panel of the Bankruptcy Appellate Panel Service or the highest appellate court or the intermediate appellate court of any other state, when requested by the certifying court if there are involved in any proceedings before it questions of law of this state which may be determinative of the cause then pending in the certifying court and as to which it appears to the certifying court there is no controlling precedent in the decisions of the Supreme Court and the intermediate appellate courts of this state.The short title of the act containing this ORS section is the Uniform Certification of Questions of Law Act.
by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
© 2008 Bankruptcy Litigation Support for Attorneys
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