The Problem Of Suspended Corporations In The Present Economic Downturn

February 21, 2012

Insurance Thought Leadership

Excerpt from, "The Problem Of Suspended Corporations In The Present Economic Downturn." For the full article, please visit Insurance Thought Leadership.

Introduction

Corporations that do not pay their state taxes may be suspended in California.1 Once suspended, a corporation effectively finds itself in a legal coma from which it can neither defend nor prosecute civil actions during the pendency of its suspension. In the context of a complex civil lawsuit, the limitations placed on a suspended corporation that is a party to the suit present unique circumstances for all concerned. For example:

• As to the suspended corporation, it is still a party to the lawsuit, but can neither prosecute its claims, nor defend itself from others;
• As to the attorney representing the now suspended corporation in the litigation, he or she risks criminal penalty and possible disbarment by continuing to defend or prosecute claims on behalf of the suspended corporation;
• As to the other parties to the lawsuit,the suspended corporation is still a party, but legally incapacitated; the situation creates strategic risks and opportunities for those other parties;
• As to insurance carriers for suspended corporations, they face the dificult choice of intervening and becoming parties to the action, or not intervening and possibly being held liable for any judgment entered against the insured; and
• As to the court, it must be aware that an insurer intervening on behalf of a suspended corporation can alter the character of the lawsuit with respect to how the case is tried under the circumstances.

The purpose of this series is to discuss some of the issues that arise when a suspended corporation is a party to a lawsuit. First, this series will explain what a suspended corporation is, and how suspended status differs from bankruptcy and dissolution. Second, it will discuss the implications of and options for dealing with an entry of default judgment against a suspended corporation. Third, it will address the risks and issues involved in representing a suspended corporation. Fourth, it will address the issues and problems that can arise when a suspended corporation's insurance carrier intervenes in a lawsuit to which the suspended corporation is a party.