September 2008

Two very recent cases – one out of the Maryland Court of Special Appeals and one out of the federal district court sitting in Maryland – have gone a long way toward better clarifying the power of corporations to file suit once their charters have been forfeited. Both courts held that a corporation may not bring or maintain a lawsuit after its charter has been forfeited, unless the suit relates to a good-faith liquidation or winding-up of the business.

In Maryland, to come into existence corporations must file organizational documents with the state. These documents are generally referred to as the company “charter” (technically, in Maryland, “Articles of Incorporation”). The state may revoke the charter if the business fails to pay its personal property taxes, or if the business fails to file its annual personal property tax return (and pay the attendant $300.00 filing fee).

As a general rule, once a corporation’s charter has been forfeited, it loses all powers granted by law, including the powers to sue and to be sued, until the business corrects the deficiency causing the forfeiture and files Articles of Revival. This was the general holding in the Court of Special Appeals case, Hill Construction Company, Inc. v. Sunrise Beach, LLC. In Hill, the plaintiff corporation filed a complaint in state court. Subsequently, while the case was pending, the corporation’s charter was forfeited for nonpayment of personal property taxes, but its owner continued to operate the business as before and using the same name as the corporation. The court dismissed the case as a result of the forfeiture, citing Maryland law which states that, upon forfeiture of a corporation’s charter, “the powers conferred by law on the corporation are inoperative, null and void,” except under the limited circumstances discussed below. 

Relying on Maryland law, the U.S. District Court for the District of Maryland applied this same analysis in Mintec Corporation v. Miton, but reached the opposite result based on the different facts of the case. In Mintec, the corporation ceased operating and then filed suit while in the process of winding up and liquidating its assets. The suit was for actions by the defendant that allegedly caused the corporation’s business to fail. Since Maryland law states that in liquidation corporate directors are vested with the powers of trustees, and therefore may “[s]ue or be sued in their own name as trustees or in the name of the corporation,” the court allowed the director-trustees to maintain the suit filed in the name of the corporation despite the fact that the corporation’s charter had been forfeited. The court noted that this power is limited, and is available only where the corporation is engaged exclusively in the process of winding up its affairs, as compared to attempting to continue regular business operations in spite of the forfeiture.

It is important to note that even if a corporation successfully files Articles of Revival, while the reinstatement of the charter generally gives retroactive effect to certain actions taken during the forfeiture period, it does not give such effect to actions taken which are deemed a “nullity” as a result of the forfeiture. One action that is a “nullity” is the filing of a lawsuit in the corporation’s name that does not relate to the winding up or liquidation of the business.

Jeffrey Fabian Joins Firm
Congratulations to a familiar voice at FBLG. 

Jeffrey S. Fabian, the firm’s part-time law clerk since 2006, recently joined Franchise & Business Law Group as a full-time associate attorney.  A 2008 graduate of the University of Maryland School of Law, Jeff welcomes the opportunity to increase his responsibilities at the firm. 

Jeff particularly enjoys preparing franchisee opportunity review letters and franchisor disclosure documents under the supervision of firm principal, David Cahn.  When asked about the future, he said, “Once I get the word that I passed the Maryland bar in November, I look forward to more client interaction and the opportunity to take the lead on certain projects.”

In addition to joining the firm full time, Jeff has other big news:  he recently announced his engagement and plans for a March 2009 wedding, and Jeff and his fiancé are buying a home in Baltimore this fall.

Although Jeff’s family is originally from Baltimore, he grew up in Fredericksburg, Virginia and earned his undergraduate degree from Virginia Tech with a major in political science and a minor in economics.

In his spare time, Jeff enjoys watching college sports and recently started rock climbing.  When asked how he got interested in law, he said that reading John Grisham novels and watching law shows while in high school inspired him.  He admits, however, that he hasn’t had much time for pleasure reading since he started law school.  Guess he has a few novels to catch up on—or maybe he’ll write his own one day.

All of us at FGLB wish to offer a hardy official welcome to Jeff and hope you will as well!

Column: Q&A with David Cahn

Q:  Obviously we want to maximize our profits from franchising...so do we have to pay sales taxes on our royalty fees?

A:  It may surprise many franchisors (and perhaps their attorneys) that the language used in their franchise agreements can be determinative as to whether or not a sales or gross receipts tax will be imposed on their royalties. — Read More