SUSPENDED CORPORATIONS

Reasons for Suspension

Most associations are incorporated. An association's corporate status can be suspended if it fails to perform certain acts described below. Associations can have their corporate status suspended for the following reasons:

• Failure to file tax returns (Rev. & Tax Code § 23301.5) 
• Failure to pay taxes (Rev. & Tax Code §§ 23301) 
• Failure to file a "Statement by Domestic Nonprofit Corporation" with the Secretary of State every two years--every odd year or every even year based on the year of initial registration (Corp. Code § 2205.)
• Failure to biennially file a "Statement by Common Interest Association" with the Secretary of State (Corp. Code § 2205)

To check your association's status, see the Secretary of State's website. 

Consequences of Suspension

A suspended association does not cease to be an association but is no longer in good standing to do business in the state. (Timberline, Inc. v. Jaisinghani (1997) 54 Cal.App.4th 1361.) Suspension means:

• Corporate Name. An association could lose its corporate name if someone reserves its name during the suspension period. (Boyer v. Jones (2001) 88 Cal.App.4th 220.) If an association loses its corporate name while suspended, it can no longer simply file a form with a new name. The Secretary of State now requires membership approval. That means further delays and additional expenses holding an election before the corporation can be revived.
    
• Litigation. An association cannot initiate lawsuits or defend itself against lawsuits. Attorneys who engage in litigation for an association, knowing it has been suspended, can be sanctioned by the courts (Palm Valley HOA v. Design MTC.) However, a trial court could grant a continuance to permit the corporation to secure a reinstatement. (Schwartz v. Magyar House, Inc., 168 Cal.App.2d 182; Traub Co. v. Coffee Break Service, Inc., 66 Cal.2d 368.) Moreover, the association's insurance company cannot appear, answer, or defend the association in litigation if the association's corporate status has been suspended. However, it could intervene in the case, becoming a party in its own name. Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc. (2006) 136 Cal. App. 4th 212. While the association is reviving its corporate status, it can seek a stay of litigation proceedings. U.S. v. 2.61 Acres of Land (9th Cir. 1985), 791 F.2d 666, 672; Color-Vue v. Abrams (1996), 44 Cal.App.4th 1599, 1606.
   
• Contracts. An association loses the right to enforce contracts (Rev. & Tax Code § 23304.5). Contracts entered into by a suspended corporation are voidable by the party entering into the contract with the suspended corporation but not voidable by the suspended corporation. (Rev. & Tax Code § 23304.1(a)); see also Performance Plastering v. Richmond Homes of California, Inc. (2007) 153. Cal.App.4th 659, settlement agreement entered into by suspended corporation was not void only voidable, and the suspended corporation must be given reasonable opportunity to cure the voidability.)
   
• Tax Returns. Suspended corporations lose the right to get an extension to file tax returns.
   
• Additional Taxes. In 2013, the Franchise Tax Board (FTB) began revoking the exempt status of a corporation once the entity is suspended. If the revocation occurs for a past tax year, the FTB will impose the annual minimum tax of $800 per year plus penalties and interest. To revive the entity, the association must file a new exemption application (Form FTB3500) with the Exempt Organization Unit of the FTB. The application, which used to be five pages, is now twenty-five. Along with the application, the association must file a copy of the endorsed articles of incorporation, executed bylaws, and recorded CC&Rs, and it requires five years of HOA financial information.

Involuntary Dissolution of Corporation

If an association fails to revive its corporate status, the Secretary of State can administratively dissolve any corporation that has been suspended for at least 48 months. (Corporations Code §§ 5008.9, 6610.5, 8610.5, and 9680.5; Revenue & Taxation Code § 23156.) Dissolution could have a significant financial impact on an association because the cost to reincorporate is much greater than simply reviving the corporation.

Continuing Duties During Suspension

Being suspended does not mean an association is relieved of its obligations. While the association goes through the revivor process, boards should continue:

• holding board meetings;
• making repairs;
• paying bills; and
• conducting annual meetings.

Reviving a Suspended Corporation

The following steps must be taken to revive an association's corporate status:

• Franchise Tax Board Suspension. (i) file all past due tax returns, (ii) pay all past due taxes, (iii) pay all penalties and fines, and (iv) file an application for "Certificate of Revivor."
• Secretary of State Suspension. (i) file missing Statements of Information with the Secretary of State, (ii) pay filing fees and penalties, and (iii) file an application for "Certificate of Revivor."

Revival Effect on Decisions. Decisions made and actions taken during suspension are ratified by reinstatement. (Peacock Hill Assn v. Peacock Lagoon.)

Determine Corporate Status. Associations can check their corporate status by typing in their name in the Secretary of State's website. To find out why an association has been suspended, contact the Secretary of State's office and the Franchise Tax Board:

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.