Yellowstone Poky, LLC. v. First Pocatello Associates, L.P.

Filing 39

ORDER STAYING CASE This action shall be stayed until 12/5/16. The motion hearing currently set for November 10, 2016 is VACATED. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (jp)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

YELLOWSTONE POKY, LLC, an Idaho
Limited Liability Company,
Plaintiff,

Case No. 4:16-cv-00316-BLW
ORDER STAYING CASE

v.
FIRST POCATELLO ASSOCIATES, L.P.,
Defendant.

FIRST POCATELLO ASSOCIATES, L.P.,
Counterclaimant,
v.
YELLOWSTONE POKY, LLC, an Idaho
Limited Liability Company, and
FEATHERSTON HOLDINGS, INC.
Counterdefendant.

Defendant First Pocatello Associates, L.P., brought to the Court’s attention,
through a Motion to Dismiss pursuant to Rule 12(b)(1) (Dkt. 30), that Plaintiff’s
predecessor-in-interest, Featherston Holdings, Inc. (“FHI”), is a tax-suspended California
corporation. Proceedings are pending to revive FHI’s corporate status. The Court now
considers, sua sponte, whether to order a brief stay to allow FHI to pursue reinstatement
before considering the pending Motion to Dismiss (Dkt. 30).
ORDER STAYING CASE - 1

BACKGROUND
This action arises out of an alleged real estate purchase and sale agreement (the
“Agreement”) between Defendant First Pocatello Associates, L.P., and Featherston
Holdings, Inc., a California corporation.1 FHI allegedly assigned its interest in the
Agreement to Yellowstone Poky, LLC, the Plaintiff in this lawsuit. Yellowstone Poky
alleges that First Pocatello failed to perform its obligations under the contract and brings
claims for breach of contract, unjust enrichment, and promissory estoppel.
On September 30, 2016, First Pocatello filed a Motion to Dismiss for Lack of
Jurisdiction under Rule 12(b)(1) (Dkt. 30). Defendant argues primarily that Yellowstone
Poky lacks standing to pursue the present action because its predecessor-in-interest, FHI,
is a tax-suspended California corporation. The argument is twofold. First, Defendant
argues that as a suspended corporation, FHI lacked the capacity to enter into the
Agreement and thus it is unenforceable. Therefore, Defendant argues, Yellowstone Poky
was not assigned a “legally protected interest” in the Agreement and can show no “injury
in fact” necessary to confer standing. The second argument rests on the fact that FHI, as a
suspended California corporation, cannot sue or defend a lawsuit. Defendant argues that
Yellowstone Poky, as the purported assignee of FHI, is subject to the same defense and

1

The Court recognizes that the parties dispute whether Featherston Holdings, Inc. was an
intended party to the alleged agreement. For the purposes of this Order, the Court assumes, but does not
decide, that FHI was a party.

(Continued)

ORDER STAYING CASE - 2

therefore lacks “standing” to bring this lawsuit.2 See Cal-W. Bus. Servs., Inc. v. Coming
Capital Grp., 163 Cal. Rptr. 3d 911, 917 (Cal. Ct. App. 2013). If Defendant is correct,
this Court lacks subject matter jurisdiction over the lawsuit.
In its response brief, Plaintiff informed the court that proceedings are pending to
obtain a “Certificate of Revivor” from the California Franchise Tax Board, which would
reinstate FHI’s corporate status. The central disagreement between the parties concerns
the effect a successful reinstatement would have on Plaintiff’s Motion to Dismiss under
Rule 12(b)(1). Defendant argues that a Certificate of Revivor would not validate the
alleged Agreement or standing deficiencies, meaning a stay would be futile. Plaintiff
disagrees, arguing that reinstatement of FHI’s corporate rights would retroactively cure
the voidability of the agreement and reinstate Yellowstone Poky’s capacity to sue
LEGAL STANDARD
“The District Court has broad discretion to stay proceedings as an incident to its
power to control its own docket.” Enelow v. New York Life Ins. Co., 293 U.S. 379, 382
(1935). In considering whether to issue a stay, the Court must weigh several “competing
interests . . . , [including] the hardship or inequity which a party may suffer in being
required to go forward, and the orderly course of justice measured in terms of the

2

This argument is more appropriately characterized as a challenge to Yellowstone Poky’s
“capacity to sue” under Federal Rule of Civil Procedure 17(b)(2). See Color–Vue, Inc. v. Abrams, 52 Cal.
Rptr. 2d 443 (Cal. Ct. App. 1996) (“Suspension of corporate powers results in a lack of capacity to sue,
not a lack of standing to sue.”) (citing Traub Co. v. Coffee Break Service, Inc. 425 P.2d 790 (Cal. 1967));
see also 6A Charles A. Wright, Arthur R. Miller and Mary Kay Kane, Federal Practice and Procedure, §
1559 (“Capacity [to sue under Rule 17(b)] has been defined as a party's personal right to come into court,
and should not be confused with the question of whether a party has an enforceable right or interest.”).
ORDER STAYING CASE - 3

simplifying or complicating of issues, proof, and questions of law which could be
expected to result from a stay.” CMAX, Inc. v. Hall, 300 F.2d 265, 268 (9th Cir. 1962).
DISCUSSION
1.

Judicial Economy Favors a Stay
First, the Court must consider whether a stay would further “the orderly course of

justice” by simplifying issues, proof, and questions of law in this case. CMAX, 300 F.2d
at 268. The Court finds that principles of judicial economy strongly dictate in favor of a
stay, as a successful reinstatement of FHI’s corporate status would render Plaintiff’s
12(b)(1) Motion largely moot.
A.

Effect of Revival on Plaintiff’s Capacity to Sue

A corporation’s capacity to sue or be sued is determined “by the law under which
it was organized.” Fed. R. Civ. P. 17(b). Under California law, a California corporation
whose powers have been suspended for failure to pay taxes lacks the capacity to sue or
defend a lawsuit. See Bourhis v. Lord, 295 P.3d 895 (Cal. 2013); Cal. Rev. & Tax Code §
23301. However, the California Supreme Court has held that once a suspended
corporation pays its taxes and obtains a Certificate of Revivor, the corporation may
continue an action filed during the period of suspension and not previously dismissed.
See Peacock Hill Assn. v. Peacock Lagoon Constr. Co., 503 P.2d 285 (Cal. 1972) (“[Our]
authorities make clear that as to matters occurring prior to judgment the revival of
corporate powers has the effect of validating the earlier acts and permitting the
corporation to proceed with the action.”).
Therefore, the Court finds that a successful reinstatement of FHI’s corporate status
ORDER STAYING CASE - 4

would render moot the challenge to Yellowstone Poky’s capacity to sue.
B.

Effect of Revival on Validity of the Purported Agreement

Under California law, contracts entered into during the time of suspension are
“voidable at the request of any party to the contract other than the taxpayer.” Cal. Rev. &
Tax. Code § 23304.1(a). However, the 1990 amendments to this statute made clear that
the rights under a contract made while a corporation is suspended are not affected “except
to the extent expressly provided by a final judgment of the court, which shall not be
issued unless the taxpayer is allowed a reasonable opportunity to cure the voidability.”
Cal. Rev. & Tax. Code § 23304.5; see also id. § 23305.1 (setting forth the requirements
for obtaining a “Certificate of Relief from Voidability” from the California Franchise Tax
Board); Arthur F. Coon, Dead or Revived? An Examination of California Revivor Law's
Terminal Void in Corporate Existence, 24 Pac. L.J 1, 13–17 (1992) (noting that
California, in contrast with other states, clearly permits retroactive validation of contracts
entered into during suspension). By California statute, therefore, contracts made during
suspension remain in full force and are merely voidable at the other party’s instance.
Suspension does not deprive a corporation of the capacity to contract.
Defendant ignores the plain language of the statute, focusing instead on case law
interpreting the retroactive validation of other non-contractual corporate acts. Such acts
are generally retroactively valid, subject to a broad savings clause, which states that a
corporation’s reinstatement is:

ORDER STAYING CASE - 5

without prejudice to any action, defense or right which has accrued by reason of
the original suspension or forfeiture, except that contracts which were voidable
pursuant to Section 23304.1, but which have not been rescinded pursuant to
Section 23304.5, may have that voidability cured in accordance with Section
23305.1.
Cal. Rev. & Tax. Code § 23305a (emphasis of contract exception added).
In interpreting the scope of that savings clause, California courts apply a
substantive-procedural distinction to determine which acts can be retroactively validated.
The great majority of these cases deal with the effect of reinstatement on steps taken by a
corporation in pending litigation, and thus they leave open the applicability of a
substantive-procedural distinction in other areas. More importantly, however, the savings
clause and this line of cases is simply inapplicable to contracts entered into during
suspension. The savings clause expressly excludes contracts from its scope, as stated by
the italicized portion of the savings clause reproduced above. The reinstatement of
contract rights is governed by the more specific provisions of Sections 23304.1, 23304.5,
and 23305.1.
Here, Yellowstone Poky has not sought to void the parties’ purported Agreement.
Under California law, therefore FHI’s suspension did not render unenforceable any
“legally protected” interest Yellowstone Poky may have in the purported Agreement.
Furthermore, any claim regarding the voidability of the Agreement would be rendered
moot by FHI’s reinstatement.
There appears to be some dispute as to whether the question of FHI’s capacity to

ORDER STAYING CASE - 6

contract should be decided by reference to Idaho or California law.3 However, the Court
reaches the same conclusion under the law of either jurisdiction. The parties point to no
provision under Idaho Law that would deprive FHI of its capacity to contract under the
circumstances. First Pocatello skips a step when pointing out that “Idaho law [provides] .
. . no cure for Plaintiff’s lack of capacity to enter into or assign the Agreement.” Def.
Resp. to Pl. Mot. to Supplement at 8–9, Dkt. 37. Defendant has not cited and the Court is
not aware of an Idaho law that would render FHI incapable to contract in the first
instance. Idaho’s corporate suspension statute applies only to “[a] domestic filing entity
that is dissolved administratively under section 30-21-602, Idaho Code.” I.C. § 30-21603. FHI, as a California corporation, would not fall within the purview of that statute. It
is conceivable that Idaho courts would determine a foreign corporation’s capacity to
contract by reference to the local law of the state of incorporation. In that case, one
returns to the conclusion above that California law does not deprive a tax-suspended

3

The Court need not reach the more difficult choice of law question: that is, whether FHI’s
capacity to contract should be determined by reference to Idaho or California law. Choice of law
principles suggest, however, that California law should apply to the question of FHI’s capacity to
contract. The validity of a land sale contract is generally governed by the law where the land is situated—
here, Idaho. In contrast, the substantive law governing the powers of a corporation are generally derived
from the state in which it was incorporated—here, California. See Restatement (Second) of Conflict of
Laws § 299 (1971) (“The termination or suspension by the state of incorporation will be recognized for
most purposes by other states.”). Furthermore, courts often determine contractual capacity by applying the
law of the party’s domicile or place of incorporation, rather than the law that would otherwise govern the
contract’s validity, based on the respective interests of the two states. See id. § 301. Here, Idaho has no
policy interest in penalizing a California corporation for failure to pay California taxes, especially where
that corporation has been reinstated and California would impose no such penalty. Furthermore,
California’s policy interest in inducing tax payments is best served by allowing a corporation to cure its
suspension by payment of back taxes. See Cadle Co. v. World Wide Hospitality Furniture, Inc., 50 Cal.
Rptr.3d 480, 486 (2006) (“The suspension statutes are not intended to be punitive. Once the statutory
goals underlying suspension are met, no purpose is served by imposing additional penalties.”).

ORDER STAYING CASE - 7

entity of the capacity to contract.
In summary, the reinstatement of FHI’s corporate status may very well moot the
issues of capacity to sue and contract presented in Defendant’s Motion to Dismiss. In the
interests of judicial economy, and to prevent the parties from incurring unnecessary
litigation costs, the Court finds that this first factor weighs in favor of granting stay.
2.

Balance of Hardships Favors a Stay

The Court must also balance the “possible damage [to Defendant] which may
result from the granting of a stay,” with “the hardship or inequity which [Plaintiff] may
suffer in being required to go forward.” CMAX, 300 F.2d at 268. Here, any hardship or
prejudice to Defendant would be minimal, because the duration of the stay would be
brief. The Court finds that four (4) weeks would be sufficient time for FHI to pursue
reinstatement, especially given that Plaintiff has been on notice of the corporate status
issue since at least August 18, 2016, when First Pocatello filed its Answer and
Counterclaim.
On the other hand, Defendant faces the prospect of significant hardship if the stay
is not granted. FHI’s present corporate status could well deprive Yellowstone Poky of
standing to pursue its case and require the Court to dismiss the present action.
Furthermore, a dismissal for lack of jurisdiction should ordinarily be without prejudice to
renew. Thus, dismissing the case would impose upon Yellowstone Poky the burden of
filing a new complaint and potentially subject the court and all parties to duplicative
proceedings.

ORDER STAYING CASE - 8

3.

California Policy and Principles of Comity

Finally, principles of comity also counsel in favor of a brief stay. When a
corporation’s status comes to light, “the normal practice is for the [California] trial court
to permit a short continuance to enable the suspended corporation to effect reinstatement
(by paying back taxes, interest and penalties) to defend itself in court.” Timberline, Inc. v.
Jaisinghani, 64 Cal. Rptr. 2d 4, 6–7 (Cal. Ct. App. 1997) (citing Schwartz v. Magyar
House, Inc., 335 P.2d 487 (Cal. 1959)). Furthermore, the Ninth Circuit has held on at
least one occasion that it is an abuse of discretion to deny a corporation’s request for a
continuance in such circumstances. United States v. 2.61 Acres of Land, More or Less,
Situated in Mariposa Cty., State of Cal., 791 F.2d 666, 671 (9th Cir. 1985).
Allowing FHI to pursue reinstatement is also consistent with California courts’
interpretation of the purpose of corporate suspension—“to put pressure on the delinquent
corporation to pay its taxes” but not to punish the corporation once it has done so. See
Peacock Hill Assoc. v. Peacock Lagoon Constr. Co., 503 P.2d 285, 286 (Cal. 1972);
accord Traub Co. v. Coffee Break Service, Inc., 425 P.2d 790 (Cal. 1967) (finding that
“lack of capacity of a corporation to maintain an action by reason of suspension of
corporate powers for nonpayment of taxes is a plea in abatement which is not favored in
the law[.]”).
CONCLUSION
The Court finds, sua sponte, that a brief stay is warranted in light of the distinct
possibility of mootness, the principle of judicial economy, the balance of hardships to the
parties, and the policy interest underlying California’s suspension law.
ORDER STAYING CASE - 9

ORDER
IT IS HEREBY ORDERED:
1.

This action shall be STAYED until December 5, 2016. During the stay, the
parties shall refrain from potentially unnecessary expense and responsive
briefing.

2.

Plaintiff is directed to provide the Court with a status report within four (4)
days of FHI’s receipt of a Certificate of Revivor or other competent
evidence proving that FHI’s corporate powers have been reinstated.
Plaintiff shall provide a status report on or before December 5, 2016 if the
matter has not been resolved by that date. Plaintiff’s status report shall
include a declaration and supporting documentation showing what notices
were sent by the Secretary of State, the California Franchise Tax Board, or
by any other entity regarding FHI’s suspension. Plaintiff may file the
accompanying documentation under seal, if necessary, to protect its
privacy.

3.

The motion hearing currently set for November 10, 2016 is VACATED.

DATED: November 7, 2016

_________________________
B. Lynn Winmill
Chief Judge
United States District Court

ORDER STAYING CASE - 10