A corporation that has been automatically dissolved for failure to pay its franchise taxes lacks capacity to pursue a lawsuit seeking to regain title to real estate, according to a recent New York court decision. Fan-Dorf Properties, Inc. v. Classic Brownstones Unlimited, LLC, Index No. 113094/2010 (Sup. Ct. N.Y. Co. Mar. 13, 2015 & Aug. 4, 2015).

 

The case involved a corporation that was dissolved by proclamation of the New York State Department of Taxation and Finance in 1993 for failure to pay its franchise taxes.  The corporation previously owned a brownstone property.  A deed was recorded in 2000, transferring the property to another entity.  In 2010, the dissolved corporation and the administrator of its sole shareholder’s estate commenced an action to quiet title, seeking to regain title to the property on the ground that the 2000 deed was not signed by the owner of the property.  At that time, the corporation paid its taxes through 1993, but took the position that it owed no taxes after that date because it was no longer doing business in New York State and that merely holding title to real property does not constitute doing business.

 

In 2014, plaintiffs added the mortgagee bank as an additional defendant in the litigation.  The bank moved to dismiss the action against it on the ground that the plaintiff corporation lacked capacity to sue because it had been dissolved and therefore, as a matter of law, was disabled from commencing legal proceedings, other than as specifically permitted by statute, such as in connection with winding up the corporation’s affairs.  The court granted the motion to dismiss, noting that the corporation was in a dissolved status both when the alleged 2000 conveyance took place and when it filed the litigation in 2010.

 

Thereafter, the corporation contacted the Department of Taxation and Finance, seeking reinstatement as an active corporation.  The corporation paid a filing fee and was reinstated.  The corporation then moved for renewal (reconsideration) of the court’s prior decision, claiming that the corporation’s reinstatement cured its prior lack of capacity to sue.

 

The court disagreed, denied renewal, and adhered to its decision dismissing the action.  The court observed that the corporation had been dissolved as long ago as 1993, which was seven years before the allegedly fraudulent deed was filed and 17 years before the corporation filed this action.  The court noted that the corporation did not address its dissolved status as of 2000 and 2010, but only after the bank moved to dismiss in 2014.

 

The court held that allowing a corporation to wait from 1993 to 2014 before rectifying its tax status, and then allowing it to pursue the proceeding, would represent “the indefinite and perpetual tolling of the statute of limitations by a dissolved corporation pending the possibility of a retroactive corporate revivification.” Such an outcome, the court concluded, was barred by controlling precedent.

 

Ganfer & Shore, LLP represented the mortgagee bank in this case.