Minority Shareholders’ Derivative Suit Foiled by Voiding of Corporation’s Charter for Nonpayment of Taxes

by Farrell Fritz, P.C.

[co-author: Franklin McRoberts]

A business’s failure to pay state taxes can be a problem if the entity later wants to bring a lawsuit, or its non-controlling owners want to sue on the entity’s behalf.

Under Section 203-a of the New York Tax Law, a New York business entity’s failure to pay franchise taxes for two years can result in automatic dissolution of the entity by proclamation of the New York State Secretary of State. Once a corporation is dissolved by proclamation for failure to pay franchise tax, it “does not enjoy the right to bring suit in the court of this state, except in [very] limited respects specifically permitted by statute.” Moran Enterprises, Inc. v Hurst, 66 AD3d 972 [2d Dept 2009].

What happens when an out-of-state entity, or shareholders on the entity’s behalf, attempt to sue in a New York court, despite the business not having paid taxes for several years in its home state? New York County Commercial Division Justice Anil C. Singh recently considering that question, specifically with respect to a Delaware entity, in Juma Technology Corp. v Servidio, Decision and Order, Index No. 151483/2016 [Sup Ct, NY County May 24, 2017].

Juma and the Transfer of Its Assets

Juma Technology Corp. (“Juma”) and two of its minority shareholders, suing derivatively on behalf of Juma, sued the majority shareholders and certain of its officers and directors. As explained in the briefs, which you can read here, here and here, the majority shareholders of Juma, a group of investment funds, originally were lenders to the business. The funds became equity owners through a series of debt and preferred equity investments totaling $25 million.

In 2012, the funds decided they could no longer loan Juma additional capital. When Juma was unable to repay its loans, the funds completed a strict foreclosure of the assets of Juma, which a majority of Juma’s board approved, resulting in the transfer of Juma’s assets to a new entity, after which the individual defendant officers and directors resigned from Juma and joined the new entity.

The Voiding of Juma’s Corporate Charter

Juma ceased to pay state taxes, racking up a delinquency of $400,000. Under a Delaware statute, 8 Del C. § 510, if a corporation fails to pay “any franchise taxes or taxes” for one year, then “the charter of the corporation shall be void.” On March 1, 2014, the Secretary of State of Delaware declared Juma’s corporate status “void” for failure to pay taxes.

Lack of Standing

Fast forward to 2016, when the minority shareholders of Juma sued in Manhattan Supreme Court, alleging that the strict foreclosure and transfer of assets from Juma to the successor entity constituted breaches of fiduciary duty, mismanagement, and waste. The various defendants, including the investment funds, filed three separate motions to dismiss the complaint. Only the funds’ motion to dismiss raised the issue of standing which ultimately became the knock-out punch.

Justice Singh held that because Juma’s corporate charter was declared void in 2014, “Juma does not have standing to sue.” The court explained that “under Delaware law, a corporation’s failure to pay taxes for one year will void its corporate charter and render inoperative all powers conferred upon it by law,” including its ability to bring lawsuits.

Noting that Delaware case law on the subject is “sparse,” the court relied primarily on a one-page decision of the Supreme Court of Delaware, which held that once a corporation is declared void under 8 Del C. § 510, it “has thereby ceased to exist and has lost any standing to appeal and be heard, even if represented by counsel.” Transpolymer Industries, Inc. v Chapel Main Corp., 582 A2d 936 [Del . Sup. Ct. 1990].

The Exception for Winding Up Corporate Affairs in Dissolution

Juma argued that it continued to have standing under a Delaware statute, 8 Del C. § 278, which states, “All corporations, whether they expire by their own limitation or are otherwise dissolved, shall nevertheless be continued, for the term of 3 years . . . for the purpose of prosecuting and defending suits . . . and of enabling them gradually to settle and close their business . . . .”

New York has a roughly analogous statute, Section 1006 of the Business Corporation Law, which the Court in Moran Enterprises held permits a corporation dissolved for failure to pay franchise taxes to continue to bring suits that “relate to the winding up of its affairs.”

But Justice Singh held that there was no such exception under Delaware law. As the Court explained,

Juma’s assertion that it was dissolved and should be given 3 years to prosecute this case pursuant to § 278 is unavailing. § 278 applies to corporations that ‘expire by their own limitation or are otherwise dissolved’ and not to corporations that are void.

As a result, the Court dismissed Juma’s claims. With respect to the minority shareholders’ claims, the Court held that the claims were derivative, not individual, because they “plead a wrong to the corporation only,” not the “breach of a duty independently owed to them.” Since the corporation lacked standing, the minority shareholders purporting to sue derivatively likewise lacked standing.


Under both New York and Delaware law, an entity dissolved for failure to pay taxes can reacquire its status as an entity in good standing by paying all tax arrears. In Delaware, the notion is that a corporation voided for nonpayment of tax is “not completely dead,” but “in a state of coma from which it can be easily resuscitated.” Wax v Riverview Cemetery Co., 41 Del 424, 436 [Del. Super. Ct. 1942]. The rule protects entities (and their owners) from inadvertent nonpayment of taxes. Perhaps in part because of this rule, the Court in Juma dismissed the plaintiffs’ claims without prejudice. But the Court’s without-prejudice dismissal probably did not console the minority shareholders of an assetless entity, hundreds of thousands of dollars in tax arrears, with little likelihood of restoration to good-standing status.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Farrell Fritz, P.C. | Attorney Advertising

Written by:

Farrell Fritz, P.C.

Farrell Fritz, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.