Written by attorney Brian K Stanley

Letting Inactive Company Lapse Can Be Costly Mistake

Using a corporation or limited liability company to conduct business activities can have important advantages, but there are also potential pitfalls. Even when a particular business is no longer being actively conducted, what the owners do with or about the company as a legal entity can make a difference. Simply letting the entity lapse may be a sound alternative to formal dissolution - but this should always be a matter of informed decision, not neglect and happenstance. A recent case in the Ninth Circuit (the federal appellate court that includes Arizona in its area of jurisdiction) illustrates this point. American Sports Radio Network, Inc. ("ASRN") and Sound Money Investors, Inc. ("SMI") held an unpaid judgment against Garrett Krause for several million dollars. Krause filed for Chapter 7 bankruptcy, and one day before the Jan. 13, 2006 bar date, ASRN and SMI filed an adversary complaint alleging that the judgment debt was not dischargeable. Krause filed a motion to dismiss the adversary complaint on the basis that ASRN and SMI lacked the capacity to sue, because their Nevada corporate charters had been revoked since 2002 for failure to pay annual fees and to file annual reports. ASRN and SMI opposed the motion to dismiss, asserting that they corrected the delinquent filing obligations and their charters were reinstated in March and April, 2006. The Bankruptcy Court (C.D. Calif.) nevertheless dismissed the adversary complaint with prejudice pursuant to Nev. Rev. Stat. ?78.175(2) because ASRN and SMI could not transact business, including filing a lawsuit, while their charters were revoked. The District Court affirmed. The plaintiff companies appealed to the Ninth Circuit Court of Appeals. In a recently published decision, that court said that Nevada law isn't necessarily so clear, and asked the Nevada Supreme Court for an advisory opinion. American Sports Radio Network, Inc. v. Krause (In re Krause), 546 F.3d 1070 (9th Cir. 2008). Even if the plaintiffs are ultimately able to resurrect their case, the simple mistake of letting the corporations lapse while holding undistributed assets (the claims against Krause) will have cost them two or three years of delay and probably $50,000 to $150,000 in otherwise-unnecessary legal expense.

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