Title: WILLIAMS v. SMITH & NEPHEW, INC.

State: oklahoma

Issuer: Oklahoma Supreme Court

Document:

WILLIAMS v. SMITH & NEPHEW, INC.  WILLIAMS v. SMITH & NEPHEW, INC. 2009 OK 36 212 P.3d 484 Case Number: 106359 Decided: 05/26/2009 THE SUPREME COURT OF THE STATE OF OKLAHOMA MICHAEL WILLIAMS, M.D., Plaintiff, v. SMITH & NEPHEW, INC., Respondent/Defendant, and DUNLAP MEDICAL, Petitioner/Defendant. ON WRIT OF CERTIORARI TO REVIEW CERTIFIED INTERLOCUTORY ORDER OF THE DISTRICT OF OKLAHOMA COUNTY, OKLAHOMA HONORABLE PATRICIA PARRISH DISTRICT JUDGE, PRESIDING. ¶0 The District Court of Oklahoma County certified its interlocutory order dismissing Dunlap Medical's cross-claims against Smith & Nephew, Inc. because those claims arose while Dunlap Medical was suspended for failure to pay its franchise taxes. Although the corporation was reinstated prior to the hearing on the motion, the trial judge interpreted CERTIFIED INTERLOCUTORY ORDER REVERSED Stanley M. Ward, Woodrow K. Glass, Scott F. Brockman, Scott K. Thomas and Zachary K. Bradt, Ward & Glass, LLP, Norman, Oklahoma, for the Petitioner. Richard M. Eldridge, Thomas E. Steichen, Alison A. Verret, Eldridge, Cooper, Steichen & Leach, PLLC, Tulsa, Oklahoma, for the Respondent Smith & Nephew, Inc. HARGRAVE, J. ¶1 Dunlap Medical, Inc. seeks review of an order that dismissed its cross-claims against Smith & Nephew, Inc. because those claims arose while Dunlap Medical was suspended for failure to pay its franchise taxes. Dunlap Medical was suspended as a corporation on March 23, 2001 and was reinstated on March 11, 2008. The trial judge granted Smith & Nephew's motion to dismiss, except as to Dunlap Medical's claim for indemnification, holding that, pursuant to BACKGROUND ¶2 Plaintiff Michael Williams, M.D. is an orthopaedic surgeon who surgically placed a medical device manufactured by Smith & Nephew into several patients. Dunlap Medical was the Oklahoma distributor of the medical device who sold it to Dr. Williams. Dr. Williams filed suit against Dunlap Medical, Inc. and Smith & Nephew, Inc. on August 7, 2007, alleging that the medical device was a defective product that eventually was recalled or withdrawn by Smith & Nephew. Plaintiff pled claims for intentional interference with business relations, deceit, intentional infliction of emotional distress and indemnification. ¶3 Dunlap Medical filed a cross-claim against Smith & Nephew, alleging that it had been misled by them and that any liability on the part of Dunlap Medical is a result of Smith & Nephew's actions. Dunlap pled claims for tortious interference with business relations, deceit, intentional infliction of emotional distress and indemnification as to any claims pending or that may be filed in the future relating to the medical device. ¶4 Smith & Nephew initially moved to strike Dunlap Medical's cross-claims by asserting that the claims did not arise out of the same transaction or occurrence as the claims of the plaintiff. The trial judge ruled that Dunlap's claims that did not arise out of the same subject matter as plaintiff's claims should be consolidated for discovery purposes and reserved the determination of bifurcation until pretrial. Smith & Nephew then filed a motion to reconsider in which, among other things, they moved to dismiss the cross-claims due to Dunlap Medical's lack of capacity to sue because it had been suspended for failure to pay franchise taxes. Dunlap Medical filed a response showing that its corporate charter had been reinstated on March 11, 2008 and argued that the incapacity issue was moot. ¶5 In arguments before the trial judge, Smith & Nephew asserted that Dunlap Medical could not "accrue" a cause of action while suspended and that reinstatement of the corporation would not "relate-back" to the date of suspension except as to causes of action that had accrued before the corporation was suspended. Smith & Nephew asserted that the third sentence of ¶6 Dunlap Medical maintained that § 1212(C) only deals with capacity to sue or be sued and that once the corporation has been reinstated, its legal disability is removed and the corporation is fully restored to its rights. Dunlap asserts that Oklahoma courts have consistently recognized the "relation-back" component of § 1212 as applicable to both the right to defend and the right to sue, and that the purpose of the penalties is not to punish, but to encourage collection of the tax. ¶7 After hearing arguments of counsel, the trial judge dismissed the cross-claims of Dunlap Medical because those claims arose while it was suspended. The trial judge ruled that pursuant to STANDARD OF REVIEW/ RULES OF CONSTRUCTION OF TAX STATUTES ¶8 This case involves interpretation of DISCUSSION ¶9 Oklahoma's Franchise Code is codified at 68 O.S. § 1201, et. seq. Section 1212(A) of Oklahoma's Franchise Tax Code provides that if the franchise tax is not paid as provided, the Oklahoma Tax Commission shall levy and collect a penalty for that delinquency. In that event, the Tax Commission may enter an order directing the suspension of the charter of such corporation and the forfeiture of all corporate or other rights inuring thereunder. Thus, the Tax Commission must levy and collect a penalty, but it is given discretion whether to suspend the corporate charter and forfeit corporate rights. ¶10 Under § 1212(A) the corporate charter is merely suspended - - it is not "forfeited," "cancelled" or "dissolved." It is the corporate rights that are forfeited.3 Subsection 1212 (F) provides that the corporate charter may be "revived" and "reinstated" by payment of the accrued fees and penalties along with payment of a reinstatement fee of $15.00 and a showing of compliance with the laws of this state.4 The fact that the corporation may be revived and reinstated reflects that the corporation is not legally dead.5 ¶11 In Corman v. H-30 Drilling, Inc., 2001 OK 92, 40 P.3d 1051 , plaintiff, on the day of trial, raised the issue of the defendant corporation's suspension and the trial judge refused to hear anything further from the corporation "because it is a non-entity for that purpose" and entered default judgment against it. We reversed the trial judge and determined that it was a denial of the corporation's due process rights not to be allowed a continuance in order to pay the franchise taxes and defend the suit against it. We reject the argument that the corporation could not accrue a cause of action while suspended because it was legally dead. ¶12 Next we turn to the trial judge's ruling that 68 O.S. § 1212(C) bars Dunlap Medical from suing on a cause of action that arose while it was suspended. The "relation-back" component of corporate charter reinstatement appears at § 1120 of Oklahoma's General Corporation Act, 18 O.S. § 1001, et. seq.6 Section 1120(E) sets out the effect of renewal, revival, extension and restoration of a corporation's certificate of incorporation after suspension for nonpayment of franchise taxes. See, State Ins. Fund v. AAA Engineering & Drafting, 1993 OK 142, 863 P.2d 1218 , 1220. Section 1120(B) provides that a corporation forfeited for nonpayment of taxes may at any time be reinstated and revive its charter, according to the prescribed procedure so long as its corporate life has not expired. Title 18 O.S. § 1120(E) provides that reinstatement shall validate all contracts, acts, matters and things made, done and performed within the scope of its certificate of incorporation by the corporation, its officers and agents during the time when its certificate of incorporation was forfeited and that, upon reinstatement, a corporation suspended for nonpayment of taxes is revived and renewed as if its certificate never had become forfeited. ¶13 The Oklahoma General Corporation Act applies to all corporations unless it is in conflict with the tax code.7 Smith & Nephew admits that relation-back applies to claims of the corporation that arose before suspension, but contends that the third sentence of § 1212(C) limits the relation-back of the corporation's ability to sue, so that after reinstatement the corporation can sue only on claims that arose before it was suspended. Dunlap Medical, on the other hand, maintains that § 1212(C) only concerns the capacity to sue and be sued and that the trial court construed it too broadly and applied it beyond its scope. The question, then, is whether 68 O.S. § 1212(C) restricts the relation-back of corporate reinstatement. If so, then the provisions of § 1212(C) will control.8 ¶14 We look to the language of the tax statute. Subsection (C) of § 1212 sets forth penalties that apply after the corporate charter is suspended. ¶15 At issue is the meaning of the third sentence of § 1212(C), which states: "as to any suit against the corporation on a cause of action that arose before forfeiture, no affirmative relief shall be granted to the corporation unless it is reinstated." Smith & Nephew asserts that this language limits the relation-back of a corporation's reinstatement. Smith & Nephew's premise is that subsection (F) of § 1212 provides a mechanism for reinstatement, and the third sentence of § 1212(C) sets forth the effect of reinstatement: to allow only pursuit of causes of action arising before such forfeiture. ¶16 We cannot agree with the interpretation of Section 1212(C) urged by Smith & Nephew and adopted by the trial judge. Section 1212(C) denies the corporation the right to sue and the right to defend in the courts of this state while suspended. If the corporation cannot sue or defend while under suspension, then the corporation cannot receive affirmative relief on any cause of action while suspended. Why, then, add a provision that, as to suits on causes of action arising before the corporation was suspended, the corporation cannot receive affirmative relief unless it is reinstated? Such language would be mere surplusage unless the intention is to make clear that even though the claim arose while the corporation was in good standing, the corporation may not receive affirmative relief in a lawsuit thereon until it has been reinstated. This would counter any argument that a corporation might raise that because the claim arose before it was suspended it is entitled to affirmative relief thereon, even though suspended. ¶17 This interpretation is in accord with the purposes behind the § 1212 penalties. Franchise tax statutes are solely for revenue-raising purposes and the failure to pay franchise taxes is an issue between the corporation and the state. Midvale Mining & Mfg. Co. v. Dutron Corp., 1977 OK 155, 569 P.2d 442 , 443. The penalties of § 1212 are to encourage or enforce compliance with the statute by penalizing a corporation for noncompliance. Id. We said that the reason for the penalty imposing personal liability on the officers and directors and directors is to aid in the collection of franchise tax by discouraging corporation transactions after suspension.569 P.2d at 444. In Corman v. H-30 Drilling, Inc., 2001 OK 92, 40 P.3d 1051 , we said that the purpose of section 1212(C) is to encourage taxpayers to pay their franchise taxes, not to trap them into losing their right to defend lawsuits, and that once the tax is paid, no further penalty should be imposed. We recognized that § 1212(C) has a "relation-back" component that is applicable to the right to defend and the right to sue provisions of § 1212, citing Bethlehem Steel Corp. v. Giese, 1984 OK 28 ¶8, 681 P.2d 769 , 771 . Corman, at 1053-54. ¶18 We have examined cases from other jurisdictions and have found the courts' rulings dependent on the particular statutes involved.13 For example, Texas' franchise tax penalty statutes 14 are similar to Oklahoma's, and Texas courts have held that once the right to sue or defend is revived, the corporation may sue or defend all causes of action, regardless of whether such causes arose before or during the period of forfeiture. Goins Construction Company, Inc. v. S.B. McLaughlin Associates, Inc., 930 S.W.2d 124, 128 (TX. Ct. App. 1996). See also, Rosenblum v. Dingfelder, 111 F.2d 406, 408-409 (2nd Cir. 1940), applying Texas law, stating that on payment of the taxes due, the corporation may again sue upon rights accruing before or during the time it has been prohibited from doing business. The Supreme Court of Arkansas, addressing a question of first impression after statutory amendments in 1999, held that restoration of corporate status vested the corporation with continuous existence as though the revocation of its charter had never occurred, so that the corporation could pursue its suit for unlawful detainer of property, notwithstanding the defendant's motion to dismiss the suit on the grounds that corporation did not have standing to sue. Omni Holding and Dev. Corp. v. C.A.G. Investments, Inc., 258 S.W.3d 374 (Ark. 2007). Smith & Nephew points to the contrary view adopted in PLM v. The E. Randle Co., 797 F.2d 204 (5th Cir. 1986), applying Mississippi law. The relevant Mississippi statute provided that upon setting aside of suspension, the organization would be restored "to all rights of which it was deprived" by such suspension, and authorized "to resume all activities" as though the suspension had not been imposed. The Fifth Circuit upheld dismissal of the corporation's suit based on lack of capacity, specifically noting that Mississippi's statute differed from those in jurisdictions reaching the opposite result because it lacked the language making clear that lifting of a suspension retroactively validates activities undertaken during the suspension. ¶19 Relation-back of the right to maintain a lawsuit on a cause of action that arose while the corporation was suspended was upheld in Flour Mills, Inc. v. Pace, 75 F.R.D. 676 (E.D. Okla. 1977). In that case, a suspended corporation brought suit to recover on an open account entered into while it was suspended and the only issue was the plaintiff's capacity to sue, as raised by defendant's motion to dismiss. After considering 68 O.S. § 1212(C) the court concluded that the act of reinstating the plaintiff's right to do business in Oklahoma related back to the date of suspension and restored it to all former powers, including the right to maintain the action. In conclusion, the Flour Mills judge noted by way of footnote that "capacity to sue" is to be distinguished from possession of a "cause of action," stating that capacity to sue is plaintiff's personal right to come into court and its cause of action is its right to relief under the facts of the case it brings. The Flour Mills judge correctly recognized that being restored to capacity to sue gives the plaintiff the ability to sue in the courts of the state, but does not mean that the plaintiff has a right to relief under the facts of the case. ¶20 Lastly, the trial judge's reliance on dicta in Nichols-Homeshield v. Mid-America Construction Supply, Inc., 1982 OK 41, 643 P.2d 309 , is misplaced. The sole issue in the case was whether the liability of individual officers and directors imposed by § 1212(C) ended when the corporation paid the taxes and penalty, or when the certificate of reinstatement was issued. We looked at the specific language of § 1212(C) mandating director and officer liability after forfeiture and before reinstatement, and held that "reinstatement" meant reinstatement by the Tax Commission and that personal liability remained until reinstatement is ordered. We stated that we were not persuaded by the defendants' reference to cases making reinstatement retroactive to the date of suspension, such as J.D. Simmons, Inc. v. Alliance Corp., 79 F.R.D. 547 (W.D. Okla. 1978). In Nichols-Homeshield, the corporation had not been properly reinstated at the time the debt was incurred, so cases applying reinstatement retroactively were inapposite. ¶21 Tax statutes are to be strictly construed and are to be applied most favorably to the one sought to be charged. We find nothing in the language of § 1212(C) that would bar the corporation, after reinstatement, from suing on a claim that arose while it was suspended. The § 1212(C) penalty denies the corporation use of or access to the courts of this state while it is suspended; it does not deny the claim itself. Reinstatement to good standing restores the corporation's ability to sue and to defend in the courts of this state, and the corporation may proceed on any viable claims that it has. CERTIFIED INTERLOCUTORY ORDER REVERSED ¶22 ALL JUSTICES CONCUR FOOT