Source: https://www.jdsupra.com/legalnews/ticket-to-sue-pennsylvanias-registrat-96754/
Timestamp: 2017-11-22 16:42:25
Document Index: 59104156

Matched Legal Cases: ['§ 401', '§ 4141', '§ 4141', '§ 4141', '§ 8587', '§ 401', '§ 411', '§ 411', '§ 411', '§ 105', '§ 412', '§ 403']

Ticket to Sue – Pennsylvania’s Registration Requirement for Foreign Business Entities | Cozen O'Connor - JDSupra
Consider the following scenario: You represent a foreign corporation in a breach of contract action in Pennsylvania state court. Your client is seeking substantial damages for unpaid widgets that it shipped to the defendant buyer under the parties’ sales contract. At trial, defendant admits that it failed to pay and offers no defense to your claim, except one. Defendant denies liability on the ground that your client lacks legal capacity to maintain a lawsuit in Pennsylvania because it is “doing business” in Pennsylvania without a “certificate of authority.” According to defendant, this precludes your client from collecting a dime.
The Pennsylvania Superior Court recently addressed this very argument and reached a decision that may surprise many practitioners. In Drake Manufacturing Company, Inc. v. Polyflow, Inc., the court, in an opinion written by Judge Patricia H. Jenkins, overturned a nearly $300,000 verdict in favor of the plaintiff because the plaintiff did not have a certificate of authority to do business in Pennsylvania. 2015 WL 302266 (Pa. Super. Jan. 5, 2015). Although plaintiff secured a certificate of authority after trial in response to defendant’s post-trial motion, the Superior Court held that plaintiff’s corrective action came too late.
As Drake makes clear, foreign corporations that are “doing business” in Pennsylvania must be registered with the Department of State to obtain relief in a Pennsylvania court. The failure to register can operate as a complete bar to recovery. Pennsylvania’s registration requirement, however, does have its limits. In General Equity LLC v. Schomaker, the Third Circuit recently held that Pennsylvania’s registration requirement is preempted by the Federal Arbitration Act (“FAA”) and does not preclude a party without a registration from enforcing an arbitration award governed by the FAA in federal court. 2015 WL 758532 (3d Cir. Feb. 23, 2015) (non-precedential). Aside from FAA actions, however, Pennsylvania’s registration requirement for foreign business entities remains in effect and can still preclude a plaintiff from recovering damages in both state and federal courts in Pennsylvania.
On July 1, 2015, a new registration regime for foreign businesses will take effect. Under the new requirements, however, foreign businesses that are “doing business” in Pennsylvania without proper authorization will still be without legal capacity to sue in Pennsylvania. See 15 Pa.C.S. § 401, et seq. It will remain critical, therefore, for each foreign business to ensure that it is properly registered, if necessary, before seeking recovery in Pennsylvania.
The Registration Requirement and the Legal Capacity to Sue
In Drake Manufacturing, plaintiff, a Delaware corporation, filed its contract action in the Warren County Court of Common Pleas. 2015 WL 302266 at *1-2 (Pa. Super. Jan. 5, 2015). Drake claimed that the defendant, Polyflow, failed to pay for machinery and pipe fittings that Drake had shipped to Polyflow pursuant to the parties’ contract. The machinery and pipe fittings were valued at $291,766.
The case was tried before the court, without a jury. At trial, Polyflow “did not dispute its failure to pay Drake or contend that [Drake] failed to perform its duties” under the parties’ contract. Polyflow’s “only defense” was that Drake lacked capacity to sue in Pennsylvania because it was “doing business” in Pennsylvania without a certificate of authority under 15 Pa.C.S. § 4141(a). Under § 4141(a), a “nonqualified foreign business corporation doing business in this Commonwealth … shall not be permitted to maintain any action or proceeding in any court of this Commonwealth until the corporation has obtained a certificate of authority.”
Polyflow asserted its defense under § 4141(a) in a motion for compulsory non-suit after the close of Drake’s case-in-chief. In support of the motion, Polyflow submitted a certification from the Pennsylvania Department of State, stating that an examination of the Department’s records did not reveal any certificate of authority for Drake. 2015 WL 302266 at *2 & n.12. Polyflow also elicited testimony from a Drake officer, who stated that he was unsure whether Drake had a certificate of authority and that he did not have a certificate “with [him]” to offer into evidence. Id. at 2 n.13.
In addition, Polyflow offered evidence to prove that Drake was “doing business” in Pennsylvania. Under Section 4141(a), “doing business” involves regular, repeated and continuing business contacts of a local nature, as opposed to a “single agreement” or an “isolated transaction.”[1] Id. at *6. For example, the Pennsylvania Superior Court has held that a foreign corporation that shipped lighting fixtures to Pennsylvania six times over a six month period was “doing business” in Pennsylvania. See Leswat Lighting, Inc. v. Lehigh Valley Restaurant Group, Inc., 663 A.2d 783, 785 (Pa. Super. 1995). Polyflow asserted that Drake satisfied this standard because it had a Pennsylvania office and had shipped machinery and pipe fittings to Polyflow’s Pennsylvania facility on several occasions.
The trial court denied the defendant’s motion for compulsory non-suit and awarded Drake $291,766 in contract damages. Polyflow re-raised the issue in a post-trial motion. In its response, Drake attached a certificate of authority to do business in Pennsylvania, which it had obtained after trial. Relying on the certificate, the trial court denied Polyflow’s post-trial motion.
The Pennsylvania Superior Court reversed, holding that Drake lacked the capacity to maintain a suit in Pennsylvania. The Superior Court determined that Drake was required to submit a “certification of authority into evidence before the verdict[,]” at the latest, and that the trial court abused its discretion when it relied on Drake’s “delinquent” post-verdict certificate of authority to deny Polyflow’s motion. 2015 WL 302266 at *3, 8-9. The Drake Court suggested that a trial court could keep the trial record open after the close of evidence, but before verdict, to enable a foreign business to submit a proper registration into evidence and satisfy the registration requirement. 2015 WL 302266 at *9. “Upon the entry of the verdict, however, the window of opportunity closes[.]” Id.
The Superior Court also determined that Polyflow had properly preserved its “lack of capacity” defense by raising the issue in its answer with new matter. Preliminary objections were not required. The court also noted that it was immaterial that Drake’s claims involved Polyflow’s failure to pay “for out-of-state shipments in California, Canada and Holland.” A “foreign corporation that ‘does business’ in Pennsylvania … must obtain a certificate in order to prosecute a lawsuit in this Commonwealth, regardless of whether the lawsuit itself concerns in-state conduct or out-of-state conduct.” Id. at *7.
The Registration Requirement and the FAA
The registration requirement, however, may not apply in cases arising under the FAA. In a recent non-precedential opinion, General Equity LLC v. Schomaker, the Third Circuit considered whether a limited liability company could enforce an arbitration award in a federal district court sitting in Pennsylvania, despite the fact that the company was not registered to do business in Pennsylvania under 15 Pa.C.S. § 8587. 2015 WL 758532 at *1-2 (3d Cir. Feb. 23, 2015). Section 8587 sets forth the current registration requirement for foreign limited liability partnerships.
In Schomaker, the parties had entered into an arbitration agreement which provided that “judgment upon the arbitration award could be entered in any federal or state court with jurisdiction[.]” Id. at *1. When the plaintiff sought to enforce an arbitration award under the agreement in the Western District of Pennsylvania, the defendant moved to dismiss on jurisdictional grounds, asserting that the Court was precluded from hearing the case under Pennsylvania’s registration requirement. It was undisputed that diversity jurisdiction existed – the “only dispute [was] whether a Pennsylvania law which would preempt jurisdiction applies in this case.” Id. The district court denied the defendant’s motion on procedural grounds.
The Third Circuit affirmed, but unlike the district court, addressed the jurisdictional issue. The Third Circuit acknowledged that Pennsylvania’s registration requirement could preclude a foreign business entity from maintaining a suit in Pennsylvania, but determined that this requirement could not stand as an “obstacle to the accomplishment of the intended objectives of the FAA.” Id. at *2. The court, therefore, held that the Pennsylvania statute was pre-empted by the FAA to the extent that it precluded a federal district court from enforcing an arbitration provision and “exercising the authority Congress clearly intended under the FAA.” Id. The court also made clear that its ruling would cover motions to compel arbitration under an arbitration clause as well as motions to enforce an arbitration award. Id.
The Third Circuit’s reasoning on these issues should apply with equal force to Pennsylvania state courts, which are also subject to the enforcement regime imposed by the FAA. See Southland Corp. v. Keating, 465 U.S. 1 (1984); Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d 860 (Pa. Super. 1991).
The New Registration Regime Effective July 1, 2015
Effective July 1, 2015, new registration requirements will take effect in Pennsylvania. See 15 Pa.C.S. § 401, et seq. Currently, foreign corporations and limited liability companies are required to obtain a “certificate of authority,” whereas limited liability partnerships are required to “register” to do business in Pennsylvania. See Dague v. Huddler, 2008 WL 4444266 (E.D. Pa. Oct. 2, 2008); but see Generational Equity, 2015 WL 758532 at *2 (subjecting limited liability company to same registration requirement as a limited liability partnership). The new requirements will consolidate and standardize the governing procedure for obtaining registration. A foreign business entity, however, will still have to register with the Department of State in order to maintain an action in Pennsylvania. 15 Pa.C.S. §§ 411, 412.
Under the new requirements, “[a] foreign filing association or foreign limited liability partnership doing business in this Commonwealth may not maintain an action or proceedings in this Commonwealth unless it is registered to do business under this chapter.” 15 Pa.C.S. § 411(b). “Foreign filing associations” include corporations, partnerships, limited liability companies and “business or statutory trust[s.]” See 15 Pa.C.S. § 411; 15 Pa.C.S. § 105. Each of the above-listed entities will be required to file a “registration statement” with the Department of State, unless the entity obtained proper registration under “former statutes” prior to July 1, 2015. 15 Pa.C.S. § 412(a)-(b). Therefore, foreign corporations that are issued a certificate of authority before July 1, 2015 will be “deemed to be registered” when the new provisions take effect.
Although the Third Circuit has limited the application of Pennsylvania’s registration requirement in actions governed by the FAA, the lack of a proper registration can still preclude a foreign business from obtaining a recovery in Pennsylvania. This requirement will remain in effect when Pennsylvania’s new registration regime takes effect on July 1, 2015.
Accordingly, foreign businesses operating in Pennsylvania should be sure to obtain proper registration, especially if they intend to initiate an action in Pennsylvania. Entities that fail to do so could forfeit much more than the $250 application fee for a certificate of authority or an application to register a foreign limited liability partnership with the Department of State. These applications, as well as other relevant forms, are available on the Pennsylvania Department of State’s website, at the following address: http://www.portal.state.pa.us/portal/server.pt/community/corporations/12457/forms/571880. Once registration is complete, it does not expire and renewal is unnecessary.
The failure to register with the Department of State, however, is not something that can sneak up on a foreign business on the eve of trial and take a verdict away. Defendants are required to raise any lack of capacity defense based on the registration requirement in their answer, or else the defense is deemed waived. A foreign business, therefore, should be on notice of any potential registration issue early in the case and can obtain recovery in a Pennsylvania court as long as it obtains a valid registration before a verdict is entered.
[1] This interpretation is consistent with the statutory requirements that will go into effect on July 1, 2015. Under these requirements, “[a]ctivities not constituting doing business” in Pennsylvania are defined as, inter alia: (i) conducting “an isolated transaction;” (ii) holding meetings of its interest holders; (iii) maintaining bank accounts; (iv) selling through independent contractors; (v) soliciting or obtaining orders of goods for out-of-state delivery; (vi) owning property, without more; and (vii) securing or collecting debts or enforcing mortgages. See 15 Pa.C.S. § 403.