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Is Your Corporate Charter in Good Standing?

If Not, You Could Lose Your Case

October 1, 2004

A Maryland corporation is required to file its Personal Property Return (Form 1) and pay a $300 fee by April 15 of each year in order to maintain its charter in good standing. If the return is not filed and the fee is not paid, then the corporation is not in good standing and, with the passage of time, the State Department of Assessments and Taxation will initiate the process to declare the corporate charter to be forfeited, which causes the corporation to become a legal non-entity.* All powers of the corporation, including the power to sue, become null and void. However, if the forfeiture resulted from failure to file the annual return, the charter can be revived, and the corporation’s status reinstated, by filing the return(s) for each year, paying the fees and penalties, and filing articles of revival. In that case, all acts done by the corporation while the charter was forfeited are validated, and all assets and rights of the corporation are restored, except those of which it was divested while its charter was forfeited. It is not uncommon for corporations in Maryland to have their charters forfeited, either intentionally or by the inadvertent failure to file annual returns. Ordinarily, the effect of the forfeiture is "no harm, no foul," because of the ease with which the charter can be revived and the retroactive effect of its revival. But, as the Court of Appeals held in Dual Incorporated, et al. v. Lockheed Martin Corporation, et al., decided on September 13, 2004, the harm can be devastating.

On October 1, 2001, the president and sole shareholder of Dual, Incorporated ("Dual") filed suit against Lockheed Martin Corporation ("Lockheed"), relating to the termination of contracts between Dual and Lockheed, and Dual and the United States Air Force. When suit was filed, Dual’s corporate charter had been forfeited. After Dual revived its corporate charter, it filed an amended complaint in October 2002. Lockheed filed a motion to dismiss on the basis that the acts complained of occurred in May and June 1999, which meant that the three-year statute of limitations expired no later than June 2002. Lockheed argued that even though the original complaint was filed timely, because Dual’s charter had been forfeited, the filing was a nullity. Therefore, because the amended complaint was filed after June 2002, the claim was time-barred. The trial court agreed and dismissed the case. The Maryland Court of Appeals reviewed the decision, and affirmed the judgment.

The Court held that the initial complaint was a nullity because it was filed by a non-entity and, although it was filed within the three-year limitations period, it did not toll the statue of limitations. It noted that, when Dual’s charter was forfeited, it lost all of its corporate powers, including the power to sue. However, Dual argued that the claims in its amended complaint, filed after its charter was revived, should relate back to the date of filing the original complaint. While noting that "the revival of a corporate charter may validate retrospectively the capacity of a corporation to sue in certain circumstances," the revival does not restore rights that were lost during the period that the charter was forfeited. The right to sue was lost when the statute of limitations expired during the period of forfeiture. The Court held clearly and unequivocally that "where a corporation’s claim is barred by the applicable statute of limitations, that claim is not resuscitated thereafter when the corporation’s charter is revived."

The lessons of this case are clear. If your business is a Maryland corporation it is extremely important that you maintain the corporate charter in good standing. Although you may think that the ease of revival protects you, as Dual discovered, it does not under certain circumstances. If you are a Maryland corporation and are filing suit, even if your attorney doesn’t ask, make sure that your corporate charter is in good standing. If you are being sued by a Maryland corporation, have your attorney check to be sure that the plaintiff’s charter is in good standing – you never know when you, like Lockheed, might get lucky.

*A charter can also be forfeited, among other reasons, for non-payment of taxes.

For more information on corporate charters, contact Mark D. Dopkin at 410.752.9735 or via email, and for more information on commercial litigation, contact Daniel S. Katz at 410.752.9725 or via email.

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