American Sports Radio Network, Inc. v. Krause

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In the Matter of: GARRETT KELLY 

KRAUSE,

Debtor, No. 07-55131

D.C. No.

CV-06-03779-AG

AMERICAN SPORTS RADIO NETWORK,

INC., a Nevada corporation; and

SOUND MONEY INVESTORS, INC., a  ORDER

CERTIFYING

Nevada corporation, QUESTION TO

Appellants, THE SUPREME

COURT OF

v.

NEVADA

GARRETT KELLY KRAUSE,

Appellee.



Filed October 10, 2008

Before: Raymond C. Fisher and Richard A. Paez,

Circuit Judges, and James L. Robart,* District Judge.

COUNSEL

Paul J. Laurin,Weiner & Laurin, 15760 Ventura Blvd., Suite

1727, Encino, California 91436, for the appellants.

Irv M. Gross, Robinson, Diamant & Wolkowitz, 1888 Cen-

tury Park East, Suite 1500, Los Angeles, California 90067, for

the appellee.

*The Honorable James L. Robart, United States District Judge for the

Western District of Washington, sitting by designation.

14381

14382 IN THE MATTER OF KRAUSE

CERTIFICATION ORDER

Pursuant to Rule 5 of the Nevada Rules of Appellate Proce-

dure, and as further explained below, we respectfully certify

the following question to the Nevada Supreme Court:

Under Nevada law, may a domestic corporation

whose charter has been revoked under Nevada

Revised Statutes section 78.175(2) prosecute a law-

suit either (a) in its own corporate name or (b)

through its directors? If not, is the defendant entitled

to have such a lawsuit dismissed with prejudice, or

must the plaintiff corporation first be given a reason-

able opportunity to reinstate its charter? Cf. Execu-

tive Mgmt. Ltd. v. Ticor Title Ins. Co., 38 P.3d 872

(Nev. 2002).

The answer to this question will be determinative of the

matter pending before this court, and there is no clearly con-

trolling precedent in the decisions of the Nevada Supreme

Court.

Submission of this case is vacated and all further proceed-

ings are stayed pending receipt of an answer to the certified

question. The parties shall notify the Clerk of this court within

one week after the Nevada Supreme Court accepts or rejects

the certified question, and again within one week after the

Nevada Supreme Court renders its answer.

I. Background

Appellee Garrett Kelly Krause (“Krause”) filed a Chapter

7 personal bankruptcy petition in the Central District of Cali-

fornia in 2005. Appellants American Sports Radio Network,

Inc. (“ASRN”) and Sound Money Investors, Inc. (“SMI”),

both Nevada corporations, were creditors of Krause’s bank-

ruptcy estate as the result of an unsatisfied Nevada civil judg-

ment for several million dollars. The bankruptcy court

IN THE MATTER OF KRAUSE 14383

designated a “bar date” of January 13, 2006, for asserting

exceptions to discharge. See 11 U.S.C. § 523(c)(1); Fed. R.

Bankr. P. 4007(c). On January 12, 2006, ASRN and SMI filed

an adversary complaint alleging nondischargeability of the

debt arising from their unsatisfied judgment under 11 U.S.C.

§§ 523(a)(2), (a)(4), and/or (a)(6).1

On March 7, 2006, Krause filed a motion to dismiss ASRN

and SMI’s adversary complaint on the ground that ASRN and

SMI lacked capacity to sue.2 In support of the motion, Krause

provided documentation showing that ASRN’s corporate

charter had been revoked by the state of Nevada on May 1,

2002, for failure to pay annual fees and to file its annual list

of corporate officers. See Nev. Rev. Stat. § 78.150 (2007).

SMI’s charter had been revoked on June 1, 2002, for the same

reasons. In opposing the motion to dismiss, ASRN and SMI

provided documentation showing that after Krause’s motion

was served, and before the bankruptcy court held a hearing on

Krause’s motion, ASRN and SMI corrected their delinquent

filing obligations and moved for reinstatement of their char-

ters. The Nevada Secretary of State reinstated ASRN’s charter

on March 28, 2006, and SMI’s on April 3, 2006.

On May 16, 2006, the bankruptcy court held a hearing on

Krause’s motion to dismiss. At the conclusion of that hear-

ing, the bankruptcy court granted Krause’s motion and dis-

missed the adversary proceeding with prejudice. Applying

1

These subsections apply to debts arising “[l]oosely speaking, . . . from

intentional wrongdoing of various sorts (respectively, fraud, fiduciary mis-

conduct, and the commission of malicious torts).” Beezley v. Cal. Land

Title Co. (In re Beezley), 994 F.2d 1433, 1435 (9th Cir. 1993)

(O’Scannlain, J., concurring).

2

Although the bankruptcy court referred to the question in this case as

one of “standing” to sue, we note that it is capacity, not standing, which

is at issue. See De Saracho v. Custom Food Mach., Inc., 206 F.3d 874, 878

n.4 (9th Cir. 2000) (distinguishing between standing and capacity to sue);

6A Charles Alan Wright, et al., Federal Practice and Procedure § 1559

(2d ed. 1990) (same).

14384 IN THE MATTER OF KRAUSE

Nevada law, the bankruptcy court concluded that the plain,

unambiguous language of Nevada Revised Statutes section

78.175(2)—stating that a corporation whose charter has been

revoked shall not “transact business”—precluded the filing of

a lawsuit by such a corporation. The court acknowledged the

Nevada Supreme Court’s holding in Executive Management

Ltd. v. Ticor Title Insurance Co., 38 P.3d 872 (Nev. 2002),

but found it inapplicable to the facts of this case because

Executive Management dealt with a different statute (relating

to foreign corporations) which the Nevada Supreme Court

found to be ambiguous.3

On appeal to the district court, the district court affirmed,

agreeing with the bankruptcy court that section 78.175(2)’s

prohibition on transacting business was “unambiguous” and

“include[d] suing a debtor in an adversary proceeding.” The

district court also found Executive Management distinguish-

able. ASRN and SMI filed a timely appeal.4

On appeal to this court, ASRN and SMI contend that

Nevada law is unclear regarding the capacity of a corporation

to continue a lawsuit when its charter has been revoked for

failure to comply with its annual fee and filing obligations.

They therefore request that we certify a question that

addresses the issue to the Nevada Supreme Court. Although

Krause states that he “does not necessarily oppose certifica-

tion,” he argues that (1) unlike in Executive Management, the

3

In Executive Management, the defendant moved to dismiss a lawsuit

by a plaintiff foreign corporation that had failed to qualify to do business

in Nevada and was thus prohibited from “commenc[ing] or maintain[ing]

any action” in Nevada under section 80.055(1)(b). See Executive Mgmt.,

38 P.3d at 874. Overruling prior precedent, see League to Save Lake

Tahoe v. Tahoe Reg’l Planning Agency, 563 P.2d 582, 584 (Nev. 1977),

however, the court held that the suit should not be dismissed, but rather

stayed, and that, if the plaintiff corporation promptly corrected its defi-

ciencies and qualified to do business in Nevada, the lawsuit could be

maintained. See Executive Mgmt., 38 P.3d at 876.

4

We have jurisdiction under 28 U.S.C. § 158.

IN THE MATTER OF KRAUSE 14385

statutory language of section 78.175(2) clearly prohibits

ASRN and SMI from maintaining their lawsuit; and (2) even

if section 78.175(2) is interpreted, consistent with Executive

Management, to mean that a domestic corporation with a

revoked charter may continue a lawsuit after promptly obtain-

ing reinstatement of its charter, ASRN and SMI cannot bene-

fit from such a rule because they did not pursue reinstatement

promptly.

II. Discussion

We must determine, first, whether the bankruptcy court5

properly ruled that ASRN and SMI lacked capacity to sue

when they filed their complaint on January 12, 2006, because

their corporate charters had been revoked pursuant to section

78.175(2). Second, if ASRN and SMI lacked capacity to sue

when they filed their adversary action, we must determine

whether the bankruptcy court erred by not allowing the subse-

quent reinstatement of their charters to relate back to the date

of filing of their complaint. Finally, even if ASRN and SMI

lacked capacity to sue and the subsequent cure of that defect

did not relate back, we must determine if the bankruptcy court

erred by dismissing the complaint rather than granting ASRN

and SMI leave to join their corporate directors as real parties

in interest.

The Federal Rules of Civil Procedure and Bankruptcy Pro-

cedure require us to apply Nevada law to determine ASRN

and SMI’s capacity to sue. See Fed. R. Civ. P. 17(b)

(“Capacity to sue . . . is determined . . . for a corporation, by

the law under which it was organized . . . .”); Fed. R. Bankr.

5

Because our review of the district court’s judgment is de novo, Metcalf

v. Golden (In re Adbox, Inc.), 488 F.3d 836, 839 (9th Cir. 2007), our ulti-

mate focus is on the bankruptcy court’s ruling. We review de novo the

bankruptcy court’s grant of a motion of dismiss. Id. at 840. We also

review de novo the bankruptcy court’s interpretation of the Federal Rules.

See Brawders v. County of Ventura (In re Brawders), 503 F.3d 856 (9th

Cir. 2007).

14386 IN THE MATTER OF KRAUSE

P. 7017 (making Federal Rule of Civil Procedure 17 applica-

ble to adversary proceedings in bankruptcy court). Similarly,

in order to determine whether the directors should have been

substituted as plaintiffs, we must determine the powers, under

Nevada law, of directors of corporations whose charters have

been revoked. In summary, this case requires us to determine

the nature and extent of the powers of a Nevada corporation,

after its charter has been revoked under Nevada Revised Stat-

utes section 78.175(2), to institute or maintain a suit, either in

its own name or through its directors.

Among the subsidiary questions that confront us are these:

May a Nevada corporation sue in its own name when its char-

ter has been revoked pursuant to section 78.175(2)? Cf. Nev.

Rev. Stat. § 78.060(2) (“Every corporation, by virtue of its

existence as such, is entitled . . . [t]o sue and be sued in any

court of law or equity.”). If not, do its directors acquire the

powers of receivers or trustees, including the power to sue on

the corporation’s causes of action? See id. § 78.175(5) (“If the

charter of a corporation is revoked . . . as provided in subsec-

tion 2, all the property and assets of the defaulting domestic

corporation must be held in trust by the directors of the corpo-

ration as for insolvent corporations . . . .”); id. § 78.635(2)(b)

(providing that a trustee or receiver of an insolvent corpora-

tion may “institute suits at law or in equity for the recovery

of any estate, property, damages or demands existing in favor

of the corporation”). If a corporation whose charter has been

revoked pursuant to section 78.175(5) has filed suit in its own

name, and an objection to its capacity to sue is made, must the

court dismiss the case? Cf. League to Save Lake Tahoe v.

Tahoe Reg’l Planning Agency, 563 P.2d 582, 584 (Nev. 1977)

(applying analogous rule to foreign corporations), overruled

by Executive Mgmt., 38 P.3d 872. If the statute of limitations

has run in the meantime, must the dismissal be with preju-

dice? Cf. id. at 584-85. Or should a court confronted with an

objection to a Nevada corporation’s capacity to sue because

its charter has been revoked instead stay the case to allow the

corporation to promptly obtain reinstatement of its charter and

IN THE MATTER OF KRAUSE 14387

to maintain the action? See Nev. Rev. Stat. § 78.180 (provid-

ing that the Secretary of State “shall” reinstate a corporate

charter upon cure of underlying deficiency, and that such rein-

statement “relates back to the date on which the corporation

forfeited its right to transact business . . . and reinstates the

corporation’s right to transact business as if such right had at

all times remained in full force and effect”); cf. Executive

Mgmt., 38 P.3d at 876 (applying analogous rule to foreign

corporations).

A. The meaning of “transact business” under section

78.175(2)

As a threshold matter, we are unsure whether, or to what

extent, the revocation of a corporate charter deprives a

Nevada corporation of its capacity to sue under Nevada law.

Section 78.175(2) provides that, upon revocation of the char-

ter, a corporation’s “right to transact business is forfeited.”

Although the term “transact business” is not defined within

section 78.175, nor in the set of general definitions applicable

to section 78.175, see Nev. Rev. Stat. § 78.010, both the bank-

ruptcy court and the district court interpreted this term to

mean, among other things, that a corporation encompassed by

the statute could not initiate or prosecute lawsuits. The district

court explained, without citation, that section 78.175(2) “un-

ambiguously prohibits a corporation who i[s] i[n] default on

the requisite filing obligations from transacting any business.

This would include suing a debtor in an adversary proceed-

ing.” Krause similarly argues that the statutory language of

section 78.175(2) “is unambiguous with respect to the termi-

nation of the corporation’s right to transact business, which

necessarily includes the right to pursue litigation” (emphasis

added).

We cannot agree that the “plain language” of section

78.175(2) controls, and we are unaware of any controlling

precedent from the Nevada courts on this question. Although

the statute prohibits transacting business, whether or not

14388 IN THE MATTER OF KRAUSE

transacting business includes pursuing litigation remains

ambiguous. Cf. Merriam-Webster’s Collegiate Dictionary

167, 1327 (11th ed. 2005) (“Business . . . 3a: a usually com-

mercial or mercantile activity engaged in as a means of liveli-

hood”) (“Transact . . . 2: to carry on the operation or

management of”). Some corporations are primarily in the

business of collecting debts and/or filing lawsuits. But most

corporations are primarily engaged in some other business.

For example, ASRN and SMI were in the business of creating

and distributing radio programming. The term “transact busi-

ness” probably could be construed to include pursuing litiga-

tion without doing violence to the text of section 78.175(2).

Nevertheless, without guidance from the Nevada courts, we

cannot conclude that it must necessarily be so construed.6

B. The powers of corporate directors under section

78.175(5)

Assuming the statutory term “transact business” in section

78.175(2) includes the filing of lawsuits, ASRN and SMI had

forfeited their right to file lawsuits at the time they filed their

complaint. We are unsure, however, whether the corporations’

directors had the right to file lawsuits on behalf of the corpo-

6

The specific uses of the term “transact business” in related provisions

of the Nevada Revised Statutes do not necessarily support the notion that

pursuing litigation constitutes transacting business under section

78.175(2). For example, with regard to foreign corporations,

“[m]aintaining, defending or settling any proceeding” in Nevada is listed

as one of numerous “[a]ctivities not constituting transaction of business.”

Nev. Rev. Stat. § 80.015 (emphasis added). Cf. id. § 80.055(1)(b) (provid-

ing specifically that a foreign corporation which has defaulted on its quali-

fication requirements “may not commence or maintain any action or

proceeding” in Nevada courts). Further, a dissolved corporation which

continues in existence only for the purpose of winding up “continues as

a body corporate for the purpose of prosecuting and defending suits” as

well as collecting its debts and discharging its obligations—though it may

not “continu[e] the business for which it was established.” Id. § 78.585;

see also Clipper Air Cargo, Inc. v. Aviation Prods. Int’l, Inc., 981 F. Supp.

956, 958 (D.S.C. 1997) (citing Nev. Rev. Stat. § 78.585).

IN THE MATTER OF KRAUSE 14389

rations. As noted above, section 78.175(5) specifically pro-

vides that when a corporation’s charter is revoked—and its

right to “transact business” thus forfeited—the corporation’s

“property and assets” shall be “held in trust by the directors

of the corporation as for insolvent corporations.” Nev. Rev.

Stat. § 78.175(5). This suggests that the corporation, itself, is

stopped dead by revocation of the charter, but that the direc-

tors step into its shoes, at least for some purposes. Cf. Porter

v. Tempa Mining & Milling Co., 93 P.2d 741, 745 (Nev.

1939) (providing, under previous version of statute, that cor-

poration was “dead for all purposes” other than those pre-

served by statute).7 Moreover, under Nevada insolvency law,

a receiver or trustee for an insolvent corporation specifically

acquires the power to file suit to “recover[ ] any estate, prop-

erty, damages or demands existing in favor of the corpora-

tion,” Nev. Rev. Stat. § 78.634(2)(b), which would seem to

include the outstanding judgment sued upon in this case.

If the directors of ASRN and SMI, like trustees of insolvent

corporations in Nevada, were empowered to sue to collect

ASRN and SMI’s debts, then the bankruptcy court should not

have dismissed this case, but should have granted their

request for leave to join the directors as the real parties in

interest. See Fed. R. Civ. P. 17(a); cf. Nev. Rev. Stat. § 78.695

(“[U]pon application [a receiver] shall be substituted as party

plaintiff . . . in the place and stead of the corporation in any

suit or proceeding at law or in equity which was pending at

the time of his appointment.”)

7

On similar facts, a district court in the District of South Carolina has

relied on Porter to conclude that the powers of a Nevada corporation

whose charter has been revoked for failure to satisfy annual filing require-

ments should be determined by reference to the rules for dissolved corpo-

rations. See Clipper Air Cargo, Inc. v. Aviation Prods. Int’l, Inc., 981 F.

Supp. 956, 58-59 & nn. 2-5 (D.S.C. 1997) (holding that a corporation

whose charter has been revoked under section 78.175(2) retains the pow-

ers of a dissolved corporation, as provided in section 78.585). This

approach, however, appears to conflict with the express statement in sec-

tion 78.175(5) that the directors of the corporation must hold its property

in trust “as for insolvent corporations.” (emphasis added).

14390 IN THE MATTER OF KRAUSE

C. The effect of reinstatement

Assuming (1) that “transact[ing] business” under section

78.175(2) includes pursuing litigation and (2) that the corpo-

rations’ directors were not empowered to act in the corpora-

tions’ stead, we are yet unsure whether the bankruptcy court

was correct to dismiss the case due to the revocation of ASRN

and SMI’s charters. Although we have found no controlling

Nevada case law on this question, under the law of many

other states, dismissal would have been improper where the

charters had been reinstated before the court ruled on the

motion or within the time period allowed by the court.8 Fur-

thermore, in somewhat analogous circumstances involving

foreign corporations, the Nevada Supreme Court recently

changed course from a strict approach to capacity to sue,

resulting in forfeitures, to a more tolerant regime. See Execu-

tive Mgmt. 38 P.3d at 876 (“Henceforth, the district court

should stay an unqualified foreign corporation’s action until

the foreign corporation qualifies. Failure to promptly qualify,

however, could result in dismissal.”).9

8

See 23 A.L.R. 5th 744 § 8[a] (1994) (“The majority of courts have held

that where the statute suspends corporate powers until compliance with the

statutory requirements is made, compliance, after suit, is sufficient to

remove the corporation’s disqualification to carry on the suit.”); see also

3 Model Bus. Corp. Act Ann. (“MBCA”) § 14.21 (2008) (providing that

an “administratively dissolved” corporation “continues its corporate exis-

tence but may not carry on any business except that necessary to wind up

and liquidate its business and affairs under section 14.05”); id. § 14.05

(stating that winding up specifically includes “collecting its assets,” and

that dissolution does not “prevent commencement of a proceeding by . . .

the corporation in its corporation name.”); cf. Executive Mgmt., 38 P.3d at

875 (noting that Nevada has adopted “parts” of the MBCA by statute). But

see 23 A.L.R. 5th 744 § 8[b] (noting that at least three states have taken

the opposite, harsher approach adopted by the bankruptcy court in this

case).

9

We note that Krause argues that, even if the rule established by Execu-

tive Management applied to domestic corporations, ASRN and SMI can-

not benefit from such a rule because they did not “promptly” obtain

reinstatement of their corporate charters. Krause would measure prompt-

IN THE MATTER OF KRAUSE 14391

The bankruptcy court and the district court correctly held

that Executive Management is not controlling precedent

because it construes a different statute, currently found at sec-

tion 80.055, governing qualification of foreign corporations

doing business in Nevada. Nonetheless, that does not make

Executive Management entirely irrelevant. The district court

further distinguished Executive Management by explaining

that “the court . . . engaged in statutory construction of N.R.S.

[section 80.055] [only] because the court found that the plain

language of the statute was ambiguous.” Unlike the ambiguity

in section 80.055, the district court found that section

78.175(2) is “unambiguous.” As noted above, however, we

disagree with the district court; in our view the term “transact

business” in section 78.175(2) is ambiguous. Moreover, in

Executive Management, the Nevada Supreme Court adopted

a “more forgiving approach” to interpretation of an ambigu-

ous forfeiture provision, choosing to avoid the “extraordinar-

ily harsh” result of dismissal and providing an opportunity for

technical defaults to be cured and cases to be decided on the

merits. See 38 P.3d at 875-76. In light of the Nevada Supreme

Court’s approach in Executive Management, the court might

apply a similar forgiving approach to the ambiguous forfeiture

provision at issue in this case. See id. at 876 (“[T]he fact that

the [Nevada] Secretary of State is willing to reinstate foreign

corporations . . . and forgive the fault in every respect . . .

[including giving complete retroactive effect to the reinstate-

ment] indicates that failing to qualify is not so egregious that

it warrants dismissal with prejudice, what is perhaps a court’s

most severe civil penalty.”); cf. Nev. Rev. Stat. § 78.180(5)

ness from either the original revocation of the charter or from the filing

of the complaint. Under Executive Management’s discussion of prompt-

ness, however, we would be inclined to hold that promptness is measured

from the point where the corporation is put on notice that its capacity to

sue is in issue, and that ASRN and SMI’s reinstatements, coming within

one month of Krause’s motion to dismiss, were therefore prompt. We, of

course, welcome any clarification that the Nevada Supreme Court may

wish to provide as to the proper measure of “promptness.”

14392 IN THE MATTER OF KRAUSE

(providing that reinstatement of domestic corporation’s

revoked charter “reinstates the corporation’s right to transact

business as if such right had at all times remained in full force

and effect”).

D. Assurance that questions of Nevada law are

dispositive

Although the issues in this appeal largely revolve around

Nevada law, Krause raises one argument of federal law

which, if correct, would moot the state-law inquiry. In a mem-

orandum disposition filed simultaneously with this order,

however, we reject that federal-law argument. Therefore, the

Nevada Supreme Court’s interpretation of Nevada law will be

determinative of this appeal.

III. Question of law

With the above discussion as a predicate, we certify to the

Nevada Supreme Court the following question of law:

Under Nevada law, may a domestic corporation

whose charter has been revoked under Nevada

Revised Statutes section 78.175(2) prosecute a law-

suit either (a) in its own corporate name or (b)

through its directors? If not, is the defendant entitled

to have such a lawsuit dismissed with prejudice, or

must the plaintiff corporation first be given a reason-

able opportunity to reinstate its charter? Cf. Execu-

tive Mgmt. Ltd. v. Ticor Title Ins. Co., 38 P.3d 872

(Nev. 2002).

We recognize that the Nevada Supreme Court may rephrase

the question as it deems necessary. Palmer v. Pioneer Inn

Assocs. Ltd., 59 P.3d 1237, 1238 (Nev. 2002) (rephrasing and

answering our certified question).

IN THE MATTER OF KRAUSE 14393

IV. Conclusion

It appears to this court that there is no controlling precedent

of the Nevada Supreme Court with regard to the determina-

tive issues of Nevada law raised by this case. We therefore

respectfully request that the Nevada Supreme Court accept

and decide the certified question. We agree that “[t]he written

opinion of the [Nevada] Supreme Court stating the law gov-

erning the questions certified . . . shall be res judicata as to the

parties.” Nev. R. App. P. 5(g).

The clerk of this court shall forward a copy of this order,

under official seal, to the Nevada Supreme Court, along with

copies of all briefs and excerpts of record that have been filed

with this court.

IT IS SO ORDERED.

Respectfully submitted, Raymond C. Fisher and Richard A.

Paez, Circuit Judges, and James L. Robart, District Judge.

__________________

Raymond C. Fisher

United States Circuit Judge, presiding

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