By Madeleine Pfefferle

On Nov. 7, 2017, the North Carolina Court of Appeals delivered a split opinion in Atlantic Coast Properties, Inc. v. Saunders, holding that a corporation’s failure to plead its legal existence and capacity to sue lacked standing to maintain a legal action. 807 S.E.2d 182 (N.C. Ct. App. 2017). The case was before the court on appeal by petitioner Atlantic Coast Properties, Inc. (“ACP”) after Judge Milton F. Fitch, Jr. granted Respondents’ motion for summary judgment in Currituck County Superior Court.

On April 7, 2006, ACP filed a petition to partition a piece of real property located in Currituck County, alleging that it possessed a one-half undivided interest. The remaining interest in the property was held by Edna May Winslow and Angerona Saunders (“Respondents”). On May 17, 2006, Winslow and Saunders answered the petition for partition alleging, among other things, that they were the sole owners of the property through adverse possession. On Oct. 16, 2013, Respondents filed a motion for summary judgment alleging that ACP lacked standing to maintain an action. On Nov. 16, 2016, the trial court granted Respondents’ motion, determining that ACP did not have the capacity to maintain the action because any act performed by ACP after the suspension of its certificate of authority was invalid and had no effect.

ACP was incorporated in Delaware on Oct. 26, 2004 and issued a certificate of authority to transact business in the state of North Carolina on Aug. 16, 2007. ACP’s corporate charter in Delaware was suspended on March 13, 2013 due to tax delinquency. On May 15, 2013, ACP’s North Carolina certificate of authority was suspended for failure to comply with Department of Revenue requirements. ACP’s registered agent was sent a notification from the North Carolina Department of the Secretary of State informing him that any act performed on behalf of ACP during the period of suspension would be invalid and have no effect.

Rule 9 of the N.C. Rules of Civil Procedure requires a party that is not a natural person make an affirmative averment showing its legal existence and capacity to sue. N.C. R. Civ. P. 9(a). Respondents contend that ACP’s initial petition failed to comply with Rule 9(a). ACP did not dispute the fact that it failed to make such an affirmative averment. The court concluded that in failing to plead its legal existence and capacity to sue, ACP, a corporation, not a natural person, failed to establish its standing to bring suit.

Beyond the procedural requirement, the court heard arguments as to whether ACP did in fact have the capacity sue. ACP argued that it was not required to have a certificate of authority to own property in the state or bring suit because a foreign corporation does not need a certificate of authority to maintain a proceeding in North Carolina courts if it is not transacting business within the General Assembly’s definition. According to the North Carolina. General Assembly, a foreign corporation is not considered to be “transacting business” for the purposes of requiring a certificate of authority by solely owning real property or solely maintaining or defending a legal action. N.C.G.S. § 55-15-01(b) (2015). ACP further cited a statute providing that the dissolution of a corporation does not abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution. N.C.G.S. § 55A-14-06(b)(5) (2015).

The Court of Appeals concluded that N.C.G.S. Section 55-15-02 specifically provides that a foreign corporation transacting business in the state may not maintain an action or proceeding unless it obtains a certificate of authority prior to trial. The court recognized that certain deficiencies may be remedied, and acknowledged that if ACP’s lack of certificate were the only thing preventing it from maintaining an action, it could have remedied the matter by obtaining a certificate prior to trial. However, the court determined that the lack of certificate was not the only thing preventing ACP from maintaining the action and that it lacked standing to bring suit. The majority opinion was not hung up on the “transacting business” language in the statute. Judge Dillion, however, in his dissenting opinion, found that argument convincing. The dissenting opinion contends that ACP did not need a certificate of authority to petition for a partition of its real estate and was not required to affirmatively aver its legal existence and capacity to sue. Judge Dillon does not believe that ACP was required comply with Rule 9(a) because ACP alleged that it was a Delaware corporation that owned real estate in North Carolina.

Based on the court’s holding, a foreign corporation must make an affirmative averment in its complaint of its legal existence and capacity to sue, and obtain a certificate of authority to transact business prior to trial, in order to properly bring an action in North Carolina state courts. ACP brought the petition to partition in 2006, prior to obtaining a certificate of authority. The court acknowledged that deficiency as a fixable one: ACP could simply obtain a certificate of authority prior to trial. However, ACP also failed to plead its legal existence and capacity to sue, which resulted in its petition being dismissed at summary judgment. ACP, as a corporation and not a natural person, was specifically required to make an affirmative averment of its legal existence and capacity to sue in its complaint in order to have standing.