By William T. MacMinn, Esquire Reprinted with permission from the July 27, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.

The Superior Court confirmed in the recent decision of Drake Manufacturing Company, Inc. v. Polyflow, Inc., 109 A.3d 250 (Pa. Super. 2015), that a foreign corporation doing business in Pennsylvania must be registered pursuant to 15 Pa.C.S.A. §4141(a) in order to maintain any litigation or recover any damages in the Commonwealth (15 Pa.C.S.A. §4141(a) is now enacted at 15 Pa.C.S.A. §411(a)).  The Drake case is an instructive and cautionary tale because the Defendant in that case admitted contractual liability for non-payment, but defended the case solely on the lack of capacity issue. There was no doubt that the Plaintiff was a foreign corporation doing business in Pennsylvania and had not registered as required by Pennsylvania’s Business Corporation Law.  Nevertheless, even after many years and several opportunities to obtain the Certificate of Registration, Plaintiff failed to do so until three weeks after winning a verdict in the case.

Defendant properly pled the lack of capacity defense in its Answer, renewed the argument in a motion for non-suit at the close of Plaintiff’s case, and filed post-trial motions requesting judgment n.o.v.  Three and a half years passed from the time of Plaintiff’s complaint until verdict, during which time Plaintiff did not make any effort to obtain the required Certificate.  Plaintiff presented no evidence on the capacity issue at trial, nor could it since it did not comply with the statute until three weeks later. Further, at the conclusion of the trial Plaintiff allowed the record to close instead of requesting that it be kept open to allow time to obtain and offer into evidence its Certificate of Registration.  Plaintiff only submitted its registration as a part of its rebuttal to Defendant’s Motion for Judgment N.O.V.   The trial court denied Defendant’s Motion finding that submitting the certificate during post-trial proceedings was permissible. It entered judgment against Defendant in the amount of nearly $300,000.00.

On appeal, the Superior Court reversed the lower court and remanded for entry of Judgment N.O.V. in favor of the Defendant. Holding that registration is an absolute pre-requisite for a foreign Plaintiff doing business in Pennsylvania to maintain a suit and recover damages, the Court further reasoned that the after-acquired certificate could not be accepted during post-trial proceedings, nor could the record be re-opened to accept it because it was evidence that could and should have been presented during trial.  The Court further noted that the issue of lack of capacity to sue may be raised either by Preliminary Objection or, as was done here, by Answer and New Matter and cautioned that failure to do either waives the defense. 

However, the question remains, is there an earlier time period at which waiver may attach? Notwithstanding Pa.R.C.P. 1028, there may be. In International Inventors Incorporated, East v. Berger, 363 A.2d 1262 (Pa. Super. 1976) the Plaintiff sought a preliminary injunction and damages. There the Defendant properly raised the issue of Plaintiff’s incapacity at the preliminary injunction hearing but the preliminary injunction was nevertheless granted.  On appeal, the Superior Court held this was error.  The Court explained that the trial court should have denied Plaintiff’s request for an injunction, but should also have stayed the proceedings to give Plaintiff an opportunity to register and thereby cure its lack of capacity.  Instead, the Court granted the injunction and is so doing decided “an issue” (i.e. injunctive relief) in the case and thereby allowed Plaintiff to “maintain a suit” in violation of the statute. The Court reversed the grant of the injunction.  Although Berger analyzed the issue of timeliness in the context of the Plaintiff’s compliance with registration requirements, the Court’s reasoning also supports the argument that a Defendant, who does not raise the capacity issue prior to preliminary injunctive relief being granted, similarly may have waived the issue for the life of the suit even though the time for responsive pleadings under the Rules of Civil Procedure had not expired. Thus, while the question of the Plaintiff’s capacity may not be at the forefront of case strategy analysis, Berger and Drake are a caution to counsel that the issue cannot be ignored.

Commercial lenders in Pennsylvania await action by the legislature to fix what appears to be an unintended byproduct of recent amendments to the Pennsylvania Probate, Estate and Fiduciaries (PEF) Code that went into effect earlier this year. You may be wondering what a statute that generally applies to trust and estate matters has to do with commercial lending transactions. The answer is that the recent changes applicable to powers of attorney generally could be interpreted to apply to powers of attorney granted in commercial loan documents, leases and other contracts (such as those granted in connection with confession of judgment clauses and certain other remedies). Historically, these statutory provisions did not apply to commercial agreements. It appears that the legislature was focusing on trust and estate documents when enacting this legislation and didn’t understand the impact of these amendments on commercial transactions.

These amendments are troubling from a lender’s perspective because they require that an agent must “act in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, in the principal’s best interest.” In a commercial loan transaction, the agent is the lender and the principal is the borrower, so the tension is obvious: a lender that is foreclosing on property, confessing judgment, collecting rents, or exercising Article 9 remedies  is not likely to be acting in the best interest of the borrower.

Pennsylvania House Bill #665 would amend the PEF Code to clarify that the power of attorney requirements do not apply to commercial transactions. This bill is presently in the Senate Judiciary Committee. Until this bill becomes law, lenders should consider making the following adjustments to commercial loan documents containing powers of attorney (typically these include documents with confessions of judgment, security agreements, assignments of rent, and mortgages):

• Include an acknowledgement by the borrower that its reasonable expectations include confession of judgment, foreclosure and other actions typically taken by a lender under the power of attorney;

• Include a waiver of the duties imposed by the PEF Code; and

• Add a notary page.