Ohio Court Upholds Statute Requiring Out of State Corporation to Register to Do Business or Face Dismissal of Claims

Even in this day and age of computers, the Internet, and fast moving inter-state commerce, state lines mean something. For example, many states, including Ohio, have statutes which require out of state corporations to take steps to obtain licenses or file registrations to do business within the state. At times, these states have statutes which provide that those foreign companies which have not properly registered are not eligible to pursue claims in the state’s courts. The noncompliant companies do not lose their claims altogether; rather, their claims can be dismissed without prejudice or stayed pending full compliance with the applicable statute.

This concept was at issue in the recent case cited as National Crime Reporting, Inc. v. McCord & Akamine, L.L.P. (2008), 177 Ohio App. 3d 551. National had filed a complaint against McCord alleging breach of contract and unjust enrichment. In response, McCord filed a motion to dismiss contending that National was not properly registered to do business in Ohio in violation of Ohio Revised Code Section 1703. National admitted that it had not registered but claimed that it had filed an application for registration which was pending. That application had been filed after the original complaint had been filed.

McCord’s motion to dismiss was converted into a motion for summary judgment by the court. After a hearing on the motion, the trial court granted summary judgment in favor of McCord on all claims. On appeal, National contended that the trial court erred in dismissing the claims with prejudice.

In its review, the appellate court noted that Section 1703.03 requires that foreign corporations must hold a license to do business in the state of Ohio. A corporation failing to obtain the license is prohibited from maintaining any action in Ohio courts until it has complied with the statute. While the initial motion had been a motion to dismiss, the court had converted it into a motion for summary judgment since it took evidence outside the complaint to resolve the matter. The appellate court noted that an adjudication under Rule 56 operates as a decision on the merits such that the dismissal is with prejudice. In this particular case, however, the court noted that the dismissal should be without prejudice since it was not a disposition on the merits; rather, it was a decision on a procedural issue.

The appellate court observed that similar issues had been presented in other cases which had held that a decision on the merits was inappropriate under these circumstances. The court stated that a dismissal based upon a lack of capacity to sue is a procedural issue rather than a decision on the merits of the case. The court also cited a case interpreting Ohio Revised Code Section 1329.10(B) which provides that no person doing business under a trade or fictitious name may commence an action in that trade name or fictitious name until it has registered that name with the Secretary of State. The court noted the parallels between these two statutes and also that they are procedural in application.

The bottom line was that the judgment was reversed and the trial court was directed to enter a new judgment dismissing the action but without prejudice.
The important takeaway from this case is that Ohio law requires that a foreign corporation must register with the Secretary of State in order to transact business in Ohio. Most importantly, if that action is not taken and a dispute arises, the foreign corporation cannot pursue claims for collection of an otherwise valid debt unless or until it has completed the registration process.

Since many construction companies cross borders or rivers in order to perform work in adjacent states, the company should be mindful of the impact those seemingly invisible lines have on the enforcement of their legal rights.

Posted by: David C. Olson