We are often asked by credit managers in California if there are any additional credit approval criteria to consider when a proposed customer and credit applicant is an out-of-state (“foreign”) corporation. While each case is fact-specific, there are some general factors for credit managers to consider that uniquely apply to extending open account credit terms to foreign corporations doing business in California.
Working with Foreign Corporations in California
The first step is to confirm that the corporation has registered with the California Secretary of State as a foreign corporation doing business in California. A simple search of the California Secretary of State website will provide this information. If registered, an agent for ‘service of process’ for the corporation will have been named, which is important if there is a default in payment and collection litigation is required to collect the outstanding receivable. The foreign corporation’s failure to register in California is a red flag and requires the credit manager to follow up with the credit applicant to determine the reason they have not registered, and to confirm that the corporation is validly existing and in good standing in its home state. (Again, a search of the home state website will usually provide this information.) The credit manager may still decide to grant credit and do business with a non-registered foreign corporation. However in the event of default in payment and collection litigation, service of process may become problematic because no California agent has been named.
If litigation is required to collect the outstanding receivable, venue is usually proper in the California Superior Court in the local county where the transaction took place (whether it be rental, parts, service, sale, or any other type), even if the corporate defendant is a foreign corporation. A judgment can be obtained against the foreign corporation in the California Superior Court where the case is filed even if the foreign corporation is not registered in California. However, collecting on the judgment becomes problematic if the corporation’s only assets are in its home state. (This is true whether or not it is registered in California.) If the only assets are in the corporate judgment debtor’s home state, then the creditor is required to “domesticate” the judgment in the corporate judgment debtor’s home state prior to attempting to levy on corporate assets. Domesticating the judgment in the corporate judgment debtor’s home state requires the creditor to retain local counsel in the foreign corporation’s home state to domestic the judgment and attempt to enforce the judgment. Each state has its own rules and procedures regarding domesticating out-of-state judgments. Enforcement of the judgment will be according to the laws and procedures of the corporate judgment debtor’s home state, rather than California’s laws and procedures governing enforcement of judgments laws and procedures. Domesticating a judgment is fairly common: Our firm has been engaged by out-of-state corporations in multiple cases where that corporation needs to domesticate and pursue such a judgment in California.
On the other hand, if the foreign corporation has assets that are located in California, and a judgment is obtained, then the creditor can attempt to levy on those California assets pursuant to the usual California enforcement of judgment laws, using California counsel.
Legal Advice from California Business Law Specialists
This blog is general in nature and not meant to cover any particular transaction. Each proposed transaction should be reviewed on a case-by-case basis to determine the legal and business risks involved in doing business with a foreign corporation. Contact us to discuss particular cases you may be considering or pursuing.