Carozza v. Federal Finance & Credit Co.

Pabke, J., delivered the opinion of the Court. The appellant, Antonio T. Carozza, was the owner of a property in Baltimore County known as “Ingleside,” and on April 29th, 1922, he and his wife, IVlargaretta' M. Oarozza, executed a mortgage conveying the same to Addison E. JVIullikin to secure an indebtedness of $50,000; and on July 10th, 1922, the mortgagors gave a mortgage lien on the same prop erty to Harry M. Rowe, Sr., as security for a contemporaneous loan of $60,000. Mr. Mullildn assigned the mortgage debt and deed on May 1st, 1922, to The Federal Finance and Credit Company and to the Baltimore Acceptance Corporation, which were his principals in the loan; and, default occurring, foreclosure proceedings were begun on June 1st, 1923. Upon the theory that the mortgage to Mullikin was without consideration, on the ground that the mortgage debt was but a renewal obligation for a portion of a former usurious charge made by the principals against Carozza, the appellants, Antonio T. Oarozza and Margaretta M. Carozza, his wife, and Harry M. Rowe, Sr., began proceedings in equity and secured an injunction against the foreclosure.

After tho bill of complaint was amended in conformity with the judgment of the chancellor on a demurrer interposed to the original complaint, answers were filed, and testimony was taken in open court and the bill of complaint was dismissed on tho proof. ²²⁶ The appellants insist that there should be a reversal because they contend that the entire mortgage debt is without consideration and is merely a renewal of a part of a formei* wholly usurious obligation which, while in the form of a purporting, corporate debt under an issue of bonds, actually was the personal loan of Antonio T. Oarozza upon hds individual credit and the security of his own property and that, by reason of his ownership of all the capital stock of the corporate obligor at the time of the creation of the debt, the corporate obligor was none other than Oarozza himself. It is also argued by the appellants that the statute providing that corporations shall not plead usury is void on constitutional grounds. These positions present issues of fact and of law, and a statement of the controlling facts will be necessary in order to grasp their significance. The Hopkins Building Corporation, a Maryland corporation that owned a lot of land at the northwest comer of St. Paul and Thirty-first Streets in Baltimore City, proposed to build and operate on this site a large apartment house to be known as the Hopkins Apartments.

The contract to build this apartment house was let to the Fisher & Oarozza Bros. Company, a corporation engaged in construction, for the sum of one million three hundred thousand dollars ($1,300,000), which included, it was said, the price of the lot and the cost of the buildings. The control of both corporations from their origin was in Antonio T. Oarozza, one of the appellants, who was their president and who was vitally concerned in their success because he was then the owner of almost all of their stock. Through the efforts of its president, Antonio T. Oarozza, the Hopkins Construction Corporation secured the agreement of the Commonwealth Finance Company to furnish, for a bonus of one hundred and eighty thousand dollars, the sum of nine hundred thousand dollars, payable in monthly instalments of specified but varying amounts, which,'with the last payment of fifty thousand dollars in Hovember, 1921, should equal the total of nine hundred thousand dollars. ²²⁷ The details of the agreement were set forth in a; paper writing or “committal” dated at Washington on April 30th, 1921, and addressed to the Hopkins Building Corporation over the signature of William A. Mills, the agent of the Commonwealth Finance Corporation.

And on this “committal” appears this endorsement: “I hereby accept the within commitment and loan and guarantee repayment of same as mentioned. This, the second day of May, 1921. “A. T. Oarozza. (Seal)” In pursuance of this agreement, the Hopkins Building Corporation, on May 9th, 1921, gave to William A. Mills, the agent of the lender, a first mortgage lien on its lot for an ostensible subsisting indebtedness from it to Mills of one million and eighty thousand dollars on its obligation in that amount and of like date with the mortgage, payable fifty thousand dollars on the first day of January, 1922, and fifty thousand dollars on the first day of every month thereafter until December 1, 1922, when the whole of the unpaid residue of the principal and the interest at the rate of six per centum per annum fell due. And in further performance of the terms under which this loan was obtained and, as a substitute for a costly corporate bond to the lender guaranteeing the completion of the apartment house when and as planned, Antonio T. Carozza and his wife gave a second mortgage, on May 5th, 1921, to the lender; on the Lake Drive Apartment House in Baltimore City, which belonged individually to Antonio T. Oarozza, and which was- subject to an outstanding mortgage of two hundred and fifty thousand dollars.

The second mortgage was in the amount of two hundred thousand dollars, without interest during a period of two years, and was to remain a lien until the Hopkins Apartments had been completed and their corporate owner had paid three hundred thousand dollars on account of the principal of the loan of one million and eighty thousand dollars. These paper writings were duly assigned by the agent, William T. Mills, to his principal, the Commonwealth Finance Company, which ²²⁸ made the first payment under this plan of fifty thousand dollars on May 5, 1921, a!nd which thereafter made monthly payments, until by October 1st, 1921, the sum of $564,-033.85 had been advanced on the promised aggregate of $900,000. The requisition of the Hopkins .Building Corporation for October 5th, 1921, was $232,249.88, but it was not forthcoming from the Commonwealth Finance Company, which promised, however, to pay in instalments of $116,124.93 on or before October 25, 1921. and of $103,716.27 on November 5, 1921. The first instalment was paid, but the second was not, and, as the Commonwealth Finance Company failed to pay anything more, the total advances made by it to the Hopkins Building Corporation aggregated $6.80,158.79.

By reason of this default, the Hopkins Building Corporation was in a most precarious situation. Under a recorded ptirporting mortgage indebtedness of $1,080,000 on an unfinished apartment, with a liability to the Fisher & Carozza Bros. Company in the sum of at least six hundred and twenty thousand dollars on account of the building of the Hopkins Apartments, and with no liquid resources and its credit impaired, the financial situation was acute, and particularly so because, of the sum due the construction company, the amount of two hundred and twenty thousand dollars was owing to sub-contractors, who were demanding a payment, which could not be met until the Hopkins Building Corporation would discharge its indebtedness to the Fisher & Carozza Bros. Company.

In this emergency two hundred and twenty thousand dollars in money had to be procured immediately in order to complete the Hopkins Apartment House. An application was made to the Federal Finance & Credit • Company and the Baltimore Acceptance Corporation, two corporations engaged in lending money. After surveying the situation, doubt arose if the mortgage of the Commonwealth Finance Corporation to secure the purporting subsisting loan of $1,080,000 was a lien on the land granted because, at the time of the ²²⁹ execution of the mortgage, the debt between the parties was but fifty thousand dollars, and the mortgage was, in fact, to obtain a lien of $1,080,000 for future advances of money to the extent only of $850,000, and there was no compliance by the mortgage with the statutory condition precedent that a mortgage to secure future loans or advances shall not be valid unless the amount or amounts of the same and the times when they are to be made shall be specifically stated in the mortgag’e. Bagby s Code, art. 66, sec. 2.

See High Grade Brick Co. v. Amos, 95 Md. 571 ; Western Nat. Bank v. Jenkins, 131 Aid. 239; Loan and Savings Ass’n v. Tracey, 142 Md. 211 . The money lenders concluded that they would grant to the Hopkins Building Corporation the desired loan of two hundred and twenty thousand dollars at six per centum interest a year for'eight, months, for a bonus of seventy-five thousand dollars, provided the principal, interest and bonus could be legally secured by a lien upon (a) the Hopkins Apartments of the borrowing corporation and (b) the Lake Drive Apartments in Baltimore City and the tract of land in Baltimore County, called “Ingleside,” which were both owned by Antonio T. Carozza. In addition, it was a part of the program to institute equity proceedings to set aside the mortgage deed of the Hopkins Building Corporation to William A. Mills to secure an alleged indebtedness of $1,080,000, that had been assigned by Mills to the Commonwealth Finance Corporation.

By these proceedings it was hoped to secure for the two lending corporations a first mortgage lien on the borrower’s property, either through a compromise settlement and release of the Commonwealth Finance Corporation’s claim on the basis of the money actually advanced, with interest, or through a cancellation by the court of the mortgage lien. The form and manner evolved for the securing of tho loan and the bonus were elaborate: 1. The Hopkins Building Corporation would issue its negotiable bonds of one thousand dollars each, dated Decern ²³⁰ ber 15th, 1921, and payable June 15th, 1922, and bearing interest at the rate of six per centum per annum, aggregating $620,000, in two series, of which Series A should be a first mortgage, and Series B should be a second mortgage lien on the property conveyed by the deed of trust securing the payment of the bonded indebtedness, and- of which Series A should aggregate $220,000, and be numbered 1 to 220, inclusive, and Series B should total $400,000, and be numbered 1 to 400, both inclusive; and the deed of trust would convey the Hopkins Apartments to secure the payment of these bonds; and the appellants, Antonio T. Carozza and Margaretta M. Carozza, his wife, “for the purpose,” as recited in the deed of trust, “of further1 securing the holders of said bonds by pledging certain property against which the lien on said properties should only be enforceable to the extent of any deficit that may arise after the enforcement of the mortgage against the property of the Hopkins Building Corporation,” would convey the Lake Drive Apartments and the tract named “Ingleside.” II. The deed of trust should recite the indebtedness of the Hopkins Building Corporation in the sum of $620,000, •the total amount of the authorized issue of bonds, to the Fisher & Carozza Bros. 'Company, for the residue of the contract price due on account of the erection of the Hopkins Apartments, and the indebtedness of the Fisher & Carozza Bros.

Company to various sub-contractors in the sum of $220;000 for work done and materials furnished in the course of the erection of the Hopkins Apartments, and the necessity of the Hopkins Building Corporation to raise this last amount, so as to pay the said sub-contractors and the additional sum of $400,000' to discharge its full liability to the Fisher & Carozza Bros. Company; and further the deed of trust should provide that the trustees certify and deliver to the Fisher & Carozza Bros. Company, “in consideration of the settlement of the indebtedness aforesaid,” all of the authorized issue of bonds, and, pending- the preparation of the permanent bonds, the Hopkins Building- Corporation ²³¹ should prepare and deliver to the trustees, for certification and delivery to the Fisher & Carozza Bros. Company temporary bonds of like tenor and form as described in tbe deed of trust, but different in amounts, as follows: (a) temporary certificate for $220,000 of Series A; (b) temporary certificate for $80,000 of Series B; and (e) temporary certificate for $320,000 of Series B. III.

When the temporary bond certificates were ready for delivery the lending corporations would pay to the Fisher & Carozza Bros. Company the sum of $220,000 as agreed, and receive therefor (1) all of the issue of first mortgage bonds, known as Series A, amounting to- $220,000 in principal, and $75,000 of the second mortgage bonds, being a part of Series B; (2) an acknowledgment by the Fisher & Oarozza Bros. Company (a) that its acceptance of Series A and B of the bonds was in full payment of all indebtedness or obligations of tbe Hopkins Building Corporation; and (b) that the entire amount due or to become due and owing to subcontractors for work or materials on tbe Hopkins xApartments does not exceed the sum of $220,000'; and that the sum received by tbe Fisher & Carozza Bros. Company from the buyers of the bonds would be used in the liquidation of all claims of such contractors, and that such buyers would have tbe right to see to the application of the purchase money for the bonds; and (3) a certificate from the Hopkins Building Corporation (a) that it had no> creditors and owed no debts other than the bonds known as Series A and B, and such amount as might be due to the Commonwealth Finance Corporation; and (b) that the issne of the bonds to the Fisher & Carozza Bros.

Company in the amount of $620,000 in Series A and B liquidated in full all of the indebtedness of the Hopkins Building Corporation to the Fisher & Carozza Bros. Company.

IV

And, immediately following the execution of the deed of trust, Antonio T. Carozza -and Margaretta M. Oarozza his wife, would enter into a contract with the Federal Finance- and Credit Company and the Baltimore Accept ²³² anee Oorporation, (1) to guarantee to these two corporations tie payment of any deficiency between the par value ($295,-000.00) and interest of the bonds and the amount received by the said corporations for the sale or redemption of said bonds on June 15th, 1922, with a stay of the enforcement of any obligation arising under this guaranty until August 15, 1922; and (2) to promise not to- dispose of or encumber any of the real estate of the guarantors, except a: property on Seminole Avenue in Catonsville, until the principal and interest of said bonds should be paid. The procedure so formulated was possible only through the complete co-operation of all the parties, and this was assured by the imperative exigency of the situation and the controlling ownership of Oarozza in both the Hopkins Building Corporation and the Fisher & Oarozza Bros. Company. The projected plan was carried through with meticulous fidelity to all the formal requirements of such corporate acts.

And on December 23rd, 1921, the Hopkins Building Oorporation, Antonio T. Oarozza and Margaretta M. Oarozza, his wife, Duke Bond and Lee S. Meyer, trustees under the deed of trust to secure the bonds, began equity proceedings against William A. Mills and the Commonwealth Finance Corporation to have declared null and void the mortgage and mortgage note given by the Hopkins Building Oorporation in the purporting- loan of $1,080,000, on the repayment by fhe Hopkins Building Oorporation of such amount as should be found due and owing. This bill of complaint was met by a counter bill of complaint of the Commonwealth Finance Corporation 'and William A. Mills, exhibited against Edwin H. Brownley, Antonio T. Oarozza, Duke Bond and Lee S. Meyer, trustees, the Hopkins Building Corporation, the Fisher & Oarozza Bros. Company and 'Margaretta M. Oa rozza, on the theory that the form of the loan of $1,080,000 and of the mortgage deed securing the same was not in accordance with the agreement and intention of the parties, and praying, among other things, that the mortgage might be reformed so as to remain a lien and be in accord with ²³³ the agreement as alleged by the complainants, and that the deed of trust to secure the $420,000 issue of bonds might be declared null and void in so far as it might in anywise affect the lien of the Commonwealth Finance Corporation. This crimination and recrimination of the adverse parties went no further than the pleadings.

With the money obtained from the two finance companies, the Hopkins Building Corporation was enabled to finish its apartment house, and this put it in a position permanently to finance its enterprise to* wards the dose of April, 1922, if the conflicting lien claims could be released and the litigation dismissed. The Metropolitan Life Insurance Company agreed to furnish $500,000 on a first mortgage lien on the Hopkins Apartments, and the Commonwealth Finance 'Corporation was willing to accept a second mortgage lien of $575,000 on the Hopkins Apartments, and a mortgage on the Lake Drive Apartments, subject to a prior mortgage of $250,000, in liquidation of a like amount of its claim. These two. loans would provide a fund of $1,075,000 to refinance the Hopkins Building Corporation, hnt this amount was insufficient to the extent of approximately $50,000. It was then that Carozza and his wife agreed to procure the necessary funds, by a loan from Addison T. Mullikin of $50,000', payable1 on August loth, 1922, without interest, and to secure the loan by a mortgage on the property called “Ingleside,” which was owned by Antonio T. Carozza, and which was subject to a prior mortgage lien of $70,000, held by the Loyola Building Association.

The preliminary authorization of the stockholders and directory of the Hopkins Building Corporation having been first obtained, the two equity causes were dismissed ; the mortgage to the Commonwealth Finance Corporation for $1,080,000 was released, and the note for that amount of the Hopkins Building Corporation surrendered and cancelled,- the mortgage to Bond & Meyer, trustees, to secure the bond issues of $640,000 was. released, and the temporary bond for $220,000 of Series A and the temporary bond for $80',000 of Series B were surrendered by the Fed ²³⁴ eral Finance & Credit Company and by tbe Baltimore Acceptance Corporation, and cancelled; and the temporary bond for $320,000 of Series B was also surrendered by tbe Fisher & Carozza Bros. Company and cancelled. Tbe Hopkins Building Corporation then executed a first mortgage lien on tbe Hopkins Apartments to secure a corporate indebtedness of $500,000 on tbe loan of tbe Metropolitan Life Insurance Company, and a second mortgage -loan on tbe Hopkins Apartments to secure a corporate indebtedness of $575,000 to tbe Commonwealth Finance Company. In tbis second mortgage, Antonio T. Carozza and bis- wife united to convey tbe Lake Drive Apartments as a further security for tbe indebtedness.

And then Antonio- T. Carozza and bis wife executed to Addison T. Mullikin their mortgage deed for an indebtedness of $50,000, payable on August 15th, 1922, without interest, and conveyed as security tbe “Ingleside” property. Tbe discount on tbis loan made it yield $49,090, and tbis amount was paid to Tbe Title Guarantee and Trust Company, which was guaranteeing the title and supervising tbe settlement, by tbe checks of tbe Federal Finance and Credit Company and the Baltimore Acceptance Corporation, for which Mr. Mullikin was acting a.s agent. Tbe relation of the parties and tbe manner o-f settlement will appear from tbe following tabulation of charges -and disbursements : Amount due the Coinmon- • wealth Finance Corporation for money advanced........$680,158.79 Interest thereon to May 1, 1922 24,836.30 $704,995.09 Bonus agreed upon 75,000.00 Total of obligation assumed..$779,995.09 Credit of portion of Title Company’s fee .... $1,250.00 ²³⁵ Ored.it of mortgage indebtedness of Hopkins Building Corp..$575,000.00 $576,250.00 Balance to Commonwealth Finance Corp...............$203,745.09 $203,745.09 Bonds held by the Federal Finance & Credit Company and Baltimore Acceptance Corporation: Series A ..............$220,000.00 Series B .............. 75,000.00 $295,000.00 Interest thereon to May 1, 1922 .................... 6,673.34 Amount due ... .-.........$301,673.34 To Federal Finance & Credit Company one-half.........$150,836.67 To Baltimore Acceptance Corporation one-half........ 150,836.67 301,673.34 Water bill ................. $155.72 Taxes on Hopkins Apartments. 20,702.06 Taxes on Lake Drive Apts.... 10,065.59 Architect’s fee of Met. Life , Ins.

Company ........... 2,542.30 Attorney for Ins. Company.. 1,500.00 Fee of Title Guarantee & Trust Company................ 2,500.00 Stamps and recording fees:... 140.05 To Edwin H. Brownley, Atty. 6,065.85 43,671.57 Total charges or disbursements....... $549,090.00 Amount of funds in hand: Amount of mortgage loan of Metropolitan Life Insurance Company.........$500,000.00 ²³⁶ Proceeds of mortgage loan of the Federal Finance & Credit Co. and of the Baltimore Acceptance Corp... 49,090.00 $549,090.00 The evidence of the records and of the paper writing are a complete denial that either the mortgage loan negotiated with the Commonwealth Finance Corporation, or the one made with the F'ederal Finance and Credit Company and the Baltimore Acceptance Corporation, wasi upon the basis of the personal credit or the individual property of the appellant, Antonio T. Oarozza. The principal debtor was in each instance the Hopkins Building Corporation, a subsisting legal entity. It is true that Oarozza conveyed1 his individual property, by both the mortgage deed and the deed of trust, to secure the payment of the debts of the principal debtor, and that he guaranteed the payment of both debts of the principal debtor.

It is doubtlessly correct to say that the loans would not have been made if he had not pledged his individual property and given his personal guaranty. Nevertheless, his obligation was that of a surety or guarantor in relation to the two mortgage loans of $1,080,000 and $620,000. Nor is it unreasonable or uncommon for a stockholder, who is the substantial owner of the corporation, to lend the credit of his guaranty or his property in an effort to prevent financial distress or ruin of the corporation. If a stockholder assumes the legal relation of a guarantor in the transactions of the corporation, he will not ordinarily be heard to deny this chosen status, and to say that a contract made in the name of the corporation, and within its competency, and as its corporate act, was not a corporate, but his own individual, act, because the corporation had ceased to exist, for the reason that he was -at the time of the apparent corporate act the solo owner of all the corporate stock.

While the appellants offered testimony tending to establish that the bond issue was a loan made by the appellees to Oarozza individually and that the Hopkins Building Corporation and the Fisher & Oarozza ²³⁷ Bros. Company were not functioning at the time as corporations, because Carozza had acquired all their outstanding stock with the knowledge and at the instance of the two finance corporations, yet the clear weight of even the oral testimony is to the contrary, and when the written evidence is considered, the conclusion is irresistible that the Hopkins Building Corporation and the Fisher & Carozza Bros. Company have never ceased to function as corporate entities. The narrative in this opinion of corporate acts need not he repeated, hut it is sufficient to say that the deed of trust from the Hopkins Building Corporation to Duke Bond and Lee S. Meyer, trustees, dated December 12th, 1921, shows by its recitals that the action taken was pursuant to and in the exercise of its corporate powers; that every requisite precedent authorization of stockholders and directors for the issue of the bonds had been duly given; that the bonds were to be issued as a corporate obligation over the corporate signature, sealed with its corporate seal and attested by its secretary, and to be delivered to the trustees by the Hopkins Building Corporation, which covenanted to pay the bonds on June 15th, 1922.

The deed of trust was signed with its corporate name by A. T. Carozza, president, sealed with its corporate seal attested by J. A. Douglas, as its secretary, acknowledged by “Antonio T. Carozza, president of the Hop kins Building Corporation,” and Edwin H. Brownley, vice-president of the Fisher & Carozza Bros. Company, made oath to the consideration being true. The temporary bonds were issued in the name of the corporation written by A. T. Carozza, as its president, and attested by J. A. Douglas, as its secretary. Hot only was it a going" concern, hut it was so affirmed in a personal guaranty of Antonio T. Carozza and wife to the two purchasers of the bonds in the amount of $295,000, when it was asserted that Carozza was interested in the Hopkins Building Corporation and would guarantee its payment of these bonds at maturity.

Again, on December 23rd, 1921, the Hopkins Building Corporation was a party plaintiff in a cause where it was alleged to be a corporation, ²³⁸ and that “the principal stockholder in the said corporation is the plaintiff, Antonio T. Oarozza,” who verified the bill of complaint in his official capacity as its president. Furthermore, the Hopkins Building Corporation filed in March, 1922, its report with the State Tax Commission of Maryland, in compliance with the statute, and1 this report gave A. T. C'arozza, with twenty shares, Edwin H. Birownley, with fourteen shares, and John A. Douglas, with one share, as its three stockholders on Januafy 1st, 1922; and was signed by John A. Douglas as its secretary and treasurer, and was impressed with the corporate seal. And finally, the Hopkins Building Corporation on May 1st, 1922, executed a mortgage on its property known as the Hopkins Apartments to the Metropolitan Life Insurance Company for $500,000, and then a second mortgage to the Commonwealth Finance Corporation for $575,000, in full and complete compliance with all the prerequisites and forms of corporate action. The equitable rule that the form of a corporate entity may be disregarded where the ownership' of all of its corporate stock is in one person is not of general application, but is commonly limited to those instances in which it becomes necessary to disregard a formal corporate existence to prevent fraud or imposition, or to enforce a paramount and superior equity.

Bellona Co.’s Case,. 3 Bland, 442 , 446; Bauernschmidt v. Bauernschmidt, 101 Md. 148, 161, 162 ; Bear Creek Lumber. Co. v. Bank, 120 Md. 566, 569-571 ; Tompkins v. Sperry, Jones & Co., 96 Md. 560, 583 ; Swift v. Smith, Dixon & Co., 65 Md. 428, 436 ; Pott & Co. v. Schmucker, 84 Md. 535