Cloverfields Improvement Assoc., Inc. v. Seabreeze Properties, Inc.

Gilbert, C. J., delivered the opinion of the Court. Cloverfields Improvement Association, Inc. (Association), one of the appellants, 1 and Seabreeze Properties, Inc. (Seabreeze), the appellee, both claim ownership by separate recorded documents to the same property. Association here contends the assignment to; it vests it with title, while Seabreeze avers the deed it received some six (6) years later is the valid document. In order to assert its ownership, Association filed a petition for a declaratory decree in the Circuit Court for Queen Anne’s County.

Following an answer by Seabreeze, ⁴²³ the matter was submitted on stipulated facts to Judge B. Hackett Turner. The trial judge decreed that Association’s assignment was a nullity, that Seabreeze was the owner of the property that Association claimed, and that Association was required to account to Seabreeze for certain monies collected by Association under the mistaken belief that they were so entitled. Before undertaking to discuss the issues presented, we shall set the scene. In 1959, David M. Nichols was a real estate developer actively engaged in Queen Anne’s County.

Among the developments undertaken by Nichols, through a corporation named Guaranteed Realty Corporation (Guaranteed), was a 337 acre area known as “Cloverfields,” located on the Chester River, Kent Island. The lots sold by Guaranteed were subject to certain restrictions, covenants, and agreements. By the terms of one clause thereof, a buyer . agreed to pay to Guaranteed or its successor “... a sum not to exceed Twenty Dollars ($20.00) per year . ..” for each lot purchased. Guaranteed agreed that it or its successor would form “... an association of the Purchasers and Owners of the lots ...” for the express “purpose of taking title to and .operating the recreational facilities.” Each purchaser/lot owner covenanted to “maintain membership” in the Association and to abide by its rules and regulations.

Guaranteed reserved unto itself the right to manage, supervise, and control all the facilities, “recreational and otherwise,” until seventy-five percent (75%) of the lots in the development had been sold. In the same year, 1959, Guaranteed conveyed the recreational facilities unto a Cloverfields Club, Inc. (Club), a corporation formed by Nichols apparently for the purpose of operating the recreational facilities. By proclamation of the Governor of Maryland, the corporate charters of Guaranteed and Club were declared to be annulled on December 2, 1964, for nonpayment of taxes and failure to file an annual report. 2 We infer that both ⁴²⁴ Guaranteed and Club failed to pay their respective annual franchise taxes. Notwithstanding the forfeiture of their charters, Guaranteed and Club purported to assign to Association, in April, 1965, “... all right, title, estate and interest in and to the annual maintenance fee established, set forth, and imposed on each of said lots....” Also, in April, 1965, Guaranteed deeded certain road ways to Association.

Earlier in time, i.e., in November of 1962, Club had assigned its right, title, and interest in the operation and maintenance of a club and recreational facilities to Association. Thereafter, Association, seemingly in reliance upon the purported assignments from Guaranteed and Club, collected the twenty dollar ($20.00) annual lot assessment charge and operated the recreational facilities. Association later discovered that Seabreeze had purchased from Olive J. Nichols and Catherine C. Wallman, “the Surviving Directors” of Guaranteed and Club, on July 2, 1971, all the remaining unsold lots in the development and, at the same time, had acquired from the surviving trustees the rights to collect the twenty dollar ($20.00) assessment and to operate the recreational facilities. From the record, we glean that Seabreeze made demand upon the lot owners for the remittance of the annual fee.

Association then brought its declaratory action. While the suit was pending, the corporate charters of Guaranteed and Club were revived on December 10, 1973, by filing “Articles of Revival” with the State Department of Assessments and Taxation of Maryland. THE APRIL 1965 DEED AND ASSIGNMENT The deed and assignment from Guaranteed to Association occurred approximately four (4) months after Guaranteed’s corporate charter had been declared forfeited. What then was the effect of the assignment?

According to H. Bruñe, Maryland Corporation Law and Practice, § 406 (rev. ed. 1953) [hereinafter referred to as Bruñe]: “The forfeiture for non-payment of taxes puts an end to the corporate existence, and the rights of ⁴²⁵ creditors become fixed at that time. The corporate assets are automatically transferred to the directors, as trustees, for use of the creditors and stockholders or members, and are held by such trustees until revival of the charter of the corporation. The directors as trustees do not incur a landowner’s liability as to property, title to which was no longer in the corporation at the time of forfeiture.’’(Footnotes omitted). (Emphasis added).

The Court of Appeals does not appear to have passed directly upon the situation presented by the unique facts of the case now before us, but, from two of its decisions, we are able to perceive what we believe would be its holding. In Atlantic Mill & Lumber Realty Co. v. Keefer, 179 Md. 496, 499-500 , 20 A. 2d 178, 180 (1941), the Court said that all power which had been granted to a corporation whose charter is forfeited is “... inoperative, null and void. This organization ... is not legally in existence as a corporation and cannot function as a corporation.” The Court stated in Callahan v. Clemens, 184 Md. 520, 528 , 41 A. 2d 473, 476 (1945), that forfeiture puts “... an end to the corporate existence.” Patently, if the corporate existence terminates upon forfeiture, and the assets are ipso facto transferred to the directors, as trustees, then the corporate officers, as officers, are devoid of authority to act for the corporation. A corporation is a creature of the State.

It owes its very being to the State. “Into its nostrils the State must breathe the breath of a fictitious life for otherwise it would be no animated body but individualistic dust.” 3 Once a corporation has been allowed to cease breathing, as through forfeiture, articles of revival 4 are the only resuscitation available to generate life in the corporate body. We hold that, inasmuch as the charters of Guaranteed and Club had been forfeited, the purported postforfeiture ⁴²⁶ corporate deed and assignment to Association, by David Nichols as president of Guaranteed and Club, were nullities and consequently of no force and effect. THE MANNER OF EXECUTION OF THE APRIL 24, 1965 DEED AND ASSIGNMENT AS AFFECTING THEIR VALIDITY Association, cognizant of the weakness of its position as a result of the postforfeiture corporate act, asserts that even if the corporate deed and assignment are nullities, the officers, David M. Nichols, president, and Catherine C. Wallman, secretary, should be held to have executed both the deed and the assignment in the capacity of surviving trustees of the defunct corporation. To bolster its position, Association relies principally upon Philbin v. Thurn ex rel.

Cook, 103 Md. 342 , 63 A. 571 (1906); State ex rel. Gable v. Cheston, 51 Md. 352 (1879); and Flickinger v. Hull, 5 Gill 60 (1847). Philbin involved a deed made by executors, who had, by a will, been named as testamentary trustees. Under the will, the executors had no power of sale, but the trustees were cloaked with that authority.

The trustees signed a deed as executors, which signing was shown to be inadvertent. Later they executed a confirmatory deed. The Court, in answer to an attack upon the first deed by a creditor, opined that where a party in possession of property has several capacities and disposes of the property in one of those capacities, the law will attribute to his disposition the proper capacity even though he does not profess to exercise it. Cheston was concerned with a deed made by executors, who, as in Philbin , were also trustees.

The executors were empowered to sell, but not to purchase. The trustees, on the other hand, could do both. As “executors,” the trustees bought and sold a certain property. When their action was assailed by litigation, the Court took the view that the deed was proper in that the law will attribute the correct authority to the act irrespective of the fact that the trustees erroneously called themselves “executors” at the time of conveyancing. ⁴²⁷ Both Philbin and Cheston were grounded on the early holding in Flickinger , wherein the Court stated: “... [W]here a man has several capacities, and is found in possession of property, the law will attach the possession to the capacity in which, of right, it ought to be held; so also, where having various capacities, he executes an authority delegated to him in one of those capacities, the law will attribute the act to the proper authority, although the person does not profess to exercise it, in virtue of that particular power.” 5 Gill at 74-75 .

One fallacy in Association’s endeavor to apply the reasoning of Philbin, Cheston, and Flickinger lies in the fact that, in each of those three cases, the persons who executed the instruments which were the subject of litigation simultaneously exercised two distinct capacities or the signing in the wrong capacity was shown to be inadvertent. In the instant case, such is not the situation. Nichols was not the president of the two corporations, Guaranteed or Club, at the time he subscribed the deed and assignment because there were no such corporations in esse. If there were no such corporations, then there could be neither a corporate president nor a corporate secretary.

Ergo, when Nichols executed the deed and assignment, he could not have done so in a dual capacity, i.e., president and trustee, because he was no longer corporate president. Moreover, it cannot be contended successfully that Nichols signed the deed and the assignment in the capacity of surviving trustee. It is manifest from the executed documents that Nichols signed as corporate president. His identification as such is beyond question.

Having signed as president, having had his signature as president attested and witnessed as such, and having acknowledged both the deed and assignment as corporate president, we would be hard pressed to hold, as Association would have us do, that Nichols was really signing in the capacity of surviving trustee. Evidence of inadvertent signing under color of the wrong office is simply not present. ⁴²⁸ There is yet a more compelling reason why the April, 1965 deed and assignment are invalid. The law of Maryland is clear that, in order for surviving trustees of an extinct corporation to pass title to what were corporate assets, the majority of the surviving trustees must act to do so. Former Md. Ann. Code art. 23, § 78 5 provided: “(a) Directors become trustees of assets until appointment of receiver. — Upon dissolution of any corporation of this State, and unless and until one or more receivers of the property and assets of the corporation have been appointed by a court of competent jurisdiction, the directors shall become and be, for purposes of liquidation, trustees of the property and assets of the corporation so dissolved.

(b) Powers of directors as trustees. — In the liquidation of the corporation and the winding up of its affairs, such trustees shall, until a receiver is appointed by such court, be vested, in their capacity as trustees, with full title to all the property and assets of the corporation. They shall proceed to collect and distribute the assets of the corporation, applying such assets to the extent available to the payment, satisfaction and discharge of existing debts and obligations of the corporation, including necessary expenses of liquidation, and distributing the remaining assets among the stockholders. They shall have power to carry out the contracts of the corporation; they may sell all or any part of the assets of the corporation at public or private sale; they may sue or be sued in their own names as trustees, or, notwithstanding such dissolution, in the name of the corporation; and they shall have power to do all other acts and things consistent with law and the charter of the corporation, necessary or appropriate to carry into effect the liquidation of the corporation and the winding up of its affairs. The will of a majority of the trustees shall govern.” ⁴²⁹ We observe that both the deed and the assignment were executed as follows: 6 As to the deed: “WITNESS: GUARANTEED REALTY CORPORATION S/ Edith H. Theraux By: S/ David M. Nichols_ President ATTEST: S/ Catherine C. Wattman Secretary (Place Corporate Seal Here) (SEAL) + + + STATE OF MARYLAND CITY OR COUNTY OF Baltimore , TO WIT: I HEREBY CERTIFY that on this 15th day of April , 1965, before me, the subscriber, a Notary Public of the State of Maryland, in and for the County or City aforesaid, personally appeared David M. Nichols , President of Guaranteed Realty Corporation, a body corporate of the State of Maryland, and he did acknowledge the aforegoing Deed to the act of said body corporate.

WITNESS my hand and Notarial Seal. (SEAL) S/ Edith H. Theraux_ Notary Public My Commission Expires: