Dixon v. Process Corp.

Gilbert, C. J., delivered the opinion of the Court. A commercial corporation is a legal entity conceived by the mind of man and legitimated by statute for the avowed purpose of achieving a maximum profit with a minimum exposure to liability. 1 When such an entity is the parent of multiple offspring in the form of subsidiary corporations, woe unto the creditor who seeks to rip away the corporate facade in order to recover from one sibling of the corporate family ⁶⁴⁶ what is due from another in the belief that the relationship is inseparable, if not insufferable, for his is a herculean task. In the matter now before us, William E. Dixon and Ernest J. Litty failed in their bid in the Circuit Court for Prince George’s County to have that court decree that the property and assets of the appellee, The Process Corporation (TPC), were those of Process Incorporated of Maryland (PIM), so that a judgment lien against the latter would be collectable from the former. The appellants also met with an utter lack of success in their efforts to impress a trust upon the property of TPC in favor of the now defunct PIM. 2 Refusing to accept what to some may have appeared “to be inevitable defeat,” 3 and in an effort to salvage their investment, the appellants vigorously assert in this Court that Chancellor William B. Bowie erred in dismissing the amended bill of complaint at the close of the plaintiffs’-appellants’ evidence. 4 Just as strenuously, TPC asseverates that Judge Bowie was correct in taking the action that he did.

Our review of the record leads us to conclude that TPC has the better of it, and we shall affirm the dismissal of the bill. We now explain why we have reached that conclusion. THE FACTS The scenario from which this appeal arises is intricate, ofttimes confusing and, yet, probably typical of many present-day land developments. TPC was initially created as an independent body but later became one of eleven (11) known subsidiaries of the parent corporation, PIM. 5 The objective of PIM was land ⁶⁴⁷ development in various counties of Maryland.

The subsidiaries came into being with the view in mind of limiting liability to the particular corporation given life for the purpose of developing a specified tract of land. PIM conducted the management affairs of all its subsidiaries, owned the equipment they used, hired their employees, paid their office rents, and operated the payrolls and unemployment matters. PIM then charged to each subsidiary the expenses PIM incurred on their behalf. The directors were the same for all corporations, and at board meetings, any matters of the various corporations were discussed.

Minutes were kept and an undocumented set of bylaws, uniform as to all the corporations, was adopted. The stock of PIM was paid for but not issued “because of the neglect of the secretary.” Articles of incorporation for both PIM and TPC were filed with the State Department of Assessments and Taxation. In early 1972, John Healey, a law partner of Thomas A. Garland, and a friend and former employee of the appellant, William E. Dixon, contacted Dixon to solicit his investment in a proposed development in Prince George’s County known as Clinton Woods. Dixon, an attorney with extensive experience in land development and real property law, was also chairman of the board and two-thirds stock owner of The Monumental Title Company (MTC).

Dixon reviewed the plat, the purchase contract, and the construction estimates. Although Dixon was “not too much interested in who ... [Clinton Woods] was titled to,” the purchase agreement and option revealed that the contract was between TPC and the Ryland Group Incorporated. Dixon declined to invest in the Clinton Woods project. Sometime in late November or early December of 1972, Healey once again contacted Dixon.

The contact concerned the acquisition and development of a large tract of land located in Charles County and known as Maxwell Hall. Healey needed $150,000 by the end of December to purchase, engineer, and rezone a 384 acre parcel known as the Chaney ⁶⁴⁸ tract, which comprised but a portion of Maxwell Hall. Dixon was interested in the venture and contacted his friend, 6 the appellant, Litty, who had previously financed a real estate development undertaking. Litty, the owner of the Leimbach Construction Corporation, agreed to participate and to finance the venture from surplus corporate funds so that he could convert ordinary income into capital gains and thus avail Leimbach of a tax advantange.

In furtherance of the venture, Dixon and Litty formed a partnership known as Benedict Associates, whose goal was to conduct the transaction and to divide the profits “50-50.” Under the relevant terms of the transaction, the Chaney tract was to be purchased by Garland (the president of PIM and TPC) acting individually as trustee 7 for the partnership of Benedict Associates. PIM agreed to repurchase the Chaney tract from the partnership within one year. A meeting was held at the offices of PIM in Columbia, Maryland in order to discuss the development, financial details, and to close the deal. Dixon, worried that the funds to repurchase the Chaney tract would not be available within the one year period, testified that he was reassured by Garland that “[w]e own the [Clinton Woods] property,” and that it would generate the cash necessary to repurchase the Chaney land from the partners.

According to Dixon,, throughout the complex negotiations and discussions of the various development projects under way, everything was referred to as being the projects of “Process.” Dixon and Litty both told Judge Bowie that they believed one corporation, “Process,” was the owner and developer of all the real estate projects. They said that it was never explained to them, and they did not ask whether the corporation they were dealing with, PIM, held title to the Clinton Woods property. Without further investigation or ascertaining who held title to Clinton Woods, the appellants agreed to loan PIM the $150,000. ⁶⁴⁹ Execution of the Benedict Associates partnership agreement, as well as the loan agreement, including a repurchase option in PIM was on December 27, 1972. PIM, through Garland as president, signed two confessed judgment notes in favor of appellants of $35,000 and $25,000 respectively.

The option-loan agreement clearly shows that the transaction was between Dixon and Litty trading as Benedict Associates and PIM. Litty told the court that he did not bother to read the papers, and that he entered into the transaction, trusting in the expertise of his friend and partner, Dixon. A letter dated December 14, 1973, and bearing the letterhead, “Process, Incorporated,” was received by Messrs. Litty and Dixon.

The content advised the appellants that “Process Incorporated of Maryland [PIM] exercises its option to purchase the partnership interests ... [the Chaney tract].” Apparently, because of a lack of funds, the repurchase did not materialize. PIM, however, in consideration of a promissory note in the amount of $50,000 payable to Dixon and litty, executed by Garland as president of PIM, obtained a ninety (90) day extension of the December 27, 1972 agreement. Nevertheless, the repurchase was never consummated because of PIM’s fiscal embarrassment, nor were the notes paid. Appellants exercised the powers contained in the notes and obtained confessed judgments in the Circuit Court for Charles County against PIM in the amounts of $28,722.83, $40,213.05, and $56,186.17, respectively. 8 The original judgments were certified to Prince George’s County and entered of record.

Following hearings on motions to vacate, the judgments, including accrued interest, were again certified to Prince George’s County and again entered of record as an integral part of appellants’ design to establish that Clinton Woods was actually an asset of PIM. ⁶⁵⁰ Dixon related to Judge Bowie that in the latter part of 1974 or early 1975, he conducted a title search wherein he discovered, much to his dismay, that title to Clinton Woods was held by TPC and not PIM. A telephone call to Healey and independent verification by counsel confirmed the existence of PIM and TPC as two separate corporate beings. Meanwhile, MTC, of which Dixon is chairman of the board, conducted settlements on various lots at Clinton Woods. Those settlements, which were preceded by a title search, revealed that TPC held the deed to Clinton Woods.

Notwithstanding the settlement’s being conducted by MTC, Dixon disclaimed any knowledge of TPC’s ownership of the Clinton Woods property. MTC’s title abstracters apparently did not show the judgments against PIM as a lien on the TPC property until Dixon directed them to do so. Dixon then undertook to withhold money due TPC and to place it in escrow pending a determination of the true ownership of Clinton Woods. Dixon’s withholding of the funds led to an argument with Garland as president of TPC over whether TPC and PIM were one and the same.

The encounter spilled over into the circuit court. There appellants charged that Garland, an officer, director, and stockholder 9 of PIM and TPC fraudulently misrepresented that PIM had “record title” to the Clinton Woods property and that appellants relied on this assertion to their detriment as title was actually held by the subsidiary corporation, TPC. The bill urged that the separate corporate identities of PIM and TPC be disregarded, that the judgment lien against PIM also be imposed on the property of TPC, and, as we have previously stated, that a trust be impressed upon the property and assets of TPC in favor of PIM. 10 ⁶⁵¹ Judge Bowie made it unmistakable that Dixon’s testimony that he assumed the difference in the names TPC and PIM in the title search “was a typographical error” was “incredulous.” I Appellants aver that “Garland was the principal, the promoter, the dominating individual in both ... [PIM and TPC]. The corporations were his alter ego.” 11 Ergo, appellants urge that Garland’s domination of the corporations for his personal ends, without regard to their separate corporate identities should not shield TPC from liability in equity for the actions of PIM.

That argument is better tailored to fix individual liability upon Garland rather than to hold PIM and TPC liable for representing and acquiescing to the false representation that PIM owned and operated the Clinton Woods property when in fact it was an asset of the subsidiary TPC. The Court of Appeals has indicated that in an appropriate case it will hold liable in equity the “alleged chief actor” of the perpetration of a fraud “accomplished through the medium of a corporate fiction” where the principal actor “is asserted to have dominated and controlled the intervening corporate entities and, through that domination and control, to have accomplished his personal ends and enterprises.” Crocker v. Pitti, 179 Md. 52, 58 , 16 A. 2d 875, 877 (1940). See also William Danzer & Co. v. W. Maryland Ry., 164 Md. 448, 457 , 165 A. 463, 466-67 (1933). Crocker is inapposite for at least three reasons: One, Judge Bowie stated he “felt that there was not one iota of fraud in the case”; two, it is patent that the chancellor did not believe that appellants relied upon any misrepresentation by Garland that PIM owned Clinton ⁶⁵² Woods; three, assuming, arguendo, the truth of appellants’ claim that they were ignorant of the existence of TPC, that TPC was a subsidiary of PIM and that TPC owned Clinton Woods, then TPC could not be a conduit through which appellants and PIM dealt.

Under appellants’ own argument, TPC was neither the “alleged chief actor” in the purported perpetration of a fraud, nor was TPC an intervening corporate entity on whom they reasonably relied to their detriment in contracting with PIM. ⁶⁵¹ “When the business corporation is born, the lawyer is the midwife who brings it into existence; while it functions he is its philosopher, guide and friend; in trouble he is its champion, and when the end comes and the last sad rites must be performed, the lawyer becomes the undertaker who disincorporates it and makes final report to the Director of Internal Revenue.” ⁶⁵² The Court, in Bethlehem Steel Co. v. Raymond Concrete Pile Co., 141 Md. 67 , 118 A. 279 (1922), believed the “instrumentality rule” was applicable. That case involved an action against Bethlehem Steel to recover for the death of an employee caused by the negligent operation of a train owned by a railroad company which was controlled by and almost exclusively owned by Bethlehem. On appeal, the Court ruled that the trial judge’s grant of appellee’s prayer that recovery could be had against Bethlehem if the deceased was killed by a train being operated “by persons in the employ of or subject to the control of” Bethlehem was erroneous. The error was caused by the trial judge’s reference to the word “control” which might have led the jury to believe that control could be established simply through ownership of the railroad’s stock.

After an examination of the “instrumentality rule,” the Court said that in order to hold the steel company liable the jury should “be required to find that the railroad company was merely an instrumentality or adjunct of the steel company, or something to that effect....” 141 Md. at 86 , 118 A. at 285 . Unfortunately, the “instrumentality rule,” 12 as with many other guiding legal principles, is not given to a hard and fast ⁶⁵³ definition. It has, however, been summarized in 1W. Fletcher, Cyclopedia of the Law of Private Corporations § 43 (rev. perm. ed. 1974).

There it is said: “[T]he corporate entity is disregarded ... wherein it is so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation. The control necessary to invoke what is sometimes called the ‘instrumentality rule’ is not mere majority or complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal.” (Footnotes omitted.) That the parent corporation owns the subsidiary, Bethlehem Steel Co. v. Raymond Concrete Pile Co., supra at 81, 118 A. at 284 , or the stock is held by one person, does not justify a disregard of the corporate entity. Carozza v. Fed. Fin. & Credit Co., 149 Md. 223, 238 , 131 A. 332, 338 (1925); Quinn v. Quinn, 11 Md. App. 638, 648 , 276 A. 2d 425, 430 (1971). Courts have considered various alternative factors in determining whether the subsidiary constitutes a mere instrumentality of the parent corporation.

Some of those alternatives are expressed in Annot., 7 A.L.R.3d 1343 , 1355 (1966): “(1) the presence in both corporations of the same officers or directors; (2) common shareholders; (3) financial support of the subsidiary’s operations by the parent; (4) underwriting the incorporation and purchase of all of the capital stock of the subsidiary by the parent corporation; (5) the fact that the subsidiary was organized with a grossly inadequate capital structure; (6) a joint accounting and payroll system; (7) the subsidiary lacks substantial business contacts with any save the parent and operates solely with assets conveyed by the parent corporation; (8) in the financial statements of the ⁶⁵⁴ parent, the subsidiary is referred to as a division of the parent corporation or obligations are assumed to be those of the parent; (9) the property of the subsidiary is used by the parent corporation as its own; (10) the individuals who exercise operating control over the subsidiary exercise it in the interest of the parent; and (11) failure to observe the formal requirements attributable to the operation of a subsidiary.” See also H. Henn, Law of Corporations § 148 (2d ed. 1970). Garland, the president and a director of both PIM and TPC, testified that the directors for the corporations were the same, the stock of PIM was paid for but not issued, PIM owned all the equipment used by its subsidiaries, hired their employees, rented their offices, operated their payrolls and unemployment matters, and managed their affairs. At meetings of the boards of directors, inferentially, of PIM,.the business matters of the various corporations were discussed. Separate board meetings for TPC were not held.

Dixon and Litty testified that Garland asserted that the Clinton Woods property was owned by “Process,” without specifying that he was referring to the subsidiary TPC, of whose very existence appellants claimed total ignorance at the time of the December 1972 agreement. We think there was legally sufficient evidence to cast doubt as to the separate corporate identities of PIM and TPC. II Appellants’ invocation of the “instrumentality rule” nevertheless, avails them naught as Maryland law is crystalline “that the corporate entity will be disregarded only when necessary to