Hildreth v. Tidewater Equipment Co.

WILNER, Judge. The issue before us is whether the Circuit Court for Howard County erred in entering judgment on a corporate debt against petitioner, John Hildreth, and whether the Court of Special Appeals erred in affirming that judgment. We shall conclude that both courts were in error and shall reverse. BACKGROUND Hildreth was the sole shareholder, director, and officer of a New Jersey corporation known as HCE, Inc., which, for convenience, we shall sometimes refer to as HCE-NJ.

The corporation, formed in November, 1996, engaged in the construction business as a subcontractor on various commercial construction projects. At some point in late 1996 or 1997, HCE, Inc. began to do business in Maryland and opened an office in Columbia. 1 Although Hildreth had formed a number of other corporations in Maryland, one of which, Hildreth Contracting and Engineers, Inc., had forfeited its charter in October, 1996, he did not register HCE-NJ in this State, as required by Maryland Code, §§ 7-202, 7-202.1, or 7-203 of the Corporations and Associations Article. Those sections, respectively, require that foreign corporations register with the Maryland Department of Assessments and Taxation before doing any interstate, foreign, or intrastate business in Mary ⁷²⁸ land. Registration requires that the corporation have a resident agent in Maryland and that it certify to the Department the address of the corporation and the name and address of the resident agent.

When HCE-NJ began to do business in Maryland, there was already existing a Maryland corporation by the name of HCE, Inc., which, for convenience, we shall refer to as HCE-Md. HCE-Md, incorporated here in 1985, had no connection with the New Jersey corporation or with Hildreth and was in the business of renting portable toilets. So far as this record reveals, the two corporations had no common customers or business creditors. At some point in late 1997, HCE-Md began receiving calls from suppliers with which it had no connection, complaining about unpaid bills, as well as suit papers intended for HCE-NJ. Looking in the telephone book, HCE-Md’s president, Harry Boyce, learned of the existence of the other HCE, called the number listed, and, being unable to get through to an individual, left a message asking that the company refrain from using the name HCE.

Boyce said that he left that message twice. Ultimately, Boyce learned of Hildreth’s existence and caused HCE-Md’s attorney, in January, 1998, to write to Hildreth, complaining about HCE-NJ’s use of the HCE name and threatening legal action if such use did not cease immediately. Evidence indicated that such use did not stop, as Boyce continued to receive correspondence from creditors of HCE-NJ and even information that HCE-NJ, using the name HCE, Inc., had filed suit in a Maryland court against the Marriott Corporation. Finally, in September, 1999, HCE-NJ registered with the Department of Assessments and Taxation under the name HCE of New Jersey, Inc. The contract that led to the lawsuit against Hildreth was with respondent, Tidewater Equipment Company, Inc., which was in the business of renting cranes.

In February, 1998, HCE-NJ rented a 20-ton capacity crane from Tidewater for one or two days and paid the rental charge as agreed. In September, 1998, HCE-NJ commenced negotiations for the ⁷²⁹ long-term rental of a crane that it intended to use in connection with a construction project in Alexandria, Virginia. The initial contact was made by an employee other than Hildreth, but Hildreth was not satisfied with the price demanded by the Tidewater salesman. Hildreth then contacted and negotiated with another Tidewater representative, Frank Kolbe, and eventually received a better price.

In the course of the negotiations, Kolbe dealt with at least one other employee of HCE-NJ, Bob Condin. Condin informed Kolbe that HCE-NJ built metal walls, that its plant was in Hanover, Maryland, and that it needed the crane to load the walls on to trucks for shipment to Alexandria. Hildreth made clear he was acting for “HCE, Inc.,” but neither said nor was asked where that company was incorporated. He informed Kolbe that the company had an office in Columbia, Maryland.

Kolbe visited both the Columbia office and the Hanover job site. He testified that the company “didn’t appear to be a fly-by-night operation,” but had “a nice office suite” and “numerous employees.” The job site in Hanover was also substantial, with “a huge warehouse,” a rail siding, and “hundreds of metal building panels.” Kolbe assumed that HCE-NJ was a Maryland corporation because it had an office in Columbia. He did not order a credit report but, in agreeing to the lease, apparently relied on his site visits, his conversations with Bob Condin, his seeing the subcontracts that HCE-NJ had with the contractor, Erkile-tian Construction Corp., and Hildreth’s oral assurance that Tidewater would be paid in accordance with the quoted terms. The arrangement was memorialized in a series of daily contracts, as the equipment was needed, commencing in September, 1998.

The rental started at $500/day plus a charge for the operator, but later was reduced to $455/day plus operator. The charges were initially billed on a weekly basis but were then converted to a monthly billing. Payment was due within 30 days, with interest at 2% per month on unpaid balances. Hildreth did not sign the contracts; they were signed on behalf of HCE-NJ by some other employee.

The charges for September, October, and November, 1998, were ⁷³⁰ paid in' January and February, 1999. When payments were not received thereafter, Tidewater, in April, 1999, re-took possession of the equipment. At the time, Tidewater was owed $47,246 for the months of December, January, February, and March, and for a few days in April. In an amended complaint filed in the Circuit Court for Howard County against HCE of New Jersey, Inc., Hildreth Contractors & Engineers, Inc., and Hildreth individually, Tidewater alleged the lease of equipment and a statement of account showing $47,246 as principal due and owing, along with $7,784 in accrued interest.

The suit was for those amounts, plus daily accruing interest thenceforth and attorneys’ fees, provided for in the contracts, in the amount of 15%, or $7,086. The only allegations made against Hildreth individually were that (1) he operated a business at 9220 Rumsey Road in Columbia trading as HCE, Inc., (2) the corporation for which he acted with respect to Tidewater was “HCE of New Jersey, Inc. t/a HCE, Inc. and/or Hildreth Contractors & Engineers, Inc., t/a HCE, Inc.”, (3) he “individually and t/a HCE, Inc. acted as if he had the authority to bind HCE, Inc. to the contract which forms the basis of the instant litigation,” and (4) “he had no authority to act on behalf of the Maryland corporation known as HCE, Inc. and he is therefore personally liable for the debts incurred herein.” As the case proceeded, the court entered summary judgment in favor of Hildreth Contractors & Engineers, Inc. but against HCE-NJ. In August, 2001, a non-jury trial was held with respect to the claim against Hildreth individually. The contracts, shown to be between Tidewater and “HCE, Inc.” were stipulated, as were the amounts alleged to be due under those contracts.

It was agreed that HCE, Inc. was lawfully incorporated in New Jersey and that it eventually registered to do business in Maryland in September, 1999, under the name HCE of New Jersey, Inc., and it was also agreed that Hildreth did not sign any of the contracts with Tidewater. Tidewater’s theory of personal liability was that Hildreth was essentially an agent acting for an undisclosed principal — that he represented that he was acting for “HCE, Inc.” but that he ⁷³¹ was not, in fact, acting for that corporation because he had no authority to do so, and that he never disclosed that his real principal was the New Jersey corporation. Relying on Hill v. County Concrete, 108 Md.App. 527 , 672 A.2d 667 (1996), the Circuit Court credited that argument. The court found that Hildreth knew that there was a Maryland corporation known as HCE, Inc. and that he had no right to do business here under that name, but that Tidewater did not know there was another HCE, Inc. or that the company operated by Hildreth was a New Jersey corporation.

The court concluded that “[t]he existence of a de jure Maryland corporation with the name HCE, Inc., means John Hildreth did not fully disclose his principal, HCE, Inc., to be a New Jersey corporation, nor did he partially disclose his principal.” It found further: “As to Tidewater, the identity of the principal was not disclosed and after the notices to John Hildreth from Mr. Boyce at HCE, Inc. of Maryland and the letter from his attorney in January, 1998, his continued use of HCE, Inc. was in bad faith. Consequently, John Hildreth is personally liable on the contract to Tidewater.” Upon that finding, the court entered judgment against Hildreth, personally, for the entire corporate debt, including interest and attorneys’ fees. Hildreth appealed, arguing that (1) officers and directors of a foreign de jure corporation are not personally liable for corporate debts solely because the corporation fails to qualify to do business in Maryland, (2) the trial court erred in finding Hildreth liable as an agent for an undisclosed to partially disclosed principal, and (3) Tidewater was estopped from denying the existence of HCE-NJ when that corporation was a de jure corporation and Tidewater knew that it was dealing with a corporation. The Court of Special Appeals agreed that Hildreth was not acting as an agent for an undisclosed or partially disclosed principal and could not be held liable on that basis — the only basis asserted by the trial court.

The only thing that was not disclosed, the court pointed out, was ⁷³² the fact that the corporation in question — HCE-NJ—was a foreign corporation that had not registered to do business in Maryland. Tidewater knew that it was dealing with a corporation engaged in the construction — not the rent-a-toilet— business; it knew the actual name of the corporation and that it had offices not just in Maryland but in New Jersey and New York as well. The relationship was a contractual, not a fiduciary, one, and Hildreth therefore was under no duty to disclose HCE-NJ’s status as an unregistered foreign corporation. The intermediate appellate court also concluded that, as a general rule, officers and directors of a valid foreign corporation are not personally liable on corporate debts merely because the corporation fails to register to do business in the forum State, but, relying on a New Hampshire case, Zenane, Inc. v. Tofer, 127 N.H. 366, 499 A.2d 1347 (1985), it held that the court could impose such liability “when justice requires.” Although acknowledging that “the traditional factors justifying veil piercing are not present here,” the court determined that “this case nonetheless presents a situation in which the corporate form must be disregarded to ‘enforce a paramount equity.’ ” We granted certiorari to review that ruling.

No cross-petition was filed challenging the intermediate appellate court’s conclusion that personal liability could not rest on the Circuit Court’s determination, that Hildreth was acting as an agent for an undisclosed or partially disclosed principal, so we shall not consider that question. The only issue before us is whether there was a basis for piercing the corporate veil of HCE-NJ and imposing personal liability for the corporate obligation on Hildreth. DISCUSSION In Bart Arconti & Sons v. Ames-Ennis, 275 Md. 295, 310 , 340 A.2d 225, 234 (1975), after reviewing pronouncements in earlier cases and the then-accepted treatise on Maryland corporation law, we stated: ⁷³³ “Although a number of variations upon the same theme may be found, the most frequently enunciated rule in Maryland is that although the courts will, in a proper case, disregard the corporate entity and deal with substance rather than form, as though a corporation did not exist ... shareholders generally are not held individually liable for debts or obligations of a corporation except where it is necessary to prevent fraud or enforce a paramount equity.” That remains the law of Maryland. Stein v. Smith, 358 Md. 670, 682 , 751 A.2d 504 , (2000) (“[T]he corporate entity will be disregarded only when necessary to prevent fraud or to enforce a paramount equity.” (quoting Bart Arconti, 275 Md. at 312 , 340 A.2d at 235 )).

As the Court of Special Appeals recognized, there was no allegation here of fraud on the part of either Hildreth or HCE NJ; nor was there any evidence or finding of fraud. Personal liability rested solely upon the notion of “paramount equity,” which, in that court’s view, arose from a combination of the following circumstances: (1) Hildreth was the sole shareholder of HCE-NJ; (2) Hildreth was “personally involved” in the business transaction with Tidewater, which the court viewed as “Hil-dreth’s dirty hands”; (3) Continuing to trade as HCE, Inc. with knowledge of the existence of a Maryland corporation of that name was evidence of bad faith on Hildreth’s part; (4) Contracts made by unregistered foreign corporations, though valid, nonetheless constitute “illegal business transaction[s] on the part of the unregistered foreign corporation, for which that corporation and its agents, officers, directors, and shareholders may be penalized,” which the court characterized as “[t]he public policy