Murphy v. Wheatley

Boyd, J., delivered the opinion of the Court. This is an appeal from a decree of Circuit Court No. 2 of Baltimore City answering certain questions raised for the Court’s decision, under the provisions of sec. 196 of Art. 16 of the Code (1904), and dismissing the bill after the cause had been remanded under our decree reported in 100 Md. 358 .-As will be seen by reference to that case the appellants seek to hold the appellees responsible, as stockholders of the City Trust and Banking Company, under sec. 87L of chap. 109 of the Acts of 1892. The Fraternal Trust and Banking Company was chartered by the Act of 1896, chap. 344, which was approved April 4th, 1896, and the charter was amended by the Act of 1900, chap. 104, by changing the name to that of “The City Trust and Banking Company”, and by authorizing the election of twenty-five directors. No certificates of stock were issued in the original name of the company, and prior to March 24th, 1900, the subscribers only received the negotiable receipts of the company for the amount of their respective payments, which were returned and exchanged on and after March 24th, 1900, for certificates-of stock issued in the new name.

Four dividends of 2x/2 per cent each were declared by the company, beginning July 1st, 1901, and were paid to and accepted by all the defendant stockholders, whose ⁵⁰³ certificates of stock had been issued prior to June 17th, 1900. The franchise tax provided for in chapter 272 of the Acts of 1900 has never been paid by the company, but payment thereof has never been demanded by or on behalf of the State, and it was never assessed to the company, In view of the decision of the lower Court, the first question to be by us determined is whether the failure of the company to pay the franchise tax caused the corporation to cease to exist six months from June 1st, 1900, to wit, on December 1st, 1900, and thereby relieved.the defendants (appellees) from liability, under the Act of 1892, to the creditors of the corporation for debts contracted after December 1, 1900. Chap. 272 of the Acts of 1900 added three sections to Art. 23 of the Code, designated as sections 85A, 85B and 85C. The first provides that “All corporations heretofore chartered under any of the laws of this State * * * which have not within two years from the date of the granting of their charters or certificates of incorporation actually organized and began business, shall be conclusively presumed to have surrendered all corporate or charter rights, unless within six months from the first day of June, 1900, each of said corporations pay to the Treasurer of this State a franchise tax equal to one-eighth of one per cent per annum, accounting from two years after the date of the granting of such charter or certificate of incorporation, upon the amount of capital stock required to be subscribed before it is authorized to begin business, and upon payment as aforesaid, and receiving the receipt of the Comptroller therefor, the said corporate or charter rights shall continue.” Section 85B is applicable to corporations thereafter “organized.” Section 85C, after requiring corporations mentioned in section 85A to pay the franchise tax annually (after a renewal of their corporate rights and franchises) until they actually organize and begin business, then provides; “ The several corporations of the several corporations mentioned in sections 85A, 85B and 85C of this Article, shall be liable for the payment of the franchise tax imposed herein upon their respective corporations, and in the same manner as though they ⁵⁰⁴ had jointly and severally agreed to pay the same; and the State Tax Commissioner is hereby charged with the duty of carrying the provisions of said sections into effect by assessing the said franchise tax upon the several corporations in said sections required to pay the same.” This company did not actually organize and begin business within two years from the date of the granting of its charter, and therefore is within the language of the statute.

The application for the preliminary decision by the Court of the questions of law raised states that, “the requisite number of shares of capital stock having been subscribed for and fifty per cent thereof having been paid in, the said stockholders met on the 2Jth day of April, i8pp, and proceeded to organize the said corporation by the election of fifteen directors, who forthwith elected a president and other officers, and proceeded to carry on the business which the said corporation was authorized to engage in by the terms of the said charter.” It did not, however, pay its bonus tax until the 16th day of June, ipoo, but by the Act of 1900, ch. 104, approved March 24th, 1900, the Legislature amended its charter. In one of the briefs of counsel for the appellees it is said of that amendment, “This Act was undoubtedly a legislative recognition of the Trust Company as a legal entity at the time the Act was approved. And it is not questioned that the Act had that effect.” Under the decisions by this Court of the Md. Tube Works v. West End Imp. Co., 87 Md. 207 , and of Cleaveland v. Mullin, 96 Md. 598 , it cannot be denied that the company did not have the lawful right to organize and’carry on its business, until the bonus tax was paid to the State Treasurer — although in point of fact it had undertaken to organize and had been actually carrying on its business since April 27th, 1899.

But without stopping to further discuss the effect of the amendment of the charter, the‘ company was undoubtedly legally organized and was actually carrying on the business for which it was chartered on and after June 16th, 1900. In Cleaveland v.Mullin, supra, Mr. Cleaveland had applied to the president and directors for twenty- five shares of the ⁵⁰⁵ capital stock of the Atlantic Trust and Deposit Company. They replied that he had been allotted twenty-five shares under the terms of his letter of subscription, and six days afterwards he asked them to cancel his subscription. That company did not pay the bonus tax until April of the following year.

We held that the company was not capable in law of accepting the offer to subscribe, and hence he was not bound,” as there must have been two parties competent to contract before there could be a contract,” and its acceptance was “a sheer nullity;” but we added: “Being a nullity no contractual obligation arose and the appellant was in no way bound to pay for the twenty-five shares of stock for which in his letter of May twenty-fifth he offered to subscribe, unless after the payment of the bonus tax, and therefore after the corporation actually became a legal entity and was clothed with corporate powers, including the power to accept offers to subscribe to its stock, the appellant had by his own acts or conduct recognized himself as, or asserted that he was, a stockholder and the trust company had dealt with, or treated him as such.” As Mr. Cleaveland had not done any act that brought him within the exception, he was relieved. But in this case four dividends were paid to all of the defendants whose certificates had been issued prior to June i6tb, 1900, and many of them subscribed for their stock after the bonus tax was paid. The Cleaveland case was a suit by a receiver of the company to collect the amount of an alleged subscription to the stock which had not been paid, but it was in effect decided by that case that such an act as these defendants did— receiving dividends — after the payment of the bonus tax would bind them, for surely they recognized themselves as stockholders and the company dealt with them as such, when it paid and they received dividends on the stock so held by them. That being so between the corporation, or its representatives, the receiver and a stockholder, a fortiori it would be so between creditors and stockholders.

The mere nonpayment of the bonus tax prior to June 16th, 1900, cannot therefore be an obstacle in the way of recovery by the appellants. ⁵⁰⁶ The company being in legal existence with all the powers given it by the charter on and after June 16th, 1900, were its corporate or charter rights forfeited on December 1st, 190O, by reason of its failure to pay the franchise tax ? A clear distinction is made by the authorities between acts of corporations required to be done as conditions precedent to their coming into existence, and those that cause a forfeiture of charter rights and powers, after they are once legally and validly acquired. In Canal Co. v. Railroad Co., 4 G. & J. 1 , the 18th section of the Charter of the Potomac Company was under consideration. Chief Judge Buchanan, on p. 123, said: “The penalty annexed to the breach of the condition in the first clause of the 18th section was, that 'the company should not be entitled to any benefit, privilege, or advantage under the Act;' and in the last that “all the interest, &c., of the company should be forfeited and cease." Now to lose all benefit, privilege and advantage; or for all interest to be forfeited and cease would be to lose the charter itself. ” He held that what was required of the company was a condition subsequent, and, on p. 122, he thus spoke of forfeitures; “Where there is an existing corporation capable of acting, but which has been guilty of an abuse, or neglect of its franchise, or the powers committed to its trust, amounting to a cause of forfeiture, such cause of forfeiture can only be enforced by a scire facias or a quo warranto, issued at the instance of the government creating the corporation, and cannot be taken advantage of incidentally, or in any other way, or by any individual; since the government, with which alone the contract arising out of the charter is made, may waive the breach of any condition of that contract, and cannot be made to enforce the forfeiture, whether it will or no, and when it may have sufficient reason for not chosing to do so.

Until it does, and that by judicial action and not by legislation, no individual or other corporation can treat it as a forfeited franchise.” In Regents v. Williams, 9 G. & J. 365 , the same thing was said in substance, and Judge Buchanan pointed out on p. 426, when the proceeding should be by scire facias and when by quo warranto, and he said the ⁵⁰⁷ corporations fare entitled to be heard in either case before they are condemned on proceedings instituted for that purpose, which must be at the instance of the government, and in no other way." In Planters Bank v. Bank of Alexandria, 10 G. & J. 356 , language to the same effect was used, and that was while considering a provision in the charter that if the bank “shall at any time refuse to pay specie for the notes when called on, the charter shall be and is hereby declared mill and void." See also Hammond v. Strauss, 53 Md. 15 ; Musgrave v. Morrison, 54 Md. 166 ; Hodges v. Railway Co., 58 Md. 623 ; Bonaparte v. R. R. Co., 75 Md. 348 ; Md. Tube Works v. West End Imp. Co., supra, and Nicolai v. Md. Ag. An., 96 Md. 330 . In Bonaparte’s case the Court said: “.This case is not one where, forfeiture is asked to be declared.

It is a question of legal birth. If the corporation had been legally born its. life could only be forfeited, and its death declared at the instance of the State.” In Frost's Lessee v. Frostburg Coal Co., 24 How. 278 , the Supreme Court of the United States had before it a section of an Act of Assembly of Maryland which provided that where over four-fifths of the capital stock of a company, to which the Act applied, and shall have been concentrated in the hands of less than five persons “all the corporate powers and privileges granted shall cease and determine." The Supreme Court held that it did not change the provision of the charter of that company, and added: “But whether it does or not, it is unimportant to determine; for conceding that it does, a private party cannot take advantage of the forfeiture. That is a question for the soverign power, which may waive it or enforce it at its pleasure.” See also Bybee v. O. & C. R. R. Co., 139 U. S. 663 , and cases therein cited. We have thus referred at length to our own cases to show the position this Court has taken by an unbroken line of decisions — where the company was an existing, valid corporation, and a forfeiture was claimed to have been incurred, and the Supreme Court of the United States in dealing with a Maryland corporation adopted the same view.

It is true that in Nicolai v. Md. Ag. An., supra, we said “There can be no doubt ⁵⁰⁸ that the Legislature may use such language in a charter as will make a forfeiture clause self-executing, and the corporation will ipso facto cease to exist, but it requires strong and unmistakable language to work such results, and ‘in the construction of clauses prescribing a condition or contingency, the Courts seem generally opposed to that which supports a forfeiture ipso facto without judgment of dissolution in a Court proceeding,’ 9 Ency of Law, 555,” and .later in that opinion we added, that “Authorities are numerous in this-State, to the effect that no cause for forfeiture of a corporation which has actually come' into existence, can be taken advantage, of, or enforced against the corporation collaterally or incidentally, or in any other mode than by a direct proceeding instituted for that purpose.” It must be admitted that the expression used in sec. 85A quoted above is very broad, but not more so than the language referred to in Canal Co. v. Railroad, supra, or in Planters Bank v. Bank of Alexandria , or in Frost's Lessee v. Frostburg Coal Co. Yet in those cases the Courts held that the charters could only be forfeited in the instance of the State, although in them third parties were seeking to attack the charters collaterally and not, as here, stockholders who now assert that the company had surrendered all corporate or charter rights on December 1st, 1900, although they actually received dividends from its business four times after that period. In Hammond v. Straus, supra, which was a suit of a creditor against a stockholder of a State bank on his statutory liability, after holding that the defendant could not defeat an action by showing non-compliance with the requirements of the statute, unless the acts required are conditions precedent to the corporate existence, the Court used this language: “By holding otherwise parties might avail themselves of the power and privileges of a corporation, without in any manner subjecting themselves to its duties and obligations, and might set up their own neglect of duty, or willful omission to comply with the requirements of the statute, as means of discharge from all their just obligations under the law. This is forbidden by every principle of law and justice, and hence such a ⁵⁰⁹ defense could never be tolerated,” and referred to the Frost-burg Coal Co. case and others.

We are aware that many of the Courts have announced a different doctrine on the subject from that adopted in this State. Judge Thompson, in his article on corporations in 10 Cyc., says on p. 1270, “Although it has been frequently said that there are but four ways in which corporations may be dissolved, yet on a little reflection it appears that there are five ways;” (1) by the expiration of the term of existence granted; (■2) by an Act of the Legislature, where the power has been reserved; (3) by a surrender of its franchises, which is accepted, and a voluntary dissolution; (4) by loss of all its mem-bers, or of an integral part; (5) “by a forfeiture of its franchises by a judicial proceeding, usually an information in the nature of a writ of quo warranto, but sometimes, under the operations of statutes, a proceeding in a Court of equity, which at the same time winds up the corporation and distributes its assets.” On p. 1274, etc., he considers the question of forfeitures and cites many cases — some holding certain things to be ipso facto forfeitures and others taking the opposite view, and cites Canal Co. v. Railroad Co. as one of the latter class of cases. He refers to the disinclination of Courts to forfeit charters — says: “The reasons for declaring such a forfeiture must be solid, weighty and cogent,” but it is evident he was not altogether in accord with the Maryland doctrine. But with the greatest respect for the views of others, we believe the doctrine that has 'prevailed in this State for three-quarters of a century the safer one, and have no desire to depart from it.

The business in this State — large and small — is now done so largely by corporations that it behooves Courts not to encourage such conditions as are likely to arise at any time, if the views contended for by the appellees are to be sustained. As long as they are prosperous the public has little opportunity to know anything about the inside workings of corporations. It is only when the crash comes, or there are internal dissensions, that a confiding public is enlightened as to the real conditions. Stockholders may not be informed ⁵¹⁰ either, but. they at- least have more opportunity to be and oftentimes when they are not it is by reason of their own neglect.

This case illustrates the dangers of the other rule, without citing other illustrations. Here was a trust and banking company doing business in the city of Baltimore from April, . 1899, until June, 1905 — declaring dividends regularly every six months during the last two years of its existence, receiving the deposits of many people, and apparently carrying on business in the usual way. Those dealing with it had the right to rely for their protection, not only on its property but on the personal responsibility of the stockholders, and when it winds up insolvent they are met by the claim that it has not been a corporation since December 1, 1900, because it had not paid the State of Maryland $62.50 for one year, if it be treated as organized in April, 1899, or $125.00, if the organization was not until the bonus tax was paid in June, 1900, and it is contended that therefore the stockholders are relieved from all liability — because their agents did not pay the State and the State did not demand payment. If such results may follow, is it not the duty of Courts to decline to declare forfeitures of charters to be self-executing when it is possible to avoid it?

And when we have our own decisions adopting what is clearly the more equitable view, and certainly the one that best protects the public, we prefer to follow them, rather than others which in a case like this would result in great injustice to many innocent people. Adopting that course we are of the opinion that the language used in sec. 85A, does not necessarily mean that such corporations shall be conclusively presumed to have surrendered all charter rights, in every proceeding that may be before the Court, but only in those taken by the State — then there may be the conclusive presumption spoken of, on proof of the necessary facts. In other words that this language does not authorize any one but the State to have the forfeiture declared for the failure to pay it a small sum of money, as it has a perfect right to waive it and no individual can take that right from it— especially can it not be done by stockholders, in order ⁵¹¹ to relieve themselves of a liability which they voluntarily assumed. But in addition to this, there are other provisions in the statute which show that the Legislature did not intend, if we concede that it had the right to do so, that the forfeiture contemplated should be self-executing and thereby destroy valuable rights, without notice to the corporations affected, because they were guilty of doing what they had a perfect right to do —to delay the time for organization and to begin business for more than two years.

Of course ignorance of the law is no excuse, but it would be manifestly unjust to cause such results as are here contended for, by passing a retroactive law requiring payment of a tax, previously not required, without giving some notice, and the statute itself indicates that the Legislature did not intendto dosuch injustice. Sec. 85C, after expressly referring to the three sections by numbers, and making a provision that is not very intelligible as published (or as found in the copy filed with the Clerk of-this Court), concludes thus: “And the State Tax Commissioner is hereby charged with the duty of carrying the provisions of said sections into effect by assessing the said franchise tax upon the several corporations in said sections required to pay the same.” It is admitted that no such assessment was made against this company or any demand made upon it. The Tax Commissioner is an officer of the State, whose special duty is to assess corporations and his duties are mainly, if not exclusively, confined to matters connected with the taxation of corporations. He cannot legally assess property of a corporation without notice and an opportunity for it to be heard; Monticello Co. v. Baltimore City, 90 Md. 416 , and whilst we do not mean to say that the imposition of such a tax as this must necessarily be governed by that decision, there can be no doubt that justice