286 U.S. 334 (1932), 598, Michigan v. Michigan Trust Co.

Docket Nº:No. 598
Citation:286 U.S. 334, 52 S.Ct. 512, 76 L.Ed. 1136
Party Name:Michigan v. Michigan Trust Co.
Case Date:May 16, 1932
Court:United States Supreme Court

Page 334

286 U.S. 334 (1932)

52 S.Ct. 512, 76 L.Ed. 1136

Michigan

v.

Michigan Trust Co.

No. 598

United States Supreme Court

May 16, 1932

Argued April 19, 1932

CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Syllabus

1. The annual tax laid by § 4 of Act No. 233, Pub. Acts of Mich. 1923, upon every local corporation "for the privilege of exercising its franchise and of transacting its business within this State" has been held by the state supreme court to be a tax on the privilege to do business, not merely on the doing of it, and to be applicable where the business is being conducted by a receiver, appointed for the purpose of continuing it.

Held:

(1) The decision must be followed in a federal court receivership as a binding construction of the local law. P. 342.

(2) A decision upholding.the tax as applied to a receiver is necessarily a construction of the statute, although the statute does not mention receivers and its application to them was guided by general principles as to the effect of a receivership. P. 343.

(3) The tax should be paid by the receiver as it accrues, as part of the expense of administration, and where this was deferred until the receivership developed from a merely protective into a winding up process, the accumulated taxes must be paid in preference to the claims of creditors. P. 344.

2. Receiverships for conservation should be watched with a jealous eye to avoid inequitable results. P. 345.

3. United States v. Whitridge, 231 U.S. 144, distinguished. P. 346.

52 F.2d 842 reversed.

District Court, affirmed.

Page 335

Certiorari, 284 U.S. 616, to review the reversal of an order requiring the receiver of a corporation to pay accrued corporate franchise taxes before the claims of creditors. The order was made on petition of the state.

Page 339

CARDOZO, J., lead opinion

MR. JUSTICE CARDOZO delivered the opinion of the Court.

A petition by the people of the State of Michigan that a receiver appointed by a federal court be directed to pay out of the moneys in his hands corporate franchise taxes due or claimed to be due to the people of the state was granted by the District Court, and denied by the Court of Appeals. 52 F.2d 842. The case is here on certiorari.

At the suit of a simple contract creditor, a receiver of the property of the Worden Grocer Company, a Michigan corporation, engaged in business at its domicile, was appointed by a Federal District Court in Michigan on February 9, 1926. The bill of complaint alleged that the defendant was solvent, and that, if its business was handled by a receiver free from interference by its creditors, it would be able to pay its debts in full and would have a surplus available for preferred and common stockholders. On the same day, the directors of the defendant adopted a resolution consenting to the receivership, and an answer admitting the allegations of the bill of complaint

Page 340

and consenting to the relief prayed for was filed forthwith. Thereupon, and still on the same day, the court made an order appointing the Michigan Trust Company receiver of the defendant and of all its assets, with authority

to carry on the business now carried on by the Worden Grocer Company and to operate and manage its property and business in such manner as will, in the judgment of said Receiver, produce the most satisfactory results.

To that end, authority was granted

to pay the current and unpaid payrolls of said defendant, to incur such obligations and indebtedness, . . . the same to be prior to the present unsecured obligation

of the defendant, "as to the Receiver may seem necessary for continuance of the business," and, in particular, "to pay all taxes and assessments levied upon the property and assets of said company," as well as all rentals accrued or to accrue thereafter.

The receiver so appointed carried on the business thus committed to its charge. It continued to do this till December 30, 1929, when the court made an order confirming a sale of all the mercantile assets, as a result of which sale there was paid to the common creditors a dividend of 25 percent. Cash and unsold real estate are still in the receiver's custody.

In February, 1930, the people of the state filed in the district court a petition that the receiver be directed to pay the corporate taxes or privilege fees for the years 1925 to 1929 inclusive, amounting in the aggregate to $10,988.36. The liability of the receiver in respect of such fees or taxes is the subject of this controversy. The District Court held that they were charges upon the assets prior to the claims of creditors in that they were expenses necessarily incurred by the receiver in fulfilling the duty to operate the business. The Court of Appeals held that they were liabilities due to the people of the state, but liabilities not to be discharged until the claims

Page 341

of all other creditors, as well as the expenses of the receivership, had been satisfied in full.

By a statute of Michigan enacted in 1923 (Act No. 233, Public Acts 1923, p. 374, § 4),

every corporation organized or doing business under the laws of this state, excepting [52 S.Ct. 514] those hereinafter expressly exempted therefrom, shall at the time of filing its annual report with the secretary of state of this state, as required by section seven hereof, for the privilege of exercising its franchise and of transacting its business within this state, pay to the secretary of state an annual fee of two and one-half mills upon each dollar of its paid-up capital and surplus, but such privilege fee shall in no case be less than ten dollars nor more than fifty thousand dollars.

There were amendments of the statute in 1927 and 1929 (Act No. 140, Public Acts 1927; Act No. 175, Public Acts 1929), but their significance in relation to this controversy is not important enough to make it necessary to quote them.

The tax is laid upon the corporation "for the privilege of exercising its franchise and of transacting its business within this state." Whether a corporation does exercise its franchise or transact its business within the meaning of a statute so framed when it does business through a receiver is a subject on which much subtle argument has been expended by state and federal courts. Distinctions have been drawn between receivers appointed to carry on the business of a corporation with a view to the continuance of its corporate life and...

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