Mt. Vernon Bank & Trust Co. v. Iowa Employment Sec. Commission

• Decision Date: 19 October 1943
• Docket Number: 46346.
• Court: Iowa Supreme Court
• Parties: MT. VERNON BANK & TRUST CO. et al. v. IOWA EMPLOYMENT SECURITY COMMISSION et al.

11 N.W.2d 402

233 Iowa 1165

MT. VERNON BANK & TRUST CO. et al. v. IOWA EMPLOYMENT SECURITY COMMISSION et al.

No. 46346.

Supreme Court of Iowa

October 19, 1943

E. A. Johnson, of Cedar Rapids, for appellants.

Homer M. Lyon, of Des Moines, for appellees.

MULRONEY Chief Justice.

Plaintiffs are two Iowa banking corporations organized in 1931 and located in adjoining towns. In their petition against the Iowa Employment Security Commission they alleged that Eloise S. Thomas, as trustee, holds 640 shares (of the 1,000 outstanding) in the Lisbon Bank and 280 shares (of the 500 outstanding) in the Mount Vernon Bank; that she also owned 10 shares individually in the Lisbon Bank and 5 shares individually in the Mount Vernon Bank; that of the total outstanding shares in the two banks, 765 shares of the stock of the Lisbon Bank are owned by the same persons who own 423 shares of the Mount Vernon Bank; that the officers of the two corporations are different persons except D. U. VanMetre who is the vice president of both banks; and that neither of the banks employ as many as eight persons but the number of employees of each bank when added together does exceed eight. The petition further prayed that the attempted act of the defendants to compel plaintiffs to pay employment security taxes be enjoined on the ground that each of them employ less than eight persons and as applied to them the common ownership and control statute of the Iowa Employment Security Law (section 1551.25, subd. F, par. 4, Code of 1939) is unconstitutional under various provisions of the state and federal constitutions.

The defendants' motion to dismiss presented the legal issues of applicability and constitutionality of section 1551.25 subd. F, par. 4, Code of 1939. The trial court held it was both applicable and constitutional, sustained the motion and, after plaintiffs elected to stand on the ruling dismissed the petition.

The Iowa Employment Security Law is found in Chapter 77.2 of the 1939 Code of Iowa. In general it provides for what amounts to a tax upon employers to be paid to the defendant commission to provide benefits for periods of unemployment. Section 1551.25 provides as follows:

"Scope. As used in this chapter, unless the context clearly requires otherwise: ***

"F. 'Employer' means: 1. Any employing unit which for some portion of a day in each of fifteen different weeks within either the current or the preceding calendar year excepting the calendar year 1935 (whether or not such weeks are or were consecutive) has or had in employment eight or more individuals (not necessarily simultaneously and irrespective of whether the same individuals are or were employed in each such day); ***

"4. Any employing unit which together with one or more other employing units, is owned or controlled (by legally enforcible means or otherwise) directly or indirectly by the same interests, or which owns or controls one or more other employing units (by legally enforcible means or otherwise), and which, if treated as a single unit with such other employing unit, would be an employer under paragraph 1 of this subsection ***."

I. The two banking corporations were "controlled" by the same interest within the meaning of the above statute. Control of a corporation is lodged in the majority shareholders. We said in First National Bank v. Fireproof S. B. Co., 199 Iowa 1285, 202 N.W. 14, 17: "It is settled doctrine that every stockholder impliedly agrees, on becoming a member of the corporation, that the management and control of the corporate business and interests shall be vested in the majority."

Appellants cite the case of Benner-Coryell Lumber Co. v. Indiana Unemployment Compensation Board, 218 Ind. 20, 29 N.E.2d 776, 780, where the Indiana Supreme Court under a similar statute held "*** that in the interpretation of the act before us, control of a corporation must be regarded as something more than that remote control that arises out of the fact that a majority of the holders of its voting stock may dictate who its directors shall be."

But we think the holding in the Benner-Coryell case was well answered in State v. Kitsap County Bank, 10 Wash.2d 520, 117 P.2d 228, 233, where the Washington Supreme Court, in speaking of the conclusion in the Benner-Coryell case, stated: "Such a construction of the statute would render the administration of the law extremely difficult and complicated, as well as uncertain. The power of control unexercised would call for one classification, and a change of policy, including the exercise of the control, would require another. In view of the necessity for an established administrative policy, it would seem that the power of control and control should be held to mean the same thing."

In Maine Unemployment Compensation Commission v. Androscoggin Junior, Inc., 137 Me. 154, 16 A.2d 252, 256, the court in interpreting a similar statute stated: "The control required is not necessarily that legally enforcible. *** Financially he [majority stockholder] had more in the corporation than either of the other stockholders. Owning the majority of the stock, he could control the election of the company's officers and determine its policies through the agencies of those so elected."

In Unemployment Compensation Commission v. City Ice & Coal Co., 216 N.C. 6, 3 S.E.2d 290, 292, the court in interpreting a similar statute stated: "*** when that individual or group having such control of a corporation likewise has similar control of one or more affiliated and related corporations (as in the instant case), these corporations-using the plain, natural and ordinarily-accepted meanings of the words-are said to be 'controlled by the same interests.' ***"

The Iowa common ownership and control statute is a definition statute. The legislature has supplied the glossary which is to be used by all who seek to define the word "employer." The term "employer" is given a meaning that might include our ordinary conception of two employers. But the legislature's right to define the terms in the statute in the way it sees fit is unlimited save by constitutional prohibitions. See Unemployment Compensation Commission v. National Life Ins. Co., 219 N.C. 576, 14 S.E.2d 689, 695, where the court stated: "We think it is self-evident that the legislature, for the purpose of levying the tax, may determine what shall constitute employment subject to taxation, without regard to existing definitions or categories."

Since the majority stockholder and stockholders of the two plaintiff corporations are the same, we hold that the language of the act plainly brings the plaintiffs within its terms and we pass to other questions to determine whether, with such an interpretation, the statute violates rights guaranteed to plaintiffs by the state and federal constitutions.

II. Plaintiffs argue that the statute violates section 10, article I of the Constitution of the United States, prohibiting impairment of the obligations of contracts, because the stockholders are not so related to the corporate entity as to be considered a part of it and it is a violation of the contract or charter between the state and the corporation to look behind the corporate entity for the purpose of imposing the tax liability based upon the actual ownership of the stock. A similar prohibition against a law impairing the obligation of contracts is found in section 21, article I of the Iowa Constitution. In Rodemacher v. Milwaukee & St. Paul Ry. Co., 41 Iowa 297, 20 Am.Rep. 592, we held that a statute fastening liability on a railway for damages resulting from fires caused by the operation of the railway was constitutional. In that case it was argued "*** that the statute in question *** impairs the contract existing between the state and the corporation under which its charter is conferred." In answer to the argument we there stated: "But there is no implied contract between a state and a corporation that there shall be no change in the laws existing at the time of the incorporation which shall render the use of the franchise more burdensome or less lucrative, any more than there is between the state and an individual that the laws existing at the time of the acquisition of property shall remain perpetually in force."

In New Haven Metal & Heating Supply Co. v. Danaher, 128 Conn. 213, 21 A.2d 383, 388, the same attack of unconstitutionality was made against the common ownership and control provision of the Connecticut Unemployment Compensation Act and there the court quoted the following from an earlier Connecticut case (Converse, Receiver v. Aetna National Bank, 79 Conn. 163, 64 A. 341, 7 Ann.Cas. 75): "'A corporation organized under general incorporation laws, whether there be or be not a statutory reservation of a power of amendment or repeal, holds its franchises necessarily subject to the right of the state to change those general laws and their application to existing corporations in any manner not prejudicial to vested interests of the latter or of its creditors or stockholders, nor inconsistent with the terms of the implied contract of the latter."'

It will also be noted that under section 8376, Code of 1939, the state reserves the right to alter corporate charters. We hold that the statute is not unconstitutional as impairing the obligation of contract.

III. Plaintiffs' chief attack upon the constitutionality of paragraph 4 goes to the "equal rights and privileges" and "due process" clauses of the federal and state constitutions. Sections 6 and 9, Art. I of the Iowa Constitution, and the Fourteenth Amendment to the Constitution of the United States. Here, the basic charge of unconstitutionality is that the statute is arbitrary and discriminatory. Plaintiffs argue that the statute denies...