Franklin Trust Co. v. State of New Jersey

• Decision Date: 30 August 1910
• Docket Number: 827.
• Citation: 181 F. 769
• Parties: FRANKLIN TRUST CO. et al. v. STATE OF NEW JERSEY. In re STEWART.
• Court: U.S. Court of Appeals — First Circuit

181 F. 769

FRANKLIN TRUST CO. et al. v. STATE OF NEW JERSEY.

In re STEWART.

No. 827.

United States Court of Appeals, First Circuit.

August 30, 1910

J Butler Studley (Brandeis, Dunbar & Nutter, on the brief), for appellants.

Arthur Lord (Arthur P. Hardy, on the brief), for the State of New Jersey.

W. G Thompson (C. F. Weed and H. G. Tucker, on the brief), for unsecured creditors.

Before PUTNAM and LOWELL, Circuit Judges, and ALDRICH, District Judge.

ALDRICH District Judge.

The taxes sought to be enforced in this case are based upon a statute of a foreign jurisdiction. They are in the nature of a franchise tax, and the decree of the Circuit Court gave them preference over unsecured local creditors in this jurisdiction.

The proposition as to what might be the status in this jurisdiction of a New Jersey tax levied upon property, under rules which exclude the idea of disproportion and arbitrary imposition, has no bearing whatever upon the question before us.

The taxes in question and the mode of assessment are admittedly arbitrary upon outstanding stock, without the remotest reference to value, and they were imposed upon an insolvent situation subsequent to proceedings in equity and subsequent to the appointment of a receiver.

The question whether taxes of the nature of those in issue shall be enforced and given preference outside the state in a suit involving the rights of creditors foreign to the jurisdiction imposing the taxes is one which concerns substantial rights, and is not to be concluded by what is called the exercise of a discretion necessarily incident to a trial; but, aside from the idea that such a question is not concluded upon grounds of discretion, and that all points come up upon appeals in equity, it is apparent that the Circuit Court, in this case, did not assume to conclude the point by determining it as one of discretion, but decided it as one involving substantive right.

It is extremely doubtful whether a tax like the one here would be upheld in New Jersey with the conditions reversed; that is to say, a tax in the nature of a fee imposed by Massachusetts upon the franchise of a corporation created in that state, with its property wholly in New Jersey, and its business being wound up in an insolvent proceeding in New Jersey. As stated in Re United States Car Co., 60 N.J.Eq. 514, 43 A. 673, a claim like the one under consideration is not a tax in the ordinary sense, but an arbitrary imposition laid upon a corporation without regard to the value of its property or of its franchises.

The corporation before us in a practical and substantial sense is an insolvent corporation, and the proceeding, since the interlocutory decree of December 4, 1905, is one to wind up the corporate affairs in Massachusetts. The corporation is a mere shell, and its existence only a technical one, and it is difficult to see equitable considerations which require that a New Jersey franchise tax or fee, characterized by its own courts as an arbitrary imposition, rather than as a just tax upon property, should be extraterritorially upheld and preferred upon equitable principles against bona fide creditors in Massachusetts who have put their money and labor and materials into the local business of the corporation. At best, under the characterization of the New Jersey courts, it is an arbitrary imposition, not a tax at all, and does not have the elements of a tax, but is something in the nature of a license fee imposed upon the corporation without regard to the value of its property or of its franchises. The corporation being one which was not to do business within the state creating it, but one which was intended to go and does go elsewhere, the so-called tax imposed upon its existence is contrary to all principles of just and 'proportional' taxation, and is, therefore, odious in an equitable if not in a legal sense.

It would seem that the latest New Jersey case, that of Ballou v. Flour Milling Co., 67 N.J.Eq. 188-191, 59 A. 331, fully sustains the view that such an arbitrary imposition would not be enforced outside of the state, because the New Jersey court there says those courts (referring to the outside courts) would neither allow the state franchise taxes which have accrued since the date of the decree of insolvency nor give priority to them if allowed, and that considerations of comity require the New Jersey courts to be governed by the rules which govern the extraterritorial courts.

It must be remembered that the proceeding here is not ancillary to one in New Jersey, but primary in this jurisdiction, and has reference to local conditions and a fund which has its situs here and which never had a situs in New Jersey, and therefore, under the doctrine and expressions of Ballou v. Flour Milling Co., 67 N.J.Eq. 191, 59 A. 331, this court surely has the right to determine what creditors have just claim to the fund in question.

Giving extraterritorial enforcement and priority to a franchise tax possessing the arbitrary, obnoxious, and discriminatory elements of the one in question would not only be contrary to principles of equity, but would be contrary to the decisions of Massachusetts, where the funds of the insolvent corporation and the equitable rights of the creditors are located-- contrary to decisions of the courts of that state in respect to her own excise laws. Oliver v. Washington Mills, 11 Allen (Mass.) 268. See, also, Com. v. Savings Bank, 123 Mass. 493. A fee or franchise tax like this has no legal status in foreign jurisdictions unless supported by statute or special equities. We fail to see any equitable considerations upholding this claim which would not exist in respect to such a claim in any winding up proceeding in an extraterritorial court.

It must be borne in mind that this is a proceeding under the general rules of equity, and not a bankruptcy case. New Jersey v. Anderson, 203 U.S. 483, 27 Sup.Ct. 137, 51 L.Ed. 284, was decided upon the broad and imperative bankruptcy section in respect to preference of taxes of all kinds, and not upon equitable considerations at all. That decision was expressly based upon the imperative force of the section of the bankruptcy act, in respect to taxes, which specifically obliges the trustee in bankruptcy to pay all taxes legally due and owing. Therefore that decision in no way touches the question whether an arbitrary imposition of this kind, though legal in the bankruptcy statutory sense, would be upheld and given priority upon general principles of equity in an equity proceeding independent of the bankrupt law. The strong dissenting opinion of Mr. Justice Harlan, the Chief Justice, and Mr. Justice Peckham does, however, deal with the question of equitable priority even in a bankruptcy case. Under the bankruptcy section in respect to taxes a license fee or franchise of the character in question doubtless has a certain legal status until the stock is surrendered and the corporation dissolved; but, when it is proposed to give it enforcement and priority over bona fide creditors of an insolvent corporation in a foreign jurisdiction upon broad principles of equity, independent of the bankruptcy statute, an entirely different question is presented.

The decree of the Circuit Court is reversed, and the case is remanded to that court with directions to enter a final decree disallowing the pending claim of the state of New Jersey for taxes; and neither party recovers costs in this court.

LOWELL, Circuit Judge, concurs in the result.

PUTNAM Circuit Judge (dissenting).

This is an appeal in equity against a direction by the Circuit Court for the District of Massachusetts for the payment by a receiver of certain taxes, arising under the statutes of New Jersey subsequently to the beginning of the proceedings by virtue of which the receiver was appointed, and, indeed, subsequently to his appointment. The appeal has been argued extensively as though it were an ordinary question of the proof of a claim against an estate in insolvency or bankruptcy, while it is not at all of that nature. It arose in connection with the administration of the estate in the hands of the receiver; and, if supported at all, it can be supported only from that point of view. Therefore, at the outset, we disregard the great mass of authorities which have been cited to us pro and con with reference to claims which can be proved against estates in insolvency or bankruptcy, or relative to priorities between such claims.

The real question is whether the amounts directed by the Circuit Court to be paid were such sums as arise during the administration of an estate in the hands of a receiver, or in connection therewith, as to which it necessarily follows that the chancellor has a certain discretion, and whether, under the circumstances, that discretion was properly exercised here. So far as the question involved has any peculiarity outside of the fundamental principles of equity applicable to the administration of estates in the hands of receivers, this appeal is practically without precedent, and without the decision of any court which authoritatively binds us. The facts are somewhat complicated, and the legal incidents which surround the main proposition as we have described it are even more complicated.

The Milford Pink Granite Quarries is a corporation organized under the laws of the state of New Jersey. It owned quarries and other real estate in Massachusetts, and also had a plant there for operating the quarries. So far as this record is concerned, no proceedings were taken in New Jersey, and no receiver of the assets of the corporation was appointed in New Jersey; and the receivership to which this appeal relates was not ancillary, but primary.

The Milford Pink Granite Quarries...