Hatch v. Morosco Holding Co.

• Decision Date: 18 May 1931
• Docket Number: No. 264.,264.
• Citation: 50 F.2d 138
• Parties: HATCH v. MOROSCO HOLDING CO., Inc., et al.
• Court: U.S. Court of Appeals — Second Circuit

50 F.2d 138 (1931)

HATCH v. MOROSCO HOLDING CO., Inc., et al.

No. 264.

Circuit Court of Appeals, Second Circuit.

May 18, 1931.

Ernst, Gale & Bernays, of New York City (Murray C. Bernays and Henry Gale, both of New York City, of counsel), for appellant.

George Z. Medalie, U. S. Atty., of New York City (Ernest Lappano, Asst. U. S. Atty., of New York City, C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., and Albert T. Clark, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., of counsel), for the United States.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge (after stating the facts as above).

The order appealed from allows the United States to prove as a claim against the receivership taxes assessed against Morosco Holding Company under section 280 of the Revenue Act of 1926 (44 Stat. 61 26 USCA § 1069), the validity of which this court sustained in Phillips v. Commissioner, 42 F.(2d) 177, pending on certiorari in the Supreme Court, 51 S. Ct. 82, 75 L. Ed. ___. That section imposes no new obligation upon the transferee of property of a taxpayer, but it permits collection from him, by a summary procedure, of taxes owed by the transferor, to the extent that the municipal law makes him liable at law or in equity for the transferor's taxes. See United States v. Updike, 281 U. S. 489, 493, 50 S. Ct. 367, 74 L. Ed. 984; Phillips v. Commissioner, supra; Wire Wheel Corp. v. Commissioner, 16 B. T. A. 737, affirmed by this court 46 F.(2d) 1013. The receiver concedes the correct computation of the tax, but denies that Morosco Holding Company was under any liability to pay a tax of the theatre company. This requires a consideration of the facts relied upon as creating such liability.

In December, 1916, Morosco Theatre Company acquired the lessee interest under a lease of premises in New York City known as the Morosco Theatre. The term of the lease was to run until May 31, 1927, and the rental reserved was $40,000 per year; the tenant being also obligated to pay taxes, assessments, water rentals, and insurance. The lease contained a covenant against assignment or subletting. In April, 1921, Morosco Holding Company was organized for the purpose of taking title to the stock of the theatre company, all of which was owned by Oliver Morosco and was subject to a pledge securing his personal indebtedness. Morosco forthwith contracted with the holding company to assign the stock to it, and he did so, in April, 1922, subject to the pledge. Upon its organization the holding company took possession of the leased premises, though no assignment or sublease was executed by the theatre company, and thereafter it and its receiver, after the latter's appointment in July, 1923, used the theatre until the expiration of the term in 1927 for the giving of theatrical productions for their own profit. They paid nothing to the theatre company for such use, but apparently discharged its obligations to the lessor. Early in the period of their operations, they paid out sums aggregating $150,000 to redeem the stock of the theatre company from the pledge to which Morosco had subjected it. When the holding company took possession of the premises, the lease was the sole asset of the theatre company. Thereafter the latter apparently transacted no business, though it has never been dissolved. There was expert testimony that the fair rental value of the Morosco Theatre in April, 1921, was between $45,000 and $50,000 per year. The witness also stated that from April, 1921, to June, 1927, the fair annual rental would be $45,000. For the years 1925, 1926, and 1927, net earnings from the receiver's operations in the theatre aggregated over $200,000.

The appellant contends that there was no "transfer" to the holding company, and hence section 280 is inapplicable. It is true that neither a formal assignment of the lease, nor any sublease of the premises, was executed by the theatre company; but at least there was a transfer of possession. Physical occupation of the premises passed to the holding company. The purpose of section 280 is to authorize a more efficient method of tax collection in circumstances where independently of that section the government might proceed by suit against one who had obtained property of the taxpayer. The inquiry, therefore, should not be whether there was a technical transfer of title, but whether property of the taxpayer was so dealt with as to make the holding company liable at law or in equity to the government as a creditor of the taxpayer. If it was, the holding company may properly be deemed a "transferee" within the meaning of the statute.

Although the additional taxes were not assessed against the theatre company until 1925, the obligation to pay them existed from the time the taxes for 1919 and 1920, respectively, accrued. Heyward v. United States, 2 F.(2d) 467 (C. C. A. 5); section 250, Revenue Act of 1918 (40 Stat. 1082). Hence the United States was a creditor of the theatre company during the entire period of the holding company's occupation of the leased premises. When the assets of a corporation are distributed to its shareholders leaving corporate debts unpaid, liability of the shareholders to a creditor, to the extent of the value of the assets received is beyond question. McWilliams v. Excelsior Coal Co., 298 F. 884 (C. C. A. 8); Capps Mfg. Co. v. United States, 15 F.(2d) 528 (C. C. A. 5); Angle v. Chicago, St. Paul, etc., Ry. Co., 151 U. S. 1, 15, 14 S. Ct. 240, 38 L. Ed. 55; Curran v. Arkansas, 15 How. 304, 14 L. Ed. 705; Wood v. Dummer, Fed Cas. No. 17,944; Updike v. United States, 8 F.(2d) 913 (C. C. A. 8); United States v. McHatton, 266 F. 602 (D. C. Mont.). Therefore, had the lease been assignable and formally assigned, there would be no doubt that the United States could have recovered against the holding company up to the value of the unexpired term. The result should be no different because of the form of the transaction. The sole stockholder obtained the use of the corporation's property without payment, provided the value of such use was greater than the rental paid the lessor, and such value should be accounted for to corporate creditors. See Segal v. Davis, 166 Minn. 265, 207 N. W. 620. We can see no valid basis for distinction, so far as the rights of creditors are concerned, between giving a sole stockholder possession of all the corporate assets for his own benefit, and a "distribution of assets." It is true that legal title to the leasehold interest remained in the theatre company and was subject to seizure by a judgment creditor, but so it would have been had the lease been assignable and assigned. Moffat v. Smith, 101 F. 771 (C. C. A. 8); Byrd v. Hall, 227 F. 537, 541 (C. C. A. 8).

Ordinarily, a creditor must proceed to judgment against his debtor and have an execution returned nulla bona before he can pursue third persons on his claim. Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371, 381, 14 S. Ct. 127, 37 L. Ed. 1113; Pierce v. United States, 255 U. S. 398, 41 S. Ct. 365, 65 L. Ed. 697. Such a requirement is salutary. It establishes the validity of the claim against the debtor and the necessity of resorting to an equitable remedy to reach assets of the debtor, or their avails, in the hands of the third party. But, where the debt is admitted (see Scott v. Neely, 140 U. S. 106, 113, 11 S. Ct. 712, 35 L. Ed. 358; In re Metropolitan Ry. Receivership, 208 U. S. 90, 109, 28 S. Ct. 219, 52 L. Ed. 403), and it is apparent that a judgment and execution against the debtor would be futile see United States v. Fairall (D. C.) 16 F.(2d) 328, the procedural requirement may be dispensed with. Thus, where corporate property is distributed to shareholders and the corporation is dissolved or its charter has expired, a creditor may sue the shareholders without first reducing his claim to judgment, McWilliams v. Excelsior Coal Co., 298 F. 884 (C. C. A. 8); United States v. Fairall, 16 F.(2d) 328 (D. C. S. D. N. Y.); United States v. Garbutt, 35 F.(2d) 924 (C. C. A. 10); Pann v. United States, 44 F.(2d) 321 (C. C. A. 9); nor does it matter that the dissolution occurred after the assets were distributed, Capps Mfg. Co. v. United States, 15 F.(2d) 528 (C. C. A. 5); Farley v. Lawson, 102 W. Va. 601, 135 S. E. 840.

In the present case the theatre company, though concededly dormant since 1921, has not been dissolved, and appellant contends that this is sufficient to...