Lowden v. State Corp.. Comm'n.

• Decision Date: 18 February 1938
• Docket Number: No. 4214.,4214.
• Citation: 42 N.M. 254,76 P.2d 1139
• Parties: LOWDEN et al.v.STATE CORPORATION COMMISSION.
• Court: New Mexico Supreme Court

42 N.M. 254

76 P.2d 1139

LOWDEN et al.

v.STATE CORPORATION COMMISSION.

No. 4214.

Supreme Court of New Mexico.

Feb. 18, 1938.

Appeal from District Court, Santa Fe County; M. A. Otero, Jr., Judge.

Certiorari by Frank O. Lowden and others, trustees in bankruptcy of the estate of the Chicago, Rock Island & Pacific Railway Company, against the State Corporation Commission, state of New Mexico, to review a franchise tax assessment. Writ granted, and defendant appeals.

Reversed and remanded with instructions.

Trustees in bankruptcy who have been appointed to conduct the business of a foreign railroad corporation in bankruptcy during rehabilitation are subject to a state franchise tax for the privilege of doing business or for the continuance of the corporate charter within the state. Comp.St.1929, §§ 32-203, 116-201, subd. 9, 116-202, subd. 19(12), 116-501, 116-502, 116-702; Laws 1935, c. 116; c. 116, §§ 7, 9; Bankr.Act § 77 as amended 11 U.S.C.A. § 205; § 77(c) (1, 2) as amended 11 U.S.C.A. § 205(c) (1, 2); 28 U.S.C.A. § 960.

Frank H. Patton, Atty. Gen., and J. R. Modrall and Richard E. Manson, Assts. Atty. Gen., for appellant.

E. R. Wright and Donoran N. Hoover, both of Santa Fe, and W. F. Peter, of Chicago, Ill., for appellees.

PER CURIAM.

Upon rehearing the original opinion is withdrawn and the following substituted.

BRICE, Justice.

This is a companion case to Southern Pacific Co. v. State Corporation Commission, 41 N.M. 556, 72 P.2d 15, recently decided by this court. The questions involved are identical except in this case an additional one must be answered.

Accordingly, it is held that the tax assessed by virtue of chapter 116, N.M.L. 1935, is valid and properly assessed against appellee, and should be paid if trustees in bankruptcy, appointed by a federal District Court under section 77 of the Bankrutpcy Act, as amended, 11 U.SC.A. § 205, providing a means for the rehabilitation of railroad corporations, are liable therefor.

The tax in question is, “An Annual Franchise Tax on Domestic and Foreign Corporations for Profit Doing Business in This State, for the Privilege of Carrying on, Doing Business, or the Continuance of its Charter Within This State,” as expressed in the title of the act, and is, “at the rate of One ($1.00) Dollar for each One Thousand ($1,000.00) Dollars, or fraction thereof, of the par value of that proportion of its authorized and issued capital stock represented by its property and business in this state.” The tax was duly assessed against appellees and the railway company, subsequent to the filing of the bankruptcy petition.

The Chicago Rock Island & Pacific Company was granted the same privileges and franchises when it was authorized to do business in New Mexico, as though it had been incorporated under this state's laws, section 32-203, N.M.Comp.Sts.1929; among which was the right to borrow money and mortgage and pledge its property and corporate franchises as security for the payment thereof, sections 116-202 and 116-702, N.M.Comp.Sts.1929; and purchasers at foreclosure sale under such mortgages may acquire such privileges and franchises with all the rights of use and enjoyment of the mortgagor, sections 116-501, 116-502, N.M.Comp.Sts.1929, and may sell such property and such franchises so purchased to any corporation of any state or territory.

Broad powers and valuable franchises are granted by chapter 116 of N.M.Comp. Sts.1929, to railway corporations, including:

“Ninth. To enter into any obligations or contracts necessary or convenient to the transaction of its ordinary affairs, or for carrying out the purposes of the corporation; and generally, such corporation shall have and possess, for the purpose of construction, maintaining and operating its railroads and telegraph lines, and carrying on its business, all the rights, powers and privileges which are enjoyed by natural persons.” Section 116-201 (Ninth), N.M. Comp.Sts.1929.

“XII. Every railroad corporation, in addition to the foregoing, shall have such further powers as may be necessary or convenient to enable it to exercise and enjoy, fully and completely, all the powers granted by this chapter; and, generally all such powers as are usually conferred upon, required and exercised by railroad corporations; and in the exercise of its powers and every thereof, shall have and enjoy all the rights, privileges, abilities and capacities which are enjoyed by natural persons.” Section 116-202, Nineteenth (12), N.M.Comp.Sts.1929.

The act provides that these privileges and franchises shall be canceled if the tax is not paid within a time specified therein. Section 7 of chapter 116, L.1935.

It was held in Re Myley Electrical Supply Co., Inc., D.C., 291 F. 775, and in Re Century Silk Mills, Inc., D.C., 12 F.2d 292, that trustees in general bankruptcy proceedings are not liable for a franchise tax upon the theory that the trustee was not exercising the bankrupt's franchise. We do not find that the question has been decided by the Supreme Court of the United States.

The character of the tax here involved is plainly expressed in the title of the act, which we have quoted.

It is a privilege tax, not upon the right to be a corporation or to exist, and not on the actual doing of business, but for the right or privilege to do the business and exercise the franchise granted by its permit to do business in this state, whether it transacts business or not; that being a matter about which the state is not concerned in assessing the tax.

It is not unlike the tax imposed by a statute of the state of Michigan and construed in Re Detroit Properties Corporation et al., 254 Mich. 523, 236 N.W. 850, 851, in which it is said:

“The privilege fee is an excise tax, not upon the right to be a corporation, but upon the activities of the corporation in the exercise of its corporate franchise, or, as it is sometimes expressed, upon the franchise ‘to do,’ not upon the franchise ‘to be.’ * * Actual transaction of business by a domestic corporation is not a condition of the tax. It is imposed on the right to transact.”

This construction of the statute was followed in People of State of Michigan v. Michigan Trust Co., 286 U.S. 334, 52 S.Ct. 512, 515, 76 L.Ed. 1136.

But assuming that the trustees are not operating the bankrupt's property under its franchises, but only by virtue of the supreme law of the land, a subject hereafter to be considered; they have taken possession of all the property of the bankrupt; and, constructively, its franchises, with the power to sell them under foreclosure and to receive the proceeds of such sale. In the meantime the trustee is operating the railroad exactly as though it was exercising the franchises granted to the bankrupt by the state, and all assets of the corporation with which the tax could be paid is held by the trustees. In case of a sale under a mortgage, the franchise will pass to a purchaser. New Orleans, etc., Ry. Co. v. Delamore, 114 U.S. 501, 5 S.Ct. 1009, 29 L.Ed. 244.

Appellees agree that the corporation is liable to the tax notwithstanding bankruptcy proceedings, and must pay it if the title to the corporation's property is retransferred. They agreed in the oral argument on rehearing that if the property of a bankrupt is operated under section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, with title in the bankrupt, the bankrupt estate is liable to the tax; but if operated by trustees, it was contended they are not so liable, though that section, as did section 77 originally, 11 U.S.C.A. § 205 note, provides for the operation of the bankrupt's estate either with title in the bankrupt or in a trustee.

In other words, the liability to the tax, as appellees contend, depends upon the depository of title selected by the bankruptcy court for its convenience in administering the rehabilitation proceedings, rather than upon any just grounds of exemption from taxation; that the rule laid down in Re Myley Electrical Supply Co., Inc., supra, and in Re Century Silk Mills, Inc, supra, regarding general bankruptcy proceedings should apply to proceedings under section 77, 11 U. S.C.A. § 205.

It is contended, however, by appellant that proceedings under section 77 of the Bankruptcy Act differ materially in purpose and effect from those of the general bankruptcy statutes, 11 U.S.C.A. § 1 et seq.; that its primary object is not to liquidate an estate and pay or settle its indebtedness, but to rehabilitate and continue the existence of the corporation as a going concern.

The scope and purpose of section 77 of the Bankruptcy Act are the same as those of section 77B; except the latter applies to the rehabilitation of corporations other than railway. Grand Boulevard Investment Co. v. Strauss, 8 Cir., 78 F.2d 180. In regard to section 77B, 11 U.S.C.A. § 207, it was said in Re Dutch Woodcraft Shops, D.C., 14 F.Supp. 467, 469, that “obviously, the essential purpose of section 77B is to preserve and continue a going business.”

In Re Sterba, 7 Cir., 74 F.2d 413, 417, the court stated:

“The proceedings under sections 74, 75, 76, and 77 [see 11 U.S.C.A. §§ 202-205], are not the equivalent of equity receivership proceedings. They contemplate a feasible plan, promptly presented, whereby the overburdened debtor may, through creditors' cooperation (though unanimous creditor action is unnecessary) secure a scaling of debt or interest, or an extension of due date of debts.”

In Troutman et al. v. Compton, 2 Cir., 74 F.2d 734, 736, the court said:

“The apparent purpose of section 77B of the Bankruptcy Act (11 U.S.C.A. § 207), which provides for proceedings in the reorganization of a corporation and its subsidiaries, is to avoid immediate liquidation of the properties involved, and to rehabilitate rather than liquidate. In equity receiverships for conservation of assets, as heretofore known, ancillary receivers were appointed in the district, other than the domiciliary district, where the corporation had property to...