Murphy v. Wheatley

• Decision Date: 09 January 1906
• Parties: MURPHY et al. v. WHEATLEY et al.
• Court: Maryland Court of Appeals

63 A. 62

102 Md. 501

MURPHY et al. v. WHEATLEY et al.

Court of Appeals of Maryland

January 9, 1906

Appeal from Circuit Court No. 2 of Baltimore City; J. Upshur Dennis Judge.

Action between John A. Murphy and others and William F. Wheatley and others. From a judgment in favor of the latter, the former appeal.

Argued before McSHERRY, C.J., and BRISCOE, BOYD, PAGE, SCHMUCKER PEARCE, JONES, and BURKE, JJ.

BOYD J.

This is an appeal from a decree of circuit court No. 2 of Baltimore City answering certain questions raised for the court's decision, under the provisions of section 196 of article 16 of the Code of 1904, and dismissing the bill after the cause had been remanded under our decree, reported in 100 Md. 358 59 A. 704. As will be seen by reference to that case, the appellants seek to hold the appellees responsible, as stockholders of the City Trust & Banking Company, under section 85 l, c. 109, p. 156, of the Acts of 1892. The Fraternal Trust & Banking Company was chartered by Acts 1896, p. 628, c. 344, which was approved April 4, 1896, and the charter was amended by Acts 1900, p. 114, c. 104, by changing the name to that of the "City Trust & Banking Company," and by authorizing the election of 25 directors. No certificates of stock were issued in the original name of the company, and prior to March 24, 1900 the subscribers only received the negotiable receipts of the company for the amount of their respective payments, which were returned and exchanged on and after March 24, 1900, for certificates of stock issued in the new name. Four dividends of 2 1/2 per cent. each were declared by the company, beginning July 1, 1901, and were paid to and accepted by all the defendant stockholders whose certificates of stock had been issued prior to June 17, 1900. The franchise tax provided for in chapter 272, p. 411, of the Acts of 1900, has never been paid by the company, but payment thereof has never been demanded by or on behalf of the state, and it was never assessed to the company.

In view of the decision of the lower court, the first question to be by us determined is whether the failure of the company to pay the franchise tax caused the corporation to cease to exist six months from June 1, 1900, to wit, on December 1, 1900, and thereby relieved the defendants (appellees) from liability, under the act of 1892, to the creditors of the corporation for debts contracted after December 1, 1900. Chapter 272, p. 411, of the Acts of 1900, added three sections to article 23 of the Code, designated as sections 85a, 85b, and 85c. The first provides that "all corporations heretofore chartered under any of the laws of this state *** which have not within two years from the date of the granting of their charters or certificates of incorporation actually organized and began business, shall be conclusively presumed to have surrendered all corporate or charter rights, unless within six months from the first day of June, 1900, each of said corporations pay to the Treasurer of this state a franchise tax equal to one-eighth of one per cent per annum, accounting from two years after the date of the granting of such charter or certificate of incorporation, upon the amount of capital stock required to be subscribed before it is authorized to begin business, and upon payment as aforesaid, and receiving the receipt of the Comptroller therefor, the said corporate or charter rights shall continue." Section 85b is applicable to corporations thereafter "organized." Section 85c, after requiring corporations mentioned in section 85a to pay the franchise tax annually (after a renewal of their corporate rights and franchises) until they actually organize and begin business, then provides: "The several corporations of the several corporations mentioned in sections 85a, 85b and 85c of this article, shall be liable for the payment of the franchise tax imposed herein upon their respective corporations, and in the same manner as though they had jointly and severally agreed to pay the same; and the state tax commissioner is hereby charged with the duty of carrying the provisions of said sections into effect by assessing the said franchise tax upon the several corporations in said sections required to pay the same." This company did not actually organize and begin business within two years from the date of the granting of its charter, and therefore is within the language of the statute. The application for the preliminary decision by the court of the questions of law raised states that "the requisite number of shares of capital stock having been subscribed for and 50 per cent. thereof having been paid in, the said stockholders met on the 27th day of April, 1899, and proceeded to organize the said corporation by the election of 15 directors, who forthwith elected a president and other officers and proceeded to carry on the business which the said corporation was authorized to engage in by the terms of the said charter." It did not, however, pay its bonus tax until the 16th day of June, 1900, but by Acts 1900, p. 114, c. 104, approved March 20, 1900, the Legislature amended its charter.

In one of the briefs of counsel for the appellees it is said of that amendment: "This act was undoubtedly a legislative recognition of the trust company as legal entity at the time the act was approved. And it is not questioned that the act had that effect." Under the decisions by this court of the Md. Tube Works v. West End Imp. Co., 87 Md. 207, 39 A. 620, 39 L. R. A. 810, and of Cleaveland v. Mullin, 96 Md. 598, 54 A. 665, it cannot be denied that the company did not have the lawful right to organize and carry on its business, until the bonus tax was paid to the State Treasurer, although in point of fact it had undertaken to organize and had been actually carrying on its business since April 27, 1899. But without stopping to further discuss the effect of the amendment of the charter, the company was undoubtedly legally organized and was actually carrying on the business for which it was chartered on and after June 16, 1900. In Cleaveland v. Mullin, supra, Mr. Cleaveland had applied to the president and directors for 25 shares of the capital stock of the Atlantic Trust & Deposit Company. They replied that he had been allotted 25 shares under the terms of his letter of subscription, and six days afterwards he asked them to cancel his subscription. That company did not pay the bonus tax until April of the following year. We held that the company was not capable in law of accepting the offer to subscribe, and hence he was not bound, as "there must have been two parties competent to contract before there could be a contract," and its acceptance was "a sheer nullity"; but we added: "Being a nullity, no contractual obligation arose and the appellant was in no way bound to pay for the 25 shares of stock for which in his letter of May 25th he offered to subscribe, unless after the payment of the bonus tax, and therefore after the corporation actually became a legal entity and was clothed with corporate powers, including the power to accept offers to subscribe to its stock, the appellant had by its own acts or conduct recognized himself as, or asserted that he was, a stockholder, and the trust company had dealt with, or treated, him as such." As Mr. Cleaveland had not done any act that brought him within the exception, he was relieved. But in this case four dividends were paid to all of the defendants whose certificates had been issued prior to June 16, 1900, and many of them subscribed for their stock after the bonus tax was paid. The Cleaveland Case was a suit by a receiver of the company to collect the amount of an alleged subscription to the stock which had not been paid, but it was in effect decided by that case that such an act as these defendants did--receiving dividends--after the payment of the bonus tax would bind them, for surely they recognized themselves as stockholders, and the company dealt with them as such, when it paid and they received dividends on the stock so held by them. That being so between the corporation, or its representative, the receiver, and a stockholder, a fortiori it would be so between creditors and stockholders. The mere nonpayment of the bonus tax prior to June 16, 1900, cannot therefore be an obstacle in the way of recovery by the appellants.

The company being in legal existence, with all the powers given it by the charter on and after June 16, 1900, were its corporate or charter rights forfeited on December 1, 1900, by reason of its failure to pay the franchise tax? A clear distinction is made by the authorities between acts of corporations required to be done as conditions precedent to their coming into existence and those that cause a forfeiture of charter rights and powers after they are once legally and validly acquired. In Canal Co. v. Railroad Co., 4 Gill & J 1, the eighteenth section of the charter of the Potomac Company was under consideration. Chief Judge Buchanan (on page 123) said: "The penalty annexed to the breach of the condition in the first clause of the eighteenth section was that 'the company should not be entitled to any benefit, privilege, or advantage under the act'; and in the last that 'all the interest, etc., of the company should be forfeited and cease.' Now, to lose all benefit, privilege, and advantage, or for all interest to be forfeited and cease, would be to lose the charter itself." He held that what was required of the company was a condition subsequent, and (on page 122) he thus spoke of forfeitures: "Where there is an existing corporation capable of acting, but which has been guilty of an abuse, or neglect of its franchise, or the powers committed to its trust, amounting to a cause of forfeiture, such cause of...