State by Furman v. Jefferson Lake Sulphur Co.

• Decision Date: 19 February 1962
• Docket Number: No. A--42,A--42
• Citation: 178 A.2d 329,36 N.J. 577
• Parties: STATE of New Jersey, by David D. FURMAN, Attorney General of the State of New Jersey, Plaintiff-Respondent, v. JEFFERSON LAKE SULPHUR COMPANY, a corporation of the State of New Jersey, Defendant-Appellant.
• Court: New Jersey Supreme Court

Page 577

36 N.J. 577

178 A.2d 329

STATE of New Jersey, by David D. FURMAN, Attorney General of the State of New Jersey, Plaintiff-Respondent, v. JEFFERSON LAKE SULPHUR COMPANY, a corporation of the State of New Jersey, Defendant-Appellant.

No. A--42.

Supreme Court of New Jersey.

Argued Nov. 21, 1961.

Decided Feb. 19, 1962.

Charles J. Kehoe, Deputy. Atty. Gen., for plaintiff-respondent (David D. Furman, Atty. Gen., attorney).

Eberhard Deutsch, New Orleans, La., for defendant-appellant (Stryker, Tams & Dill, Newark, attorneys; Arthur C. Dwyer, Newark, and Rene H. Himel, Jr., Deutsch, Kerrigan & Stiles, New Orleans, La., of counsel).

The opinion of the court was delivered by

FRANCIS, J.

The Chancery Division of the Superior Court declared invalid an amendment to the charter of the defendant corporation which was designed to circumvent the Custodial Escheat Act, L.1951, c. 304, N.J.S. 2A:37--29 et seq. N.J.S.A. The subsequent appeal from the decision was certified on our own motion before argument in the Appellate Division.

Jefferson Lake Oil Co. was incorporated in Louisiana in 1928. Later, its name was changed to Jefferson Lake Sulphur Company, Inc. Defendant Jefferson Lake Sulphur Company was created in New Jersey on March 30, 1949. The Louisiana corporation was merged into the New Jersey company on December 30, 1949. Under the merger agreement Louisiana stockholders were entitled to exchange their shares for shares of the New Jersey product corporation. It provided also that all 'debts, liabilities and duties' of both companies would survive the merger and become in all respects the obligations of the product corporation. That result would have followed in any event by operation of law. See State v. Union Bag-Camp Paper Corp., 35 N.J. 390, 173 A.2d 290 (1961).

Prior to the merger, and more particularly between 1933 and 1949, the Louisiana corporation had declared dividends on its stock. On each declaration the funds for payment were transferred to a special dividend account in a New Orleans bank. Eventually the dividends unclaimed by stockholders were deposited in one account where they remained until called for by the stock owner. Louisiana had no escheat statute which applied to these dividends.

Subsequent to the merger and down to June 5, 1953 (five years prior to institution of this action), the resulting New Jersey corporation declared dividends on its outstanding stock. In each instance the same practice was followed with respect to deposit thereof in a separate account, the depositary being a New York bank.

On July 13, 1951 New Jersey enacted the Custodial Escheat law, L.1951, c. 304, N.J.S. 2A:37--29 et seq., N.J.S.A. It provides that:

'* * * (T)he state may take into its protective custody property consisting of cash, dividends, interest or wages owed by any corporation organized and doing business under the laws of this state, belonging to any person remaining unknown, or whose whereabouts is unknown, or whose property remains unclaimed as defined herein for a period of 5 successive years; and after a period of protective custody has expired as herein prescribed, the state may proceed to escheat such property to itself.' N.J.S. 2A:37--29, N.J.S.A.

The procedure established to obtain possession of the property is a summary action in the Superior Court brought by the Attorney General in the name of the State. And the Court is authorized to direct a corporation such as defendant to deliver the property to the State Treasurer for safekeeping. N.J.S. 2A:37--30, 31, N.J.S.A. As a further aid to the effectiveness of the remedy, a specific duty was imposed upon the person having knowledge or information concerning escheatable property to notify the Attorney General within a reasonable time. N.J.S. 2A:37--42, N.J.S.A. Basically, the legislative purpose was to confer upon the State the right to possession of certain intangible personalty in ample time to avoid the application of the six-year statute of limitations (N.J.S. 2A:14--1, N.J.S.A.). State v. Union Bag-Camp Paper Corp., supra, at p. 393, 173 A.2d at p. 292. As we said in Union Bag, reasonably prompt notice is contemplated. Failure to give the notice will bar reliance on the statute of limitations. State by Parsons v. United States Steel Corp., 22 N.J. 341, 355--360, 126 A.2d 168 (1956). Thus, as a matter of public policy as projected by the Legislature, as the end of five years after the declaration of corporate dividends, the State acquires as accrued right to possession of those remaining unclaimed, a right partaking on the characteristics of an equitable lien. State v. Union Bag-Camp Paper Corp., supra, at p. 398, 173 A.2d at p. 295.

About four months after the adoption of the Custodial Escheat statute, defendant engaged in a frankly admitted effort to circumvent its application. On December 5, 1951, the Board of Directors adopted a resolution recommending amendment of the certificate of incorporation by adding Article (n) as follows:

'As to every dividend on any stock of this company or any of its predecessors, which shall remain or has remained, unpaid and unclaimed for a period of three years following the date on which it was payable, the funds set aside for payment of such unclaimed dividend shall be reclaimed by, and shall revert in full ownership to, this corporation, and the obligation of this corporation to pay such dividend shall thereupon cease; provided that the board of directors may, at any time, for any reason satisfactory to it, but need not, authorize the officers of the company to pay to the entity theretofore entitled thereto the amount of any dividend, ownership of which will have reverted to the company under the provisions hereof.'

No such provision was in the certificate of incorporation of the Louisiana company.

Further amendments, Articles (o) and (p), were recommended also. The purpose of Article (o) was to bring about a reversion of ownership to the defendant of any shares of its stock which, under the merger agreement, were to be issued in substitution for stock of the Louisiana corporation but which remained unclaimed by January 1, 1953. As of that date, such shares would be issued in the name of defendant. The aim of Article (p) was to bring about a transfer to defendant of title of any shares of defendant's stock which had been issued or were issuable as a stock dividend, or pursuant to a stock split up or any other plan of recapitalization or reorganization, whenever such shares remained unclaimed for three years. The Board of Directors was given the same discretion to issue to the original owner the stock so 'escheated' to the corporation under Articles (o) and (p) as under Article (n). Although the principle involved is the same, the validity of (o) and (p) is not specifically involved in the present litigation.

As can be seen by the Article (n) amendment, defendant in effect undertakes to establish a private escheat law for itself and to interpose it between the corporate entity and the State. Moreover, the amendment sets up the Board of Directors as a private judicial tribunal and invests it with broad discretion, unlimited as to time, to decide whether, for any reason deemed sufficient by it, payment should be made subsequent to the expiration of the three-year period to a stockholder whose unclaimed dividends have been 'escheated' to the corporation. This portion of the amendment apparently was designed to substitute for N.J.S. 2A:37--40, N.J.S.A. which authorizes the Superior Court at any time within seven years after the final judgment of escheat to reopen the proceedings and for specified reasons to direct payment to a stockholder of previously unclaimed dividends.

To accomplish the purpose of amending the charter, the Board of Directors mailed to all stockholders of defendant and of the Louisiana corporation a notice of special meeting and a proxy statement explaining the matter. The explanation of Article (n) was that its object was 'to provide that all dividends on the company's stock, unclaimed for three years after the date payable shall revert in full ownership to the company.' That statement was not accurate. The proposed amendment not only related to defendant's dividends but to those of 'any of its predecessors,' i.e., the Louisiana company, as well. Furthermore, the explanation said that the amendments ((n), (o) and (p)) were prompted by the New Jersey Escheat law, 'under which all money payable to others by New Jersey corporations, unclaimed by the owner for five years, and all other property held for others by such corporations, unclaimed by the owner for fourteen years, becomes the property of the State of New Jersey.' The inaccuracy of that information is patent. Under the act, custody of the unclaimed dividends, not title to them, is transferred to the State Treasurer at the order of the Superior Court after the five-year period. But title does not pass until at least two more years have elapsed without claim by the true owner in which event a judgment of escheat may be entered. And even upon the entry of an escheat judgment, at any time within seven additional years thereafter, the proceedings may be reopened and the stockholder's share, plus interest thereon, ordered released to him, if he did not have Actual knowledge of the escheat action. In addition to the described lack of information, the statement failed to advise of the safeguards imposed on the State as to notice to stockholders of the custodial escheat action and of the later proceeding for judgment of escheat. Even assuming that the charter change under review was not Ultra vires, in a situation where a corporation seeks to influence its stockholders to 'escheat' their property to it rather than have it pass to the State, the fiduciary status which the corporation occupies with respect to the unclaimed dividends calls for full and fair disclosure of all the relevant facts upon which the...