State v. Surety Corp. of America

• Decision Date: 25 July 1932
• Citation: 162 A. 852,19 Del.Ch. 17
• Court: Court of Chancery of Delaware
• Parties: STATE OF DELAWARE, v. SURETY CORPORATION OF AMERICA, a corporation of the State of Delaware

162 A. 852

19 Del.Ch. 17

STATE OF DELAWARE, v. SURETY CORPORATION OF AMERICA, a corporation of the State of Delaware

Court of Chancery of Delaware, New Castle

July 25, 1932

RECEIVERSHIP: Exceptions to two claims. One of the claims excepted to is that of the State for annual franchise taxes assessed against the defendant corporation for the years 1923 to 1930, inclusive, and for a penalty for failure of the corporation to file the annual report for the years 1929 and 1930. The other claim is that of Beneficial Loan Society for $ 1,350, being the amount due under a surety bond alleged to have been executed by the defendant to cover defalcations of certain of the claimant's employees; and for $ 2,519.32 being return of premiums paid for surety bonds, pro rated from date of bonds to March 21, 1924, the date when the receivers were appointed.

A bill for receiver was filed by the State against the defendant on March 8, 1924, under the provisions of Sections 573 and 614, Revised Code 1915. On March 21, 1924, the corporation answered by joining in the prayers of the bill and on the same day a receiver was appointed.

William H. Foulk, Deputy Attorney General, for the State.

William H. Foulk, for claimant Beneficial Loan Society.

Caleb S. Layton, of the firm of Richards, Layton & Finger, for receiver, the exceptant.

OPINION

THE CHANCELLOR:

CLAIM OF STATE OF DELAWARE.

The order appointing the receiver conferred no power on him to operate the business. The Insurance Commissioner, prior to the filing of the bill, had refused to renew the defendant's certificate of authority to do business. The court is authorized by Section 573 of the Code "in a proper case made * * * to appoint a receiver to take charge of, settle and close up the affairs of said Company under the direction of the said Court, to enjoin it from doing business, and to make such order and decree as may be necessary or proper."

It is not contended that the appointment of the receiver operated to terminate the corporation's existence. Where a receiver is appointed under the general insolvency statute (Section 3883, Revised Code 1915), it is well settled that the continuity of the corporation's life is in no wise interrupted. Du Pont v. Standard Arms Co., 9 Del.Ch. 315, 81 A. 1089; Badenhausen Co. v Kidwell, 12 Del.Ch. 370, 107 A. 297; Jones v. Maxwell Motor Co., 13 Del.Ch. 76, 115 A. 312. And similarly when a receiver is appointed under the sections of the Code under which this suit was inaugurated, the appointment does not dissolve the corporation.

The question which the pending exception raises is whether or not the annual franchise tax is assessable and payable for the year or years ensuing after a receiver has been appointed for the corporation, and the activities of the receiver are in fact simply those that are incidental to a liquidation of the assets and a distribution to creditors and stockholders.

In the recent case of Michigan v. Michigan Trust Co., decided by the Supreme Court of the United States on May 16, 1932 (286 U.S. 334, 52 S.Ct. 512, 515, 76 L.Ed. 1136), Mr. Justice Cardozo, speaking for the court, observed that much subtlety of argument had been expended by the state and federal courts upon the sort of question which the pending exception presents. Reference to his opinion will disclose the distinctions which the cases have drawn. These distinctions have to do first with the nature of the tax, whether it is a tax imposed on the privilege of the corporation "to be," or a tax on the privilege "to do," which latter, so long as the corporate life exists, is closely assimilable to the privilege of the corporation "to be," unless, as some courts have held, the wording of the privilege "to do" is to be construed as contemplating the actual doing of business by the corporation. The distinctions further concern themselves with whether the receiver's activities were such as to warrant the view that he was acting exclusively as an agent of the court in administering an estate in trust for creditors and stockholders entirely independently of the corporate creature's existence, or whether, on the other hand, though an arm of the court, he was in the exercise also of the corporate franchise for which the tax is payable; and this distinction further runs into another one which is drawn between so-called primary and secondary franchises.

The franchise tax law under which the taxes in question were assessed, in Section 65 (Revised Code 1915, § 102), as amended (36 Del. Laws, c. 6, § 1), provides that an annual tax shall be paid "for the use of the State, by way of license for the corporate franchise as hereinafter mentioned." It is a debt due the State. The statute elsewhere expressly so provides.

It does not seem necessary, in view of the language of the statute, to indulge in any discussion in order to support the statement that the tax is one that is imposed on the corporation for the privilege of existing. The mere retention by the corporation of its charter creates the obligation to pay the tax, irrespective of whether or not the corporation is in the active conduct of the business which it was created to carry on. People of State of New York v. Jersawit, 263 U.S. 493, 44 S.Ct. 167, 68 L.Ed. 405. This being the nature of the tax, the cases of United States v. Whitridge, Receiver, 231 U.S. 144, 34 S.Ct. 24, 58 L.Ed. 159, and Keeney v. Dominion Coal Co., (D. C.) 225 F. 625, cited by the solicitor for the receiver, are distinguishable, for in those cases the court construed the statute involved as meaning to impose the tax on the doing of business by the corporation, and consequently held that as the business done by the receiver was not done by the corporation, the tax was not payable by the receiver.

The tax, then, being of the nature it is, can the estate in the hands of the receiver be held liable to pay it when the year or years for which it is assessed ensued after the receiver's appointment and during the period of liquidation of the estate, and when the receiver was not engaged in and the corporation was under injunction against, conducting or operating the business? That is the question.

It is undenied, indeed it is admitted, that the corporation itself is liable for the tax. But in this particular case if the liability for the tax debt is collectible from the corporation only, it will never be collected because the receivership has ousted the corporation from all of its assets and looks to a distribution of them among creditors and stockholders. When it comes to ascertaining who the creditors are, the receiver says that the State is not to be included among them except for taxes that had accrued prior to the date of his appointment, that the assets on that date became a trust fund for the benefit of creditors and stockholders, citing Mackenzie Oil Co. v. Omar Oil & Gas Co., 14 Del.Ch. 36, 120 A. 852, and that the class of creditors for whose benefit the trust is to be administered was rigidly fixed as of the date of the appointment. Hence, the receiver contends, the State, in so far as taxes subsequently accruing are concerned, is not in the class of creditors.

In Michigan v. Michigan Trust Co., supra, in which it was contended that the franchise tax assessed after a receiver had been appointed was collectible only from the corporation and not from the receiver, the court after observing that such a contention would subordinate the State to all other creditors proceeded to say: "We find no warrant for the discrimination either in the provisions of any statute or in any principle of equity governing the distribution of a fund in the hands of a receiver. On the contrary, statute and doctrine point the other way." I am aware that the case in which this language was used was one in which at the outset the receivership was a conservation one and it was believed the company was a solvent concern, and that it did not turn into a liquidation receivership until after the tax liability had arisen. In this material respect therefore the case is distinguishable from the one sub judice. But reading the opinion of the Supreme Court in its entirety, I think it indicates that if the receivership had been a liquidating one from the beginning the conclusion of the court would still have been that the tax was payable out of the corporation's assets in the hands of the receiver.

Where the question has been directly presented of whether in a purely liquidating receivership franchise taxes assessed by the State upon a corporation for its privilege to exist are payable out of the estate in the hands of the receiver, notwithstanding such taxes have accrued since the date of his appointment, and notwithstanding the corporate franchise was of no value to the receiver and that he had never in fact made any use of it, the weight of authority supports the claim of the State to be paid. In re United States Car Co., 60 N.J.Eq. 514, 43 A. 673, 674; People of State of New York v. Hopkins, (C. C. A.) 18 F. (2d) 731; Conklin v. U. S. Shipbuilding Co., (C. C.) 148 F. 129; Duryea v. American, etc., Co., (C. C.) 133 F. 329...