Gledhill v. Fisher & Co.

262 N.W. 371, 272 Mich. 353, 102 A.L.R. 1042, 1935 Mich. LEXIS 493

• Court: Michigan Supreme Court
• Decided: September 9, 1935
• Docket: Docket No. 84, Calendar No. 38,194.
• Status: Published

Opinions

Bushnell, J.

The Wesbrook-Lane Properties Corporation, whose name was subsequently changed to United Bealty & Construction Company, was formed for lawful purposes, including the purchasing, holding and dealing in real estate. Its entire original capital was supplied, and its entire stock owned, by the New Center Development Corporation, which under the law of Michigan had the legal right to hold the stock. All of the original capital of the New Center Development Corporation was in turn supplied by Fisher & Company, which owns the stock of the New Center Development Corporation, All three corporations were organized for similar purposes.

In holding that the corporate entity should be disregarded and Fisher & Company be held liable as the actual vendee under the land contract between plaintiffs and the Wesbrook-Lane Properties Corporation, Mr. Justice Nelson Sharpe relies largely on the following quotation from People, ex rel. Attorney General, v. Michigan Bell Telephone Co., 246 Mich. 198 (P. U. R. 1929 B, 455, P. U. R. 1929 E, 27), wherein the court said:

“Where a corporation is so organized and controlled and its affairs so conducted as to- make it a mere instrumentality or agent or adjunct of another corporation, its separate existence as a distinct corporate entity will be ignored and the two corporations will be regarded in legal contemplation as one unit.”

However, in that case the disregard of the corporate entity was impelled by the finding of the court that the relationship of parent and subsidiary was being used as a device to justify rates which were not based upon the real cost to the public utility of the service for which it charged, the court distinctly stating:

“When a corporation exists as a device to evade legal obligations, the courts, without regard to actual fraud, will disregard the entity theory. ’ ’

Appellees also rely on Old Ben Coal Co. v. Universal Coal Co., 248 Mich. 486, in which it again was held that the subsidiary was a mere device of trade in order to evade liability. The record in that case shows that the plaintiff claimed not only - undue domination and control' over the subsidiary by the parent corporation, but, in addition, that this control was exercised by the parent corporation in such .a manner .as to defraud and wrong the complainant. It was alleged that the Universal Coal Company was organized by Price Hill Colliery-Company for the purpose of selling the latter’s coal; that after a large judgment was rendered against the Universal Coal Company, the parent corporation immediately organized the Universal Coal Sales Company and transferred to it all the assets of the Universal Coal Company for the fraudulent purpose of defeating the satisfaction of plaintiff’s judgment.

Before the corporate entity may be properly disregarded and the parent corporation held liable for the acts of its subsidiary, I believe it must be shown not only that undue domination and control was exercised by the parent corporation over the subsidiary, but also that this control was exercised in such a manner as to defraud and wrong the complainant, and that unjust loss or injury will be suffered by the complainant as the result of such domination unless the parent corporation be held liable. The rule is correctly stated by Ballantine in an article on the separate entity of corporations, in 60 American Law Beview, page 28, as follows:

“But to justify treating the sole stockholder or holding company as responsible it is not enough that the subsidiary is so organized and controlled as to make it ‘merely an instrumentality, conduit or adjunct’ of its stockholders. It must further appear that to recognize their separate entities would aid in the consummation of a wrong. ’ ’

In Powell on “Parent and Subsidiary Corporations,” extensively quoted by both parties to this suit, the proper limitation on the rule is stated on page 6 of the text as follows:

“A refusal to recognize the ordinary immunity of stockholders not only overturns a basic provision of statutory or common law, but is also contrary to a vital economic policy underlying the whole corporate concept. Such a result must therefore be viewed as an extraordinary exception and should be permitted only in cases in which it is necessary in order to promote justice. Belief against the parent corporation, therefore, should be granted only if a refusal to do so would result in an unjust loss or injury to the complainant. ’ ’

In the ease at bar I am unable to find that any control exercised over the Wesbrook-Lane Properties Corporation by Fisher & Company was exercised in such a manner as to defraud or wrong the plaintiffs, or that such domination was in any way injurious to them. In entering into the land contract, plaintiffs relied entirely upon the WesbrookLane Corporation as the sole and actual purchaser. There was no representation by Fisher & Company that it was the real party in interest or that its responsibility was in back of the Wesbrook-Lane Corporation. In fact, plaintiffs did not know at that time that their vendee was a subsidiary of the New Center Corporation or of Fisher & Company. The articles of association of the Wesbrook-Lane Properties Corporation, showing the paid-in capital, were a matter of public record, and could have been examined by plaintiffs or anyone else. While it is true that the corporation was originally organized with a capital of but $25,000, later increased to $50,000, and that it subsequently entered into a large number of contracts for the purchase of land, involving large obligations, the vendors with whom it dealt retained title to the property sold as security. Plaintiffs sold their property for $125,000, of which $15,000 was paid down. Interest payments were met for a number of years, and the balance was reduced to $100,974.43. This balance was adequately secured, were it not for the subsequent depreciation in values. There is no claim whatsoever of any diversion of assets by Fisher &) Company from the Wesbrook-Lane Properties Corporation at any time. As a matter of fact, the record shows that over $400,000 was advanced to that corporation at various times by the New Center Development Corporation, subsidiary of Fisher & Company.

The organization of a corporation for the avowed purpose of avoiding personal responsibility does not in itself constitute fraud justifying the disregard of the corporate entity. In Elenkrieg v. Siebrecht, 238 N. Y. 254 (144 N. E. 519, 34 A. L. R. 592), the court stated:

“Whether or not the corporation is the creature of Siebrecht is not a determining feature.' Whether it be a subterfuge is misleading. Many a man incorporates his business or his property and is the dominant and controlling feature of the corporation. He may do so for the very purpose of escaping personal liability.”

Wormser, in his “Disregard of the Corporate Fiction and Allied Corporate Problems,” goes far in holding a parent corporation liable for the debts of its subsidiary where the latter is formed for a fraudulent purpose, but he distinctly limits the rule as follows (p. 18):

“It follows that no fraud is committed in incorporating for the precise purpose of avoiding and escaping personal responsibility. Indeed, that is why most people incorporate, and those dealing with corporations know, or at least, are presumed to know, the law in this regard. ’ ’

The law permitted a corporation to own and hold stock in a subsidiary. 2 Comp. Laws 1929, §§ 9968, 10018-10026. The capital stock constituted a trust fund for the payment of the debts of the corporation. Clark v. E. C. Clark Machine Co., 151 Mich. 416; Peninsular Savings Bank of Detroit v. Black Flag Stove Polish Co., 105 Mich. 535. A stockholder in a corporation that owns another is not .a stockholder in the latter. Sabre v. United Traction & Electric Co., 225 Fed. 601. A subsidiary may be formed for the very reason that prompts individuals to form corporations, to protect themselves from personal liability, to make only its capital liable, to say to those that deal with it, “here is the amount of our capital stock; we are a bona fide corporation organized for legitimate purposes and doing’ business in a legal manner. If you want to deal with us on the basis of our liability as shown by onr capital set up, you may do so, and if not, you may refrain from so doing.” There was no fraud in the purchase of the property by the subsidiary without disclosing the ownership of its capital stock. The record does not show that any reliance was placed on who the purchasers were. It was a time when there was a tremendous inflation in real estate, as evidenced by the many cases that have reached this court. The depression and accompanying deflation in values were not foreseen.. Plaintiffs and their vendee agreed upon a price. Plaintiffs knew or should have known that they could only look to the corpolation vendee, or the property in the event of a default. A large down payment was made, the depression came, plaintiffs took back their property and retained all that had been paid on it by vendees. Even had they known that the capital stock was owned by solvent stockholders, the latter were immune from liability. The statute permitting ownership of a subsidiary cannot be set aside, or disregarded, and the individual stockholders, whether personal or corporate, reached, when the corporation was neither organized, conducted or used for perpetration of a fraud. The owners of the capital stock, through their voting power, can control a corporation. If they properly exercise this control for lawful purposes and their stock is fully paid up, they are immune from personal liability. The very purpose of using the corporate form of doing business may be to limit the liability of the stockholders, and, as stated in Donnell v. Herring-Hall-Marvin Safe Co., 208 U. S. 267 (28 Sup. Ct. 288), ‘‘to inter pose a nonconductor through which, in matters of contract, it is impossible to see the men behind.” Also, see, Rough v. Breitung, 117 Mich. 48; Park Bank v. Remsen, 158 U. S. 337 (15 Sup. Ct. 891); Hale v. Henkel, 201 U. S. 43 (26 Sup. Ct. 370); Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371 (14 Sup. Ct. 127); J. J. McCaskill Co. v. United States, 216 U. S. 504 (30 Sup. Ct. 386).

We need not go into the history of corporations, except to state that the one thing which distinguished all English corporations, whether the idea was borrowed from the Roman or canon law or not, is that whether a private corporation was considered as a delegation of the sovereign power of the government or the theory was dominant that the capital contributions of the members constituted a trust fund for the benefit of its shareholders, or the individual contributions to the joint stock constituted personal property, was that those dealing with the corporation or contracting with it were limited in their recovery against the corporation to the property owned and possessed by it, held in trust by the corporation, contributed by subscribers to its capital stock. 1 Blackstone’s Commentaries, p. 484, goes so far as to say:

“The debts of a corporation either to or from it are totally extinguished by its dissolution.”

Whether this is precisely true or not, we need not consider. Certainly as early as the year book of 19 Henry VI, 80, it was held that relief could not be had against the members of a corporation for its debts. As stated in Myers v. Irwin, 2 S. & R. (Pa.) 368, 371,

“The personal responsibility of the stockholders is inconsistent with the nature of the body corporate.”

The conception of Chief Justice Marshall of a corporation is set forth in Trustees of Dartmouth College v. Woodward, 4 Wheat. (17 U. S.), 518. The fundamental conception of a private corporation created under the Constitution and law of this State is that it is an artificial entity authorized to he created to engage in any lawful business, separate and distinct from the holders of its individual stock, authorized by law to be created to enable persons to pool their interests to the extent of their several contributions to the capital stock to carry on such lawful business by the venture or stake of its capital stock in manufacturing, trade or commerce. It is this capital stock which creditors know they may have recourse to to enforce the corporation’s contractual liability and which everyone who deals with the corporation is legally charged with knowing is the limit of such liability. To permit a creditor who contracted with his eyes open and charged with actual and constructive notice of the limitations upon the corporation’s liability to go behind the corporate organization and reach the property of individual stockholders is to overturn the entire historic and legal conception of a private corporation, and its effect to discourage the joint venture of combined capital in industrial enterprises and to discourage ventures in business and commercial enterprises.

The original contract sought to be enforced despite its release and cancellation must of itself have been one originally in which the plaintiffs were entitled to sue the individual stockholders in the corporation upon. Nothing that was said by any of the representatives of the corporation or of the stockholders at the time of the cancellation or surrender of this contract could affect the liability of the individual stockholders in the defendant (sub sidiary) corporation. At the time the contract was entered into, no inquiry was made as to who constituted the incorporators of the defendant corporation. Plaintiffs dealt with the corporation just as they would have dealt with any other company in reliance upon the capital stock of the purchasing company and the inherent value of the real estate itself. There is no proof in this case that the defendant (subsidiary) corporation was in any way the agent or tool of the corporation which controlled its capital stock, or that it was not a corporation organized in good faith to pay for, acquire and hold the property purchased. Under the Constitution and laws of this State, the defendant (parent) corporation had a right to organize a subsidiary corporation and to own and control its capital stock. Those individuals and corporations which do that which, by the Constitution and laws of the State, they are authorized to do, cannot be held guilty of-fraud for complying with the law and exercising the powers and duties which the Constitution and laws say they may exercise.

The decree is reversed and the bill of complaint dismissed, with costs to defendants.

Potter, C. J., and Fead, Butzel, and Edward M. Sharpe, JJ., concurred with Bushnell, J. North and Wiest, JJ., concurred in the result.