Paper Products Co. v. Doggrell

261 S.W.2d 127, 195 Tenn. 581, 31 Beeler 581, 42 A.L.R. 2d 651, 1953 Tenn. LEXIS 382

• Court: Tennessee Supreme Court
• Decided: July 17, 1953
• Status: Published

Opinions

Mr. Justice Tomlinson

delivered the opinion of the Court.

Appellees, Doggrell and Konz, together with one Van E. Whitaker, Jr., were the sole stockholders in an Arkansas corporation formed by them under the name of Forrest City Wood Products, Inc. with principal office to be located in St. Francis County, Arkansas.

The Arkansas statute requires the articles of incorporation to be filed (1) with the Secretary of State and (2) thereafter in the office of the County Clerk of the County in which the corporation’s principal place of business is to be located.

Doggrell and Konz, Tennessee residents, left the management of the corporation entirely to the third stockholder, Whitaker, a resident of Arkansas. The lawyer in Memphis who prepared the charter directed Whitaker to file it with the Secretary of State and then with the Clerk of the County Court of St. Francis County, Arkansas. Whitaker did file it with the Arkansas Secretary of State, but inadvertently failed "to file it with the Clerk of the County Court of !St. Francis County. It was not filed with this clerk until after the account which gave rise to this suit had been made. Neither Doggrell nor Konz were aware of the fact that the charter had not been filed in St. Francis County as required by the Arkansas statute. Neither has received any dividends or profits or remuneration from the corporation.

Under the decisions of the Arkansas Court of last resort the stockholders of a corporation are liable as partners when the charter is not filed as required by the Arkansas statute in the county where the principal office of the corporation is to be maintained. Based on those decisions of the Arkansas Supreme Court, Whitaker, the third stockholder in the aforementioned corporation, has been adjudged by the Arkansas Court liable for a debt made by this corporation before this charter was filed in St. Francis County., Whitaker v. Mitchell Manufacturing Co., 219 Ark. 779, 244 S. W. (2d) 965. The Arkansas Court rendered no judgment in that case against Doggrell and Konz because no service had been had on these Tennessee residents.

Whitaker who operated and managed the business of the corporation purchased goods in the name of the corporation from Paper Products Company and issued the company’s note payable in thirty days. Paper Products Company iii this transaction dealt with the. Forrest City Wood Products, Inc. as such and not through the personal credit of Doggrell and Konz. These two stockholders knew nothing whatever about the account in question.

Forrest City Wood Products, Inc. became bankrupt. A substantial balance of its note issued to Paper Products Company remains unpaid. Accordingly, Paper Products Company instituted this suit in Shelby County, Ten-essee Circuit Court against Doggrell and Konz. It seeks a recovery against them individually because of the Arkansas law holding stockholders personally liable as partners for the accounts made by a corporation whose charter has not been filed in the County where its principal office is located.

It was the judgment of the Shelby County Circuit Court that Doggrell and Konz are not liable individually, or as partners, for this obligation of Forrest City Wood Products, because this Arkansas rule “is penal in its nature, and will not be enforced in the State Courts of Tennessee”. Paper Products Company has appealed and insists that (1) the Arkansas rule is not penal in nature and (2) under the law of comity the Arkansas rule should be applied to this case.

Under Tennessee decisions, the liability of a stockholder for the debts of his corporation is determined' by the law of the State in which that corporation is domiciled unless such law is contrary to the legislation or public policy of Tennessee, or is penal in nature. Under these circumstances such law of a sister State will not be enforced in Tennessee. Sullivan v. Farnsworth, 132 Tenn. 691, 705, 179 S. W. 317.

When a Tennessee Court is called upon to enforce the civil law of a sister jurisdiction it will determine whether such law is penal in nature or contrary to the public policy of the law of Tennessee in which it is sought to be enforced. Whitlow v. Nashville, C. & St. L. Ry. Co., 114 Tenn. 344, 350, 84 S. W. 618, 68 L. R. A. 503./Whether the aforementioned law of Arkansas, therefore, is contrary to our public policy or penal in nature is a matter to be determined in this ease by the Tennessee Court since it is in that Court that it is sought to enforce this Arkansas rule.

The Arkansas statute heretofore referred to provides that “Upon the filing with the Secretary of State of articles of incorporation, the corporate existence shall begin.”/Ark. Stats. Section 64-103. (Emphasis supplied.) It follows that the corporate existence of Forrest City Wood Products, Inc. had begun prior to the inadvertent failure of Whitaker to file the corporation’s charter in the office of the County Court of St. Francis County, Arkansas. The Arkansas rule, therefore, is that an inadvertent failure to comply with some detail in a bona fide effort to comply with the law chartering corporations is a failure which makes the stockholders liable in Arkansas for those debts of the corporation made prior to the compliance with such required detail.

This Arkansas rule is contrary to the public policy of Tennessee, wherein the rule is that the stockholders are not liable for the debts of their corporation in a case where there has been “made a bona fide effort to comply with the provisions of law”, but “have inadvertently failed in some particular, and in good faith have exercised the franchises of such corporation. ’ Cunnyngham v. Shelby, 136 Tenn. 176, 181-182, 188 S. W. 1147, 1149, L. R. A. 1917B, 572. /It is a commonly known fact that one of the purposes of organizing a corporation for the carrying on of a business is to relieve stockholders of individual liability for the debts of the corporation. That fact is well known to those dealing with corporations. The Tennessee rule forwards the accomplishment of that purpose.

In ascertaining whether the Arkansas statute is penal in nature it is well to observe again that under the Arkansas rule the stockholders of the corporation are liable as partners for the mere failure, after the commencement of corporate existence, to file its charter in the Arkansas County of its principal office. This liability is imposed without regard to the fact that a creditor is not prejudiced by the failure to comply with this detail and was not misled thereby. There is no escape from the conclusion, therefore, that this rule prescribes a penalty in order to enforce a compliance with the law of Arkansas as to the registering of a charter in the county where the principal office of the corporation is maintained. “Penalties prescribed by one state to enforce a compliance with its laws will not be enforced by the courts of another state.’’ Brower v. Watson, 146 Tenn. 626, 636, 244 S. W. 362, 365, 26 A. L. R. 99L,

A case directly in point is Woods v. Wicks, 75 Tenn. 40 cited in appellees ’ brief. A statute of Kentucky was involved in that suit. That statute required the directors of a corporation to file and record within a specified time in a certain office a certificate stating the amount of the capital stock fixed and paid in. Stockholders were arbitrarily made liable in double the amount of their stock for failure to file such certificate. The Tennessee Court refused to hold such stockholders liable for the failure to file such certificate. In rejecting such a suit our Court said that “no court of another sovereignty can be expected to enforce sucli a penalty”. 75 Tenn. .at page 50.

Appellant has cited several cases decided subsequent to Woods v. Wicks, supra. His insistence seems to be that these cases conflict with Woods v. Wicks. Attention of counsel is called to the fact that in the cases to which he refers the corporation was seeking to do business in Tennessee without compliance with Tennessee law.

The judgment must be affirmed with costs taxed to Paper Products Company and its surety.