98 So. 895 | Ala. | 1923
Lead Opinion
A fireman for the city of Birmingham having received an injury caused by negligence on the part of the driver *652
of an automobile bus of a transportation company, obtained judgment, which was affirmed in Norwood Transportation Co. v. Crossett,
The bill as amended contained a detailed statement of the averred relationship between the Birmingham Realty Company, a corporation (appellant), and the Norwood Transportation Company, a corporation, which raises the point that the former's corporators, under the averred facts, are shown to have organized the transportation corporation fraudulently as a device to evade personal obligation or liability incident and necessary to the furnishing of due or required transportation to and from the realty subdivisions of the Birmingham Realty Company and the city of Birmingham. That is to say, the theory of the bill is that the promotors and stockholders of the corporation formed and incorporated the same for an illegal purpose to shield it and them from the consequences of their contracts, acts, and duties incident to such transportation company, and primarily to relieve the Birmingham Realty Company from liability in the conduct of one of its businesses or enterprises at the places indicated. Moore Handley Hdwe. Co. v. Towers Hdwe. Co.,
It is unnecessary to observe that no question of reorganization, consolidation, or merger of corporations is presented by the pleadings before us. Boyette v. Preston Motors Corporation,
The general rule applied in federal courts is that a court of equity will disregard the fiction of distinct corporate existence whenever a corporation is so organized, controlled, and its affairs conducted as to make it merely an instrumentality, department, or incidental business of another corporation, in the sense that it is a mere "dummy" or "shadow" of the holding corporation. And, when this is the case, to prevent a fraud equity will subject the assets of the real and holding corporation to the satisfaction of a judgment against the "dummy" corporation. 14 C. J. p. 62, note 82; Miller Lux, Inc., v. East Side C. I. Co.,
The observation of the theory of the bill is well founded — not that complainant is asking a court of equity to enforce his commonlaw claim for damages, nor to enforce a liability against the individuals holding stock in the several corporations. The plaintiff, George Crossett, as the original plaintiff in judgment in the suit at law, did not have two legal remedies available to him (Mobile Towing Wrecking Co. v. Hartwell,
The general rules that one who sues a corporation is estopped to deny its corporate character, and that its existence cannot be assailed collaterally, present for decision the question in the case. Complainant (appellee) did not assail the corporate existence of the Norwood Transportation Company, but admitted that it "is a legally established corporation," in that all the forms and requirements of law were complied with in its formation; and hence the necessity for Crossett's suit in equity against the Birmingham Realty Company for the injury inflicted as averred. That is to say, complainant avers the fact constituting the true relationship between the Birmingham Realty Company and the Norwood Transportation Company invokes the aid of a court of equity to ascertain and declare the identity in equity of the two corporations, and that they are "one and the same corporation" in the accounting sought. The demurrer to the bill as amended was overruled, and a case for equitable jurisdiction was held to be thereby presented; though it was declined by the decree to hold that the judgment at law against the Norwood Transportation Company was a binding judgment against the Birmingham Realty Company. It was decreed such judgment was one which, in equity and good conscience, the Birmingham Realty Company should pay, after accounting, from the amount of money or other assets of the Norwood Transportation Company which have gone into the treasury of the Birmingham Realty Company, and that conveyances of the properties of the Norwood Transportation Company were in *653 fraud of creditors and of the complainant's claim.
Counsel state the question for decision must exist on the fundamental assumption that legally the Norwood Transportation Company was a separate corporation from the Birmingham Realty Company; yet under the facts averred and the prayer of the amended bill the two corporations are in a sense identical, and subject to an accounting and to final liability.
It is averred that the "interlocking history" of the two corporations will not show "any transaction whereby the Birmingham Realty Company paid the Norwood transportation Company for rendering services" in the business of transporting passengers for the former corporation from its subdivisions and real properties to and from the city of Birmingham; but that all the proceeds earned in that service are taken by the realty company, which manages and controls the former corporation; that the end of the common purposes was the furnishing of adequate transportation from its real properties to and from the city of Birmingham, and the Norwood Transportation Company discharged a necessary function of the Birmingham Realty Company, and made available and desirable the real properties in the two subdivisions indicated until adequate street car services were provided.
In Moore Handley Hdwe. Co. v. Towers Hdwe. Co.,
"In those cases where 'associates combine together to create a paper corporation, to cover a partnership or joint venture, and where the stockholders are partners in intention,' and have resorted to the fiction of separate corporate entity to free themselves from individual obligations which had attached to them, with respect to the business they propose to carry on, prior to the organization of the company, courts of equity, when the ends of justice require it, will disregard and look beyond the fiction of corporate entity, and hold the corporation to a discharge of the liabilities resting on its members; and this may be done, although some of the shareholders had not originally incurred the obligation sought to be enforced, provided they had notice of it before entering the corporation, and participated in the effort to avoid it. Davis Imp. Wrought Iron W. W. Co. v. Davis Wrought Iron W. Co., 20 Fed. Rep. 700; Beal v. Chase,
And in Christian Craft Gro. Co. v. Fruitdale Lbr. Co.,
The foregoing principle has been frequently adverted to by the federal courts. In Hunter v. Baker Motor Vehicle Co. (D. C.) 225 Fed. 1006, 1015, is contained the announcement that the exceptions to the general rule of separate corporate existence and liability are: The legal fiction of distinct corporate entity is disregarded, when necessary to do so in order to circumvent fraud, and also when a corporation is so organized and controlled and its affairs are so conducted as merely to make it an instrumentality or adjunct of another corporation. In re Watertown Paper Company, 169 Fed. 252, 255, 94 C.C.A. 528, 532, 22 Am. Bankr. Rep. 190, 194, 195.
The earlier case of Exploration Mercantile Co. v. Pacific H. S. Company, 177 Fed. 825, 829, 839, 840, 101 10. C.C.A. 39, 43, 53, 54, contains these statements:
" * * * The conception that a corporation is a legal entity, existing separate, apart and distinct from the natural persons who compose it, is a fiction which has been introduced for convenience in making contracts, acquiring property, suing and being sued, and to secure limited liability on the part of stockholders. 'It is a certain rule,' says Lord Mansfield, C. J., 'that a fiction of law shall never be contradicted so as to defeat the end for which it was invented, but for every other purpose it may be contradicted.' * * * The fiction of a corporate entity was never invented to promote injustice or defraud, and when it is used for such a purpose it should be disregarded, and the actual fact should be ascertained." Many authorities are cited. 7 Am. Eng. Ency. of L. 633, 634; 1 Cook on Corp. (5th Ed.) p. 27. "The corporate entity cannot be so disguised that it can successfully masquerade in the name of a stockholder, and, evading the searching eyes of a court of equity, hinder, delay, and defraud its creditors and defeat the provisions of the bankruptcy act. A court of equity looks through forms to the substance of things, thus preserving the rights of innocent parties against all forms of deception and fraud."
It would appear that the fundamental proposition urged by complainant was touched upon in In re Rieger, Kapner Altmark (D.C.) 157 Fed. 609, 613, where the announcement is made that —
"The fiction of legal corporate entity cannot be so applied by the partners as to work a fraud on a part of their creditors, or hinder and delay them in the collection of their claims, and thus defeat the provisions of the bankrupt *654 act. The doctrine of corporate entity is not so sacred that a court of equity, looking through forms to the substance of things, may not in a proper case ignore it to preserve the rights of innocent parties or to circumvent fraud." (Italics supplied.)
This exception to the general rule indicated was recognized in W. A. Liller Bldg. Co. v. Reynolds, 247 Fed. 90, 150 C. C. A. 308; In re Eilers Music House (C.C.A.) 270 Fed. 915; Macfadden v. Jenkins,
The argument of appellant's counsel as to stockholders' liability, and individual liability for corporate obligations or duties, is beside the question presented (McDonnell v. Ala., etc., Ins. Co.,
Mr. Cook, in his work on Corporations (volume 1 [5th Ed.] § 6, p. 24 et seq.), says of "dummy" and fraudulent corporations that the court will sometimes ignore the corporate existence in order to do justice, and that "the corporate existence will be disregarded, and the acts and contracts of the persons holding all the stock will be considered the acts and contracts of the corporation itself, where the effect is the same as though the corporation had acted or contracted as a corporation. Hence, where all the stock is combined with all the stock of other companies in order to form a combination which is illegal, the state will forfeit the charter of the corporation, although technically it is not a party to the agreement" (State v. Standard Oil Co.,
The exception is also recognized in many authorities collected to support the text of 14 C. J. § 5, pp. 52, 53, §§ 19, 20, 25, pp. 59, 62, that it is now well settled that "the legal fiction of distinct corporate existence may be disregarded in a case where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality or adjunct of another corporation." Miller, etc., Co. v. East Side Canal, etc., Co.,
Mr. Fletcher, in his Cyclopedia of Corporations, vol. 1, § 45, p. 63, declares:
"Agency for parent corporation. The legal fiction of distinct corporate existence may also be disregarded in a case where a corporation is so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality, conduit or adjunct of another corporation. Hunter v. Baker Motor Vehicle Co., 225 Fed. 1006; Gay v. Hudson River Elec. Power Co., 187 Fed. 12; Westinghouse Elec. Mfg. Co. v. Allis-Chalmers Co., 176 Fed. 362; In re Muncie Pulp Co., 139 Fed. 546; O'Brien v. Champlain Const. Co., 107 Fed. 338; Kelly Ning Yung Benev. Ass'n v. Clere Clothing Co.,
In Martin v. Development Co. of America, 240 Fed. 42, 45, 153 C.C.A. 78, 81, Circuit Judge Hunt said: "A holding corporation has a separate corporate existence, and is to be treated as a separate entity, unless facts are averred which show that such separate corporate existence is a mere sham, or has been used as an instrument for concealing the truth, or where the organization and control are shown to be such as that it is but an instrumentality or adjunct of another corporation," and, we may add, where the parent or controlling corporation has made of it an instrumentality, conduit, business department, or "dummy," as in the control and payment of the employees and the collection of funds from the subsidiary or departmental corporation, etc. That is to say, ordinarily, however, the fiction of distinct corporate entity is adhered to, and the two corporations are treated as distinct entities. While the legal fiction of distinct corporate existence will be disregarded, when necessary to prevent fraud, or when a corporation is so organized and controlled and its affairs so conducted as to make it only an adjunct or instrumentality of another, it requires a strong case to induce a court of equity to consider two corporations as one, on account of one owning all the capital stock of the other. 14 C. J. p. 63, note; 1 Cook on Corporations (7th Ed.) § 317; Peterson v. C., R.I. P. Ry.,
So much for the general authorities. In our court it is held that evidence of fraud may be shown for the purpose of attacking the corporate existence of the alleged corporation at the instance of a third party. Christian Craft Gro. Co. v. Fruitdale Lbr. Co.,
The majority, composed of Justices SAYRE, SOMERVILLE, MILLER, and BOULDIN, while believing that the phase of the bill for accounting, at complainant's instance, as to the moneys and properties of Norwood Transportation Company received or held by the respondent, has equity, and was not subject to demurrer interposed, yet are of opinion that the bill is without equity in the phase thereof seeking to hold the Birmingham Realty Company and its assets liable to the judgment against Norwood Transportation Company, and in that aspect is subject to demurrer.
If the foregoing views of the writer (concurred in by Mr. Justice GARDNER) be not well founded in respects as indicated by the opinion of the majority, Justices GARDNER and THOMAS join in the opinion that the accounting prayed for should be had. All the justices (aside from Mr. Chief Justice ANDERSON) are of opinion that the phase of the bill (specifically exhibited in paragraphs 5, 19, 20, 21, and 22) challenging the bona fides of the $25,000 mortgage, is not subject to any ground of demurrer directed to the bill as amended, and that relief against the mortgage, if warranted by the evidence, may be awarded under the general prayer.
Mr. Chief Justice ANDERSON dissents, and agrees with the majority as to that phase of the bill which they hold is wfthout equity, and, while the bill may contain equity as a creditors' bill and for accounting, thinks it is defective as such, and that demurrer should be sustained.
The judgment of the circuit court in equity is affirmed in part, in part reversed, and remanded, at the cost of the appellee.
Affirmed in part, reversed in part, and remanded.
SAYRE, SOMERVILLE, GARDNER, MILLER, and BOULDIN, JJ., concur.
ANDERSON, C. J., dissents.
Addendum
Since preparing the views expressed on the original hearing, the writer has found other cases which he thinks he should bring to the attention of the majority.
The case of Portsmouth Cotton Oil Refining Co. v. Fourth Nat. Bank of Montgomery (D.C.) 280 Fed. 879, was to the effect that a bank which organized a subsidiary corporation to handle property it owned, and which had no capital or property, except that supplied by the bank, was liable for damages sustained by a purchaser of property from the corporation, which paid the bank for the same, where the property was not as represented and warranted.
The case of Martin v. Development Co. of America, 240 Fed. 42, 153 C.C.A. 78, decided February 13, 1917, was before Chicago, Milwaukee St. Paul R. Co. v. Minn. Civic Com. Ass'n (October term, 1917),
"Much emphasis is laid upon statements made in various decisions of this court that ownership alone of capital stock in one corporation by another does not create an identity of corporate interest between the two companies, or render the stockholding company the owner of the property of the other, or create the relation of principal and agent or representative between the two. * * *
"While the statements of the law thus relied upon are satisfactory in the connection in which they were used, they have been plainly and repeatedly held not applicable where stock ownership has been resorted to, not for the purpose of participating in the affairs of a corporation in the normal and usual manner, but for the purpose, as in this case, of controlling a subsidiary company so that it may be used as a mere agency or instrumentality of the owning company or companies. United States v. Lehigh Valley R. Co.,
The decision in United States v. Lehigh Valley R. Co.,
"That the facts thus averred and the other allegations contained in the proposed amended bill tended to show an actual control by the railroad company over the property of the coal company and an actual interest in such property beyond the mere interest which the railroad company would have had as a holder of stock in the coal company is, we think, clear. The alleged facts, therefore, brought the railroad company, so far as its right to carry the product of the coal company is concerned, within the general prohibitions of the commodities clause, unless for some reason the right of the railroad company to carry such product was not within the operation of that clause. The argument is that the railroad company was so expected [excepted] because any control which is exerted or interest which it had in the product of the coal company resulted from its ownership of stock in that company, and would not have existed without such ownership. The error, however, lies in disregarding the fact that the allegations of the amended bill asserted the existence of a control by the railroad company over the coal corporation and its product, rendered possible, it is true, by the ownership of stock, but which was not the necessary result of a bona fide exercise of such ownership, and which could only have arisen through the use by the railroad of its stock ownership for the purpose of giving it, the railroad company, as a corporation, for its own corporate purposes, complete power over the affairs of the coal company, just as if the coal company were a mere department of the railroad. Indeed, such a situation could not have existed had the fact that the two corporations were separate and distinct legal entities been regarded in the administration of the affairs of the coal company."
In United States v. Delaware, L. W. R. Co.,
"But the decisions construing the statute recognize that one corporation can be an agent for another corporation, and that by means of stock ownership one of such companies may be converted into a mere agent or instrumentality of the other. United States v. Lehigh Valley R. Co.,
Mr. Justice GARDNER agrees with the foregoing.