1. A corporation, dissolved and put out of existence by the
State which created it, may not invoke the powers of a court of
bankruptcy under § 77B of the Bankruptcy Act. P.
302 U. S.
124.
The record does not present a case where creditors are the
moving parties, or where there has been any act of bankruptcy
committed by the corporation, or where any pertinent law of the
State is in conflict with the federal bankruptcy laws.
2. A private corporation can exist only under the express law of
the State or sovereignty by which it was created. Its dissolution
puts
Page 302 U. S. 121
an end to its existence, and there must be some statutory
authority for the prolongation of its life, even for litigation
purposes. P.
302 U. S.
125.
3. Under the Illinois law a corporation is without corporate
capacity to initiate any legal proceedings after two years from the
date of its dissolution, and this includes a proceeding for
reorganization under Bankruptcy Act § 77B. P.
302 U. S.
126.
4. State laws in conflict with the laws of Congress on the
subject of bankruptcies are suspended only to the extent of actual
conflict. P.
302 U. S.
126.
5. How long and upon what terms a state-created corporation may
continue to exist is a matter exclusively of state power. P.
302 U. S.
127.
6. Section 77B of the Bankruptcy Act does not enable
stockholders to resuscitate, in any other guise, a corporation the
powers and existence of which, save for the winding up of pending
litigation, have been extinguished by the State that created it. P.
302 U. S.
129.
86 F.2d 667 reversed.
Certiorari, 301 U.S. 676, to review the affirmance by the court
below of an order of the District Court entered in a reorganization
proceeding under 77B of the Bankruptcy Act. The order confirmed the
report of a special master and commanded a receiver in possession
of property in foreclosure proceedings in a state court to turn
over to a temporary trustee, and restrained further prosecution of
the foreclosures.
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
Respondent was organized as a corporation under the laws of
Illinois, and, pursuant to those laws, it was dissolved. The only
property it ever owned or possessed was a building and the land
upon which it stood, situated at
Page 302 U. S. 122
No. 4136 Wilcox avenue in the City of Chicago. This property,
when acquired, was subject to the lien of a first mortgage,
securing bonds aggregating $95,000, and, subsequent to the
acquisition of the property, to a junior mortgage to secure the
payment of $15,000. The corporation was organized on April 10,
1929. On May 22, 1931, the superior court of Cook county, Ill., in
a proceeding regularly before it, and in accordance with a statute
of Illinois, entered a decree dissolving the corporation and
declaring its charter and authority as such to be null and void.
The decree has never been appealed from or otherwise challenged or
assailed. That it became and is now effective cannot be
doubted.
On July 10th, certain mechanics' liens were foreclosed, and a
sale of the property thereafter made pursuant to the foreclosure
decree. Certificate of sale was issued, entitling the holder
thereof to a conveyance of the property upon the expiration of the
period of redemption. The right of redemption expired as to
respondent on August 5, 1932, and as to creditors on November 5,
1932. No redemption has ever been made or attempted. On October 24,
1931, suit was brought in a state court to foreclose the lien of
the first mortgage, and on November 10, 1931, suit was brought in
the same court to foreclose the lien of the junior mortgage. A
receiver was appointed, who took possession of the property, and
was in possession thereof at the time this case was heard in the
federal District Court. Respondent appeared in both foreclosure
suits, but apparently offered no defense.
By the statutes of Illinois (Smith-Hurd Rev.Stat., 1929, c. 32)
it is provided:
"§ 14. All corporations organized under the laws of this State
whose powers may have expired by limitation or otherwise shall
continue their corporate capacity for two years for the purpose
only of collecting debts due such corporation and selling and
conveying the property
Page 302 U. S. 123
and effects thereof. Such corporations shall use their
respective names for such purposes, and shall be capable of
prosecuting and defending all suits at law or in equity."
"
* * * *"
"§ 79. The dissolution, for any cause whatever, of any
corporation shall not take away or impair any remedy given against
such corporation, its officers, or stockholders, for any
liabilities incurred previous to its dissolution if suit therefor
is brought and service of process had within two years after such
dissolution."
The two-year period, within which the corporation could sue,
acquire property, or perform any corporate function apart from
suits then pending, expired May 22, 1933.
Thus matters remained until May, 1935, when three persons,
namely, Mrs. Fay Fischel, her father Hyman Schulman, and her
brother Sam Schulman, acquired all the shares of the respondent
from the then stockholders. Meetings purporting to be stockholders'
and directors' meetings were then held, officers and directors
elected, and a resolution was passed authorizing the filing of a
petition for the reorganization of respondent under § 77B of the
Bankruptcy Act, 48 Stat. 912, 11 U.S.C. § 207.
On June 13, 1935, respondent filed a petition for reorganization
under § 77B, and on June 21st filed a petition praying for an order
directing the receiver in the state foreclosure suits to turn over
property in his possession and restraining the further prosecution
of such suits. Petitioner answered, denying that respondent was a
corporation, setting up the corporate dissolution, the foreclosure
proceedings, and the sale of the corporate property. It also
averred that the bankruptcy petition was not filed in good
faith.
The special master, to whom the case was referred, found and
reported that the bankruptcy petition had been filed in good faith;
that respondent had legal capacity to
Page 302 U. S. 124
file the petition, and that the petition was sufficient to
confer jurisdiction upon the court over respondent and the property
in question. The master further found that no deed ever issued
under the mechanic's lien foreclosure certificate, and that such
certificate was purchased and now is the property of the debtor.
However, it appears from the record that the certificate was
purchased in connection with the acquisition of the stock by the
three persons already mentioned, more than two years after the
period of redemption had expired.
The federal District Court confirmed the report of the master,
appointed a temporary trustee, required the state court receiver to
turn over the property to the trustee, and restrained further
prosecution of the foreclosure proceedings. On appeal, the court
below affirmed the order of the District Court, Judge Briggle
dissenting.
In re Forty-One Thirty-Six Wilcox Bldg.
Corporation, 86 F.2d 667.
In the decisions of other circuit courts of appeal cited by
respondent, support may be found for involuntary proceedings in
bankruptcy against a dissolved corporation, brought by creditors
and based upon an act of bankruptcy committed within four months.
The question presented here differs substantially from the
questions presented in those cases, and we put them aside as
inapplicable, without either approval or disapproval. The sole
question now for determination is whether, under the facts just
detailed, a corporation, dissolved and put out of existence by the
state which created it, may nevertheless itself invoke the powers
of a court of bankruptcy under § 77B. The record does not present a
case where creditors are the moving parties, or where there has
been any act of bankruptcy committed by the corporation, or where
any pertinent law of the state is in conflict with the federal
bankruptcy laws.
The decisions of this Court are all to the effect that a private
corporation in this country can exist only under
Page 302 U. S. 125
the express law of the state or sovereignty by which it was
created. Its dissolution puts an end to its existence, the result
of which may be likened to the death of a natural person. There
must be some statutory authority for the prolongation of its life,
even for litigation purposes.
Oklahoma Gas Co. v.
Oklahoma, 273 U. S. 257;
First National Bank v.
Colby, 21 Wall. 609,
88 U. S. 615;
Oregon Railway Co. v. Oregonian Ry. Co., 130 U. S.
1,
130 U. S. 20;
see also Greeley v. Smith, 10 Fed.Cas. p. 1075, 3 Story
657;
Board of Councilmen v. Deposit Bank, 120 F. 165, 166
et seq.; Dundee Mortg. & Tr. Inv. Co. v. Hughes, 77 F.
855.
Sections 14 and 79 of the Illinois statute seem plain enough on
their face, but, if any doubt as to their meaning and effect would
otherwise exist, that doubt has been set at rest by the decisions
of the Illinois appellate courts. In
Life Assn. of America v.
Fassett, 102 Ill. 315, decided before the sections under
consideration were enacted, the state Supreme Court held that it
was the settled policy of the state that, upon the dissolution of
domestic corporations, however effected, they were to be regarded
as still existing for the purpose of settling up their affairs and
having their property applied for the payment of their just debts.
See Singer & Talcott Co. v. Hutchinson, 176 Ill. 48,
51, 51 N.E. 622. In
American Exch. Bank v. Mitchell, 179
Ill.App. 612, 615, 616, the general rule was announced that, after
a corporation is dissolved, it is incapable of maintaining an
action, and that all such actions pending at the time of
dissolution abate in the absence of a statute to the contrary. The
state decisions following the enactment of these sections make it
clear that this general rule still remains in force in Illinois
except for the specific modifications in respect of time and
circumstance set forth in §§ 14 and 79.
See Dukes v. Harrison
& Reidy, 270 Ill.App. 372;
Consolidated Coal Co. v.
Flynn Coal Co., 274 Ill.App. 405.
See also A. J. Bates Co.
v. United States, 3 F. Supp. 245,
Page 302 U. S. 126
248;
Charles A. Zahn Co. v. United States, 6 F. Supp.
317, where the Court of Claims held that, under these sections of
the Illinois statute, an Illinois corporation ceased to exist and
became incapable of transacting any business whatever in its
corporate capacity, and that a suit purporting to be brought by a
dissolved corporation after two years to recover internal revenue
taxes paid by the corporation could not be maintained.
It is plain enough under the Illinois statute that, after the
expiration of two years from the date of its dissolution,
respondent was without corporate capacity to initiate any legal
proceeding, including a proceeding under § 77B, unless we are able
to say that the statute, in its terms or in its application, is in
conflict with § 77B. While state laws in conflict with the laws of
Congress on the subject of bankruptcies are suspended, they are
suspended "only to the extent of actual conflict with the system
provided by the Bankruptcy Act of Congress."
Stellwagen v.
Clum, 245 U. S. 605,
245 U. S. 613.
The dissolution effected under Illinois law is in no way related to
a state of insolvency or bankruptcy. Insolvency or bankruptcy as a
ground for dissolution is not within the terms or contemplation of
the law. Liquidation of a corporation is no part of the purpose of
the dissolution; nor is insolvency or liquidation involved in the
proceedings to enforce the mechanics' liens or foreclose the
mortgages. Quite evidently, the latter were simply ordinary
proceedings to enforce liens against the property subject thereto.
Straton v. New, 283 U. S. 318,
283 U. S.
327-330. The state receivership was purely incidental to
the foreclosure suits, and therefore limited and special. It was
not an equity receivership within the meaning of § 77B of the
Bankruptcy Act.
Duparquet Co. v. Evans, 297 U.
S. 216,
297 U. S.
219-221.
The principle recently announced in
Hopkins Savings Assn. v.
Cleary, 296 U. S. 315,
296 U. S. 337,
is applicable here.
Page 302 U. S. 127
That case dealt with an intrusion by the federal government on
the powers of the state over state building and loan associations.
Speaking of these associations, this Court said:
"How they shall be formed, how maintained and supervised, and
how and when dissolved are matters of governmental policy which it
would be an intrusion for another government to regulate by statute
or decision, except when reasonably necessary for the fair and
effective exercise of some other and cognate power explicitly
conferred."
It is not reasonably possible to find any conflict between § 77B
and the Illinois statute or the dissolution proceedings or the lien
foreclosure suits.
The court below relied upon its former decision in the case of
In re 211 East Delaware Place Bldg. Corp., 76 F.2d 834.
That was a case, however, where the bankruptcy petition had been
filed by creditors, not by the dissolved corporation, and therefore
the capacity of the defunct corporation to institute proceedings
was not involved. We express no opinion as to the correctness of
this decision; but Judge Evans, who wrote the opinion, apparently
regarded the distinction as important. For, in a later proceeding
in the case,
14 F. Supp.
96, 100, he said that the forfeiture of the charter of the
corporation did not prevent such a proceeding by creditors, and
then added,
"The only effect which this loss of corporate existence may have
upon a bankruptcy proceeding is in respect to the inability of the
corporation to admit acts of bankruptcy or state of
insolvency
or to file a voluntary petition."
(Italics supplied.)
How long and upon what terms a state-created corporation may
continue to exist is a matter exclusively of state power.
Horn
Silver Mining Co. v. New York, 143 U.
S. 305,
143 U. S.
312-313;
Ashley v. Ryan, 153 U.
S. 436,
153 U. S.
441-443;
New Jersey v. Anderson, 203 U.
S. 483,
203 U. S. 493.
The circumstances under which the power shall be exercised
Page 302 U. S. 128
and the extent to which it shall be carried are matters of state
policy, to be decided by the state Legislature. There is nothing in
the Federal Constitution which operates to restrain a state from
terminating absolutely and unconditionally the existence of a
state-created corporation, if that be authorized by the statute
under which the corporation has been organized. And it hardly will
be claimed that the federal government may breathe life into a
corporate entity thus put to death by the state in the lawful
exercise of its sovereign authority.
The power to take the long step of putting an end to the
corporate existence of a state-created corporation without
limitation connotes the power to take the shorter one of putting an
end to it with such limitations as the Legislature sees fit to
annex.
Compare Packard v. Banton, 264 U.
S. 140,
264 U. S. 145;
Davis v. Massachusetts, 167 U. S. 43,
167 U. S. 47;
Rippey v. Texas, 193 U. S. 504,
193 U. S.
509-510. And, since the federal government is powerless
to resurrect a corporation which the state has put out of existence
for all purposes, the conclusion seems inevitable that, if the
state attach qualifications to its sentence of extinction, nothing
can be added to or taken from these qualifications by federal
authority.
It is suggested that the state cannot keep the corporation alive
for its own purposes and deny it life for federal purposes. The
proposition need not be challenged, since it is perfectly evident
that, here, the state has reserved nothing for itself which it has
denied to the federal authority. The only relevant provisions are
those relating to legal proceedings. The state law permits such
proceedings to be instituted on behalf of a dissolved corporation
within two years; but these proceedings may be brought either in
the state courts, or, when appropriate, in the federal courts.
After two years, no proceedings may be initiated on behalf of the
corporation in either state or federal courts, but such proceedings
as
Page 302 U. S. 129
have been instituted during that period in any of these courts
may be prosecuted to completion.
Singer & Talcott Co. v.
Hutchinson, supra, 176 Ill. 48, at 52-53, 51 N.E. 622. The
right of resort to the courts of the state, and to those of the
nation having jurisdiction, both in respect of the initiation of
proceedings and the completion of proceedings already initiated, so
far as Illinois law is concerned, stands upon an exact parity.
The aim of this proceeding under § 77B is to bring about a
reorganization of a corporation which has been dissolved and shorn
of its capacity to initiate any legal proceeding by the state which
possesses, in respect of the corporation, the power of life and
death. It is not a proceeding on behalf of creditors. It is not a
liquidation proceeding having for its object the distribution of
the corporate assets. The dissolution was adjudged because the
corporation had disobeyed the laws of the state. For that reason,
the state prohibited the continuance of the corporate enterprise.
The stockholders, however, now seek to escape the penalty for this
dereliction by resuscitating and continuing the corporation, and,
to that end, invoke the aid of a federal statute. This is simply an
attempt to thwart a valid state law. Whether the enterprise be
continued under the original name and charter of the corporation,
or in some new corporate name or guise, can make no difference.
Either course would contravene the legislatively declared policy of
the state. Section 77B cannot be regarded as countenancing such a
result.
The only power left to the corporation when this proceeding was
brought was to finish pending cases begun within two years after
its dissolution. With that exception, its corporate powers were
ended for all time and for all purposes. It was without authority
to purchase the certificate issued at the mechanic's lien
foreclosure sale, or to adopt resolutions authorizing proceedings
under
Page 302 U. S. 130
§ 77B, or to bring a proceeding to effectuate a reorganization
under that section. In respect of these matters, the corporation
was nonexistent.
Decree reversed.
MR. JUSTICE CARDOZO, dissenting.
I am unable to concur in the opinion of the Court.
1. Respondent, though dissolved, was still a corporation in such
a sense and to such a degree as to have capacity to maintain a
proceeding in bankruptcy for the liquidation of its assets.
By Bankruptcy Act § 4, 11 U.S.C. § 22(a), any corporation, with
exceptions not now material, may become a voluntary bankrupt.
By Bankruptcy Act § 1(6), 11 U.S.C. § 1(6), "
corporations'
shall mean all bodies having any of the powers and privileges of
private corporations not possessed by individuals or
partnerships."
Respondent, when it filed its petition in the bankruptcy court,
was still in possession of some of the privileges and powers of
private corporations not possessed by individuals or partnerships.
True, a decree of dissolution had been entered by a court of
Illinois, the place of its domicile. True, two years had gone by
since the making of that decree. Nonetheless, the corporation still
had the power, if suits were then pending either in its favor or
against it, to litigate in its corporate name and through its
corporate officials.
Life Association of America v.
Fassett, 102 Ill. 315;
Singer & Talcott Stone Co. v.
Hutchinson, 176 Ill. 48, 51 N.E. 622;
Commercial Trust Co.
v. Mallers, 242 Ill. 50, 89 N.E. 661;
Graham & Morton
Transp. Co. v. Owens, 165 Ill.App. 100;
Griggsville State
Bank v. Newman, 275 Ill.App. 11. With the license of Illinois,
respondent was actively defending suits for the foreclosure of
mortgages on its property when it went into the federal court. A
fragment of corporate power was
Page 302 U. S. 131
thus untouched by dissolution. Within the definition of the
Bankruptcy Act, the body that retained this power, and indeed
exercised it, too, was still a corporation. There are suggestions
in the books that, even in the absence of a statute preserving
corporate capacities after a decree of dissolution, the bankruptcy
power to distribute the assets of an insolvent debtor is not
subject to destruction by a withdrawal, possibly a precipitate one,
of corporate existence.
See, e.g., Hammond v. Lyon Realty
Co., 59 F.2d 592, 594-595.
Cf. Austin v. Thomas, 78
F.2d 602;
In re American & British Mfg. Corporation,
300 F. 839, 847;
Cresson & Clearfield Coal Co. v.
Stauffer, 148 F. 981. The case at hand does not charge us with
a duty to decide whether that is so. Here, the state has elected to
keep the corporation in existence, maimed but still alive. In
choosing to create or continue an artificial entity, though with
limited and narrow powers, the state subjects its creature to the
bankruptcy power of the Congress insofar as that power is directed
at juristic beings of that order. Congress has said to
Illinois:
"If an association with any corporate capacities exists under
your laws, bankruptcy -- either voluntary or involuntary -- is a
proper form of liquidation."
To this the state responds, or is figured as responding:
"An association with corporate capacities does exist under our
laws, but it may not go into a court of bankruptcy, because we will
not give it the capacity to go there. Winding up proceedings for
one in its position are in the state tribunals only."
The response, even if taken to be authentic, must be held of no
avail. It is not within the competence of Illinois, by any form of
words, to preserve the artificial entity for a purpose of her own
and destroy it for the purpose of withdrawal from the supremacy of
federal law.
2. If respondent has capacity to maintain a bankruptcy
proceeding to liquidate its business through the medium of a sale
for cash, it has capacity also to maintain a bankruptcy proceeding
under § 77B.
Page 302 U. S. 132
A proceeding under § 77B is styled one to give effect to a
corporate reorganization. Whatever its form or label, it derives
its origin and vitality from the bankruptcy power.
Continental
Illinois National Bank & Trust Co. v. Chicago, R.I. & P.
Ry. Co., 294 U. S. 648;
Campbell v. Alleghany Corp., 75 F.2d 947;
In re New
Rochelle Coal & Lumber Co., 77 F.2d 881. Only because the
remedy is traceable to that power is it constitutional and valid.
The notion is baseless that reorganization, even when initiated on
the petition of the debtor, is solely or chiefly for the benefit of
shareholders. It is even more distinctively and commonly for the
benefit of creditors.
Cf. In re Central Funding
Corporation, 75 F.2d 256, 261. The old form of bankruptcy had
in view a liquidation of the assets for cash, and nothing else, a
method of disposing of them that might result in needless
sacrifice. The new form of bankruptcy is more flexible and often
more efficient, permitting, as it does, a disposition of the assets
upon credit as well as for cash, and in consideration of shares of
stock or bonds to be issued by the buyer. Whoever, being a
corporation, may resort to the old form is at liberty, acting in
good faith, to resort to the new. This is so by the express mandate
of the statute, which tells us, § 77B(a), 11 U.S.C. § 207(a), that
"any corporation which could become a bankrupt under § 4 (11 U.S.C.
§ 22) of this Act" may petition in the new proceeding. By that
test, a dissolved corporation with capacity requisite to apply to a
court of bankruptcy for a liquidation of its assets has the
capacity requisite to apply for a reorganization of its business.
As to this, the lower federal courts are in general accord.
Old
Fort Improvement Co. v. Lea, 89 F.2d 286;
In re Forty-One
Thirty-Six Wilcox Bldg. Corp., 86 F.2d 667;
Capital
Endowment Co. v. Kroeger, 86 F.2d 976;
In re 211 East
Delaware Place Bldg. Corp., 76 F.2d 834, 836. Their opinions
vindicating that conclusion are instructive and convincing.
Page 302 U. S. 133
This is not to say that every method of reorganization
appropriate or permissible for a corporation whose life is
unimpaired is appropriate or permissible for one already doomed.
The plan of reorganization will be unlawful if it attempts to
authorize the debtor, following a decree of dissolution, to do
business thereafter in defiance of state law. In general, there
will be little difficulty in so adapting a decree to the
necessities of the particular case as to attain the needed harmony.
The opinions already cited suggest appropriate expedients.
Old
Fort Improvement Co. v. Lea, supra, p. 290;
Capital
Endowment Co. v. Kroeger, supra, p. 979. Instead of continuing
the business through the petitioning debtor or its agents, the
decree may permit the formation of another corporation which will
take over the assets, issuing shares of stock or bonds to creditors
or others. There may be new capital, new shareholders, new
directors and officers. Neither in the record nor in the precedents
does one find a basis for a holding that the formation of such a
corporation will be in conflict with any public policy of the State
of Illinois. The old corporation was dissolved for failure to pay
franchise taxes and file an annual report. The new one, if created,
may promote the welfare of the state both financially and
otherwise. Be that as it may, the state will be amply competent to
vindicate her own dignity if there is a fraud upon her laws. No
plan of reorganization is before us at this time. So far as
appears, none has been prepared. Whether the plan to be submitted
later will be worthy of confirmation is a question for the
future.
Cases may indeed arise where a court will be satisfied upon the
filing of the petition that reorganization is not feasible. In that
event, the proceeding may be dismissed as not brought in good
faith.
Tennessee Pub. Co. v. American Bank, 299 U. S.
18,
299 U. S. 22. At
times, a decree of dissolution may be a circumstance, along with
others, pointing
Page 302 U. S. 134
to that conclusion. Here, the good faith of the debtor has been
found by the courts below after inquiry by a master to whom the
cause had been referred. The single question presented to us by the
petition for certiorari is one of jurisdiction. Did a court of
bankruptcy have power to entertain the proceeding at the instance
of such a suitor? I hold that power did not fail.
MR. JUSTICE STONE and MR. JUSTICE BLACK join in this
opinion.