Title: Hildreth v. Tidewater

State: maryland

Issuer: Maryland Supreme Court

Document:

In the Circuit Court for Howard County
Case No. 13-C-99-41695
IN THE COURT OF APPEALS OF MARYLAND
No. 32
September Term, 2003
______________________________________
JOHN E. HILDRETH
v.
TIDEWATER EQUIPMENT
COMPANY, INC.
______________________________________
Bell, C.J.
         *Eldridge
Raker
Wilner
Cathell
Harrell
Battaglia,
   JJ.
______________________________________
Opinion by Wilner, J.
______________________________________
Filed:   December 18, 2003
*Eldridge, J., now retired, participated in the
hearing and conference of this case while an active
member of this Court; after being recalled pursuant
to the Constitution, Article IV, Section 3A, he also
participated in the decision and adoption of this
opinion.
1 Hildreth maintained that HCE, Inc. did not begin to do business in Maryland until
June, 1998.  The Circuit Court found that it began business here in 1996 or 1997, and, for
purposes of this appeal, Hildreth does not challenge that finding.
The issue before us is whether the Circuit Court for Howard County erred in entering
judgment on a corporate debt against petitioner, John Hildreth, and whether the Court of
Special Appeals erred in affirming that judgment.  We shall conclude that both courts were
in error and shall reverse.
BACKGROUND
Hildreth was the sole shareholder, director, and officer of a New Jersey corporation
known as HCE, Inc., which, for convenience, we shall sometimes refer to as HCE-NJ.  The
corporation, formed in November, 1996, engaged in the construction business as a
subcontractor on various commercial construction projects.  At some point in late 1996 or
1997, HCE, Inc. began to do business in Maryland and opened an office in Columbia.1
Although Hildreth had formed a number of other corporations in Maryland, one of which,
Hildreth Contracting and Engineers, Inc., had forfeited its charter in October, 1996, he did
not register HCE-NJ in this State, as required by Maryland Code, §§ 7-202, 7-202.1, or 7-203
of the Corporations and Associations Article.  Those sections, respectively, require that
foreign corporations register with the Maryland Department of Assessments and Taxation
before doing any interstate, foreign, or intrastate  business in Maryland. Registration requires
that the corporation have a resident agent in Maryland and that it certify to the Department
the address of the corporation and the name and address of the resident agent.
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When HCE-NJ began to do business in Maryland, there was already existing a
Maryland corporation by the name of HCE, Inc., which, for convenience, we shall refer to
as HCE-Md.  HCE-Md, incorporated here in 1985, had no connection with the New Jersey
corporation or with Hildreth and was in the business of renting portable toilets.  So far as this
record reveals, the two corporations had no common customers or business creditors.  At
some point in late 1997, HCE-Md began receiving calls from suppliers with which it had no
connection, complaining about unpaid bills, as well as suit papers intended for HCE-NJ.
Looking in the telephone book, HCE-Md’s president, Harry Boyce, learned of the existence
of the other HCE, called the number listed, and, being unable to get through to an individual,
left a message asking that the company refrain from using the name HCE.  Boyce said that
he left that message twice.  Ultimately, Boyce learned of Hildreth’s existence and caused
HCE-Md’s attorney, in January, 1998, to write to Hildreth, complaining about HCE-NJ’s use
of the HCE name and threatening legal action if such use did not cease immediately.  
Evidence indicated that such use did not stop, as Boyce continued to receive
correspondence from creditors of HCE-NJ and even information that HCE-NJ, using the
name HCE, Inc., had filed suit in a Maryland court against the Marriott Corporation.  Finally,
in September, 1999, HCE-NJ registered with the Department of Assessments and Taxation
under the name HCE of New Jersey, Inc.
The contract that led to the lawsuit against Hildreth was with respondent, Tidewater
Equipment Company, Inc., which was in the business of renting cranes.  In February, 1998,
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HCE-NJ rented a 20-ton capacity crane from Tidewater for one or two days and paid the
rental charge as agreed.  In September, 1998, HCE-NJ commenced negotiations for the long-
term rental of a crane that it intended to use in connection with a construction project in
Alexandria, Virginia.  The initial contact was made by an employee other than Hildreth, but
Hildreth was not satisfied with the price demanded by the Tidewater salesman.  Hildreth then
contacted and negotiated with another Tidewater representative, Frank Kolbe, and eventually
received a better price.  In the course of the negotiations, Kolbe dealt with at least one other
employee of HCE-NJ, Bob Condin.  Condin informed Kolbe that HCE-NJ built metal walls,
that its plant was in Hanover, Maryland, and that it needed the crane to load the walls on to
trucks for shipment to Alexandria.
Hildreth made clear he was acting for “HCE, Inc.,” but neither said nor was asked
where that company was incorporated.  He informed Kolbe that the company had an office
in Columbia, Maryland. Kolbe visited both the Columbia office and the Hanover job site.
He testified that the company “didn’t appear to be a fly-by-night operation,” but had “a nice
office suite” and “numerous employees.”  The job site in Hanover was also substantial, with
“a huge warehouse,” a rail siding, and “hundreds of metal building panels.”  Kolbe assumed
that HCE-NJ was a Maryland corporation because it had an office in Columbia.  He did not
order a credit report but, in agreeing to the lease, apparently relied on his site visits, his
conversations with Bob Condin, his seeing the subcontracts that HCE-NJ had with the
contractor, Erkiletian Construction Corp., and Hildreth’s oral assurance that Tidewater would
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be paid in accordance with the quoted terms. 
The arrangement was memorialized in a series of daily contracts, as the equipment
was needed, commencing in September, 1998.  The rental started at $500/day plus a charge
for the operator, but later was reduced to $455/day plus operator.  The charges were initially
billed on a weekly basis but were then converted to a monthly billing.  Payment was due
within 30 days, with interest at 2% per month on unpaid balances.  Hildreth did not sign the
contracts; they were signed on behalf of HCE-NJ by some other employee.  The charges for
September, October, and November, 1998, were paid in January and February, 1999.  When
payments were not received thereafter, Tidewater, in April, 1999, re-took possession of the
equipment.  At the time, Tidewater was owed $47,246 for the months of December, January,
February, and March, and for a few days in April.
In an amended complaint filed in the Circuit Court for Howard County against HCE
of New Jersey, Inc., Hildreth Contractors & Engineers, Inc., and Hildreth individually,
Tidewater alleged the lease of equipment and a statement of account showing $47,246 as
principal due and owing, along with $7,784 in accrued interest.  The suit was for those
amounts, plus daily accruing interest thenceforth and attorneys’ fees, provided for in the
contracts, in the amount of 15%, or $7,086.  The only allegations made against Hildreth
individually were that (1) he operated a business at 9220 Rumsey Road in Columbia trading
as HCE, Inc., (2) the corporation for which he acted with respect to Tidewater was “HCE of
New Jersey, Inc. t/a HCE, Inc. and/or Hildreth Contractors & Engineers, Inc., t/a HCE, Inc.”,
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(3) he “individually and t/a HCE, Inc. acted as if he had the authority to bind HCE, Inc. to
the contract which forms the basis of the instant litigation,” and (4) “he had no authority to
act on behalf of the Maryland corporation known as HCE, Inc. and he is therefore personally
liable for the debts incurred herein.”
As the case proceeded, the court entered summary judgment in favor of Hildreth
Contractors & Engineers, Inc. but against HCE-NJ.  In August, 2001, a non-jury trial was
held with respect to the claim against Hildreth individually.  The contracts, shown to be
between Tidewater and “HCE, Inc.” were stipulated, as were the amounts alleged to be due
under those contracts.  It was agreed that HCE, Inc. was lawfully incorporated in New Jersey
and that it eventually registered to do business in Maryland in September, 1999, under the
name HCE of New Jersey, Inc., and it was also agreed that Hildreth did not sign any of the
contracts with Tidewater.  Tidewater’s theory of personal liability was that Hildreth was
essentially an agent acting for an undisclosed principal – that he represented that he was
acting for “HCE, Inc.”  but that he was not, in fact, acting for that corporation because he had
no authority to do so, and that he never disclosed that his real principal was the New Jersey
corporation.  
Relying on Hill v. County Concrete, 108 Md. App. 527, 672 A.2d 667 (1996), the
Circuit Court credited that argument.  The court found that Hildreth knew that there was a
Maryland corporation known as HCE, Inc. and that he had no right to do business here under
that name, but that Tidewater did not know there was another HCE, Inc. or that the company
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operated by Hildreth was a New Jersey corporation.  The court concluded that “[t]he
existence of a de jure Maryland corporation with the name HCE, Inc., means John Hildreth
did not fully disclose his principal, HCE, Inc., to be a New Jersey corporation, nor did he
partially disclose his principal.”  It found further:
“As to Tidewater, the identity of the principal was not disclosed
and after the notices to John Hildreth from Mr. Boyce at HCE,
Inc. of Maryland and the letter from his attorney in January,
1998, his continued use of HCE, Inc. was in bad faith.
Consequently, John Hildreth is personally liable on the contract
to Tidewater.”
Upon that finding, the court entered judgment against Hildreth, personally, for the
entire corporate debt, including interest and attorneys’ fees.
Hildreth appealed, arguing that (1) officers and directors of a foreign de jure
corporation are not personally liable for corporate debts solely because the corporation fails
to qualify to do business in Maryland, (2) the trial court erred in finding Hildreth liable as an
agent for an undisclosed to partially disclosed principal, and (3) Tidewater was estopped
from denying the existence of HCE-NJ when that corporation was a de jure corporation and
Tidewater knew that it was dealing with a corporation. The Court of Special Appeals agreed
that Hildreth was not acting as an agent for an undisclosed or partially disclosed principal and
could not be held liable on that basis – the only basis asserted by the trial court.  The only
thing that was not disclosed, the court pointed out, was the fact that the corporation in
question – HCE-NJ – was a foreign corporation that had not registered to do business in
Maryland.  Tidewater knew that it was dealing with a corporation engaged in the construction
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– not the rent-a-toilet – business; it knew the actual name of the corporation and that it had
offices not just in Maryland but in New Jersey and New York as well.  The relationship was
a contractual, not a fiduciary, one, and Hildreth therefore was under no duty to disclose HCE-
NJ’s status as an unregistered foreign corporation.
The intermediate appellate court also concluded that, as a general rule, officers and
directors of a valid foreign corporation are not personally liable on corporate debts merely
because the corporation fails to register to do business in the forum State, but, relying on a
New Hampshire case, Zenane, Inc. v. Tofer, 499 A.2d 1347 (N.H. 1985), it held that the court
could impose such liability “when justice requires.”  Although acknowledging that “the
traditional factors justifying veil piercing are not present here,” the court determined that
“this case nonetheless presents a situation in which the corporate form must be disregarded
to ‘enforce a paramount equity.’” We granted certiorari to review that ruling.  No cross-
petition was filed challenging the intermediate appellate court’s conclusion that personal
liability could not rest on the Circuit Court’s determination that Hildreth was acting as an
agent for an undisclosed or partially disclosed principal, so we shall not consider that
question.  The only issue before us is whether there was a basis for piercing the corporate veil
of HCE-NJ and imposing personal liability for the corporate obligation on Hildreth.
DISCUSSION
In Bart Arconti & Sons v. Ames-Ennis, 275 Md. 295, 310, 340 A.2d 225, 234 (1975),
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after reviewing pronouncements in earlier cases and the then-accepted treatise on Maryland
corporation law, we stated:
“Although a number of variations upon the same theme may be
found, the most frequently enunciated rule in Maryland is that
although the courts will, in a proper case, disregard the
corporate entity and deal with substance rather than form, as
though a corporation did not exist . . . shareholders generally are
not held individually liable for debts or obligations of a
corporation except where it is necessary to prevent fraud or
enforce a paramount equity.”
That remains the law of Maryland.  Stein v. Smith, 358 Md. 670, 682, 751 A.2d 504,
(2000) (“[T]he corporate entity will be disregarded only when necessary to prevent fraud or
to enforce a paramount equity.” (quoting Bart Arconti, 275 Md. at 312, 340 A.2d at 235)).
As the Court of Special Appeals recognized, there was no allegation here of fraud on
the part of either Hildreth or HCE-NJ; nor was there any evidence or finding of fraud.
Personal liability rested solely upon the notion of “paramount equity,” which, in that court’s
view, arose from a combination of the following circumstances:
(1) Hildreth was the sole shareholder of HCE-NJ;
(2) Hildreth was “personally involved” in the business
transaction with Tidewater, which the court viewed as
“Hildreth’s dirty hands”;
(3) Continuing to trade as HCE, Inc. with knowledge of the
existence of a Maryland corporation of that name was evidence
of bad faith on Hildreth’s part;
(4) Contracts made by unregistered foreign corporations, though
valid, nonetheless constitute “illegal business transaction[s] on
the part of the unregistered foreign corporation, for which that
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corporation and its agents, officers, directors, and shareholders
may be penalized,” which the court characterized as “[t]he
public policy against illegal business transactions”;
(5) Maryland law precludes unregistered corporations doing
business in Maryland from seeking relief in Maryland courts,
which the court regarded as “[t]he public policy against
unregistered corporations using Maryland courts to protect their
illegal business transactions”; and
(6) The fact that HCE-NJ was registered after Tidewater’s
complaint was filed but was later forfeited in 2001 for failure to
file a 2000 property return, which the court said “suggests a
conscious evasion of responsibility on the part of HCE-NJ and
Hildreth.”
Although we have not heretofore given any generic definition of “paramount equity”
in this context, it is abundantly clear from our actual holdings in cases where attempts were
made to pierce a corporate veil – to hold stockholders personally liable for corporate
obligations – that those circumstances, individually or in combination, do not suffice.
In a number of cases, including Bart Arconti, we made favorable reference to the
synthesis supplied in the 1953 edition of Herbert Brune’s work, MARYLAND CORPORATION
LAW AND PRACTICE, § 371, as to when a corporate entity will be disregarded:
“First.  Where the corporation is used as a mere shield for the
perpetration of a fraud, the courts will disregard the fiction of
separate corporate entity.
Second.  The courts may consider a corporation as
unencumbered by the fiction of corporate entity and deal with
substance rather than form as though the corporation did not
exist, in order to prevent evasion of legal obligations.
Third.  Where the stockholders themselves, or a parent
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corporation owning the stock of a subsidiary corporation, fail to
observe the corporate entity, operating the business or dealing
with the corporation’s property as if it were their own, the
courts will also disregard the corporate entity for the protection
of third persons.”
(Emphasis added).
There is nothing in this record that could possibly justify the first of these
circumstances.  As already noted, there is no claim, no evidence, and no finding that Hildreth
used HCE-NJ as “a mere shield for the perpetration of a fraud.” 
The third circumstance embodies what is sometimes called the “alter ego” doctrine.
Fletcher observes that the “alter ego” doctrine has been applied “where the corporate entity
has been used as a subterfuge and to observe it would work an injustice,” the rationale being
that “if the shareholders or the corporations themselves disregard the proper formalities of
a corporation, then the law will do likewise as necessary to protect individual and corporate
creditors.”   1 WILLIAM MEADE FLETCHER, FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE
CORPORATIONS § 41.10 at 574-76 (1999 Rev. Vol.).  The doctrine, says Fletcher, is applied
“with great caution and reluctance” and only in “exceptional circumstances.”  Id. at 579-80.
Courts will apply the doctrine when the plaintiff shows (1) “complete domination, not only
of the finances, but of policy and business practice in respect to the transaction so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of
its own,” (2)  that “such control [was] used by the defendant to commit fraud or wrong, to
perpetrate the violation of the statutory or other positive legal duty, or dishonest and unjust
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act in contravention of the plaintiff’s legal rights,” and (3) that such “control and breach of
duty proximately caused the injury or unjust loss.”  Id. at 583-86.  Because piercing the
corporate veil is founded on equity, “where no fraud is shown, the plaintiff must show that
an inequitable result, involving fundamental unfairness, will result from a failure to disregard
the corporate form.”  Id. at 605.
Although there appears to be no universal rule as to the specific criteria that courts
will consider in determining whether to apply the doctrine, Fletcher observes that some of
the factors commonly considered, when dealing with a single corporation, are (1) whether
the corporation is inadequately capitalized, fails to observe corporate formalities, fails to
issue stock or pay dividends, or operates without a profit, (2) whether there is commingling
of corporate and personal assets, (3) whether there are non-functioning officers or directors,
(4) whether the corporation is insolvent at the time of the transaction, and (5) the absence of
corporate records.  Id. § 41.30 at 625-28.  These factors, occasionally articulated somewhat
differently, have been applied in earlier Court of Special Appeals cases.  See Dixon v.
Process Corp., 38 Md. App. 644, 653, 382 A.2d 893, 899 (1978); Travel Committee v. Pan
Am, 91 Md. App.123, 158-59, 603 A.2d 1301, 1318-19 (1992); Residential Warranty v.
Bancroft, 126 Md. App. 294, 307, 728 A.2d 783, 789 (1999).  See also DeWitt Truck Brokers
v. W. Ray Flemming Fruit Co., 540 F.2d 681 (4th Cir. 1976), cited by the Court of Special
Appeals in Travel Committee, and Iceland Telecom v. Information Systems and Net., 268 F.
Supp.2d 585, 589-91 (D. Md. 2003).
2 The “alter ego” doctrine must, of course, take account of close corporation laws,
which commonly allow close corporations to elect not to have a board of directors and to
have the corporation run directly by the stockholders.  See, for example, Maryland Code, §§
4-301 - 4-303 of the Corporations and Associations Article; N.J. Stat. § 14A:5-21. The record
does not indicate whether HCE-NJ had elected close corporation status.
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There is no support in this record for basing personal liability on the “alter ego”
doctrine.  With respect to the more general factors mentioned by Fletcher, there is no
evidence that Hildreth exercised such complete domination over HCE-NJ to warrant a
conclusion that the corporation “had no separate mind, will or existence of its own.”  There
is no evidence that HCE-NJ was undercapitalized, that corporate formalities were not
observed,2 that the corporation operated without a profit, that there were non-functioning
officers or directors, that the company was insolvent when it entered into the arrangement
with Tidewater, that there were no or inadequate corporate records.  In part, this void in the
record may well be due to the fact that Tidewater never sought in the trial court to establish
liability on Hildreth’s part by piercing the corporate veil of HCE-NJ, but argued only that
Hildreth was acting as agent for an undisclosed or partially disclosed principal.  As Hildreth
legitimately complains, had the quest for personal liability on his part been premised on a
piercing of the corporate veil, he might have supplied affirmative evidence negating these
various factors, even though it was Tidewater’s burden to prove their existence.  
What the record does show is that HCE-NJ was a valid, subsisting corporation which,
until it suffered a reversal of fortunes, had substantial assets and business prospects. The
relevant contracts, with the general contractor and with Tidewater, were in its name, and,
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indeed, the contracts with Tidewater were signed on its behalf not by Hildreth but by another
employee.  Although the conclusion is certainly warranted that Hildreth deliberately
permitted HCE-NJ to operate in Maryland without benefit of registration and with knowledge
of the existence of HCE-Md, there is no evidence that that conduct in any way influenced
Tidewater to enter into the contractual arrangement from which this debt arose.  Tidewater
knew that it was dealing with a corporation, and it had satisfied itself that the corporation had
substantial contracts and assets, that it had two business locations in the State, that it had
numerous employees, and that it was not a “one man show.”  Kolbe’s assumption that HCE-
NJ was a Maryland corporation did not come from anything Hildreth said.  Indeed, much of
the information apparently relied upon by Kolbe in agreeing to the contract came from
Condin, not Hildreth.
In sustaining liability on Hildreth’s part, the Court of Special Appeals seemed to be
applying the second in Brune’s trilogy of circumstances, disregarding the corporate existence
“in order to prevent the evasion of legal obligations.”  That, in turn, appears to rest on
Hildreth’s failure to register the corporation and his decision to continue using the name
HCE, Inc. after being advised of the existence of HCE-Md., which the appellate court treated
not only as bad faith but the violation of public policy.  Tidewater sees that set of
circumstances as an independent basis for “paramount equity,” urging that “paramount
equity” need not rest solely on the “alter ego” doctrine.
In Bart Arconti, we noted the “appealing quality” of the second (and third) of Brune’s
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propositions, but also observed that our cases have not given an expansive meaning to that
proposition.  Bart Arconti, itself, is a testament to the narrowness of that window.  Bart
Arconti & Sons, Inc. (Arconti & Sons) was a subcontractor on three construction projects and
defaulted on each.  The corporation, along with two allied corporations, was owned and
controlled by two brothers, Bart and George Arconti.  After the general contractor filed suit,
the brothers allowed Arconti & Sons to become dormant and placed all new business in the
other two corporations.  They allowed those corporations to use Arconti & Sons assets
without compensation and credited their personal indebtedness to Arconti & Sons on loans
from that company against salaries allegedly due them.  The trial court found that the purpose
of those activities was to evade legal obligations during the pendency of the action and had
the effect of rendering Arconti & Sons “all but insolvent.”  Bart Arconti & Sons, supra, 275
Md. at 305, 340 A.2d at 231.  The court also found that the brothers, as dominant directors
and sole stockholders, had “personally directed their operations with only one purpose in
mind, using the [other two corporations] to keep the subcontracting business of [Arconti &
Sons] but without leaving any real asset of [Arconti & Sons] remaining in that corporation.”
Id.  Upon those findings, the trial court found reason to pierce the corporate veil of Arconti
& Sons and extend the ultimate judgment in favor of the general contractor against the
brothers individually.
The brothers appealed, and we reversed, noting that we were unaware “of any
Maryland case where, on facts resembling those here, the Court has allowed the corporate
3 There have been dozens of cases, some more than 100 years old, in which the Court
has either sustained or reversed the piercing of corporate entities.  The cases are largely fact-
specific, and there is no profit to be gained in discussing them.  The law was effectively
enunciated in Bart Arconti.  See  Starfish Condo. v. Yorkridge Serv., 295 Md. 693, 458 A.2d
805 (1983) and Antigua Condominium v. Melba Investors, 307 Md. 700, 517 A.2d 75 (1986).
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entity to be disregarded merely because it wished to prevent an ‘evasion of legal obligations’
– absent evidence of fraud or similar conduct.”  Id. at 311-12, 340 A.2d at 235 .  Though
confirming that a corporate entity will be disregarded when necessary to prevent fraud or to
enforce a paramount equity, we did not regard the conduct of the brothers as sufficient to
establish a paramount equity.
If the conduct in Bart Arconti, clearly designed to cause the corporation to evade a
legal obligation, did not suffice to justify disregarding the corporate entity, surely Hildreth’s
conduct here does not. 3  That conduct may have subjected him to a $1,000 fine pursuant to
§ 7-302(b) of the Corporations and Associations Article; it would have served as well to
preclude the corporation from filing suit in Maryland, see § 7-301; and  it may have rendered
him or HCE-NJ liable to HCE-Md.  Section 7-305 makes clear, however, that the failure of
a foreign corporation to comply with the registration requirements “does not affect the
validity of any contract to which the corporation is a party,”  and there is nothing in the
registration statutes that permits a court to invade the corporate entity simply because of a
failure to register.  
We do not regard Brune’s second proposition as a separate basis for piercing a
corporate veil.  With its very limited scope, yet to be actually found in any Maryland case,
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it is, at best, subsumed, along with the “alter ego” doctrine, in the notion of paramount
equity, and has no application in this case.  The record here reveals nothing more than the
fact that a valid, subsisting corporation entered into a commercial contract and later became
unable to satisfy its obligation under that contract.  That is unfortunate, but it is not a basis
for making someone else liable for the corporate debt.
Concerned that we may not agree with his argument under M aryland law, Hildreth
presents the alternative argument that, as HCE-NJ was a New Jersey corporation, his liability
as a stockholder of that corporation must be determined under New Jersey law.  As we do
agree with his primary argument, however, we need not reach that issue.
JUDGMENT OF COURT OF SPECIAL APPEALS REVERSED;
CASE REMANDED TO THAT COURT WITH INSTRUCTIONS TO
REVERSE JUDGMENT OF CIRCUIT COURT FOR HOWARD
COUNTY AGAINST PETITIONER; COSTS IN THIS COURT AND
COURT OF SPECIAL APPEALS TO BE PAID BY RESPONDENT.