Case Name: Commonwealth v. Hoffman-Henon Company (et al., Appellant)
Court: Supreme Court of Pennsylvania
Jurisdiction: Pennsylvania
Decision Date: 1955-05-25
Citations: 382 Pa. 213
Docket Number: Appeal, No. 329
Parties: Commonwealth v. Hoffman-Henon Company (et al., Appellant).
Judges: Before Stern, C. J., Stearns, Jones, Bell, Chidsey, Musmanno and Arnold, JJ.
Reporter: Pennsylvania State Reports
Volume: 382
Pages: 213–227

Head Matter:
Commonwealth v. Hoffman-Henon Company (et al., Appellant).
Argued November 16, 1954.
Before Stern, C. J., Stearns, Jones, Bell, Chidsey, Musmanno and Arnold, JJ.
May 25, 1955:
Theodore Voorhees, with him Christopher Branda, Jr., and Barnes, Deehert, Price, Myers & Rhoads, for appellants.
Byman Zucherman, with him Da/oid D. Goff and Goff & Rubin, for appellee.

Opinion:
Opinion by
Mr. Justice Jones,
The Commonwealth issued a scire facias sur lien for capital stock and corporate loan taxes settled against the defendant, Hoffman-Henon Company, a Pennsylvania corporation, summoning the substituted executors and trustees of the estate of Eli Kirk Price, deceased, as terre-tenants. The terre-tenants answered that the Commonwealth's asserted lien was discharged by a judicial sale of the property upon the foreclosure of a mortgage given by a predecessor in title and that the terre-tenants had acquired the mortgaged property at the sheriff's sale free of the lien of the Commonwealth. The court below gave judgment for the Commonwealth in the aggregate amount of the liened taxes with interest from dates of settlement, and the terre-tenants took this appeal.
The real question involved is whether a straw man, to whom a corporation conveys its property for the purpose of having him mortgage it to secure a loan for the corporation's use and who thereafter reconveys the property to the corporation, subject to the mortgage, is a predecessor in title within the meaning of Section 1401 of The Fiscal Code of 1929, P. L. 343, as amended by the Act of June 3, 1933, P. L. 1474, 72 PS §1401.
The circumstances under which the question arose are as follows. The defendant corporation acquired title to premises at 156-162 North 20th Street, Philadelphia, by four separate conveyances during the period 1926 to 1928. On June 8, 1931, Paul J. Henon, Jr., and Daniel T. Henon, respectively president and secretary of the corporation, made a written application in their individual names to the executors and trustees of the Price Estate for a mortgage loan in the amount of $40,000 on the premises above mentioned, reciting in their application that they would become "bondsmen and future owners in fee" of the property. By deed dated June 17, 1931, the corporation conveyed its realty to the Henons, in fee simple. The corporate acknowledgment of the deed recited that it was executed and delivered "in pursuance of a resolution of said corporation made June 17, 1931." On the same day the Henons executed a bond to the Price Estate in the sum of $40,000 secured by their mortgage of the premises in question. The Henons at once transferred the proceeds of the loan to the corporation. Approximately three weeks later, viz., on July 11, 1931, the Henons reconveyed the property to the company subject to the mortgage to the Price Estate. Between August 25, 1932, and September 22, 1936, the Commonwealth settled against the defendant corporation the capital stock and corporation loan taxes here involved.
Early in 1935, the mortgage then being in default, the trustees of the Price Estate foreclosed it and bought in the property at the sheriff's sale, held on February 4, 1935, for a bid of $50. At the request of the Secretary of Revenue, one of the executors and trustees of the Price Estate executed an affidavit on May 1, 1935, reciting the giving of the mortgage by the Henons to the Price Estate, the subsequent conveyance of the premises by the Henons to the corporation under and subject to the mortgage, the foreclosure and sheriff's sale of the mortgaged property and the execution and recording of the sheriff's deed to the Price Estate. On May 7, 1935, the Secretary of Revenue notified the sheriff of Philadelphia County by letter that, since the amount bid at the sheriff's sale was not sufficient to cover the amount of the mortgage debt, the Commonwealth had no claim against the real estate for the unpaid corporation taxes. The letter closed with instructions to the sheriff to disregard the Commonwealth's claim for taxes due by the defendant corporation insofar as it related to the particular execution. Compare Home Owners' Loan Corporation Tax Case, 149 Pa. Superior Ct. 440, 27 A. 2d 688. Almost ten years later, viz., on January 18, 1945, the Commonwealth instituted the present scire facias proceeding.
In order not to complicate the broad basic question involved with facts special to the instant case, we shall pass over the evidence which the appellants urge as capable of supporting a finding that the conveyance by the corporation to the Henons was for value and therefore not a straw transaction — a conclusion which the learned hearing judge drew but which the court en banc overruled. Also, we shall assume for present purposes that the representatives of the Price Estate had reason to believe from attendant circumstances that the Henons were straws for the corporation for the purpose of executing and delivering the bond and mortgage in their individual capacities.
Section 1401 of The Fiscal Code of 1929, as originally enacted, provided that all State taxes, etc., and all public accounts settled against any corporation should be a first lien upon the property and franchises of such corporation from the date of settlement and that, upon a judicial sale of such corporation's property, the Commonwealth's claims should first be allowed and paid out of the proceeds of such sale before any judgment, mortgage or other claim or lien against such corporation. The 1933 amendment of Section 1401 provided, however, that "Where the lien of a ground rent, mortgage, or other lien created by or entered against a predecessor in title to such corporation . is discharged by a judicial sale, the lien of the Commonwealth shall be transferred from the property sold to the fund realized from the sale, and the purchaser shall take free of the lien of the Commonwealth, notwithstanding that the fund may be insufficient to pay all or part of the same, and, on distribution of the fund, the Commonwealth's lien shall be postponed in payment to said lien or liens created by or entered against such predecessor in title . . . ."
Why, then, was the mortgage of the Henons to the Price Estate not the mortgage of a predecessor in title to the corporation? Indisputably, they were bona fide holders of the legal title to the property by virtue of the corporation's deed of June 17, 1931. If they were not, then the mortgage security which they executed and delivered to the Price Estate for full value was a nullity. But, if the title was validly in the Henons, as it undoubtedly was, from June 17, 1931, to the time of their reconveyance of the property to the corpora tion on July 11, 1931, they were, ipso facto, predecessors in title to the corporation when they gave their mortgage to the Price Estate. To hold otherwise would require reading something into the amendment of 1933 that is not there. Incidentally, it was more than a year after the lien of the Henons' mortgage had attached before the State tax was settled against the corporation. See Scranton Lackawanna Trust Co., to Use v. Scranton Lackawanna Trust Co., Guardian, 310 Pa. 125, 129, 165 A. 42, and Davis v. Seltzer, 313 Pa. 382, 383-384, 169 A. 761.
In Curran's Estate, 312 Pa. 416, 421, 167 A. 597, Mr. Justice Linn, speaking for this court, said that the fact that a mortgagor was a straw man for a corporation was immaterial to the validity of the mortgage. The learned justice then went on to say, "The important question is, is there a mortgage of real estate, a real security? Ulrich's [the straw man's] mortgage exists. The terms of the mortgage, as well as the obligation in his bonds, are enforcible, the one against the land, the other against him." Plainly enough, that was so because the straw man was the valid holder of the legal title at the time of the execution and delivery of his mortgage.
In Aronson v. Heymann, 56 Pa. Superior Ct. 501, a conveyance was made to a straw grantee who gave to agents for the grantor his bond for a portion of the purchase price secured by his mortgage of the premises which he then conveyed to the real purchaser "under and subject to the payment of the mortgage debt." Payment of the principal debt having been defaulted, the mortgage was foreclosed with due notice to the mortgagor's grantee as terre-tenant and a deficiency judgment was entered against the straw mortgagor on his bond. The straw man paid the judg ment against himself and then sued his grantee to recover the amount of his loss. The facts being undisputed, the court below gave judgment for the plaintiff for want of a sufficient affidavit of defense. On appeal, the Superior Court affirmed, holding that the straw mortgagor had a right to indemnity from his grantee (the real party in interest) for his loss on the principle that a grantor who conveys under and subject to a mortgage is entitled to indemnity from his grantee against loss suffered by reason of the grantor's personal liability on his bond. The effect of the Superior Court's ruling was to confirm that the straw grantee had valid legal title to the property when he mortgaged it and, consequently, he was entitled to the protection given any other titleholder who conveys subject to a mortgage. Here, again, the actuality of a straw man's title to realty, with all of its legal implications, was recognized and fully respected.
There is nothing legally, or even morally, wrong with a straw transaction which is utilized to effectuate a legitimate purpose. Such arrangements are by no means infrequent. In the instant case, it is conceded that there was neither fraudulent intent nor design on the part of anyone to the transaction. The loan applied for by the Henons, if made, was to be made by Pennsylvania fiduciaries from trust funds in their keeping. At the time of this transaction (1931), Article III, Section 22, of the Pennsylvania Constitution prohibited legislative authorization of investments by fiduciaries in the bonds or stock of any private corporation. According to then current opinion, a corporate bond secured by a mortgage to a trustee for the benefit of the bondholders was not considered a legal investment for Pennsylvania trust funds. It was not until the decision of this court in Haroney's Estate, 311 Pa. 336, 166 A. 914, in 1933 that such an investment was established as legal for fiduciaries.
For support of its ruling in the instant case, the learned court below relied on the opinion of the Court of Common Pleas of Philadelphia County in Commonwealth v. Corner Realty Co., 41 D. & C. 236, from which it quoted approvingly as had also the Court of Common Pleas of Lackawanna County in Commonwealth v. City Realty Co., 56 D. & C. 156. The Corner Realty Co. case, supra, was the genesis of the idea that a straw grantee of a corporation for the purpose of mortgaging the property for a proper corporate use is not a predecessor in title to the corporation in relation to its reacquisition of the property from the straw. Certain it is that the rationale of that decision did not stem from anything contained in the 1933 amendment of Section 1401 of The Fiscal Code of 1929. A reading of the opinion in the Corner Realty Co. case impresses that it was chiefly an expression of moral indignation that a lien of the Commonwealth for subsequently settled State taxes could be junior to the lien of a prior encumbrance placed by a straw grantee. Thus, the court spoke of the corporation's conveyance to the straw man as a "device [capable] of evading liability for corporate taxes imposed upon the real and corporate owner." But, this is not a case of either tax collection or tax evasion. True enough, behind the lien here involved is the Commonwealth's claim for some unpaid taxes; but, the question with which this case is concerned is the construction of a statute providing for the priority of the Commonwealth's liens under certain circumstances.
The salutary purpose of the 1933 amendment of Section 1401 of The Fiscal Code of 1929 was to vouchsafe the security interest of a mortgagee who, for value, held a first lien upon real estate later conveyed to a corporation. Without the 1933 proviso, there existed the possibility that a tax lien of the Commonwealth, although junior in time, would, nevertheless, be senior in right to a first mortgage lien if and when the mortgaged property should be sold at judicial sale. The possible hardship in such a situation was palpaable; hence the 1933 amendment. Of course, if a mortgagee's conduct, in circumstances such as are present in the instant case, is motivated by a desire to aid the grantor in evading payment of corporate taxes to become due the Commonwealth, then the transaction could be set aside or at least held ineffectual, as to the Commonwealth's rights, because of the vitiating fraud. But, where the corporate conveyance of realty and the giving of a mortgage thereof are parts of a bona fide arrangement for the corporation's benefit, the lien of the mortgage should be secured to the mortgagee unimpaired, as the 1933 amendment plainly allows. No just purpose will be served by fictitiously denying, subsequently, to the straw holder of the legal title status as a predecessor in title. And, that is especially so where, as here, there were no State taxes settled against the corporation at the time the mortgage lien attached and the full proceeds produced by the encumbrance went into the corporation's treasury forthwith for proper business uses.
The judgment is reversed and is here entered for the defendant terre-tenants.
By amendment of Article III, Section 22, of the State Constitution, adopted November 7, 1933, tbe General Assembly was authorized to prescribe "tbe nature and kind of investments" of trust funds by fiduciaries.