Opinion
No. 32009
Decided February 23, 1950.
Corporations — Nonprofit corporations may be formed for purpose not involving pecuniary gain — Section 8623-97, General Code — Statement in articles of incorporation, not conclusive — True test is actual character of proposed corporation — Character determined by authority corporation actually possesses and may exercise — Corporation authorized to acquire existing corporation for profit — And to engage in real estate transactions and establish trust fund — Not nonprofit corporation, when — Profit may consist of saving expense or obtaining low-cost service — Secretary of State may refuse to record articles of incorporation, when.
1. Under the provisions of Section 8623-97, General Code, a corporation not for profit may be formed for any purpose or purposes not involving pecuniary gain or profit for which natural persons may lawfully associate themselves.
2. A statement in articles of incorporation characterizing a proposed corporation as one not for profit is not conclusive as to its nature.
3. The true test is the actual character of the proposed corporation.
4. Such character is determined not by the authority that probably will actually be exercised by the corporation but rather by the authority it actually posseses and may exercise under the articles recorded.
5. A corporation authorized to acquire the assets and liabilities of an existing corporation for profit and to purchase, convey, lease, develop and operate realty and to devote surplus funds to a trust for the benefit of the citizens and the development of the community in which the members reside is not a corporation not for profit.
6. Such profit may consist of a saving of expense or the obtaining of a service at a cost lower than that which otherwise would be paid therefor.
7. When it is apparent that a proposed corporation not for profit does not meet the statutory requirements for a corporation of that character, it is the duty of the Secretary of State to refuse to record the articles of incorporation.
IN MANDAMUS.
The four relators are residents of the village of Greenhills, Ohio, and are the signers of articles of incorporation of a proposed nonprofit corporation which is to be known as Greenhills Home Owners' Corporation and which is to succeed an existing corporation for profit bearing the same name.
The respondent is the Secretary of State of the state of Ohio.
The relators have invoked the original jurisdiction of this court for the purpose of obtaining a writ of mandamus to require the respondent to record their articles of incorporation.
To the relators' petition the respondent has filed a demurrer on the ground that the facts alleged are not sufficient to constitute a cause of action.
Mr. Charles P. Taft, Messrs. Steer, Strauss Adair and Mr. Charles H. Tobias, Jr., for relators.
Mr. Herbert S. Duffy, attorney general, and Mr. Nelson Lancione, for respondent.
In the language of Section 12283, General Code, is the recording of the proposed articles of incorporation "an act which the law specially enjoins as a duty resulting from" the office of the respondent Secretary of State?
As disclosed by the petition, the purpose clause of the articles of incorporation of the proposed nonprofit corporation reads as follows:
"The purpose or purposes for which said corporation is formed are: To promote the social welfare of the community known as the village of Greenhills, Hamilton county, Ohio, and the surrounding territory; and to secure the benefits of home ownership to the present inhabitants of the area and to such persons of similar character and modest financial status who may become inhabitants of the area; to attain said purposes by acquiring the assets, liabilities and good will of the Greenhills Home Owners' Corporation, presently organized and existing under the laws of Ohio; by purchasing all or any part of the property known as the 'Greenhills Greenbelt' community, in Springfield township, Hamilton county, Ohio, now owned by the United States Government; by conveying, leasing, developing or operating such property as the aforesaid purposes, the civic interest of the Greenhills community, and principles of good land and village planning demand; by devoting any funds remaining after payment of the costs expended toward and in furtherance of the aforesaid purchase and development to a public charitable trust to be known as the Greenhills Civic Trust, for the benefit of the civic advancement and development of the general community in and about Greenhills, and the general social welfare of the citizens thereof; and by doing any or all other things in furtherance of said purpose to the same extent as natural persons might or could do.
"Each person becoming a member of this corporation agrees thereby, as a condition of membership, that any surplus receipts of the corporation which might otherwise in any way inure to his benefit as pecuniary gain or profit, may not be accepted or received by him as such member."
In declining to record the articles of incorporation the respondent stated that his refusal was for the reason that "a real estate business cannot be incorporated as a corporation not for profit, under the decision in State, ex rel. [ Atty. Genl.], v. Home Co-operative Union, 63 Ohio St. 547."
The statute under which the relators wish to incorporate is Section 8623-97, General Code, which reads as follows:
"A corporation not for profit may be formed hereunder for any purpose or purposes not involving pecuniary gain or profit for which natural persons may lawfully associate themselves, provided that where the General Code makes special provision for the filing of articles of incorporation of designated classes of corporations not for profit, such corporation shall be formed under such provisions and not hereunder."
In the first sentence in their articles of incorporation the relators state that they desire to form a corporation not for profit; and in their purpose clause they state that any person becoming a member of the corporation will not accept surplus receipts of the corporation which might "inure to his benefit as pecuniary gain or profit."
Are these self-designating statements conclusive as to the character of the proposed corporation?
This court has followed the general rule by answering this question in the negative. In his opinion in the case of Celina Mercer County Telephone Co. v. Union-Center Mutual Telephone Assn., 102 Ohio St. 487, 133 N.E. 540, 21 A.L.R., 1145, Hough, J., said:
"How may it be determined whether a corporation or association is one for profit or not for profit? Does the filing of articles of incorporation, in which the declaration is made that it is not for profit, and on which the charter is issued, govern or determine this question? Is the issuance or nonissuance of capital stock controlling, or is it whether a business is to be engaged in, and operated with consideration of the character of that business and the method of conducting it, that is the true test?
"We think the latter."
To the same effect is the following restatement of the rule in the case of Read v. Tidewater Coal Exchange, Inc., 13 Del. Ch. 195, 116 A. 898:
"Nor would a mere declaration in its certificate of incorporation that it was organized not for profit, be sufficient to stamp upon it a nonprofit character. In each case, when the corporation is examined, the true facts must be ascertained and the corporation judged accordingly, no matter what its scheme of operation, or its pretensions may be."
In 1 Fletcher Cyclopedia of the Law of Private Corporations (Perm. Ed.), 240, Section 71, the rule is summarized as follows:
"The particular classification within which a corporation falls depends upon the purposes for which it is formed and the powers conferred upon it."
The relators rely on the decision in the case of State, ex rel. Steubenville Gas Electric Co., v. Taylor, Secy. of State, 55 Ohio St. 61, 44 N.E. 513, in which it was held that the duty of the Secretary of State as to filing articles of incorporation is controlled by the statutes of the state and not by the discretion of the officer. However, a study of that case discloses that the Secretary of State refused to file amendments to articles of incorporation, and this refusal was sustained by the court in denying a writ of mandamus. In the opinion it was said by Spear, J.:
"The foundation of corporations in this state is regulated by general laws. When the proposed incorporation shows compliance with those laws it is entitled to articles of incorporation; if it fails to so comply, the application is to be refused upon that ground, and that is sufficient."
The next question involves the decision of this court in the case of State, ex rel. Attorney General, v. Home Co-operative Union, 63 Ohio St. 547, 59 N.E. 220, upon which the respondent relies. The syllabus reads as follows:
"Companies incorporated under Section 3235, Revised Statutes, for the purpose of dealing in real estate are necessarily for profit, and must be so organized."
The relators insist, first, that this decision is not applicable here, and, second, that, if it is applicable, it should be overruled. The court finds itself unable to agree with either of these contentions.
The instant case illustrates the soundness and the applicability of that decision. Is the proposed corporation to be one "not involving pecuniary gain or profit" to its members as contended by the relators?
A study of the previously quoted purpose clause reveals that this corporation will be authorized "to attain said purposes by acquiring the assets, liabilities and good will of the Greenhills Home Owners' Corporation * * * [a corporation for profit]; by purchasing all or any part of the property known as the 'Greenhills Greenbelt' community * * *; by conveying, leasing, developing or operating such property as the aforesaid purposes, the civic interest of the Greenhills community, and principles of good land and village planning demand; by devoting any funds remaining after payment of the costs expended toward and in furtherance of the aforesaid purchase and development to a public charitable trust to be known as the Greenhills Civic Trust, for the benefit of the civil advancement and development of the general community in and about Greenhills, and the general social welfare of the citizens thereof; and by doing any or all other things in furtherance of said purpose to the same extent as natural persons might or could do." Thus, the proposed nonprofit corporation will have authority to acquire the assets and liabilities of an existing corporation for profit, to purchase realty, to convey realty, to lease realty, to develop realty, to operate realty, to devote surplus funds to a trust for the benefit of the citizens and the development of the community, and to do all things a natural person might or could do in furtherance of the objectives.
Is this broad authority consistent with the concept of a corporation not dealing in real estate and not for profit? To so hold would require a disregard of the foregoing plain language. However, the relators point to the additional provision that each member of the corporation agrees not to accept pecuniary gain or profit from any corporate surplus. One difficulty with this contention is the clear purpose to confer both direct and indirect benefits to members of the corporation irrespective of the realization of a surplus. That these benefits include pecuniary gain or profit is demonstrated by the expressed purpose to secure the benefits of home ownership to persons of "modest financial status." (Italics supplied.) Obviously it is a most commendable objective to encourage and assist the purchase of homes by those who otherwise could not afford such an acquisition. But just as obviously this fact does not warrant a disregard of the statutory provision enacted by the General Assembly. As was said in the opinion in the case of State, ex rel. Troy, Pros. Atty., v. Lumbermen's Clinic, 186 Wn. 384, 58 P.2d 812:
"Profit does not necessarily mean a direct return by way of dividends, interest, capital account or salaries. A saving of expense which would otherwise necessarily be incurred is also a profit to the person benefited. If respondent renders to its incorporators or members, or to businesses in which they are interested and in whose profits they share, a service at a cost lower than that which would otherwise be paid for such service, then respondent's operations result in a profit to its members."
But in the instant case even any surplus placed in the trust fund may be used for the "development of the general community" in which the relators live.
In the matter of incorporation the controlling question, of course, is not what part of its authority probably will actually be exercised by the corporation but rather what authority it actually possesses and may exercise under the articles recorded.
Under the circumstances the respondent Secretary of State properly declined to record the proffered articles of incorporation on the ground that the proposed corporation as the successor to a corporation for profit fails to meet the statutory requirements for a corporation not for profit. Hence, in the absence of a clear legal duty to record the articles, the demurrer to the petition must be sustained and the writ denied.
Writ denied.
MATTHIAS, HART, ZIMMERMAN, STEWART and TURNER, JJ., concur.
TAFT, J., concurs in paragraphs one, two, three, four and seven of the syllabus, but dissents from paragraphs five and six of the syllabus and from the judgment.
It seems to me that the conclusion reached in paragraph five of the syllabus, which is apparently based upon the statement in paragraph six of the syllabus, is contrary to previous decisions of this court.
In State v. Standard Life Assn., 38 Ohio St. 281, the first paragraph of the syllabus reads:
"Corporations organized under the laws of Ohio, are of two classes: 1st. Those organized for profit, which must have a capital stock owned by stockholders. 2d. Those organized for purposes other than for profit, consisting of members associated together for a lawful purpose. To the second class belong corporations formed under the provisions of Section 3630 of the Revised Statutes for the mutual protection and relief of its members, and for the payment of stipulated sums of money to the family or heirs of deceased members."
The corporation involved in that case was obviously of a kind designed to provide benefits for its members. Under the fifth and sixth paragraphs of the syllabus in the instant case, such corporation could not have been classified as a corporation organized "for purposes other than for profit."
In Snyder v. Chamber of Commerce, 53 Ohio St. 1, 41 N.E. 33, the syllabus reads:
"The declaration in the articles of incorporation of a chamber of commerce, that it 'is formed not for profit,' is not inconsistent with a provision for capital stock, nor with a declaration that it is intended to promote the prosperity of the city in which it is located; and the trustees or directors of such corporation are personally liable for all its debts by them contracted."
In the court's opinion by Shauck, J., it is said:
"Nor was the view of the trial court justified by the fact that the corporation was intended to promote the growth and prosperity of the city, and thus to confer incidental benefit upon its members and officers in common with others owning property in the city or doing business therein. * * * Corporations for profit within the meaning of the statute are those which are formed for the prosecution of business enterprises with a view to realizing gains to be distributed as dividends among the shareholders in proportion to their contributions to the capital stock."
Here, again, under paragraphs five and six of the syllabus in the instant case, the corporation involved in the Snyder case could not have been classified as one "not for profit."
The foregoing cases are particularly inconsistent with paragraphs five and six of the syllabus in the instant case because both cases held that the corporations there involved must be classified as ones "not for profit." The question was not, as in the instant case, merely whether or not they could be so classified.
The syllabus of State, ex rel. Atty. Genl., v. Home Co-operative Union, 63 Ohio St. 547, 59 N.E. 220, must be read in the light of the statute referred to therein. The only reasons given by the court in its brief opinion for the conclusions therein expressed were:
"Such corporations [dealing in real estate] expire by limitation of the statute in 25 years; and it would not be possible for the defendant to conduct its business in the period limited by the statute so as to avoid loss to a large number of its members."
This 25-year limitation no longer appears in our statutes.
In the opinion in Read v. Tidewater Coal Exchange, Inc., 13 Del. Ch. 195, 116 A. 898, immediately preceding the portion thereof quoted in the majority opinion, appears the following:
"Whether dividends are expected to be paid may, generally speaking, be taken as the test by which we are to determine whether, or not, a given corporation is organized for profit. Perhaps a better way to put it would be to say that a corporation is for profit when its purpose is, whether dividends are intended to be declared or not, to make a profit on the business it does which in reason belongs to it and which if its affairs are administered in good faith would be available for dividends. Subterfuges by which a corporation allowed its profits to be diverted to those owning it, though not in the form of dividends, would manifestly not remove from the corporation its feature of profit making."
The paragraph in the opinion in that case following the one containing the part quoted in the majority opinion reads in part:
"Profit furthermore must be something of a tangible or pecuniary nature. Intangible benefits, not capable of measurement in definite terms, though of value to the recipients, cannot be called profits."
The nature of the corporation there involved appears, from what was said in the Delaware court's opinion at page 201, as follows:
"From the foregoing it appears that the exchange was a sort of trade agency created and maintained by railroads and coal shippers, to assist in removing the general adverse conditions existing at tidewater, conditions which were, as is well known, causing great and alarming concern along the entire eastern seaboard."
It is also stated in that opinion at page 211:
"I have no doubt that its members were benefited by its activities, and in an indirect way this benefit doubtless reflected itself in their financial betterment."
The Delaware court held that the corporation there involved was a corporation "not for profit." Its decision and reasoning appear to be inconsistent with the fifth and sixth paragraphs of the syllabus in the instant case.
The majority opinion in the present case contains a quotation from 1 Fletcher Cyclopedia of the Law of Private Corporations (Perm. Ed.). Section 68 in that volume reads in part:
"Within the meaning of such a provision, a corporation 'for pecuniary profit' has been defined to be a corporation organized for the pecuniary profit of its stockholders or members. Profit is used in a pecuniary sense, and does not extend to intangible benefits.
"* * *
"Nonprofit corporations are not confined to those which are eleemosynary or charitable, but include business or auxiliary corporations not for profit, as well."
In American Jersey Cattle Club v. Glander, Tax Commr., 152 Ohio St. 506, the first paragraph of the syllabus reads:
"The fact, that a corporation is organized and operated as one not for profit, does not mean that its enterprises may not be conducted for gain, profit or net income to the corporation as a legal entity apart from its members."
It has been suggested that the writ of mandamus should be denied since relator does not have a clear legal right to the relief sought, because it is doubtful under the law whether the proposed corporation is one not for profit. In effect, this amounts to saying that, if the law is not clear, this court will permit the Secretary of State to determine what it is. If the law is clear, there should be no necessity of bringing this matter to the court, but, if it is not clear, it is the function of this court to determine what it is.