Case ID: ala_121/html/0340-01.html
Source: Caselaw Access Project
Author: {"author": "McCLELLAN, O. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

The Christian & Craft Grocery Co. v. Fruitdale Lumber Co.
    
      Action Against Partners Claiming to be a Corporation.
    
    1. Corporation; when parties estopped to deny and when not. Where parties contract with each other as corporations they are in respect of such contracts estopped to deny corporate existence; and, conversely, where a party contracts with another hut not as a corporation, he is not as to such contract estopped to deny the corporate existence of such other party, or to show that the entity with which he dealt was an individual or a partnership.
    2. Bane. — Where one seeks to establish and enforce by suit a personal liability against certain individuals who defend on the ground that they are only stockholders and officers of a de facto corporation with which plaintiff dealt as a corporation, it is competent and material for the plaintiff to show that he did not deal with the defendants as a corporation hut as a partnership; and this though the partnership assumed a name more appropriate to a corporation than a partnership and did business under it, and the plaintiff contracted with the defendant under that name.
    3. Declarations of a party buying goods that his company is a partnership are admissible. — If one of several individuals purchases goods under a firm or corporate name and at the time of the purchase represents to the seller that he and his associates are a partnership doing business as partners under said name, it is competent for the seller, when suing the individuals for the price of the goods sold, to prove the declarations to show the character of the dealings.
    4. Circumstances tending to show bad faith in creating a corporation when admissible. — When a plaintiff sued certain individuals as partners doing businéss in a firm name, and asserts and produces evidence tending to prove that he dealt with them in the contract on which he sues, as a partnership, and they plead that they are members of a corporation, the facts and circumstances tending to show that there was no bona fide intention to create a corporation, such as there was no corporation fee paid as required by statute, no money or property of value paid in as corporation stock, no meeting of directors and the like, are competent evidence.
    5. Corporation organised in form of law when it can be assaulted as fraudulent.- — Where there is no bona fide intention to organize a real corporation with capital to respond to its liabilities, but the purpose is to put forward a sham without capital in order to cover a partnership exempt from liability as a partnership, the purpose and effect are abortive, and the pretended existence of such corporation is open to collateral attack as a fraudulent device, and the pretended corporation is to be taken as non existent, except as to those who have contracted with it as a corporation in such way as to estop themselves to show the fraud even though the proceedings to incorporate are on their face regular and show a complete corporation.
    6. Fee not paid does not prevent organisation of die facto corporation. — If a commission is issued to a corporation organized under our statutes, the fact that the required fee ■ whs not paid will not of itself prevent the corporation from having de facto existence. But its contracts will be void.
    Appeal from, the Circuit Court of Washington.
    Tried before the Hon. William S. Anderson,
    
      The Christian Si Craft Grocery Co. sued the defendants Hall and others as partners doing business under the firm name of the Fruitdale Lumber Company, for goods sold to them. Two of the defendants pleaded denying that they were members of the partnership named and that there was no such partnership. Certain proceedings in the probate court of Washington county were introduced in evidence to show that the Fruitdale Lumber Company was a corporation. The plaintiffs offered to prove by the declarations of the defendant, Hall, made at the time he purchased the goods of plaintiffs on account of which this suit is brought, and by other evidence noticed in the opinion, that the defendants were partners doing business under the firm name of the Fruitdale Lumber company, and that the plaintiffs contracted with the defendants as partners, but this evidence was excluded on the ground that the existence of the corporation could not be assailed collaterally. The plaintiff further offered to prove the circumstances attending the attempt to create this Fruitdale Lumber company, into a corporation. These facts and circumstances are noticed in full in the opinion and need not be stated here. The court refused to permit this evidence on the same ground. These rulings of the court are presented for review in this appeal.
    Cause reversed.
    Citas. L. Bromberg, Jr., and G. L. & H. T. Smith, for appellant,
    contended that plaintiff was not estopped to deny the existence of the corporation because it did not deal with a corporation; that there was no corporation either de jure or de facto; and that there being no corporation the parties were bound as partners, citing, Eaton v. Walker, 6 Lawyers’ Co-operative Rep. 102; Fuller v. Roe, 57 N. Y. 23; Peltus v. Aiken, 61 Ill. 454; Jones v. Aspen Hardware Go., 40 Pac. Rep. 459; Guckert v. Haicke, 28 Atl. 249; Abbott v. Ref. Go., 4 Neb. 416; Thompson on Corp., Sec. 508; Beach on Partnerships, Sec. 4; Cook on Stock & Stockholders, Sec. 233; Snider’s Sons’ Go. v. Troy, 91 Ala. 228; Flag v. Stowe, 85 Ill. 164; Hurt v. Salisbury, 55 Md. 310; State v. Webb, 110 Ala. 227; Elyton Land Go. v. B’ham Warehouse & Elevating Go., 92 Ala. 424; Davidson v. Hobson, 59 Mo. App. 130.
    
      W. D. Dunn and McIntosh & High, contra,
    
    contended that partnership cannot be proven by the declarations of one of the alleged partners; parties dealing with a corporation estopped to deny corporate existence,- or to inquire into irregularities in its formation; a partnership is not the necessary legal consequence of an abortive attempt, at incorporation, Humes v. O’Brien & Washington, 74 Ala. 81; Central R. R. & Banking Go. v. Smith, 76 Ala. 579; Thornton v. Kerr & Hope, 6 Ala. 823; Gross et al. v. Langley, 50 Ala. 8; Elyton Land Go. v. B’ham Warehouse & Elevator Go., 92 Ala. 407; Cen. Ag. & Mech. Ass’n v. Gold Life Ins. Go., 70 Ala. 132; Bibb v. Hall & Farley, 101 Ala. 79; Pond v. Git. Mut. Bldg. d.Loan Ass’n, 61 Ala. 232.
   McCLELLAN, O. J.

— The appellees in this case contend for, the appellant recognizes, and nobody doubts, the principle that where parties contract with each other as corporations they are in respect of such contracts estopped to deny, corporate existence. It must be equally free from doubt that where a party contracts with another but not as a corporation, he is not as to such contract estopped to deny the corporate existence of such other party or to show that the entity with which he dealt was an individual or partnership. So that in a case like the present one, where the plaintiff, the Grocery Company, seeks to establish and enforce a personal liability against certain individuals who defend on the ground that they were only stockholders and officers of a de facto corporation with which plaintiff, they assert, dealt as a corporation, it is obviously competent and most material for the plaintiff to show that it did not deal with the defendants as a corporation but as individuals composing a partnership; and this though the partnership assumed and did business under a name more appropriate to a corporation than to a partnership, and the plaintiff contracted with the defendants under that name. The plaintiff sought to prove that it sold its goods to the Fruitdale Lumber Co. as a partnership composed of the individuals now sued, and not as a corporation, by testimony to the effect that the defendant Hall purchased said goods for the Fruitdale Lumber Co, on tlie representation that said company was a partnership composed of himself and the other defendants. The trial court excluded this evidence. This was error. It ■was not competent to show that the Fruitdale Lumber Co. was not a corporation de jure or de facto, nor that it was a partnership composed of the defendants; but it was competent as tending to show that the plaintiff dicl not contract with that company as a corporation but as ■a partnership, and hence was not estopped to show by Other evidence, if any such it could adduce, competent to that result that said company was not a corporation, but was a partnership composed of the defendants. Whether this error was prejudicial to plaintiff and, therefore, available to reverse the judgment depends upon whether the presumption of injury from error committed is overturned by unconflicting evidence that the Fruitdale Lumber Co. was in fact a corporation. Assuming that the jury would have believed the excluded testimony, as they had a right to do, and have found in line with it, as it would have been open .to them to do, that plaintiff did not deal with the Fruitdale Lumber Co. as a corporation, the effect of admitting this testimony would have been to raise the estoppel resting on plaintiff from the fact that it had contracted with the lumber company in the name under which it was attempted to be incorporated, or was nominally incorporated, and to leave the plaintiff free to prove by other evidence that the company was a partnership Avhose members were individually liable for plaintiff’s debt. And we could not assume that there was no such other evidence, even if the record were silent on the point: We should have to take it that there was such other evidence which plaintiff was prevented to introduce by the ruling which virtually estopped him to show the fact it would have tended to establish; and we should have to allow the presumption of injury from error to stand. But the record is not silent, it does not stop here. It shows further that the plaintiff proposed to assault and offered evidence attacking the corporate existence of the •Fruitdale Lumber Co. It proposed to show that said company had never paid the incorporation fee required by the act of 1895, without which by the terms of the ■ statute the issuance of a commission to the corporators to do business as a corporation is forbidden and all contracts attempted to be made by the concern are wholly void. — Acts 1894-5, pp. 1024-5-6. And in addition to this, it offered further evidence tending to show that the pretended corporation was a sham, a delusion and a snare, fraudulent in intent and execution, wholly without capital and devised solely to cloak a partnership enterprise against individual liability of partnership- members. The evidence offered and rejected went to show that nothing Avas paid for the shares of the pretended corporation’s pretended capital stock, that the affidavits of subscriptions made and paid were knoAvingly false and fraudulent, that no money nor any property of value was ever paid or transferred to the company to constitute its capital, that no corporate function Avas ever performed except the pretended election of officers‘and directors, that no meeting of the directors Avas ever held, but the business for which the corporation was pretended to be formed Avas carried on by these defendants as individuals associated together as partners, and that all this was in furtherance and execution of an intention all along existing to carry on a partnership by means of the pretended incorporation in such a way as that the company would have no assets to meet debts, and as that these individuals could not be held liable for debts contracted in the name of the company. We are, therefore, clear to the conclusion not only that the plaintiff should have been alloAved to prove the declarations of Hall that the Fruitdale Lumber Oo. Avas a partnership composed of the defendants, but that all the evidence offered by it tending to shOAV that the incorporation of said company was a fraud and a pretense intended to cover a partnership business, to shield the partners from individual liability and to set up a straAV corporation without capital and without assets, should have been alloAved to *go to the jury. And the fact that the fee for incorporation had not been paid Avas also competent in this connection, as some evidence toward a conclusion of fraud — a badge of fraud, so to speak, going in some degree to show that the parties did not in good faith intend and attempt to bring into being a real, substantive artificial entity. But this fact of the non-payment of the fee would not, of itself, in our opinion, prevent the imperfect and incomplete organization from being a de facto corporation. It is a prerequisite to the issuance of a commission, but if without it, a commission is issued, the contemplation of the statute is not that there is no de facto corporation, but that the contracts of such a corporation should be wholly void.

Of course the views we have expressed lead to and involve this proposition: That where there is no bona fide purpose and effort to organize a real corporation with a capital to respond to its liabilities, but the purpose and effort is to put forward a sham without capital or assets to cover a real partnership and the carrying on of a partnership business exempt from liability as a partnership, the purpose and effort are abortive, the pretended existence of a corporation is open to collateral attack as a mere fraudulent device, and, though on the face of the proceedings there is a regular and complete incorporation, the pretended corporate entity is to be taken as non-existent except as to persons who have contracted with it as a corporation in such way as to estop them- . selves to show the fraud.

For the error committed by the trial court in excluding the evidence referred to, offered by plaintiff, the judgment must be reversed. The cause is remanded.

Reversed and remanded.