Title: Hugh W. Brown, Jr. and Alabama MBA, Inc. v. W.P. Media, Inc.

State: alabama

Issuer: Alabama Supreme Court

Document:

REL:2/20/2009
Notice: This opinion is subject to formal revision before publication in the advance
sheets of Southern Reporter.  Readers are requested to notify the Reporter of Decisions,
Alabama Appellate Courts, 300 Dexter Avenue, Montgomery, Alabama 36104-3741 ((334) 229-
0649), of any typographical or other errors, in order that corrections may be made before
the opinion is printed in Southern Reporter.
SUPREME COURT OF ALABAMA
OCTOBER TERM, 2008-2009
____________________
1061314
____________________
Hugh W. Brown, Jr., and Alabama MBA, Inc.
v.
W.P. Media, Inc.
Appeal from Jefferson Circuit Court
(CV-05-2921)
SMITH, Justice.
The plaintiffs below, Alabama MBA, Inc., and Hugh W.
Brown, Jr., appeal from a summary judgment in favor of the
defendant, W.P. Media, Inc., in this action seeking damages
for breach of contract.  We reverse and remand.
1061314
2
Facts and Procedural History
In 2001, W.P. Media and Alabama MBA executed a contract
(hereinafter "the operating agreement") whereby the parties
agreed to operate a joint venture named Alabaster Wireless
MBA, LLC, a corporation intended to provide wireless Internet
services to consumers.  In the contract, W.P. Media agreed to
create a wireless network to be used by Alabaster Wireless and
to provide certain technical support once the wireless network
was created.  Under the operating agreement, Alabama MBA was
to contribute capital in the amount of $79,300 and W.P. Media
was to contribute "proprietary technology" equal to the same
amount.  Brown signed the contract on Alabama MBA's behalf as
its chairman of the board. 
In May 2005, Brown and Alabama MBA filed a complaint in
the Jefferson Circuit Court alleging that, among other things,
W.P. Media had breached the operating agreement by failing to
construct a wireless network.  Further, in a separate count,
Brown alleged that in 2003 he had personally loaned W.P. Media
$100,000 pursuant to a loan agreement and that W.P. Media had
breached the loan agreement. 
1061314
3
In December 2005, Brown moved for a partial summary
judgment on the breach-of-loan-agreement claim.  The trial
court entered a partial summary judgment for Brown on that
claim and awarded damages.  The trial court also certified its
judgment as final under Rule 54(b), Ala. R. Civ. P.  No appeal
was taken from that judgment, and that judgment is not at
issue in this appeal.  
In January 2007, W.P. Media moved for a summary judgment
on the remaining claim that it had breached the operating
agreement.  Specifically, W.P. Media maintained that articles
of incorporation for Alabama MBA were not filed until 2002,
after the operating agreement had been executed.  Thus, W.P.
Media contended, the operating agreement was void because
Alabama MBA lacked capacity to enter into the contract.
Additionally, W.P. Media contended that Alabama MBA, as an
allegedly improperly incorporated entity, was not a real party
in interest and was thus due to be dismissed from the case.
The trial court denied W.P. Media's summary-judgment
motion.  W.P. Media subsequently filed a motion for the trial
court to "reconsider" the denial of the motion, a motion to
compel arbitration, and a motion for a change of venue.  After
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4
a hearing, the trial court issued an order setting aside its
previous order denying W.P. Media's motion for a summary
judgment, entered a summary judgment for W.P. Media on the
breach-of-contract claim, and held that the motions to compel
arbitration and for a change of venue were moot.  Brown and
Alabama MBA appeal. 
Standard of Review
"'This Court's review of a summary judgment is
de novo. Williams v. State Farm Mut. Auto. Ins. Co.,
886 So. 2d 72, 74 (Ala. 2003).  We apply the same
standard of review as the trial court applied.
Specifically, we must determine whether the movant
has made a prima facie showing that no genuine issue
of material fact exists and that the movant is
entitled to a judgment as a matter of law.  Rule
56(c), Ala. R. Civ. P.; Blue Cross & Blue Shield of
Alabama v. Hodurski, 899 So. 2d 949, 952-53 (Ala.
2004).  In making such a determination, we must
review the evidence in the light most favorable to
the nonmovant.  Wilson v. Brown, 496 So. 2d 756, 758
(Ala. 1986).  Once the movant makes a prima facie
showing that there is no genuine issue of material
fact, the burden then shifts to the nonmovant to
produce "substantial evidence" as to the existence
of a genuine issue of material fact.  Bass v.
SouthTrust Bank of Baldwin County, 538 So. 2d 794,
797-98 (Ala. 1989); Ala. Code 1975, § 12-21-12.
"[S]ubstantial evidence is evidence of such weight
and quality that fair-minded persons in the exercise
of impartial judgment can reasonably infer the
existence of the fact sought to be proved."  West v.
Founders Life Assur. Co. of Fla., 547 So. 2d 870,
871 (Ala. 1989).'"
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5
Prince v. Poole, 935 So. 2d 431, 442 (Ala. 2006) (quoting Dow
v. Alabama Democratic Party, 897 So. 2d 1035, 1038-39 (Ala.
2004)).
Discussion
The issue in this case is whether Alabama MBA was
properly incorporated both at the time the operating agreement
was executed and at the time Alabama MBA and Brown filed the
underlying action.
It is undisputed that, at the time the operating
agreement was executed, the articles of incorporation for
Alabama MBA had not been filed.  However, Brown filed articles
of incorporation for Alabama MBA in the Jefferson County
Probate Court in October 2002, and the secretary of state's
records indicate that Alabama MBA was incorporated at that
time.  The record reveals that Alabama MBA did not hold an
organizational meeting, pay taxes, issue stock, or adopt
bylaws until early 2007.  Further, before then Alabama MBA had
no bank accounts or employees; all Alabama MBA's expenses were
paid by Brown personally.
In its summary-judgment motion, W.P. Media argued that
because Alabama MBA was not incorporated at the time the
1061314
No authority is cited either below or on appeal for the
1
proposition that an improperly formed or putative corporation
lacks capacity to enter into a contract, and thus that
question is not before this Court.  
6
operating agreement was executed, it lacked capacity to
contract.  Thus, W.P. Media maintained, the contract was "void
ab initio" and no action for its breach could be maintained.1
Corporate existence begins when articles of incorporation
are filed, unless a later effective date is specified in the
articles.  Alabama Code 1975, § 10-2B-2.03, states: 
"(a) 
Unless 
a 
delayed 
effective 
date 
is
specified, the corporate existence begins when the
articles of incorporation are filed. 
"(b) The probate judge's filing of the articles
of incorporation is conclusive proof that the
incorporators satisfied all conditions precedent to
incorporation except in a proceeding by the state to
cancel or revoke the incorporation or involuntarily
dissolve the corporation."
(Emphasis added.)
There is no dispute in the record that the articles of
incorporation for Alabama MBA were filed in 2002, after the
operating agreement had been executed.  Even so, Alabama MBA
contends that it existed as a "de facto corporation" at the
time the operating agreement was executed.  
"[A]n improperly formed corporation can nevertheless
exist as a de facto corporation. 'A de facto
1061314
7
corporation ... can be brought into being when it
can be shown that a bona fide and colorable attempt
has been made to create a corporation, even though
the efforts at incorporation can be shown to be
irregular, informal, or even defective.' Harris v.
Stephens Wholesale Bldg. Supply Co., 54 Ala. App.
405, 408, 309 So. 2d 115, 117 (1975)." 
Eagerton v. Second Econ. Dev. Coop. Dist. of Lowndes County,
909 So. 2d 783, 789 (Ala. 2005).  In contrast, a "de jure
corporation" is "[a] corporation formed in accordance with all
applicable laws and recognized as a corporation for liability
purposes."  Black's Law Dictionary 366 (8th ed. 2004).  It
appears undisputed that Alabama MBA was not a de jure
corporation at the time the operating agreement was executed.
Alabama MBA contends that it existed as a de facto
corporation at the time the operating agreement was executed;
the record, however, reveals no substantial evidence of "bona
fide and colorable" attempts to incorporate Alabama MBA
occurring before the execution of the operating agreement.
Therefore, we hold that Alabama MBA did not exist as a de
facto corporation at the time the operating agreement was
executed.  
Although Alabama MBA might not have existed as either a
de jure corporation or a de facto corporation, Alabama MBA
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8
contends that W.P. Media is nevertheless estopped from denying
Alabama MBA's corporate existence.  We agree.
"Corporate action may also be established under
principles of estoppel, whether or not an entity or
organization qualifies as a de facto corporation.
The doctrine is based on conduct by a party which
recognizes an organization as a corporation or an
express or implied representation by a corporation
that it is a corporation.  In the first instance,
estoppel cannot apply to one who has not dealt with
the organization or in any way recognized it as
having corporate existence, or who has participated
in holding it out as a corporation. In the second
instance, where a party has contracted or otherwise
dealt with an organization, believing it to be a
corporation, there may have been no holding out of
corporate status by the organization. In either
instance, estoppel arises from the contract or
course of dealing by the parties and is applicable
in 
a 
suit 
by 
the 
party 
dealing 
with 
the
organization, 
as 
well 
as 
in 
a 
suit 
by 
the
organization."
Richard A. Thigpen, Alabama Corporation Law § 3:59 (3d ed.
2003) (footnotes omitted).
Alabama MBA, citing City of Orange Beach v. Perdido Pass
Developers, Inc., 631 So. 2d 850 (Ala. 1993), and Bukacek v.
Pell City Farms, Inc., 286 Ala. 141, 237 So. 2d 851 (1970),
argues that because W.P. Media treated Alabama MBA as a
corporation, W.P. Media is now estopped from denying Alabama
MBA's corporate existence.  In City of Orange Beach v. Perdido
Pass Developers, Inc., the City of Orange Beach refused to
1061314
9
approve zoning for an island owned by Perdido Pass Developers,
Inc., even though Orange Beach had entered a contract with the
previous owner of the island to approve certain zoning
ordinances that would allow the island to be developed.
Perdido Pass and others sued Orange Beach, alleging breach of
contract.  On appeal, Orange Beach argued that Perdido Pass
did not obtain title to the island because it was not
incorporated at the time the previous owner conveyed the
property and, therefore, it did not have standing to sue.  We
stated: 
"These arguments are also without merit. ...
Although Perdido Pass's articles of incorporation
were filed before the signing of the deed, the
evidence shows that Perdido Pass was treated as a
corporation by all parties, including Orange Beach.
Orange Beach received various applications from
Perdido Pass, issued receipts to Perdido Pass for
various payments, and issued a septic tank license
to Perdido Pass for the island. We will not allow
Orange Beach to deny Perdido Pass's existence as a
corporation after having dealt with it as a
corporation. See Bukacek v. Pell City Farms, Inc.,
286 Ala. 141, 237 So. 2d 851 (1970); City of
Greenville v. Greenville Water Works Co., 125 Ala.
625, 27 So. 764 (1900)."
631 So. 2d at 854.
In Bukacek v. Pell City Farms, Inc., Bukacek entered into
an agreement with others to form Pell City Farms, Inc., and he
1061314
10
conveyed a 300-acre tract to the corporation.  Subsequently,
Bukacek filed an action to quiet title, alleging that Pell
City Farms, Inc., was incapable of taking legal title because
no articles of incorporation had been filed and it was neither
a de jure nor a de facto corporation.  This Court held: 
"[W]e think the fact situation here presented shows
that while Pell City Farms, Inc., may not have been
a corporation de jure--or perhaps even de facto--
insofar as the transaction here is concerned, it
should be regarded practically as a corporation,
being recognized as such by the parties themselves.
In other words, the incidents of corporate existence
may exist as between the parties by virtue of an
estoppel. Thus, besides corporations de jure and de
facto, there can be a recognition of a third class
known as 'Corporations by estoppel.'"
Bukacek, 286 Ala. at 145, 237 So. 2d at 853 (emphasis added).
W.P. Media entered into a contractual relationship with
Alabama MBA to operate Alabaster Wireless.  The operating
agreement identified Alabama MBA as a corporation, was
executed in Alabama MBA's corporate name, and was signed by
Brown as Alabama MBA's "chairman of the board."  W.P. Media
further concedes in its brief that Alabama MBA and Brown had
essentially "represented" that Alabama MBA was "a viable,
legal corporation" and that W.P. Media had "no reason to
doubt" those representations.  Appellee's brief, at 25.
1061314
Alabama MBA also argues that in 2007 it ratified the
2
operating agreement.  See Petroff v. Arbona, 336 So. 2d 178,
181 (Ala. 1976) (noting that "under proper circumstances a
corporation may after its organization adopt or ratify the
contracts of its promoters").  However, our holding pretermits
discussion of that issue.
11
Although 
Alabama 
MBA 
had 
not 
yet 
filed 
articles 
of
incorporation at the time the operating agreement was executed
in 2001, the articles of incorporation were subsequently filed
in 2002.  The record reveals that at no time during the
venture did W.P. Media challenge the validity of the operating
agreement until after it was sued for breaching the operating
agreement.  Under the facts of this case, we hold that W.P.
Media's actions of entering into a contract with Alabama MBA
and participating with Alabama MBA in the joint venture before
and after Alabama MBA's articles of incorporation were filed
estop W.P. Media from denying Alabama MBA's corporate
existence for purposes of challenging the validity of the
operating agreement.  City of Orange Beach, supra; Bukacek,
supra.2
WP Media also contends that Alabama MBA was not properly
incorporated at the time it filed the instant action; thus, it
argues, Alabama MBA was not a "real party in interest" under
Rule 17, Ala. R. Civ. P., and cannot maintain this action.  In
1061314
12
support 
of 
its 
contention 
that 
Alabama 
MBA 
was 
not
incorporated when the underlying action was filed, W.P. Media
argues that Brown "chose not to form the corporation and
[instead] treat[ed] everything personal" and that, in addition
to filing articles of incorporation, Alabama MBA was also
required to meet the prerequisites of Ala. Code 1975, § 10-2B-
2.05(a).  That Code section provides:
"After incorporation the initial directors shall
hold an organizational meeting, at the call of a
majority 
of 
the 
directors, 
to 
complete 
the
organization 
of 
the corporation by appointing
officers, adopting bylaws (unless the power to adopt
initial bylaws has been reserved to the shareholders
in the articles of incorporation), and carrying on
any other business brought before the meeting."
W.P. Media asserts, and the record supports its assertion,
that Alabama MBA held no "organizational meeting" until after
it and Brown filed the underlying action.  W.P. Media also
asserts that Alabama MBA failed to meet the record-keeping
requirements of Ala. Code 1975, § 10-2B-16.01.  W.P. Media
argues that Alabama MBA was improperly incorporated because it
failed to comply with these two Code sections after it had
filed its articles of incorporation.
As started above, the plain language of § 10-2B-2.03
explicitly states that the probate judge's filing of the
1061314
13
articles of incorporation is "conclusive proof that the
incorporators 
satisfied 
all 
conditions 
precedent 
to
incorporation."  (Emphasis added.)  Although § 10-2B-2.05 sets
forth procedures to "complete the organization of the
corporation" (emphasis added), that Code section explicitly
states that this occurs "[a]fter incorporation."  Moreover,
nothing in the language of § 10-2B-16.01 requires records to
be kept as a prerequisite of proper incorporation--in fact, §
10-2B-16.01 only prescribes duties of existent corporations.
As stated above, it is undisputed that Brown complied
with § 10-2B-2.03 and that articles of incorporation for
Alabama MBA were filed in 2002, years before the underlying
action was initiated.  Therefore, there is no merit in W.P.
Media's 
argument 
that 
Alabama 
MBA 
was 
not 
properly
incorporated at the time this action was filed and thus cannot
be a real party in interest in this case.  
Conclusion
Alabama MBA has demonstrated that W.P. Media is estopped
from denying Alabama MBA's corporate existence.  Therefore,
the summary judgment is reversed, and the case is remanded for
further proceedings. 
REVERSED AND REMANDED.
Cobb, C.J., and Woodall, Parker, and Shaw, JJ., concur.