Case Name: Trust Company v. Floyd et al.
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1890-10-28
Citations: 47 Ohio St. 525
Docket Number: 
Parties: Trust Company v. Floyd et al.
Judges: 
Reporter: Ohio State Reports, New Service
Volume: 47
Pages: 525–544

Head Matter:
Trust Company v. Floyd et al.
Agency — Personal liability of agent — Corporations—Board of directors— When may be chosen — When directors liable personally for obligar tions contracted in corporate name,
1. A person who contracts as agent, without having in fact authority to do so, is personally responsible to those, who, in ignorance of his want of authority contract with him, though he acts in good faith, believing that he is invested with such authority.
2. This liability is founded upon the implied promise of the person so contracting as agent, that he has authority to hind the principal; and the measure of damages, is the loss sustained by the other contracting party by reason of his not having the valid contract which the agent assumed to make.
3. The corporate powers, business, and property, of corporations formed for profit, must be exercised, conducted, and controlled, by a board of directors, who cannot be chosen until ten per cent, of the capital stock specified in the articles of incorporation has been subscribed. Persons contracting as directors, when less than that amount of stock has been subscribed, are without authority to create any corporate obligation, and become personally liable, though they believe in good faith that they are contracting in behalf of a legally constituted corporation, and that they have authority to bind it by the contract.
(Decided Oct. 28, 1890.)
Error to tbe Circuit Court of Jefferson county.
Tbe original action was commenced in tbe Court of Common Pleas of Jefferson county on tbe 3rd day of January, 1885, by Tbe Farmers’ Co-operative Trust Company, tbe plaintiff in error, against John Floyd, Davidson S. Gault, John Medill, A. C. Ault, and John F. Hartshorn, who are tbe defendants in error here, and William M. Lee, J. D. Whitham, Benjamin Griffith, R. C. Yance, S. N. Orr, John Farris, John Coad, Nathaniel Wells and Yirginius P. Duvall.
Summons was duly served upon those, who are defendants in error in this court, but no service was obtained upon the other defendants in the action below.
On the 8th of May, 1885, the plaintiff filed an amended petition, which (omitting the caption), is as follows:
“ The said plaintiff complains of the said defendants and says, that it is a corporation duly organized under the laws of, and doing business in, the state of Pennsylvania; that the said defendants, from the 6th day of May, 1878, until the 11th day of April, 1883, were associated together in the buying and selling of wool, and doing a general merchandizing business in wool, under the name and style of “The Wool Growers’ Exchange; ” that the places of business of said association were at Steubenville, Jefferson county, Ohio, and the city of Philadelphia, state of Pennsylvania; that in the formation of said association the said defendants, John F. Hartshorn, Nathaniel Wells, S. N. Orr, Benjamin Griffith, William M. Lee, J. D. Whitham, A. C. Ault, Davidson S. Gault, Virginius P. Duvall and John Floyd, undertook in their names as incorporators to organize a corporation for said association under the laws of the state of Ohio, under the name of “The Wool Growers’ Exchange,” and did obtain a pretended certificate of incorporation from the secretary of state of the state of Ohio, for that purpose, but said plaintiff avers that said defendants, or either of them, or any person for them or on their behalf, never had or procured said association to be properly or legally incorporated under the laws of the state of Ohio, or of any other state. Said plaintiff avers that said pretended incorporators set forth in their said pretended certificate, filed with the secretary of state, that the capital stock of said organization shall be fifty thousand dollars ($50,000), and yettlmp, said pretended incorporators, gave notice to the pretended stockholders to meet for the purpose of choosing directors, when less than $3,000 of the capital stock had been subscribed, and less than $2,000 of the capital stock paid in, and said pretended stockholders, including said incorporators, did meet on the 19th day of June, 1878, and held an election under said notice and elected said defendants, William M. Lee, president; John Floyd, vice-president; J. D. Whitham, treasurer; Benjamin Griffith, secretary, and Davidson S. Gault, R. C. Vance, S. N. Orr, John Medill, John Farris and John Coad, directorsuf said pretended corporation. Plaintiff says that afterwards, to wit: March 16,1881, the said defendant, A. C. Ault, was added to said pretended board of. directors.
Plaintiff says that at no time has there been more than $3,000 of the pretended capital stock of $50,000 of said pretended corporation subscribed, nor more than $2,000 paid in, and that all of said defendants, incorporators, officers and directors, knew during all the time they conducted the business of said association, that not more than $3,000 of the capital stock had been subscribed, and not more than $2,000 paid in. Said plaintiff further says that said incorporators, nor any of them, nor any person for them, gave any notice by publication of the opening of the books of said corporation for subscription to the capital stock; neither were the books ordered opened, nor in fact opened for subscription to the capital stock. Said plaintiff further says that from the time of the organization of said pretended corporation or association, until its close by assignment on the 11th day of April, 1883, said defendants had control of the affairs of said association and did a large business in the buying and selling of wool, amounting to thousands of dollars annually, borrowed large sums of money, contracting a large indebtedness. Plaintiff further says that on or about April 1, 1881, said defendants removed the business of the said association to Philadelphia, state of Pennsylvania, contrary to the provisions of the pretended charter of said association. Plaintiff says that between the 1st day of August and the 1st day of December, A. r>. 1882, it sold to said defendants, doing-business under the name of “ The Wool Growers’ Exchange,” as aforesaid, 31,840 pounds of wool, which was delivered to said defendants at the city of Philadelphia, state of Pennsylvania, and that on the 8th day of January, 1883, there was a balance due said plaintiff from said defendants, on account of said wool so sold and delivered to them, the sum of $3,195. Plaintiff says that the said pretended charter obtained by said defendants was under the act of the general assembly of the state of Ohio, entitled an act supplementary to an act entitled an act to provide for the creation and regulation of incorporated companies in the state of Ohio, passed May 1,1852, passed April 13,1867, as amended April 20, 1874, as amended April 11, 1876, as amended March 12, 1877, as amended March 28, 1878, and that said pretended charter sets forth the object of said Association as follows: “That we have associated ourselves together for the purpose of forming an organization to establish a wool house and handle wool, merchandise, produce, and furnishing supplies to wool growers and others on commission and purchase or sale, or in such other manner as will be for the best interest of the stockholders herein, and to do a general commission business in the articles above enumerated, and also for the purpose of disseminating through bureaus or journals useful knowledge and information pertaining to the improvement and protection of wool growing interests.” Plaintiff says that under said pretended charter and said act of the general assembly of the state of Ohio under which the said pretended charter was obtained, said defendants had no authority or power as a corporation to buy or sell wool, and that therefore all of said acts of said defendants in a pretended corporate capacity in the buying and selling of wool, and in the buying of said wool from said plaintiff were ultra vires and invalid. Plaintiff says that said defendants on the 8th day of January, 1888, through said defendant, J. D. Whitham, their agent, executed and delivered to plaintiff, as evidence of said indebtedness, a promissory note, of which the following is a true copy:
“ Cochrantown, Pa., Jan. 8, 1883.
“ March 20th after date, for value received, we jointly and severally promise to pay to The Farmers’ Co-operative Trust Company, or order, thirty-one hundred and ninety-five dollars, with interest, and in case of default of payment at maturity, an additional five per cent, for the collection of the same. And we jointly and severally empower any attorney of record in this commonwealth, or elsewhere, to appear for us, or either of us, and confess judgment against us, or either of us, for the same and accrued interest, together with said five per cent, attorney’s fees, with costs of suit, release of errors, and without stay of execution; and for value received we jointly and severally do waive the right and benefit severally of any law of this or any state exempting property, real or personal, from sale, and if levy is made on land, we do also jointly and severally waive the right of inquisition, and consent to the condemnation thereof, with full liberty to sell the same on fi. fa. with release of errors thereon.
“ J. D. Whitham, Treas.
“ J. D. Whitham.”
Plaintiff further says that no part of said sum has been paid.
Plaintiff says that at the time of the sale of said wool, and the acceptance of said promissory note, it had no knowledge of the manner in which said defendants were conducting said business, but relied upon all the members of said Association, jointly and severally, for tbe payment of their said claim. Said plaintiff further says, that said Wool Growers’ Exchange, as a corporation or association, is wholly insolvent, having no property whatever, out of which it can make its said claim, and that the debts against said Wool Growers’ Exchange are more than $40,000. Plaintiff says that at the time of the selling of said wool and the issuing of said promissory note as aforesaid, all of said defendants were the active business managers of said association and had full knowledge of the failure of said association as aforesaid to obtain and carry into effect a complete charter, and had also full knowledge that the buying or selling of wool was beyond the scope and authority of said pretended corporation as aforesaid. Plaintiff avers that said defendants, J. D. Whitham, R. C. Yance, S. N. Orr and A. C. Ault, did business under their initials and that plaintiff does not know and cannot ascertain their full name. Plaintiff therefore says that said defendants are jointly and severally indebted to said plaintiff, in the sum of $3,195, with interest from the 8th day of January, A. D. 1883. Wherefore plaintiff prays judgment against said defendants, and each of .them, for said sum of $3,195, with interest upon the same from the 8th day of January, 1883, and costs of suit.”
Hartshorn made default; the other defendants who were served with process, demurred generally to the amended petition, and after the demurrers were overruled, filed a joint answer, controverting all the allegations of the petition except the averment of the plaintiff’s incorporation.
The plaintiff, upon the trial, obtained a verdict for the full amount claimed in the petition.
The court overruled the motion filed by the answering defendants for a new trial, and rendered judgment against them on the verdict, and also rendered judgment against Hartshorn on default, for the same amount.
A bill of exceptions was duly taken by the defendants, from which it appears, that at the trial, the parties gave evidence tending to prove, on their respective parts, the issues joined by the pleadings. To enable the plaintiff to recover, under the instructions given by the court to the jury, it was necessary for them to find, that there had not been subscribed to the capital stock of “ The Wool Growers’ Exchange,” an amount equal to ten per cent, thereof; that the plaintiff was ignorant of this defect in the incorporation; and, that the defendants themselves, or through an agent appointed by them, actually participated in the transaction with the plaintiff, set forth in the petition.
The burden of establishing these facts, the jury were instructed, was on the plaintiff.
The defendants requested that certain instructions be given to the jury, which, together with the action of the court with respect to them, are set out in the bill of exceptions, as follows.:
“ I am requested by counsel to charge the following propositions :
“ Proposition I. If the said Medill, Eloyd, Ault and Gault, who have filed a joint answer herein, under all the circumstances of the case, without negligence on their part, believed, and had a good right to believe, that the condition as to the subscription of $5,000 of the capital stock of The Wool Growers’ Exchange, had been complied with prior to the election of officers, then they are not liable to plaintiff, if the articles of incorporation were duly filed with the secretary of the state of Ohio, and said Wool Growers’ Exchange did proceed to carry on, and did carry on the business for which they were incorporated.”
This, gentlemen, I refuse to charge — mere belief is not sufficient.
I am also requested by defendants to charge as follows:
“ Proposition II. If you are satisfied, from the evidence in this case, that the defendants answering in this case, knowingly and with the design to defraud the public generally, combined together and held forth false and deceptive colors, and did acts which are wrong and have thereby injured the plaintiff, they must make him whole by responding to the full extent of that injury, and the act of incorporation in such case, when the same is defective, and the organization thereunder was effected without the requisite amount of .•stock subscribed, will not protect the defendants from such liability. But if, on the contrary, you are satisfied from the .evidence that the said defendants, in good faith and without ¡negligence, proceeded to the organization of the corporation and thereafter carried on business as a corporation in good faith, believing and having cause to believe that the requisite amount of stock had been subscribed, and that the corporation was otherwise regularly organized, then, and in such case, the act of incorporation will protect them from personal liability in this action to the plaintiff, although in fact it should now turn out that the organization was effected when less than the requisite amount of stock had been subscribed.”
“ This I refuse. Actual fraud on the part of the defendants is not essential to the case of the plaintiff, nor will good faith and sincere belief alone afford a shield.”
The defendants excepted to the refusal of the court to instruct the jury as requested by them, and also excepted generally to the charge given; and those of them,against whom judgment was rendered, (except Hartshorn, who, refusing to join as a plaintiff in error, was made a party defendant,) prosecuted error to the circuit court, where the judgment was reversed, upon the following grounds as stated in the journal entry
“ First. — The court of common pleas erred in overruling the separate demurrers of plaintiffs in error to the amended petition of defendant in error, The Farmers’ Co-operative Trust Company.
“ Second. — The court of common pleas erred in refusing to give the propositions numbered one and two of the requests of the plaintiffs in error to the jury as requested by plaintiffs in error, and in the charge as given by the court to the jury so far as inconsistent with said requests.”
It is sought by the present proceeding in error, to reverse the judgment of the circuit court, and have that of the common pleas affirmed.
John M. Oook, Estep $ Fstep, and A. H. Battin, for plaint- • iff in error.
1. The claim of plaintiff in error is that the subscribing of the ten per cent, of the capital stock was a condition precedent to the commencement of the business by the association, and that if ten per cent, was not subscribed, these parties, defendants in error, who conducted the business, made themselves individually responsible for all liabilities incurred, and that the question of fraud had nothing to do with it; that if ten per cent, was not subscribed before directors and officers were elected, it was the duty of defendants in error to have known it, and their simple belief could not effect the matter. If there was a corporation by the issuing of the certificate, it was a lifeless thing until the ten per cent, was subscribed. Sections 10 and 44, Act of March 21, 1851; Swan & Critchfield, 168; Medill v. Collier, et al. 16 Ohio St. 599; Bank v. Hall, 35 Ohio St. 158; Navigation Company v. Eagle, 29 Ohio St. 238.
2. That it was necssary to have ten per cent, capital stock, bona fide, subscribed, seems to us to be settled in Ohio. Chamberlain v. Railroad Company, 15 Ohio St. 225; Railroad Company v. Smith, 15 Ohio St. 328; Swan & Critchfield Statutes, vol. 1, page 276, sections 5, 6 and 9; Jewett v. Railroad Company, 34 Ohio St. 601; Powers v. Railroad Company, 33 Ohio St. 429; Fay et al. v. Noble et al., 7 Cush. 194; Fuller v. Rowe, 57 N. Y. 23; Coppin v. Greenlee, 38 Ohio St. 279, 280.
3. Directors and Managers of a corporation are agents, and governed by the rules of law respecting agency. Thompson on Liability of Officers and Agents of Corporations, sections 77, 78 and 79, and 351, 352, 353, 395 and 401; Field on Corporations, sections 156 and 178; also 79, 80 and 81; Story on Agency, section 264.
4. When can a corporation commence business ? Morawetz, Vol. 1, section 29-57, 137 and 408, and vol. 2, section 738.
5. These directors had no authority to act for the corporation. Morawetz, section 583; they were not officers defaeto. Morawetz, vol. 2, section 640.
6. If the corporation or its agents would be estopped from denying its or their authority, yet there is nothing to estop plaintiff in error from claiming that defendant in error had no principal behind them. The law provides that directors shall not be elected until ten per cent, of the capital stock is subscribed. Hence the attempt to elect officers was void, not voidable, and all acts of the agents were equally void. Morawetz, vol. 2, sections 654, 655, 656, 657, 658, 659 and 661.
7. It is the settled law of corporations- in other states, that the subscription of the amount of the capital stock required by the charter, must be made before any calls can be made upon the stock for the general purposes of the corporation, or before the corporation commences business. This is absolutely a condition precedent. Cases cited supra. Also Salem Mill Dam Company v. Ropes, 6 Pick. 23; 9 Pick. 187; Stoneham Branch R. R. Co. v. Gould, 2 Gray, 277; Redfield on Railways, section 18 on pages 1 and 2 and notes.
8. The plea of de facto corporation almost always implies the doctrine of estoppel. These parties, to shield themselves, are seeking to get behind a charter which they procured and then violated. A stranger contracting with the corporation might plead it was a de facto corporation, but these parties are estopped from taking advantage of their own wrong. It would be a fraud to permit them to do so. Lawler et al. v. Walker et al., 18 Ohio, 156 and 157; Bartholomew v. Bently et al., 1 Ohio St. 37; Straus & Bro v. Insurance Company, 5 Ohio St. 60; Bank of Chillicothe v. Swain, 8 Ohio, 287; Kaiser v. Savings Bank, 41 American, 85; Railroad Co. v. Stout, 26 Ohio St. 241.
9. If defendants in error did not know that the ten per cent, of the capital stock was not subscribed, they might have known; it was their business to know, hence they are responsible. Seale v. Bank, 20 Law Bulletin, 50; Cole v. Cassidy, 138 Mass. 437; Jewett v. Railway, 34 Ohio St. 601, supra; Bray v. Farwell, 81 N. Y. 600; Morawetz, vol. 1, sections 408, 410, 57, 137, 140 ; Vol. 2, sections 738, 823; Chamberlain v. Railway, 15 Ohio St. 225, supra; Revised Statutes, 3235; Coppin v. Greenless, 38 Ohio St. 279 and 280.
10. The powers of a corporation after it receives its certificate, fall into two classes, such as may be exercised before, and such as cannot be until-after the election of directors. Powers v. Railway Co., 88 Ohio St. 432; Railway Co. v. Smith, 15 Ohio St. 328.
11. Persons who carry on the business of a corporation before it is legally authorized to transact business, are personally liable for debts contracted by them. Medill v. Collier, 16 Ohio St. 599, supra; Kaiser v. Lawrence Savings Bank, 41 American, 85.
12. There being in law no corporation authorized to transact business, there is no principal, and the agent is personally bound on the general doctrine of agency. Story on Agency, section 264; Angelí & Ames on Corporations, section 303. 13. The doctrine of estoppel has no application to a case like this. It is not a case where one has dealt with a corporation, and received its property or money, and then refused to pay because it was not legally incorporated. Lucas v. Savings Institute, 22 Ohio St. 339; Goodwin et al. v. Evans, 18 Ohio St. 150 and 168; Warner v. Collender et al., 20 Ohio St. 197; Newburg Petroleum Co. v. Weare et al., 27 Ohio St. 354; Callender et al. v. Railway. Co., 11 Ohio St. 526; Morawetz on Corporations, sections 743, 781 and 631; 22 N. Y. 494; Hays v. Galion Gas Light Co., 29 Ohio St. 330 and 340; Morawetz, vol. 2, 610 and 923; Thomas v. Railroad Co., 101 United States, 71.
W. P. Hays and I. E. Baton, for defendants in error.
1. We claim that before the defendants can be held responsible, they must have been guilty of fraud. 9 W. Va. 580; Bartholomew v. Bently, 15 Ohio, 659; Thompson on Liability of Officers, 401; 12 Gray, Mass. 203; Taylor on Corporations, section 623; Spearing’s Appeal, 71 Penn. 11; 38 Ohio St. 270.
2. And we contend that the subscription of ten per cent, stock, is not a prerequisite to corporate existence or to the right to carry on business. State ex rel. Pugh v. Robinson et al., 12 O. L. Bulletin, 269; Eaton v. Aspinwall, 19 N. Y. 119; Bank v. Hall, 35 Ohio St. 159.
3. The Wool-Growers’ Exchange, having assumed, by entering into the contract with plaintiff, to have requisite power, and plaintiff having dealt with the corporation as a corporation, both parties are estopped to deny it. Stout v. Fulick, Central Reporter No. 5, page 335; 2 Blackford Ind. 367; Worcester Med. Inst. v. Harding, 11 Cush. 285; 31 Ind. 268; 6 N. H. 164; 27 Ohio St. 343; Taylor on Corporations, section 739; Angell & Ames on Corporations, section 635; Whitney v. Wyman, 101 U. S. 392.
4. Defendants contend also that they are protected in the absence of fraud from the debts of the corporation, because it, The Wool-Growers’ Exchange, was a defacto corporation. 43 Ohio St; 481; 38 Ohio St. 269.
5. We claim that the authorities teach that there are only four classes of cases where corporate officers can be liable for the debts of the corporation, where injury results: 1. Where their acts are malum in se; 2. Where their acts are prohibited by law; 3. Where the statute under which the corporation is organized, provides for a liability against the officers; 4. Where their acts are fraudulent. Medill v. Collier et al., 16 Ohio St. 599; Angell & Ames on Corporations, 591, 595, 596, 599, 605, 606 and 607; Whitney v. Wyman, 101 U. S. 392; Humphreys v. Mooney, 5 Colo. 283; Stout et al. v. Fulick et al., Central Reporter No. 5, 333; Gartside Coal Co. v. Maxwell, The Reporter, vol. 19, page 106.

Opinion:
Williams, J.
The circuit court, it appears from the record, reversed the judgment of the court of common pleas, because of alleged errors in overruling the demurrers to the amended petition, and refusing the instructions which the defendants requested to be given to the jury. It sufficiently appears from the petition, that in 1878, the defendants attempted to form, under the laws of this state, a corporation called " The Wool Growers' Exchange," for the purpose, as declared in the articles of incorporation, of dealing in " wool, merchandise, produce, and furnishing supplies to wool growers and others, on commission, and purchase or sale, and to do a general commission business in the articles above enumerated; and, also for the purpose of disseminating, through bureaus or journals, useful knowledge and information pertaining to the improvement and protection of wool growing interests." The amount of the capital stock was fixed at fifty thousand dollars, in shares of ten dollars each. When less than three thousand dollars of stock had been subscribed, and less than two thousand dollars paid in, an election was held by the defendants and others, at which the defendants were chosen as directors of the concern. These directors organized, by selecting from their number, the customary officers of a corporation. Thereafter, in 1882, while the defendants against whom the judgment in the case was rendered, were acting as such directors, controlling and managing the business of "The Wool Growers' Exchange," wool was purchased in its name, from the plaintiff, to the amount averred in the petition; and the balance of $3,195 of the purchase-price, for which, with interest, the plaintiff recovered judgment, remains unpaid. The defendants had knowledge that ten per cent, of the stock of the corporation had not been, and never was subscribed or paid in, but the plaintiff was ignorant of that fact. There is no allegation in the petition that the defendants were actuated by any fraudulent purpose, or had any design to cheat or defraud the plaintiff. Without such purpose or design, it is claimed, that the defendants could not be made liable, and therefore the lack of such averment is a fatal defect in the petition. Whether it be so, or not, is the question raised by the demurrers. The instructions refused, present a question somewhat different in form, though much of the same nature, which is, whether a personal liability was incurred by the defendants, if, in the transaction with the plaintiff, they acted in good faith, believing that the requisite amount of stock to authorize the organization of the corporation had been subscribed.
Upon both questions, the circuit court held with the defendants, and if its holding upon either was correct, its judgment must be affirmed.
A somewhat extended examination has satisfied us, however, that upon neither, is the decision in harmony with the great weight of authority. The courts of this country, and of England, with few exceptions, adhere to the doctrine so clearly laid down by Mr. Justice Story in his commentaries on the Law of agency, where it is said: " wherever a party undertakes to do any act, as the agent of another, if he does not possess any authority from the principal therefor, or if he exceeds the authority delegated to him, he will be personally responsible therefor to the person with whom he is dealing for or on account of his principal. There can be no doubt, that this is, and ought to be, the rule of law in the case of a fraudulent representation made by the agent, that he has due authority to act for the principal; for it is an intentional deceit. The same rule may justly apply, where the agent has no such authority, and he knows it, and he nevertheless undertakes to act for the principal, although he intends no fraud. But another case may be put, which may seem to admit of more doubt; and that is, where the party undertakes to act, as an agent, for the principal, Iona fide, believing that he has due authority; but, in point of fact, he has no authority, and, therefore, he acts under an innocent mistake. In this last case, however, the agent is held by law to be equally as responsible, as he is in the two former cases, although he is guilty of no intentional fraud or moral turpitude. This whole doctrine proceeds upon a plain principle of justice; for- every person, so acting for another, by a natural, if not by a necessary, implication, holds himself out, as having competent authority to do the act; and he thereby draws the other party into a reciprocal engagement.....If he has no such authority, and acts Iona fide, still he does a wrong to the other party; and if that wrong produces an injury to the latter, owing to his confidence in the truth of an express or implied assertion of authority by the agent, it is perfectly just, that he who makes such an assertion, should be personally responsible for the consequences, rather than that the injury should be borne by the other party, who has been misled by it. Indeed, it is a plain principle of equity, as well as of law, that where one of two innocent persons must suffer a loss, he ought to bear it, who has been the sole means of producing it, by inducing the other to place a false confidence in his acts, and to repose upon the truth of his statements." Story on Agency, section 264. In the note to this section, many cases which sustain the text are cited. And in the notes to Thompson v. Davenport, in Smith's Leading Cases, vol. 2, pt. 1, commencing on page 408 of the eighth edition, a number of cases on the same subject are collected. In addition to those, others might be referred to, among them the following: Walker v. The Bank of the State of New York, 9 N. Y. 582; White v. Madison, 26 N. Y. 117; Weave v. Gore, 44 N. H. 196.
In the last case cited above, it is held, that " although no fraud or wrongful motive can be imputed to the agent, still his act is an affirmation that he has authority to make the contract, and he may justly be held responsible for the truth of it; and it is no more than reasonable that he should suffer the consequences of his mistake, rather than the party who is misled by it, because, before holding himself out as such agent, it is his duty to ascertain whether his claim so to act is well founded or not; and he surely cannot be heard complain that others have confided in his assertion of authority, and upon the strength of it have entered into reciprocal engagements with him. Even if wholly innocent of any wrongful purpose, his case falls within the familiar principle, that when one of two innocent persons must suffer a loss, it ought to be borne by him who has been the means of causing it, by inducing the other to confide in the truth of his representations."
While, however, the authorities generally agree that a person, who, without having in fact authority to make a contract as agent, yet does so under the bona fide belief that such authority is vested in him, is nevertheless personally reponsible to those who "contract with him in ignorance of his want of authority, a diversity of opinion is found in the cases in regard to the exact nature of the liability, and the character of the action by which it may be enforced. In Jenkins v. Hutcheson, 13 Ad. & E. 746, it is intimated by Eble, J., that an action of deceit would lie in such cases, notwithstanding the good faith of the agent, and some authorities may be found to that effect. Another class of cases hold that the liability is upon the contract; but, it is believed that whether the agent is so liable, depends upon the intention of the parties as discovered from the contract itself; and on this question, the form of the agreement, and the mode of signature maybe quite conclusive. The rule, on this subject, as stated in Story on Agency, is, that an agent cannot be sued on the very instrument itself, as a contracting party; unless there be apt words to charge him. Section 264a. Still another class of eases establish the rule, which we are inclined to adopt, that in cases like the one we are considering, the agent is liable upon his implied promise that he possesses the authority he assumes to have. Smith's Leading Cases, vol. 2, pt. 1, 408, (eighth ed.,) and. cases there cited. Lewis v. Nicholson, 88 Eng. C. L. 512.
In White v. Madison, supra, in learned opinion it is held, that the liability of the agent in such cases, rests upon the ground that he warrants his authority, and not that the contract is to be deemed his own.,
Bartholomew v. Bently, 15 Ohio 659, is referred to, as establishing, both that the liability of the agent in cases of this kind,is founded on fraud, and, that the petition should charge a fraudulent intent in direct terms. That was an action in case, for deceit, under the practice which prevailed before the adoption of the code of civil procedure. The questions arising upon the demurrer,related to the form of the remedy, and the sufficiency of the declaration in such an action. They are stated by Bie.char.3d, J., to be: " First — Can a special action on the case for fraud, which has resulted in damage of the plaintiffs, be maintained in a ease like this, upon sufficient declaration ? Second — Is this declaration good upon demurrer ? " The court answers the first question in the affirmative, and in speaking of the declaration says: " The objection taken by counsel is a want of certainty. The action is founded on a fraudulent combination, and for holding out false colors at the commencement of the banking operations, and at various subsequent periods. The only direct charge of a fraudulent intention is in the withdrawal of the funds, and this, for aught that appears, may have been long since the bills in plaintiff's hands were issued.....It is thought that the averment of a fraudulent design should have been made in positive terms, as to each specific act relied upon to sustain the action." Under the practice then in force, pleadings were subject to demurrer, unless they were appropriate in their form and allegations to the particular action pursued; and we do not understand it to be there decided, that no other action, could be maintained on the facts of that case. A different action was maintained in Medill v. Collier, 16 Ohio St. 599, which, so far as the grounds upon which the liability of the bank directors was placed, is not greatly dissimilar to the case before us.
Under our present system of pleading, it is not important what was formerly the most appropriate remedy. Upon the facts stated in the petition, the law, we think, implied a promise on the part of the defendants, that in making the contract with the plaintiff, they had authority to bind the corporation they assumed to represent; and if they had not, they are answerable for the consequences. That they were without such authority seems clear. It was held by this court in Bartholomew v. Bently, 1 Ohio St. 37, that while mere irregularities in organizing a corporation would not subject the officers to private liability, to protect them from such liability, the provisions of the act of incorporation must be substantially pursued. By our statutes, under which the proceedings were taken for the formation of the corporation referred to in the petition, the corporate powers, business, and property of corporations formed for profit, must be exercised, conducted, and controlled by a board of directors, all of whom must be stockholders; the articles of association must state the amount of the capital stock, and the number of shares into which it is divided; and at least ten per cent, of that amount must be subscribed, before directors can be chosen. So that, the subscription of the necessary amount of the capital stock to authorize the election of directors, is not only a matter of substance, but is essential to the organization of the corporation, and necessary to the transaction of business by it. It is the security which the law requires shall be provided, before the corporation enters upon its business, for the protection of those who may deal with it. The statutory liability of the stock subscribers, is an additional security. In the effort to form the corporation in question, neither of these securities was provided. Counsel contend, that it is, nevertheless, a corporation de facto, and estopped to deny its liability to the plaintiff. If it were, it is not readily perceived how this would aid the defendants. Until there were stock subscriptions to an amount warranting the organization, the subscribers could not be compelled to pay beyond the sum required at the time of the subscription; nor would the statutory liability attach, unlessn there were some ground of estoppel, not appearing in this case. The implied undertaking of the defendants, was, that they represented a corporation with the capital stock required by law; while the one to which they insist the plaintiff shall be compelled to resort, was, if a de facto corporation, so only in name, without substance or capacity ; and if the doctrine of estoppel could be brought to the aid of the plaintiff against it, the defendants are not in a position to require a resort to that remedy, to relieve them from the liability they have incurred.
The case appears to have proceeded in the trial court, upon the theory, that if the defendants were liable at all, the amount which the plaintiff was entitled to recover, was the balance due on the contract. This was not necessarily the measure of recovery. As we have already seen, the action in such cases is not founded on the contract made for the supposed principal, but on the implied promise of the agent that he had authority to bind the principal; and the damages which may be recovered for its breach, is the loss sustained by the plaintiff by reason of his not having the valid contract which the agent undertook that he should have. The damages may sometimes exceed the amount due on the contract made in the name of the principal, for it is held,they may include the costs and expenses of an unsuccessful action against the principal to enforce the contract. White v. Madison, supra ; Simons v. Patchett, 7 E. & B. 568; Collen v. Wright, Id. 301; 2 Smith's Leading Cases, 410.
In Morawetz on Corporations, it is said, that the measure of damages, in an action against the directors or officers of a corporation, who induce a person to deal with it, before the capital indicated in its charter has in fact been provided, is the loss sustained "by reason of the difference between the capital which he actually received, and that which he was entitled to expect." Under this rule, we think, the plaintiff might properly recover the balance remaining unpaid on the purchase-price of the wool sold. Prima facie, that is the amount of the plaintiff's loss, and it does not exceed the amount of the capital which the corporation was required by law to have before it could be represented by directors, and which the defendants, by assuming to act for it, undertook that it did have. It is true the petition alleges that the corporation is insolvent, with an indebtedness exceeding ten per cent, of the capital stock; but whether the claims of other creditors stand upon a like footing with that of the plaintiff, or can, or will be enforced against the defendants, does not appear. Besides, if the proper stock subscriptions had been obtained, the corporation might not have become insolvent; or before it did, the plaintiff's claim might have been paid or secured. If, in such case, the plaintiff could recover no more than a sum equal to the proportion of the capital which should have been provided, that his claim bears to the whole indebtedness contracted in the corporate name, it would be. necessary to take an account of the assets and liabilities, to determine the amount of the recovery. That rule applied to this case, would require that the defendants be charged with an amount equal to the necessary stock subscriptions, and the statutory liability of the subscribers, and that all the creditors be brought in to have their claims adjusted, before the amount of the verdict could be arrived at. The plaintiff has not sought to compel the defendants to provide a fund for the payment of other creditors who are not themselves asserting their claims, nor have the defendants complained because they were not compelled to do so.' Whether the defendants could, in the trial court, if they had deemed it to their advantage, have had the claims of all the creditors adjusted, the aggregate liabilities ascertained, and the total amount the defendants could be called upon to pay, determined, and apportioned among the creditors, we need not decide. They did not make that claim in the court below, nor do they make it here.
In our opinion, the court of common pleas committed no error in overruling the demurrers to the petition,-nor in refusing the instructions requested by the defendants.
The judgment of the circuit court is reversed and that of the court of common pleas affirmed.