Court Opinion

ID: 9443885
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:33:12.083448+00
Date Added: 2024-06-11T17:29:38.177358
License: Public Domain

McALLlSTER, Circuit Judge
(dissenting).
In this case, the articles of incorporation were filed with the Secretary of State of Arkansas. They were not filed with the County Clerk of the county in which the corporation’s principal place of 'business was located. The Supreme Court of Arkansas construes the state corporation statute 1 as providing that the incorporators or stockholders of a corporation organized under Arkansas law are personally liable, as partners, for all obligations incurred before the articles are filed in both the office of the Secretary of State and the County Clerk of the proper comity. That fact, however, does not, in my opinion, require that the courts of Tennessee, or a federal court in Tennessee, applying the law of the forum, hold stockholders or incorporators of an Arkansas corporation personally liable, as partners, for debts of the corporation because of the technical defect of noufilitig in the office of the County Clerk. This conclusion is based on two grounds: (1) that under Arkansas law, the corporation, by virtue of the filing of its articles with the Secretary of State, was a de facto corporation, and, under the laws of Tennessee, the members of a de facta corpora*680tion cannot be held lia-ble, as partners, by third persons who deal with them in their supposed corporate capacity, merely on account of a technical defect in the formation of the corporation; (2) the corporation statute, as construed by the courts of Arkansas, is a penal statute, which the courts of another state do not enforce.
The general rule as to the liability of members of a de facto corporation is set forth in 13 American Jurisprudence, page 201, as follows: “The members of a de facto corporation 'cannot be held liable as partners, according to the prevailing rule, by third persons who deal with them in their supposed corporate capacity merely on account of a technical defect in the formation of the corporation.” Under Tennessee law, stockholders are not individually liable for the debts of a de facto corporation. Merriman v. Magiveny, 59 Tenn. 494. See also Crouch v. Gray, 154 Tenn. 521, 290 S.W. 391, 50 A.L.R. 1023.
In Arkansas, it is held in Bank of Midland v. Harris, 114 Ark. 344, 170 S.W. 67, that statutory requirements for the organization of corporations are .generally regarded as conditions precedent to its formation, but if some requirement to a valid organization is omitted, such as failure to file its articles of incorporation with the proper officer, and the other requirements are met, there will result a corporation de facto, that is, an association whose right to corporate functions and attributes is complete as against all the world except the sovereign.
Where a company, having filed articles with the County Clerk, does not complete incorporation by filing articles with the Secretary of State, but does business as a corporation, it is a de facto corporation. Wesco Supply Co. v. Smith, 134 Ark. 23, 203 S.W. 6. In the foregoing case, it was held that one who was not an original incorporator but had only entered into a contract for the purchase of stock, was not liable as a partner under the Arkansas statute.
The corporation involved in this case had, as a corporation de facto, a corporate capacity, and possessed all the powers of a de jure corporation except that it was subject to direct attack by the State of Arkansas.
An association that, by the law of the state in which it purports to be incorporated, is a de facto corporation, will be. dealt with in another state as a domestic de facto corporation is dealt with by the law of the latter state. First Title & Securities Co. v. United States Gypsum Co., 211 Iowa 1019, 233 N.W. 137, 73 A.L.R. 1196.
In Woods v. Wicks, 75 Tenn. 40, 41, the Supreme Court of Tennessee cited, as a sound conclusion, the holding of the Court of Appeals of New York in Chase v. Lord, 77 N.Y. 1, to the effect that, “after a corporate capacity has been acquired, a personal liability of the stockholder is inconsistent therewith, and -cannot be imposed for a failure to perform some act except by a clear legislative direction.”
All of the foregoing would seem clearly to sustain appellant’s contention that) under the law of Tennessee, he is not liable as a partner for the debts of a de facto Arkansas corporation of which he was an incorporator and stockholder; and no question of his liability would ever, perhaps, 'have arisen except for a peculiar quirk in Arkansas law, for in that state, members of a de facto corporation are held, contrary to all other authorities, individually liable as partners for all the debts of the corporation, where there has been a failure to file the articles with the County Clerk, as well as with the Secretary of State.
This rule stems from one of the early Arkansas cases construing its incorporation statute. Garnett v. Richardson, 1879, 35 Ark. 144. The statute itself contains no provisions as to such individual liability.2 That results only from the construction of the statute by the court. In Bank of Midland v. Harris, 1914, 114 Ark. 344, 170 S.W. 67, Chief Justice McCulloch, speaking for the court, observed that the Garnett case was contrary to the weight of modern authority, and later, in Wesco Supply Co. v. Smith, 1918, 134 Ark. 23, 203 S.W. 6, the same judge, in a dissenting opinion, *681stated that he thought it would be better to overrule Garnett v. Richardson in express words rather than to attempt to distinguish it from the case then before the court. Later, however, in Whitaker v. Mitchell Mfg. Co., 1952, 219 Ark. 779, 244 S.W.2d 965, 967, the Supreme Court of Arkansas continued to follow the Garnett case, as it said, “Regardless of what our views might be were this question of first impression,” and “if we were free to do so we might agree with the dissenting opinion of Chief Justice McCulloch in which he stated it would be better to overrule the decision in the Garnett case rather than tty to distinguish it.” Such conclusions, which the court feels obliged to announce, under the law of Arkansas, lead to the utmost hardship and injustice to innocent parties, as, of course, the court realizes, but it feels bound to follow its earliest adjudication on the subject.
It is to be said that there seems a 'certain inconsistency in the Arkansas decisions, since, in Wesco Supply Co. v. Smith, 134 Ark. 23, 203 S.W. 6, 8, the court in its opinion quoted with approval from Cook on Corporations, Vol. 1, Section 234, as follows: “The great weight of authority has clearly established the rule that where a supposed corporation is doing business as a de facto corporation, the stockholders cannot he held liable as partners, although there [may] have been irregularities, omissions, or mistakes in incorporating or organizing the company.”
It appears, however, that the Supreme Court of Arkansas holds that there is individual liability on the part of incorporators or stockholders of a de facto corporation. Tennessee holds that there is no individual liability on the part of incorporators or stockholders of a de facto corporation. Here, the rule should be applied that an association that, by the law of the state in which it purports to he incorporated, is a da facto corporation, will be treated in another state as a domestic de facto corporation is treated by the law of the latter state. Since there, is no personal liability on the part of incorporators or stockholder s of a de facto corporation in Tennessee, the forum of this case, it should be held that there is no personal liability on the part of the appellant for the debts of the de facto Arkansas corporation.
There is a further reason why appellant should not be held personally liable for the debts of the corporation. The incorporation statute of Arkansas, as construed by the Supreme Court of that state, holding incorporators and stockholders personally liable for the debts of a de facto corporation, is, in my opinion, a penal statute; and where liability is penal in its nature, it will not be enforced outside of the state creating it. Woods v. Wicks, 75 Temí. 40. As stated in the accompanying opinion, whether a statute of one state, which, in some aspects, might be called penal, is a penal law in the international sense that it cannot be enforced in the courts of another state, depends upon whether the purpose of the pertinent statute is to punish an offense against the public justice of the state, or to afford a private remedy to a person, injured by a wrongful act; and the test whether a law is penal, in the strict and primary sense, is whether the wrong sought to be redressed is a wrong to the public, or a wrong to the individual. Huntington v. Altrib, 146 U.S. 657, 13 S.Ct. 224, 231, 36 L.Ed. 1123. In the foregoing case, it was held that a statute of a foreign state which made the officers of a corporation, who sign and record a false certificate of the amount of its capital stock, liable for all the debts, was not penal. The court emphasized that the statute took pains to secure and maintain a proper corporate fund for the payment of the corporate debts, and, with this aim, made the stockholders individually liable for the debts of the corporation until the capital stock was paid in and a certificate of the payment made by the officers. The individual liability of the stockholders took the place of a corporate fund, until that fund had been duly created; and the individual liability of the officers took the place of the fund, in case their statement that it had been duly created was false. “If the officers do not truly state and record the facts which exempt them from liability, they are made liable directly to every creditor of the company, who by reason of their wrongful *682acts has not the security, for the payment of his debt out of the corporate property, on which he had a right to rely. * * * it gives a civil remedy, at the private suit of the creditor only, and measured by the amount of his debt, it is as to him clearly remedial. To maintain such a suit is not to ■ administer a punishment imposed upon an offender against the state, but simply to enforce a private right secured under its laws to an individual.” (Emphasis supplied.) A liability under a statute such as the court was concerned with in the above case is quite different from the liability imposed under the incorporation statute of Arkansas.
It seems to me that the Arkansas statute, as construed by the Supreme Court of that state, is directed to punishing the infraction of the statute in not filing the articles of association in the office of the County Clerk, as well as with the Secretary of State. I do not see how it can be said that such a statute affords a private remedy to a person injured by the wrongful act of nonfiling. The corporation is considered by the Supreme Court of Arkansas as a de facto corporation. No person and no creditor has been, or could be, injured in the slightest degree, directly or indirectly, by the failure of one of the officers to file the articles in the offices of the County Clerk. This was a mere technical omission to comply with the details of requirements under the statute. It did not affect the right of the corporation to do business in the same way as a de jure corporation, with rights to corporate functions and attributes, complete as against all the world except the State of Arkansas acting directly against the corporation. Bank of Midland v. Harris, supra. There was no wrong committed against any individual in not filing the articles with the County Clerk. To subject an innocent party, who happens to be an incorporator or original stockholder, to what may prove great financial losses or ruin, in being obliged to pay personally all the debts of the corporation merely because someone who should have complied with this technical requirement failed to do so, seems to me to subject appellant to a liability that is clearly penal in its nature.
Unless it be held that, under Tennessee law, the incorporators or original stockholders of a de facto corporation are personally liable for all the debts of the corporation for failure to comply with the minor requirements of filing, the judgment should be reversed; and, in my opinion, such should be the holding of this court.

. Section 64-103, Arkansas Statutes, Annotated, 1SH7, provides, in so far as here relevant, as follows: “Upon the filing with the Secretary of State of articles of incorporation, the corporate existence shall begin. Provided, however, a set of the Articles of Incorporation * * * shall be filed for record with the County Clerk of the County in which the Corporation’s principal office or place of business in this State is located.”

. See footnote 1, ante.