Court Opinion

ID: 7900836
Source: CourtListenerOpinion
Date Created: 2022-09-08 21:55:27.727032+00
Date Added: 2024-06-11T16:32:15.189116
License: Public Domain

The opinion of the court was delivered by
Porter, J.:
In directing a.verdict the court seems to have proceeded upon the theory that the plaintiff was estopped by the proceedings before the referee in bankruptcy from now asserting a claim against Sheldon for án individual liability updn the indebtedness after contending there that the note was' the obligation of the company and hot that of Sheldon individually, and after procuring an adjudication to that effect. There is nothing inconsistent in the claim now made .by the plaintiff and that asserted before the referee. The plaintiff is not seeking to recover upon the note nor upon the theory that it is the individual note of C. M. Sheldon. The bank merely pleads the facts under which it was induced to make the loan to the defendants and to accept as evidence of the indebtedness what purported to be the note of the company. By reason of the other facts alleged,'and abundantly sustained by the proof, as well as by the admissions of defendants, it is shown that the pretended company was never lawfully incorporated. It appears to have been a mere sham, a company on paper. The law is well settled that in such cases those persons who hold themselves out to the public as officers of a corporation, and assume to act in a corporate capacity, are individually liable for debts incurred by them in the name and pretended authority of such corporation before the organization is completed. (Walton v. Oliver, 49 Kan. 107, 30 Pac. 172; Hurt v. Salisbury, et al., 55 Mo. 310; Kaiser v. Lawrence Savings Bank, 56 Iowa, 104, 8 N. W. 772; Wechselberg v. Flour City Nat. Bank, 64 Fed. 90; 1 *465Purdy’s Beach on Private Corp. § 131; 3 Thomp. Com. on the Law of Corp. § 2992.)
The charter of the company was issued • August 23, 1904. The note was executed by C. M. Sheldon in the name of The C. M. Sheldon Company on June 5, 1905. Ten days after he had obtained from the bank the money on the note he was adjudged a bankrupt on his voluntary petition.
The appellees contend, first, that their evidence established that all the requirements of the laws of the territory of Arizona were fully complied with in obtaining the charter; that the company was empowered to transact business under the laws of that territory, and there was not, therefore, such a failure to incor-' porate as to bring the case within the doctrine of Walton v. Oliver, 49 Kan. 107, 30 Pac. 172. In other words, that there must be an entire failure upon the part of the incorporators to comply with the provisions of the law for the government of corporations before the individuals can be held personally liable for debts incurred in the company’s name.
It is not every irregularity in the proceedings that will render the incorporation ineffectual or cast upon the individuals the burden of liability for debts incurred in the name of the company. Where the in-corporators have acted in entire good faith, supposing that they are legally incorporated, and there has been a substantial compliance with the provisions of the law respecting the formation of such corporations, and especially where business has been carried on in the name of the corporation for a considerable time, the individuals can not be held liable. (Gartside Coal Co. v. Maxwell, 28 Fed. 187.) Such, at least, is the modern rule (1 Purdy’s Beach on Private Corp. § 131), although there is some conflict in the authorities (Doty v. Patterson, 155 Ind. 60, 56 N. E. 668). In some states the situation is met by statutory provisions imposing upon *466the incorporators a liability as partners where the incorporation has not been made in compliance with law.
“Outside- of the question of the existence of such statutes, and chiefly in jurisdictions where they do not exist, there is a class of cases holding- to the simple, just and easily applied doctrine that where a number of coadventurers assume or attempt, under the provisions of a general statute, to organize themselves into a corporation, and fail to take the steps which that statute makes essential to their becoming incorporate, and assume to contract corporate debts without having taken such steps, they are liable for such debts as partners.” (3 Thomp. Com. on the Law of Corp. § 2992.)
The present case can not readily be distinguished from that of Walton v. Oliver, 49 Kan. 107, 30 Pac. 172, where the charter naming the directors for the first year was duly acknowledged and filed in the office of the secretary of state, but no corporate stock was subscribed or paid. The persons assuming to act as directors were held personally liable for debts incurred before the organization was completed. In the opinion it was said:
“We do not understand that a corporation can proceed to the transaction of business without any portion of its capital stock being subscribed or paid.” (p. 113.)
It is the contention of defendant Bowen that no liability attaches to him because the proof does not show that he knew of the execution of the note, and he testified that he had no knowledge of the transaction. He gave the use of his name as one of the incorporators of the pretended company. It required his participation in the enterprise to obtain even the semblance of corporate existence, and as held in Fredendall v. Taylor and others; impleaded, etc., 26 Wis. 286, 19 N. W. 911, the liability of all the parties to the assumption of corporate power springs “from the fact that there was no responsible body or corporation behind them which they could bind, and against which the plaintiff could have had his remedy.” (p. 290.) “Having no prin*467cipal, they bound themselves individually.” (Wechselberg v. Flour City Nat. Bank, 64 Fed. 90, 97.) A similar contention was urged in the case last cited, but the liability of all the signers of the articles of incorporation was said to be “of the same nature which would be imposed if the original plan had been to form a partnership.” (p. 97.) 'That case differs from'this only because a statute of Wisconsin provided that no corporation should transact business with any other than its members until a certain percentage of its stock should be subscribed and paid, and imposed a liability upon the stockholders for debts incurred in violation of the provision. We think, however, that the same rule should be applied irrespective of statutory'provisions. (3 Thomp. Com. on the Law of Corp. § 2992.)
It is true the defendants offered proof to show that the bank extended the credit solely to C. M. Sheldon personally, and knew that no bona ficle attempt to incorporate had been made. But there was a conflict in the evidence upon this issue and the court could not direct a verdict. Besides, the defendants, who held themselves out to the public as officers and directors of the corporation, and who executed the note in the company’s name, are estopped to claim that the company was not in fact duly incorporated, or that it exceeded its authority in borrowing the money. ' (Aultman v. Waddle, 40 Kan. 195, 19 Pac. 730; Marshall Foundry Co. v. Killian, 99 N. C. 501, 6 S. E. 680, 6 Am. St. Rep. 539.)
The court erred in directing a verdict and the judgment is reversed and a new trial ordered.