Court Opinion

ID: 6514113
Source: CourtListenerOpinion
Date Created: 2022-07-19 18:25:00.582909+00
Date Added: 2024-06-11T15:54:25.094851
License: Public Domain

CLOPTON, J.
A corporation de facto exists, when from irregularity or delect in the organization or constitution, or from some omission to comply with the conditions precedent., a corporation de jure is not created, but there has been a colorable compliance with the requirements of some law under which, an association might be lawfully incorporated for the purposes and powers assumed, and a «se?1 of the rights claimed to be conferred by the law — when there is an organization with color of law, and the exercise of corporate franchises. Meth. E. Un. Church v. Pickett, 48 N. J. L. 599.
The enabling law, under which a corporation for the purposes and objects of the Dispatch Publishing Company, and with the powers assumed, might have been lawfully created at that time, is contained in sections 1803-3812 of' the Code of 1876, and the amendatory acts, which authorize and provide for the incorporation of two or more persons desirous of forming a private corporation for the purpose of carrying on any industrial or other lawful business not otherwise specially *229provided for by law. — Acts 1SS2-3, p. 4-0. The plea avers that defendant- and two other named persons tiled, September 2, 1,885, with the .judge of probate of Montgomery comity a written declaration, signed by themselves, setting forth substantially the matters required by the statute, except the resideuces of the persons ; that t-liev organized by the election of three directors, and commenced and continued to do business in a corporate capacity, and were so doing business when the debt sued for was contracted. If the averments of the plea be true, the truth of which is admitted by the demurrer, the Dispatch Publishing Company was an association having capital stock divided into shares, organized by the election of officers, transacting business, and exercising franchises, functions and powers, alter an attempted incorporation, as if it were a corporation dejare — a colorable compliance with the requirements of an existing and enabling law, and user of the rights claimed to be conferred thereby — the essential elements of a corporation de facto.—Cen. Agr. & Mech. Asso. v. Ala. Gold Life Ins. Co., 70 Ala. 120.
Appellant seeks by the action to hold defendant, who was a member, liable as a partner for paper and other supplies sold to the Dispatch Publishing Company. Whether the share-/ holders in a corporation de facto are individually liable for the/ corporate debts, in the absence of fraud or a statute, is a ques/ tion as to which the authorities are in direct antagonism. Ii\ Cook on Stock and Stockholders, § 233, the doctrine asserted is: UA corporate creditor, seeking to enforce the payment of his debt, may ignore the existence of the corporation, and may proceed against the supposed stockholders as partners, by proving that the prescribed method of becoming incorporated was not complied with by the company in question.” The leading cases supporting this doctrine are Bigelow v. Gregory, 73 Ill. 197; Abbott v. Omaha Smelt. Co., 4 Neb. 416; Garrett v. Richardson, 35 Ark. 144; Ferris v. Thaw, 72 Mo. 446; Richardson v Mayo, 40 Ohio St. 9; Coleman v. Coleman, 78 Ind. 344. We have omitted reference to a few cases sometimes cited, for the reason, that either the question of liability as partners was not before the court, as in Blanchard v. Kaull, 44 Cal. 440; or the debt was contracted before any steps were taken, other than the mere filing of a certificate, toward organization, as in Porpoise Fish Co. v. Bergen, 13 Amer. & Eng. Cor. Cas. 1; or it was contracted after the expiration of the charter by its own limitation, without re-organization, as in Nat. Bank v. Landon, 45 N. Y. 410. In the case last cited, the share-holders entered into a special agreement, which by its terms created a partnership as to third persons.
*230In 2 Mor. on Corp. § 748, the doctrine is stated as follows : “If an association assumes to enter into a contract in a corporate capacity, and the party dealing with the association contracts with it as if it were a corporation, the individual members can not be charged as parties to the contract, either sev- or jointly, or as partners.” The following cases maintain the doctrine, that the members of a corporation defactocan not be held liable as partners for the corporate debts: Fay v. Noble, 7 Cush. 188; First Nat. Bank v. Avery, 117 Mass. 476; Stout v. Zulick, 48 N. J. L. 599; Plan. Bank v. Padgett, 69 Ga. 164; Mer. & Man. Bank v. Stone, 38 Mich 779; Humphrey v. Mooney, 5 Cal. 282; Cen. City Sav. Bank v. Walker, 66 N. Y. 424; Gartside Coal Co. v. Maxwell, 22 Fed. Rep. 197; Whiting v. Wyman, 101 U. S. 392.
The plea and demurrer do not raise the question of the liability of the supposed stockholders as partners, where there has been no intention or attempt to incorporate; where they are acting as a body corporate, without even color of legislative authority — , sheer usurpation. The plea avers that the debt sued for was contracted by the Dispatch Publishing Company, which is alleged to have been a defacto corporation, and that plaintiff sold the goods to, and contracted with the company as a corporation, knowing that it was doing business as such. The question before us, and the only question we propose to decide, is whether, there being no fraud alleged, nor statute making the stockholders individually liable, a creditor who has dealt with a de facto corporation as a corporation, who has entered into contractual relations with it in its corporate name and capacity, can disregard the existence of the corporation, and, electing to treat it as a partnership, enforce the collection of his debt from the stockholders individually ? The conflicting authorities afford aid in’ the solution of this question, only so far as their opinions may be in accord with settled principles and sustained by reason. Though it is an undecided question in this State, principles have been well settled, which materially bear upon the inquiry, and mark the way to a correct conclusion.
Corporations may exist either de jure, or defacto. If of the latter class, they are under the protection of the same law, and governed by the same legal principles as those of the former, so long as the State acquiesces in their existence and exercise of corporate functions. A private citizen, whose rights are not invaded, who has no cause of complaint, has no right to inquire collaterally into the legality of its existence. This can only be done in a direct proceeding on the part of the Slate, from whom is derived the right to exist as a corpo*231ration, and whose authority is usurped. This principle was/ clearly and emphatically declared in Lehman v. Warner, 61 Ala. 455, in the following language; “The corporation must, of necessity, be presumed to be rightfully in possession of the franchise, and rightfully to exercise the power, which the legislative grant confers. Individual right is not invaded, if the negative is true in fact, and there is usurpation. It is the State- — the sovereign — whose rights are invaded, and whose rights are usurped. The individual could not create the corporation — could not grant, define, limit its powers; and no grant of these by the sovereign can lessen his rights. There can consequently be no cause of complaint by the citizen, and no right to inquire whether the corporate existence is rightful —de jure — or merely colorable.” — Taylor on Corp. § 145; 4 Airier. & Eng. Encyc. of Law, 198. ■ The creditor can not proceed against the stockholders as partners, without proving non-compliance with prescribed conditions precedent, thus inquiring collaterally, not into the fact, but the legality of its existence. ■
It is also an established rule of general application, that a party who contracts with a corporation, exercising corporate! powers, and performing corporate functions — existing as a facto corporation — in its corporate name and capacity, will not be permitted, in a suit on the contract, to deny and disprove',! the rightfulness of its existence.—4 Amer. & Eng. Encyc. Law, 198. In Smartwood v. Michigan Air Line R. R. Co., 24 Mich. 390, Cooley, J. declares the rule as follows: “Where there is thus a corporation defacto, with no want of legislative power to its due and legal existence, when it is proceeding in the performance of corporate functions, and the public are dealing with it on the supposition that it is what it professes to be, and the questions are only whether there has been exact regularity and strict compliance with the provisions of the law relating to corporations; it is plainly a dictate alike of justice and public policy, that in controversies between the de facto corporation and those who have entered into contract relations with it, as corporators or otherwise, that such questions should not be suffered to be raised.”
The general rule is thus stated by Brickell, C. J.: “Whoever contracts with a corporation in the use of corporate powers and franchises, and within the scope of such powers, is estopped from denying the existence of the corporation, or inquiring into the regularity of the corporate organization, when an enforcement of the contract, or of rights arising under it, is sought.”—Cahall v. Citizens’ M. B. Asso., 61 Ala. 232; Central Agr. & Mech. Asso. v. Ala. Gold Life Ins. Co., 70 Ala. 120; Schloss v. Montg. Trade Co., 87 Ala. 411.
*232It is conceded tliat the rule has been invoked,/'and applied most frequently in suits against the stockholders qa-corporation, or persons who have contracted with it, where th¿^stockholder, corporation or person is seeking to avoid a liability by denying the legality of the corporate organization. But why should it not be applicable in other cases? Why should a stockholder be estopped, in a suit by a creditor of an insolvent coloration, to require payment of his unpaid subscription, and the creditor allowed to ignore the existence oí the corporation, and proceed against the stockholder as a partner ? Why should not the estoppel be mutual? Taylor, in his work on Corporations, § 148, having stated the general rule, that a corporation when sued on its contract, and the person who contracted with it, when sued on his contract, is each estopped to deny its legal incorporation, adds: “Furthermore, persons who have contracted with a corporation as such, and have acquired claims against it, are estopped from denying its corporate existence for the purpose of holding its share-holders, liable as partners.” And the same rule was applied in several of the cases cited above, in which a corporate creditor was seeking to hold the stockholder liable as a partner for a corporate debt. The abrogation of the foregoing well established rule is the logical sequence of maintaining a suit by a creditor of a de facto corporation, charging the stockholders as partners.
Another consideration. Section 8 of Article NIAr of the Constitution declares: “In no case shall any stockholder be individually liable, otherwise than for the unpaid stock owned by him or her.” Exemption from liability, other than for unpaid stock, is the declared policy of the State. It can not be imposed by legislation, or by the judgment of a court. In view of the constitutional provision, it is manifest that the share-holders of the Dispatch Publishing Company intended, by the attempt to incorporate, to avoid individual liability for the debts contracted by the corporation. When a party deals and contracts with a corporation as corporators, exemption from individual liability7- enters as an element of the contract. It is true that the liability of persons associated in an enterprise or adventure is not determinable by the name they assume, but by the legal consequences of their acts. A partnership may arise as to third persons, by mere operation of law, and contrary to the intention of the parties; but, to have this effect, the elements essential to constitute a partnership as to third persons must exist. A corporation de facto has an independent status, recognized by the law as .distinct from that of its members. A partnership is not the necessary legal consequence of an abortive attempt at incorporation. As said *233in Fay v. Noble, supra, “Surely, it can not be, in the absence of all fraudulent- intent, that such a legal result follows as to fasten on parties involuntarily, for such a cause, the enlarged liability of co-partners, a liability neither contemplated nor assented to by them. The statement of the proposition carries with it a sufficient refutation.”
Maintenance of such suit involves judicial nullification of franchises and powers enjoyed and exercised by a de facto corporation, as a distinct entity recognized by the law, acquiesced in by the State; defeats the corporate character of the contract, changes the relation from that of stockholders to that of partners; substitutes other and new parties to the contract, and effects the imposition of an enlarged liability, which they did not assume, but intended to avoid; so understood by the creditor, when he contracted the debt with the corporation as such. The contract is valid and binding on the corporation, which the creditor trusted. ^No injustice is done him, for all his rights and remedies are preserved by the principle that the corporation and the share-holder are estopped from denying its legal existence, as against him.^> It will not answer to say that he is not repudiating, but enforcing the,, contract. He repudiates the party — the corporation — withl which he made the contract, and seeks its enforcement against| parties who never entered into contractual relations with him| The doctrine that a creditor who has dealt with a de facta corporation, in its corporate capacity, can not charge the stockholders as partners with the corporate debt, there being no fraudulent intent alleged and proved, seems to us to be sustained by the weight of authority, maintained by stronger reasoning, consistent with well settled principles, and in harmony with the policy of the State. •
Affirmed.