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G. C. ARNOLD vs.


44 Phil 634 (1923)

FACTS: Arnold and Willits and Patterson, Ltd. entered into a contract by which plaintiff was appointed agent for a
period of 5 years. A dispute arose as to the amount which plaintiff should receive for his services. Patterson retired
and Willits became the sole owner of the assets of the firm. Willits then organized a corporation. He became
exclusive owner except for a few stocks (nominal shares to qualify the directors) for organizational purposes.
Another instrument was executed between Arnold and Willits. Such defined and specified the compensation of
Arnold. Nothing shows that such was formally ratified or approved by the corporation. A statement of the
corporation's account showed that there was due and owing the plaintiff a sum of money. The corporation's creditor's
committee protested against such amount. Arnold filed suit to collect. Willits argued that the document was signed
without the authority of the defendant corporation and also filed a counterclaim.

ISSUE: Whether plaintiff may collect from defendant corporation.

HELD: Yes. The proposition that a corporation has an existence separate and distinct from its membership has its
limitations. It must be noted that this separate existence is for particular purposes. It must also be remembered that
there can be no corporate existence without persons to compose it; there can be no association without associates.

This separate existence is to a certain extent a legal fiction. Whenever necessary for the interests of the public or for
the protection or enforcement of the rights of the membership, courts will disregard this legal fiction and operate
upon both the corporation and the persons composing it.

He continued his employment and rendered his services after the corporation was organized and the second document
was signed just the same as he did before, and both corporations recognized and accepted his services.

It was a one man corporation, and Willits, as the owner of all of the stock, was the force and dominant power which
controlled them. After the document was signed it was recognized by Willits that the plaintiff's services were to be
performed and measured by its term and provisions, and there never was any dispute between plaintiff and Willits
upon that question.

Statements of account were made and prepared by the accountant on the assumption that the document was in full
force and effect as between the plaintiff and the defendant. Previous financial statements show upon their face that
the account of plaintiff was credited with several small items on the same basis, and it was not until the 23d of March,
1921, that any objection was ever made by anyone.

Arnold vs. Willits and Patterson

Facts: In 1916, the Firm Willits & Patterson in San Francisco entered into a contract with Arnold whereby
Arnold was to be employed for a period of five years as the agent of the firm here in the PI to operate an oil mill for
which he was to receive a minimum salary of $200/mth, a 1% brokerage fee from all purchases and sales of
merchandise, and half of the profits of the oil business and other businesses. provided if the business was at a loss,
Arnold would receive $400/mth. Later, Patterson retired and Willits acquired all interests of the business. Willits
organized a new Corp in San Francisco which took over and acquired all assets of the Firm Willits & Patterson.
Willits was the owner of all the capital stock. New corp had the same name. After, Willits, organized a new
Corporation here in the PI to take over all the business and assets of the firm here in the PI. Willits was the owner
of all the capital stock. Later, there was dispute with regard to the construction of the contract as a result, a new
contract in the form of a letter was entered into. Willits signed this. The statements of account showed that 106K
was due and owing to Arnold. W&P Corp was in financial trouble and all assets were turned over to a creditor’s

In 1922, Arnold filed this complaint to recover 106K from W&P. W&P argues that the 2 nd contract was signed
without authority. And as counterclaim alleged that Arnold took 30K from the Corp but only 19.1K was due to him
thus he owed 10.1K to W&P. CFI ordered Arnold to return the 10.1K.

Issue: Is the CFI correct?

Held: No. The SC reverses. Arnold entitled to 68K plus half of 75K, representing PNs.

Both Corp’s organized by Willits were a One Man Corporation. After the 2 nd contract was signed it was recognized
by Willits that Arnold’s services were to be performed by its terms and there never was any dispute between Arnold
and Willits.

Although a new corp was created, the new corp dealt with and treated Arnold as its agent in the same manner as the
previous corp had, thus the new corp is bound by the contract which the old firm made. In fact, the 2nd contract
protected Willits from a larger claim, which the accountant said, would be over 160K.

Where a stock of a corporation is owned by one person whereby the corp functions only for the benefit of such
individual owner, the corp and the individual should be deemed to be the same. Thus the corp is bound by the contract.