G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF APARRI,
LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., LYCEUM OF
TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN
PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC.,
respondents.

Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.

Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.

Froilan Siobal for Western Pangasinan Lyceum.

SYLLABUS

1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME WHICH IS

IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING CORPORATION, PROHIBITED;
CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED BY THE APPENDING OF GEOGRAPHIC
NAMES TO THE WORD "LYCEUM". — The Articles of Incorporation of a corporation must, among
other things, set out the name of the corporation. Section 18 of the Corporation Code establishes
a restrictive rule insofar as corporate names are concerned: "Section 18. Corporate name. — No
corporate name may be allowed by the Securities an Exchange Commission if the proposed name
is identical or deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name." The policy underlying the prohibition in
Section 18 against the registration of a corporate name which is "identical or deceptively or
confusingly similar" to that of any existing corporation or which is "patently deceptive" or
"patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which
would have occasion to deal with the entity concerned, the evasion of legal obligations and duties,
and the reduction of difficulties of administration and supervision over corporations. We do not
consider that the corporate names of private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate
names of private respondent entities all carry the word "Lyceum" but confusion and deception are
effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do
not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of
the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the
Philippines.

2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT ATTENDED
WITH EXCLUSIVITY. — It is claimed, however, by petitioner that the word "Lyceum" has acquired
a secondary meaning in relation to petitioner with the result that word, although originally a
generic, has become appropriable by petitioner to the exclusion of other institutions like private
respondents herein. The doctrine of secondary meaning originated in the field of trademark law.
Its application has, however, been extended to corporate names sine the right to use a corporate
name to the exclusion of others is based upon the same principle which underlies the right to use
a particular trademark or tradename. In Philippine Nut Industry, Inc. v. Standard Brands, Inc.,
the doctrine of secondary meaning was elaborated in the following terms: " . . . a word or phrase
originally incapable of exclusive appropriation with reference to an article on the market, because
geographically or otherwise descriptive, might nevertheless have been used so long and so
exclusively by one producer with reference to his article that, in that trade and to that branch of
the purchasing public, the word or phrase has come to mean that the article was his product." The
question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of the general public (or at least
that portion of the general public which has to do with schools). The Court of Appeals recognized
this issue and answered it in the negative: "Under the doctrine of secondary meaning, a word or
phrase originally incapable of exclusive appropriation with reference to an article in the market,
because geographical or otherwise descriptive might nevertheless have been used so long and so
exclusively by one producer with reference to this article that, in that trade and to that group of
the purchasing public, the word or phrase has come to mean that the article was his produce (Ana
Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the
distinctiveness into which the name or phrase has evolved through the substantial and exclusive
use of the same for a considerable period of time. . . . No evidence was ever presented in the
hearing before the Commission which sufficiently proved that the word 'Lyceum' has indeed
acquired secondary meaning in favor of the appellant. If there was any of this kind, the same tend
to prove only that the appellant had been using the disputed word for a long period of time. . . .
In other words, while the appellant may have proved that it had been using the word 'Lyceum' for
a long period of time, this fact alone did not amount to mean that the said word had acquired
secondary meaning in its favor because the appellant failed to prove that it had been using the
same word all by itself to the exclusion of others. More so, there was no evidence presented to
prove that confusion will surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first two assigned errors must
necessarily fail." We agree with the Court of Appeals. The number alone of the private
respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum" has
not been attended with the exclusivity essential for applicability of the doctrine of secondary
meaning. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the
Western Pangasinan Lyceum and a little later with other private respondent institutions which
registered with the SEC using "Lyceum" as part of their corporation names. There may well be
other schools using Lyceum or Liceo in their names, but not registered with the SEC because they
have not adopted the corporate form of organization.

3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY ARE
CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S NAME. — petitioner
institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its
corporate name and that other institutions may use "Lyceum" as part of their corporate names. To
determine whether a given corporate name is "identical" or "confusingly or deceptively similar"
with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their entirety and when the name
of petitioner is juxtaposed with the names of private respondents, they are not reasonably
regarded as "identical" or "confusingly or deceptively similar" with each other.

DECISION

FELICIANO, J p:

Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the
corporate name Lyceum of the Philippines, Inc. and has used that name ever since.

On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private
respondents, which are also educational institutions, to delete the word "Lyceum" from their
corporate names and permanently to enjoin them from using "Lyceum" as part of their respective
names.

Some of the private respondents actively participated in the proceedings before the SEC. These
are the following, the dates of their original SEC registration being set out below opposite their
respective names:
Western Pangasinan Lyceum — 27 October 1950

Lyceum of Cabagan — 31 October 1962

Lyceum of Lallo, Inc. — 26 March 1972

Lyceum of Aparri — 28 March 1972

Lyceum of Tuao, Inc. — 28 March 1972

Lyceum of Camalaniugan — 28 March 1972

The following private respondents were declared in default for failure to file an answer despite
service of summons:

Buhi Lyceum;

Central Lyceum of Catanduanes;

Lyceum of Eastern Mindanao, Inc.; and

Lyceum of Southern Philippines

Petitioner's original complaint before the SEC had included three (3) other entities:

1. The Lyceum of Malacanay;

2. The Lyceum of Marbel; and

3. The Lyceum of Araullo

The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the
Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against the
Liceum of Araullo was dismissed when that school motu proprio change its corporate name to
"Pamantasan ng Araullo."

The background of the case at bar needs some recounting. Petitioner had sometime before
commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to
require it to change its corporate name and to adopt another name not "similar [to] or identical"
with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner Julio Sulit held
that the corporate name of petitioner and that of the Lyceum of Baguio, Inc. were substantially
identical because of the presence of a "dominant" word, i.e., "Lyceum," the name of the
geographical location of the campus being the only word which distinguished one from the other
corporate name. The SEC also noted that petitioner had registered as a corporation ahead of the
Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to change its name to another
name "not similar or identical [with]" the names of previously registered entities.

The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case
docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court
denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21
October 1977. 2

Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the
educational institutions it could find using the word "Lyceum" as part of their corporate name, and
advised them to discontinue such use of "Lyceum." When, with the passage of time, it became
clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No. 2579 to
enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC hearing
officer rendered a decision sustaining petitioner's claim to an exclusive right to use the word
"Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case (SEC-
Case No. 1241) and held that the word "Lyceum" was capable of appropriation and that petitioner
had acquired an enforceable exclusive right to the use of that word.

On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing
officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have
become so identified with petitioner as to render use thereof by other institutions as productive of
confusion about the identity of the schools concerned in the mind of the general public. Unlike its
hearing officer, the SEC En Banc held that the attaching of geographical names to the word
"Lyceum" served sufficiently to distinguish the schools from one another, especially in view of the
fact that the campuses of petitioner and those of the private respondents were physically quite
remote from each other. 3

Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991,
however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner
filed a motion for reconsideration, without success.

Before this Court, petitioner asserts that the Court of Appeals committed the following errors:

1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-
46595 did not constitute stare decisis as to apply to this case and in not holding that said
Resolution bound subsequent determinations on the right to exclusive use of the word Lyceum.

2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.

3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary
meaning in favor of petitioner.

4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated by
the petitioner to the exclusion of others. 5

We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by
noting that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res
adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare
decisis pertinent, if only because the SEC En Banc itself has re-examined Associate Commissioner
Sulit's ruling in the Lyceum of Baguio case. The Minute Resolution of the Court in G.R. No. L-
46595 was not a reasoned adoption of the Sulit ruling.

The Articles of Incorporation of a corporation must, among other things, set out the name of the
corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as
corporate names are concerned:

"SECTION 18. Corporate name. — No corporate name may be allowed by the Securities an
Exchange Commission if the proposed name is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the amended
name." (Emphasis supplied)

The policy underlying the prohibition in Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to that of any existing corporation or
which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the
avoidance of fraud upon the public which would have occasion to deal with the entity concerned,
the evasion of legal obligations and duties, and the reduction of difficulties of administration and
supervision over corporations. 7

We do not consider that the corporate names of private respondent institutions are "identical with,
or deceptively or confusingly similar" to that of the petitioner institution. True enough, the
corporate names of private respondent entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of geographic names to the word "Lyceum."
Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the
Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the
Lyceum of the Philippines.

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred
to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo
and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented
by the youth for exercise and by the philosopher Aristotle and his followers for teaching." 8 In
time, the word "Lyceum" became associated with schools and other institutions providing public
lectures and concerts and public discussions. Thus today, the word "Lyceum" generally refers to a
school or an institution of learning. While the Latin word "lyceum" has been incorporated into the
English language, the word is also found in Spanish (liceo) and in French (lycee). As the Court of
Appeals noted in its Decision, Roman Catholic schools frequently use the term; e.g., "Liceo de
Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum"
is in fact as generic in character as the word "university." In the name of the petitioner, "Lyceum"
appears to be a substitute for "university;" in other places, however, "Lyceum," or "Liceo" or
"Lycee" frequently denotes a secondary school or a college. It may be (though this is a question of
fact which we need not resolve) that the use of the word "Lyceum" may not yet be as widespread
as the use of "university," but it is clear that a not inconsiderable number of educational
institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or
"Liceo" denotes a school or institution of learning, it is not unnatural to use this word to designate
an entity which is organized and operating as an educational institution.

It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in
relation to petitioner with the result that that word, although originally a generic, has become
appropriable by petitioner to the exclusion of other institutions like private respondents herein.

The doctrine of secondary meaning originated in the field of trademark law. Its application has,
however, been extended to corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies the right to use a particular
trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the
doctrine of secondary meaning was elaborated in the following terms:

" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article
on the market, because geographically or otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with reference to his article that, in that trade
and to that branch of the purchasing public, the word or phrase has come to mean that the article
was his product." 12

The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of the general public (or at least
that portion of the general public which has to do with schools). The Court of Appeals recognized
this issue and answered it in the negative:

"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used so long and so exclusively by one producer with
reference to this article that, in that trade and to that group of the purchasing public, the word or
phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
56). This circumstance has been referred to as the distinctiveness into which the name or phrase
has evolved through the substantial and exclusive use of the same for a considerable period of
time. Consequently, the same doctrine or principle cannot be made to apply where the evidence
did not prove that the business (of the plaintiff) has continued for so long a time that it has
become of consequence and acquired a good will of considerable value such that its articles and
produce have acquired a well-known reputation, and confusion will result by the use of the
disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92 Phil.
448).

With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the
appellant. If there was any of this kind, the same tend to prove only that the appellant had been
using the disputed word for a long period of time. Nevertheless, its (appellant) exclusive use of
the word (Lyceum) was never established or proven as in fact the evidence tend to convey that
the cross-claimant was already using the word 'Lyceum' seventeen (17) years prior to the date
the appellant started using the same word in its corporate name. Furthermore, educational
institutions of the Roman Catholic Church had been using the same or similar word like 'Liceo de
Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long before
appellant started using the word 'Lyceum'. The appellant also failed to prove that the word
'Lyceum' has become so identified with its educational institution that confusion will surely arise in
the minds of the public if the same word were to be used by other educational institutions.

In other words, while the appellant may have proved that it had been using the word 'Lyceum' for
a long period of time, this fact alone did not amount to mean that the said word had acquired
secondary meaning in its favor because the appellant failed to prove that it had been using the
same word all by itself to the exclusion of others. More so, there was no evidence presented to
prove that confusion will surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first two assigned errors must
necessarily fail." 13 (Underscoring partly in the original and partly supplied)

We agree with the Court of Appeals. The number alone of the private respondents in the case at
bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the
exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also
that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the
term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name with
the SEC and began using the word "Lyceum." It follows that if any institution had acquired an
exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan
Lyceum, Inc. rather than the petitioner institution.

In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to
reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which
records had been destroyed during World War II, Western Pangasinan Lyceum should be deemed
to have lost all rights it may have acquired by virtue of its past registration. It might be noted that
the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner had filed its
own registration on 21 September 1950. Whether or not Western Pangasinan Lyceum, Inc. must
be deemed to have lost its rights under its original 1933 registration, appears to us to be quite
secondary in importance; we refer to this earlier registration simply to underscore the fact that
petitioner's use of the word "Lyceum" was neither the first use of that term in the Philippines nor
an exclusive use thereof. Petitioner's use of the word "Lyceum" was not exclusive but was in truth
shared with the Western Pangasinan Lyceum and a little later with other private respondent
institutions which registered with the SEC using "Lyceum" as part of their corporation names.
There may well be other schools using Lyceum or Liceo in their names, but not registered with the
SEC because they have not adopted the corporate form of organization.

We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive
right to use the word "Lyceum" in its corporate name and that other institutions may use
"Lyceum" as part of their corporate names. To determine whether a given corporate name is
"identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not
enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate
corporate names in their entirety and when the name of petitioner is juxtaposed with the names
of private respondents, they are not reasonably regarded as "identical" or "confusingly or
deceptively similar" with each other.

WHEREFORE, the petitioner having failed to show any reversible error on the part of the public
respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision
of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.
Lyceum of the Philippines v. CA (G.R. No. 101897)

Facts:

Petitioner Lyceum of the Philippines had commenced before the SEC a proceeding against the
Lyceum of Baguio to change its corporate name alleging that the 2 names are substantially
identical because of the word ‘Lyceum’. SEC found for petitioner and the SC denied the
consequent appeal of Lyceum of Baguio in a resolution. Petitioner then basing its ground on the
resolution, wrote to all educational institutions which made use of the word ‘Lyceum’ as part of
their corporate name to discontinue their use. When this recourse failed, petitioner moved before
the SEC to enforce its exclusive use of the word ‘Lyceum.’ Petitioner further claimed that the word
‘Lyceum’ has acquired a secondary meaning in its favor. The SEC Hearing Officer found for
petitioner. Both SEC En Banc and CA ruled otherwise.
Issues:

(1) Whether or not ‘Lyceum’ is a generic word which cannot be appropriated by petitioner to the
exclusion of others.

(2) Whether or not the word ‘Lyceum’ has acquired a secondary meaning in favor of petitioner.

(3) Whether or not petitioner is infringed by respondent institutions’ corporate names.

Ruling:

(1) YES. “Lyceum” is in fact as generic in character as the word “university.” In the name of the
petitioner, “Lyceum” appears to be a substitute for “university;” in other places, however,
“Lyceum,” or “Liceo” or “Lycee” frequently denotes a secondary school or a college. It may be that
the use of the word “Lyceum” may not yet be as widespread as the use of “university,” but it is
clear that a not inconsiderable number of educational institutions have adopted “Lyceum” or
“Liceo” as part of their corporate names. Since “Lyceum” or “Liceo” denotes a school or institution
of learning, it is not unnatural to use this word to designate an entity which is organized and
operating as an educational institution.

(2) NO. Under the doctrine of secondary meaning, a word or phrase originally incapable of
exclusive appropriation with reference to an article in the market, because geographical or
otherwise descriptive might nevertheless have been used so long and so exclusively by one
producer with reference to this article that, in that trade and to that group of the purchasing
public, the word or phrase has come to mean that the article was his produce. With the foregoing
as a yardstick, [we] believe the appellant failed to satisfy the aforementioned requisites. While the
appellant may have proved that it had been using the word ‘Lyceum’ for a long period of time, this
fact alone did not amount to mean that the said word had acquired secondary meaning in its favor
because the appellant failed to prove that it had been using the same word all by itself to the
exclusion of others. More so, there was no evidence presented to prove that confusion will surely
arise if the same word were to be used by other educational institutions.

(3) NO. We do not consider that the corporate names of private respondent institutions are
“identical with, or deceptively or confusingly similar” to that of the petitioner institution.
True enough, the corporate names of private respondent entities all carry the word
“Lyceum” but confusion and deception are effectively precluded by the appending of
geographic names to the word “Lyceum.” Thus, we do not believe that the “Lyceum of
Aparri” can be mistaken by the general public for the Lyceum of the Philippines, or that the
“Lyceum of Camalaniugan” would be confused with the Lyceum of the Philippines. We
conclude and so hold that petitioner institution is not entitled to a legally enforceable
exclusive right to use the word “Lyceum” in its corporate name and that other institutions
may use “Lyceum” as part of their corporate names.
G.R. No. L-28113 March 28, 1969

THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO BALINDONG,
petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN MACARAMPAD,
FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY, MACALABA INDAR LAO.
respondents.

L. Amores and R. Gonzales for petitioners.

Jose W. Diokno for respondents.

CASTRO, J.:

The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the councilors,
of the municipality of Balabagan of the same province. Balabagan was formerly a part of the
municipality of Malabang, having been created on March 15, 1960, by Executive Order 386 of the
then President Carlos P. Garcia, out of barrios and sitios 1 of the latter municipality.

The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain
the respondent municipal officials from performing the functions of their respective office relying
on the ruling of this Court in Pelaez v. Auditor General 2 and Municipality of San Joaquin v. Siva. 3

In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section
23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the power to
create barrios in the provincial board, is a "statutory denial of the presidential authority to create
a new barrio [and] implies a negation of the bigger power to create municipalities," and (2) that
section 68 of the Administrative Code, insofar as it gives the President the power to create
municipalities, is unconstitutional (a) because it constitutes an undue delegation of legislative
power and (b) because it offends against section 10 (1) of article VII of the Constitution, which
limits the President's power over local governments to mere supervision. As this Court summed
up its discussion: "In short, even if it did not entail an undue delegation of legislative powers, as it
certainly does, said section 68, as part of the Revised Administrative Code, approved on March
10, 1917, must be deemed repealed by the subsequent adoption of the Constitution, in 1935,
which is utterly incompatible and inconsistent with said statutory enactment."

On the other hand, the respondents, while admitting the facts alleged in the petition,
nevertheless argue that the rule announced in Pelaez can have no application in this case because
unlike the municipalities involved in Pelaez, the municipality of Balabagan is at least a de facto
corporation, having been organized under color of a statute before this was declared
unconstitutional, its officers having been either elected or appointed, and the municipality itself
having discharged its corporate functions for the past five years preceding the institution of this
action. It is contended that as a de facto corporation, its existence cannot be collaterally attacked,
although it may be inquired into directly in an action for quo warranto at the instance of the State
and not of an individual like the petitioner Balindong.

It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved
to the State in a proceeding for quo warranto or other direct proceeding, and that only in a few
exceptions may a private person exercise this function of government. 4 But the rule disallowing
collateral attacks applies only where the municipal corporation is at least a de facto corporations.
5 For where it is neither a corporation de jure nor de facto, but a nullity, the rule is that its
existence may be, questioned collaterally or directly in any action or proceeding by any one whose
rights or interests ate affected thereby, including the citizens of the territory incorporated unless
they are estopped by their conduct from doing so. 6
 And so the threshold question is whether the municipality of Balabagan is a de facto corporation.
As earlier stated, the claim that it is rests on the fact that it was organized before the
promulgation of this Court's decision in Pelaez. 7

Accordingly, we address ourselves to the question whether a statute can lend color of validity to
an attempted organization of a municipality despite the fact that such statute is subsequently
declared unconstitutional.lawphi1.ñet

This has been a litigiously prolific question, sharply dividing courts in the United States. Thus,
some hold that a de facto corporation cannot exist where the statute or charter creating it is
unconstitutional because there can be no de facto corporation where there can be no de jure one,
8 while others hold otherwise on the theory that a statute is binding until it is condemned as
unconstitutional. 9

An early article in the Yale Law Journal offers the following analysis:

It appears that the true basis for denying to the corporation a de facto status lay in the absence
of any legislative act to give vitality to its creation. An examination of the cases holding, some of
them unreservedly, that a de facto office or municipal corporation can exist under color of an
unconstitutional statute will reveal that in no instance did the invalid act give life to the
corporation, but that either in other valid acts or in the constitution itself the office or the
corporation was potentially created....

The principle that color of title under an unconstitutional statute can exist only where there is
some other valid law under which the organization may be effected, or at least an authority in
potentia by the state constitution, has its counterpart in the negative propositions that there can
be no color of authority in an unconstitutional statute that plainly so appears on its face or that
attempts to authorize the ousting of a de jure or de facto municipal corporation upon the same
territory; in the one case the fact would imply the imputation of bad faith, in the other the new
organization must be regarded as a mere usurper....

As a result of this analysis of the cases the following principles may be deduced which seem to
reconcile the apparently conflicting decisions:

I. The color of authority requisite to the organization of a de facto municipal corporation may be:

1. A valid law enacted by the legislature.

2. An unconstitutional law, valid on its face, which has either (a) been upheld for a time by the
courts or (b) not yet been declared void; provided that a warrant for its creation can be found in
some other valid law or in the recognition of its potential existence by the general laws or
constitution of the state.

II. There can be no de facto municipal corporation unless either directly or potentially, such a de
jure corporation is authorized by some legislative fiat.

III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which
is apparent on its face.

IV. There can be no de facto corporation created to take the place of an existing de jure
corporation, as such organization would clearly be a usurper.10

In the cases where a de facto municipal corporation was recognized as such despite the fact that
the statute creating it was later invalidated, the decisions could fairly be made to rest on the
consideration that there was some other valid law giving corporate vitality to the organization.
Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute
had not been invalidated cannot conceivably make it a de facto corporation, as, independently of
the Administrative Code provision in question, there is no other valid statute to give color of
authority to its creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court granted a
similar petition for prohibition and nullified an executive order creating the municipality of Lawigan
in Iloilo on the basis of the Pelaez ruling, despite the fact that the municipality was created in
1961, before section 68 of the Administrative Code, under which the President had acted, was
invalidated. 'Of course the issue of de facto municipal corporation did not arise in that case.

In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it
confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never been passed." Accordingly, he held that
bonds issued by a board of commissioners created under an invalid statute were unenforceable.

Executive Order 386 "created no office." This is not to say, however, that the acts done by the
municipality of Balabagan in the exercise of its corporate powers are a nullity because the
executive order "is, in legal contemplation, as inoperative as though it had never been passed."
For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored." As
Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State Bank: 13

The courts below have proceeded on the theory that the Act of Congress, having been found to
be unconstitutional, was not a law; that it was inoperative, conferring no rights and imposing no
duties, and hence affording no basis for the challenged decree. Norton v. Shelby County, 118 U.S.
425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559, 566. It is quite clear, however, that
such broad statements as to the effect of a determination of unconstitutionality must be taken
with qualifications. The actual existence of a statute, prior to such a determination, is an operative
fact and may have consequences which cannot justly be ignored. The past cannot always be
erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have
to be considered in various aspects — with respect to particular relations, individual and
corporate, and particular conduct, private and official. Questions of rights claimed to have become
vested, of status of prior determinations deemed to have finality and acted upon accordingly, of
public policy in the light of the nature both of the statute and of its previous application, demand
examination. These questions are among the most difficult of those which have engaged the
attention of courts, state and federal, and it is manifest from numerous decisions that an all-
inclusive statement of a principle of absolute retroactive invalidity cannot be justified.

There is then no basis for the respondents' apprehension that the invalidation of the executive
order creating Balabagan would have the effect of unsettling many an act done in reliance upon
the validity of the creation of that municipality. 14

ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the
respondents are hereby permanently restrained from performing the duties and functions of their
respective offices. No pronouncement as to costs.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Capistrano, JJ., concur.
Teehankee and Barredo, JJ., took no part.

Separate Opinions

FERNANDO, J., concurring:

I concur fully with the well-written opinion of Justice Castro. It breaks new ground; it strikes out
new paths. It is precisely because of its impact on the power of judicial review of executive acts
that I deem a few additional words would not be amiss.
1. Insofar as the effect of a declaration of unconstitionality is concerned, the latter and more
realistic trend reflected in Chicot County Drainage District v. Baxter State Bank 1 had previously
elicited our approval. Thus: "'Rutter vs. Esteban (93 Phil. 68) may be construed to mean that at
the time of the decision the Moratorium law could no longer be validly applied because of the
prevailing circumstances. At any rate, although the general rule is that an unconstitutional statute
— 'confers no right, creates no office, affords no protection and justifies no acts performed under
it.' ... there are several instances wherein courts, out of equity, have relaxed its operation ... or
qualified its effects 'since the actual existence of a statute prior to such declaration is an operative
fact, and may have consequences which cannot justly be ignored' ... and a realistic approach is
eroding the general doctrine ....'" 2 Also: "We have taken note, of the fact that, on June 30, 1961,
Section 25 of Reorganization Plan No. 20-A had been declared unconstitutional by this Court in the
case of Corominas, et al. v. The Labor Standards Commission, et al., .... It appears, however, that
the Plaintiff had filed his claim before Regional Office No. 4 of the Department of Labor on July 26,
1960, or about one year before said Section 25 had been declared unconstitutional. The
circumstance that Section 25 of Reorganization Plan No. 20-A had been declared unconstitutional
should not be counted against the defendant in the present case. In the case of Manila Motor Co.,
Inc. v. Flores, ..., this Court upheld the right of a party under the Moratorium Law which had
accrued in his favor before said law was declared unconstitutional by this Court in the case of
Rutter v. Esteban, 93 Phil. 68." 3

2. Nothing can be clearer therefore in the light of the two above cases than that a previous
declaration of invalidity of legislative acts would not be bereft of legal results. Would that view
hold true of nullification of executive acts? There might have been doubts as to the correct answer
before. There is none now.

A judicial decision annulling a presidential exercise of authority 4 is not without its effect either.
That much is evident from the holding now reached. The act stricken down, whether proceeding
from the legislature or the Executive, could in the language of the Chicot County case, be
considered, prior to the declaration of invalidity, as "an operative fact and may have
consequences which cannot justly be ignored."

Thus the frontiers of the law have been extended, a doctrine which to some may come into play
when a statute is voided is now considered equally applicable to a Presidential act that has met a
similar fate. Such a result should not occasion surprise. That is to be expected.

There would be an unjustified deviation from the doctrine of separation of powers if a

consequence attached to the annulment of a statue is considered as not operative where an
executive order is involved. The doctrine of co-equal or coordinate departments would be
meaningless if a discrimination of the above sort were considered permissible. The cognizance
taken of the prior existence of an enactment subsequently declared unconstitutional applies as
well as to a Presidential act thereafter successfully assailed. There was a time when it too did exist
and, as such, a fact to be reckoned with, though an infirm source of a legal right, if, as
subsequently held, considered violative of a constitutional command.

3. Precisionists may cavil at the above view; they may assert, and with some degree of
plausibility, that the holding in the Pelaez case goes no further than to locate a statutory infirmity
in the Presidential act there challenged, creating municipal corporations under what the then
Executive considered a grant of authority found in the Revised Administrative Code. 5 Such a
power having been found not to exist, the decision, so it may be asserted, did not reach the
constitutional issue of non-delegation of legislative power. Tersely put, there was no finding of
nullity based on a violation of the Constitution.

To such a claim, it suffices to answer that while the challenged Administrative Code provision
was in fact held as not containing within itself the authority conferred on the President to create
municipal corporations, the opinion by the then Justice, now Chief Justice, Concepcion went
further. As was pointed out by him: "Although Congress may delegate to another branch of the
Government the power to fill in the details in the execution, enforcement or administration of a
law, it is essential, to forestall a violation of the principle of separation of powers, that said law:
(a) be complete in itself — it must set forth therein the policy to be executed, carried out or
implemented by the delegate — and (b) fix a standard — the limits of which are sufficiently
determinate or determinable — to which the delegate must conform in the performance of his
functions. Indeed, without a statutory declaration of policy, the delegate would, in effect, make or
formulate such policy, which is the essence of every law; and without the aforementioned
standard, there would be no means to determine, with reasonable certainty, whether the delegate
has acted within or beyond the scope of his authority. Hence, he could thereby arrogate upon
himself the power, not only to make the law, but also — and this is worse — to unmake it, by
adopting measures inconsistent with the end sought to be attained by the Act of Congress, thus
nullifying the principle of separation of powers and the system of checks and balances, and,
consequently, undermining the very foundation of our Republican system." 6

From which, it would follow, in the language of the opinion: "Section 68 of the Revised
Administrative Code does not meet these well-settled requirements for a valid delegation of the
power to fix the details in the enforcement of a law. It does not enunciate any policy to be carried
out or implemented by the President. Neither does it give a standard sufficiently precise to avoid
the evil effects above referred to." 7

It is thus clear that while it might not be strictly accurate to advance the view that there was a
finding of unconstitutionality of a challenged statutory norm, there could be no objection to the
view that the holding was one of unconstitutional application.

Nor is this all. If there be admission of the force of the assertion that the Pelaez opinion went no
further than to locate in the challenged Executive orders creating municipal corporations an act in
excess of statutory authority, then our decision in this case is all the more noteworthy for the
more hospitable scope accorded the Chicot doctrine. For as originally formulated, it would merely
recognize that during its existence, prior to its being declared violative of the constitute, the
statute must be deemed an operative fact. Today we decide that such a doctrine extends to a
Presidential act held void not only on the ground of unconstitutional infirmity but also because in
excess of the statutory power conferred. That to me is the more significant aspect of this decision.
To repeat, to that point of view I yield full concurrence.

I do so because it appears to me a logical corollary to the principle of separation of powers. Once

we accept the basic doctrine that each department as a coordinate agency of government is
entitled to the respect of the other two, it would seem to follow that at the very least, there is a
presumption of the validity of the act performed by it, unless subsequently declared void in
accordance with legally accepted principles. The rule of law cannot be satisfied with anything less.

Since under our Constitution, judicial review exists precisely to test the validity of executive or
legislative acts in an appropriate legal proceeding, there is always the possibility of their being
declared inoperative and void. Realism compels the acceptance of the thought that there could be
a time-lag between the initiation of such Presidential or congressional exercise of power and the
final declaration of nullity. In the meanwhile, it would be productive of confusion, perhaps at times
even of chaos, if the parties affected were left free to speculate as to its fate being one of doom,
thus leaving them free to disobey it in the meanwhile. Since, however, the orderly processes of
government not to mention common sense, requires that the presumption of validity be accorded
an act of Congress or an order of the President, it would be less than fair, and it may be
productive of injustice, if no notice of its existence as a fact be paid to it, even if thereafter, it is
stricken down as contrary, in the case of Presidential act, either to the Constitution or a
controlling statute.
 The far-reaching import in the above sense of the decision we now render calls, to my mind, for
an articulation of further reflection on its varied implications. We have here an illustration to
paraphrase Dean Pound, of the law being stable and yet far from standing still. That is as it ought
to be; that is how law grows. It is in that sense that the judicial process is impressed with
creativity, admittedly within limits rather narrowly confined. That in itself is to hold fast to the
appropriate role of the judiciary, far from insignificant as our decision discloses. Hence, this
separate concurring opinion, which, I trust, will make manifest why my agreement with what
Justice Castro had so ably expressed in the opinion of the Court is wholehearted and entire.

Concepcion, C.J., concurs.

MALABANG v. BENITO, G.R. No. L-28113, March 28, 1969 (Digested Case)

Re: De facto municipal corporation

FACTS: Petitioners assailed the validity of EO 386 of the then President Carlos P. Garcia, which
created the Municipality of Balabagan out of barrios and sitios of Malabang. Petitioner relied on
the ruling in Pelaez v. Auditor General while respondent contended that that the rule announced
in Pelaez can have no application in this case because unlike the municipalities involved in Pelaez,
the municipality of Balabagan is at least a de facto corporation, having been organized under color
of a statute before this was declared unconstitutional, its officers having been either elected or
appointed, and the municipality itself having discharged its corporate functions for the past five
years preceding the institution of this action. It is contended that as a de facto corporation, its
existence cannot be collaterally attacked, although it may be inquired into directly in an action for
quo warranto at the instance of the State and not of an individual like the petitioner Balindong.

WON:
(1) WON the controverted matter may be attacked collateraly.

(2) WON EO 386 is constitutional.

HELD:
(1) Yes. It is indeed true that, generally, an inquiry into the legal existence of a municipality is
reserved to the State in a proceeding for quo warranto or other direct proceeding, and that only in
a few exceptions may a private person exercise this function of government. But the rule
disallowing collateral attacks applies only where the municipal corporation is at least a de facto
corporations. For where it is neither a corporation de jure nor de facto, but a nullity, the rule is
that its existence may be, questioned collaterally or directly in any action or proceeding by any
one whose rights or interests are affected thereby, including the citizens of the territory
incorporated unless they are estopped by their conduct from doing so.

(2) No. In the cases where a de facto municipal corporation was recognized as such despite the
fact that the statute creating it was later invalidated, the decisions could fairly be made to rest on
the consideration that there was some other "valid law" giving corporate vitality to the
organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a time
when the statute had not been invalidated cannot conceivably make it a de facto corporation, as,
independently of the Administrative Code provision in question, there is "no other valid statute to
give color of authority to its creation".
71 N.W. 1056 (Wis. 1897)

96 Wis. 641

BERGERON, Respondent,

v.

HOBBS and others, Appellants

Supreme Court of Wisconsin

June 24, 1897

Argued: June 12, 1897

APPEAL from a judgment of the circuit court for Bayfield county: JOHN K. PARISH, Circuit Judge.
Affirmed.

The defendants, under the name of Bayfield Agricultural Association, employed several persons to
perform labor in improving their grounds and in erecting fences and buildings. Time checks given
by the defendants to such laborers, for such labor, were assigned to the plaintiff, who brings this
action to recover their amount, alleging that the defendants were a copartnership. The defendants
alleged that they were members of a corporation, and denied that they were copartners, or liable
as such. This was the issue which was tried. It appeared upon the trial that articles of organization
of the defendants as the Bayfield County Agricultural Association, and a certificate showing the
election of officers, had been recorded in the office of the register of deeds of Bayfield county, but
were not on file there. They had been deposited with instruction to record and return them, which
had been complied with. When the testimony of both sides was in, the court directed a verdict for
the plaintiff for the amount of the time checks. From a judgment on that verdict the defendants
appeal.

Affirmed.

For the appellants the cause was submitted on the brief of George P. Rossman.

For the respondent there was a brief by W. H. Packard and A. W. McLeod, and oral argument by
Mr. McLeod. They argued, among other things, that whenever the statute requires the filing of the
articles of association the filing of the original certificate with the clerk is an indispensable
prerequisite to the creation of the corporation. Until this has been done the corporation has no
existence, and failure in that regard may be shown incidentally and taken advantage of
collaterally, whenever the fact of incorporation is in any form called into question. Childs v. Hurd,
32 W.Va. 66; Mokelumne Hill C. & M. Co. v. Woodbury, 14 Cal. 425; Abbott v. Omaha S. & R. Co.
4 Neb. 416; McIntire v. McLain Ditching Asso. 40 Ind. 104; Att'y Gen. v. Hanchett, 42 Mich. 436;
Thomp. Corp. § 226. Filing the articles of association with the register of deeds is a condition
precedent. Abbott v. Omaha S. & R. Co. 4 Neb. 416; Martin v. Deetz, 102 Cal. 55; Thomp. Corp.
§ 227; Spencer, Field & Co. v. Cooks, 16 La. Ann. 152; Bigelow v. Gregory, 73 Ill. 197.

ALFRED W. NEWMAN, J. ROUJET D. MARSHALL, J., concurred and dissented in part.

OPINION

[96 Wis. 642] NEWMAN, J.

There are two questions raised on this appeal: (1) Was the mere recording of the articles of
incorporation, with the certificate of the election of officers, without the intention or fact of the
papers themselves remaining in the office, a sufficient compliance with the statute, so that the
organization of the corporation became complete, as upon a proper filing of the papers
themselves? And (2) if the recording was not sufficient for that purpose, are the defendants liable
to the plaintiff only as a de facto corporation, or are they liable as copartners?

1. The statute (sec. 1460, R. S.) provides that, upon the filing of "a certificate of organization, . . .
with a copy of the constitution," in the office of the register of deeds of the county, "such society
shall have all the powers of a corporation necessary to promote the objects thereof." It cannot be
doubted that the filing of the proper papers in the proper office is made, by the statute, a
condition precedent to the vesting of corporate powers. The court may not be able to clearly
define the respect wherein the mere recording and removal of the papers from the office fails to
serve the full purpose which the legislature intended to accomplish by the filing of them. The
legislature, no doubt, had good and sufficient reasons for its choice of means to promote its
purpose. For the court it is not a question of equivalents. A literal filing of the papers is necessary
because it is so written in the law. The term "filing" and the verb "to file," as related to this
subject, include the idea that the paper is to remain

1057

in its proper order on file in the office. A paper is said to be filed when it is delivered to the proper
officer, and by him received, to be kept on file. Bouv. Law Dict. The statute is plain and easy of
observance. Valuable rights and exemption from personal liability are to be secured by its
observance. It is no undue severity to require its strict observance. The defendants had not
observed it, and had not secured corporate powers.

2. Had the defendants secured immunity from individual liability? No doubt, as a general rule,
where an attempt to organize a corporation fails by omission of some substantial step or
proceeding required by the statute, its members or stockholders are liable as partners for its acts
and contracts. Beach, Priv. Corp. §§ 16, 162; 1 Thomp. Corp. §§ 239, 416, 417. But the
defendants' contention is that they are not within this rule, because they are at least de facto a
corporation, and their right to be a corporation cannot be inquired into in a collateral action, but
only in a direct action for that purpose by the state. The infirmity of the defendants' contention is
in the assumption that they are de facto a corporation. In order to secure this immunity from
inquiry into its right to be a corporation in a collateral action, its action, as a corporation, must be
under a color, at least, of right. It is immaterial that they have carried on business under the
supposed authority to act as a body corporate, in entire good faith. If they had not color of legal
right, they have obtained no immunity from individual liability for the debts of the supposed
corporation. Until the articles of incorporation are filed in the office of the register of deeds of the
county, there is no color of legal right to act as a corporation. The filing of such paper is a
condition precedent to the right to so act. So long as an act, required as a condition precedent,
remains undone, no immunity from individual liability is secured. 1 Thomp. Corp. §§ 226, 508.

The defendants are not a corporation either de jure or de facto, but are liable for the plaintiff's
claim as partners. It was not necessary to prove a copartnership by evidence. That was
established by implication of law. Nor was it necessary to prove that the debt was unpaid. There
was no presumption that it had been paid to be rebutted. The judgment of the circuit court is
right, and must be affirmed.

By the Court.--The judgment of the circuit court is affirmed.

CONCUR BY: MARSHALL

DISSENT BY: MARSHALL

MARSHALL, J. With the decision that the defendants failed to comply with all the conditions
precedent to the corporate existence of the agricultural association I concur, but from the decision
that because of such failure such association was not a corporation de facto I respectfully dissent;
hence dissent from the conclusion reached that the defendants are personally liable to plaintiff,
and that the judgment should be affirmed, but, on the contrary, hold that it should be reversed.

My brethren cite Beach, Priv. Corp. § 162, and 1 Thomp. Corp. §§ 239, 508, to the effect that,
unless all the conditions precedent to the creation of a corporation are performed, there can be no
corporation in fact, and that the members of the pretended corporation will be personally liable.
Then §§ 417 and 420 of Judge Thompson's work are cited, to the effect that, if the corporation
never comes into being in fact, so as to be regarded as a corporation de facto, the persons who
have assumed to contract in its name are personally liable. These sections seem to be tied
together, in the opinion of the court, as if the two ideas are in harmony, when the contrary, to my
mind, is manifestly true. Thompson treats this subject in such a way as to naturally confuse one
who attempts to follow him as authority. After saying, in §§ 239, 508, in effect, that all the
conditions precedent to the creation of a corporation must be complied with, in order that the
members may escape personal liability, he says, in § 417, that the rule does not apply to
corporations de facto, and in § 420 that where there is a corporation de facto,--in other words,
where the circumstances are such that a corporation might exist, and where the party seeking to
charge the members individually has dealt with them as a corporation,--he is estopped from
setting up the fact that they are not a corporation de jure, in order to charge them personally.
From this confusion it is not to be wondered at that if a person tries to follow Judge Thompson he
will be led inevitably into the position of holding that, unless all the conditions precedent to the
existence of a corporation are complied with, personal liability of the members of the corporation
will exist, though the rule does not apply if the organisation be a corporation de facto. That comes
from trying to harmonize conflicting decisions, that proceed on theories so opposite that harmony
is impossible.

If we hold with Missouri, Arkansas, and some other states, that unless all the steps necessary to
the creation of the corporation have been taken there is no corporate existence, and that the
members of the association are personally liable, we, in effect, say that it is not sufficient to
enable such members to escape personal liability to show that their organization is a corporation
de facto; that nothing short of a corporation de jure will do. But if we adopt the growing doctrine,
supported, as I shall show, by the overwhelming weight of authority in this country, that if a
person contracts with a de facto corporation, the members of the latter and such person believing,
in good faith, in its legal existence, such members cannot be held personally liable, then we
concede, necessarily, that it is not essential to freedom from such liability that all the statutory
requisites to the existence of a corporation be complied with, because, when that is done, the
organization, obviously, is not a corporation de

1058

facto only; it is a corporation de jure. This is too plain to admit of serious discussion.

While the decision in this case, as I read the opinion of the court, in one view, goes upon the
ground that the members of a de facto corporation are not responsible personally, inasmuch as it
may be held that the decision really is to the effect that personal liability exists because all the
conditions precedent to a corporation de jure were not complied with, some reference to
authorities on the subject of whether to escape such liability it is necessary that the corporation
exist in fact may be proper.

The development of the law on this subject has been rapid in recent years in the direction of
holding that the state only can challenge the legality of the exercise of corporate powers. The
ancient doctrine was that all contracts made by a corporation in excess of its powers were void.
That has not been changed, but the doctrine has grown up and become well-nigh universal, that
the state only can raise the question by proceedings to punish the corporation. Our court is fully
committed to such doctrine. John V. Farwell Co. v. Wolf, ante, p. 10. Following closely upon the
growth of such doctrine, as applied to transactions in excess of corporate powers, where there is
no question as to the existence of the corporation, it has been extended, so as to prevent private
persons, who have contracted with a de facto corporation, from questioning its existence; holding
that sovereign power only can raise that question. This court having fully adopted the doctrine
where there is a corporation in fact, how it can be rejected where the corporation is de facto
merely is not perceived, inasmuch as a controlling reason for it in the one case applies equally to
the other. In both cases there is an exercise of powers that can only be lawfully exercised by
sovereign authority; hence the unauthorized exercise of power constitutes a public offense, not
against any individual, but against the sovereignty of the state. A few authorities of the multitude
that exist on the question under discussion will be referred to.

In Cochran v. Arnold, 58 Pa. 399, the question was whether a person who had contracted with a
pretended corporation, so defectively formed that in a suit by the commonwealth it would have
been enjoined for want of legal existence, could, in an action against the members of such
corporation to enforce personal liability, successfully question the corporate existence. The case is
particularly in point here, because the corporation claimed to exist by compliance with a general
law, and the point was made that the rule that a private person cannot question the existence of a
corporation assuming to exist under the special law does not apply fully to corporations organized
under general laws. To that and the general subject Mr. Justice STRONG said: "Though formed
under a general law, it is, as against all the world but the commonwealth, as completely and
effectually a corporate body as if it had been created by a special act of assembly and by letters
patent. . . . Until the franchise claimed and used has been directly adjudged not to exist, there is
a corporation de facto, at least. If there is anything settled, it is that the corporate existence of a
corporation de facto cannot be inquired into collaterally. Upon this subject the authorities are too
numerous to admit of citations." The learned judge then proceeds to show that the doctrine
announced was contrary to earlier decisions of the court, but that happily, before any great
mischiefs had been caused by the error in such earlier decisions, the opportunity was presented
for correcting it and placing the court in line with the great weight of authority on the subject.
Considering the consequences of a contrary view, he said, in effect: 'The mischiefs of such a
doctrine would be the same, whatever the mode of obtaining corporate existence. One jury might
say there was no corporation; another jury find to the contrary. One creditor might sue the
corporation as a valid organization; another sue the members, alleging that the charter is null and
furnishes no immunity from personal liability. New stockholders might come in, wholly ignorant of
the secret vice in obtaining the corporate thing, and be held liable. The charter would have to be
effective upon the one hand and ineffective upon the other. What confusion would such a
monstrous doctrine produce!' This language fairly expresses the idea of the court, and is not too
strong to fit the case; and the ruling has been followed down to the present time by such court. In
Hamilton v. C., M. & P. R. Co. 144 Pa. 34, 23 A. 53, there was an attempt to set up want of legal
incorporation, and Justice PAXTON said, in effect, the corporation at least had a de facto
existence; therefore, it could contract debts, and, if there is anything settled in the law, it is that
the existence of a corporation de facto cannot be inquired into collaterally. See, also, Spahr v.
Farmers' Bank, 94 Pa. 429; also, Guckert v. Hacke, 159 Pa. 303, 28 A. 249, where the court held
that though, if plaintiff had dealt with defendants as a corporation he would have been estopped
from claiming against them in any other capacity, he was not in that case, because he did not
know that they pretended to be a corporation; therefore, did not deal with them as such.

The same subject was treated by the supreme court of Georgia in Planters' & M. Bank v. Padgett,
69 Ga. 159, where the rule was laid down, in effect, that having contracted with the company,
through its officers or agents, both parties believing the corporation to exist de jure as well as de
facto, an action cannot be maintained against them personally on the contract. The members
never agreed to enter into the contract severally or jointly; they never agreed to be bound as
partners, or to hold themselves out as such. The contract
1059

was intended to bind the association in a corporate capacity only.

In Gartside Coal Co. v. Maxwell, 22 F. 197, the corporation was so defectively organized as to
have no legal existence. An action was brought by one who had dealt with it, against the
stockholders, to hold them personally liable. Judge BREWER, in delivering the opinion of the court,
said, substantially, if the corporation had been challenged by the state, its exercise of corporate
powers would have been enjoined, but where persons act in good faith, and suppose they are
members of a valid corporation and transact business as such, and the corporate existence is not
challenged by the state, they cannot be held liable as individuals; that if a person deals with a
supposed corporation,--with what all persons suppose is a corporation,--he cannot afterwards turn
around and say, "Well, I dealt with this supposed corporation; I thought it was a corporation; I
trusted it as such; but, by reason of failure to legally incorporate, there is no legal corporation;
therefore, I will hold the stockholders personally liable." I do not think that can be done. To the
same effect are Stafford Nat. Bank v. Palmer, 47 Conn. 443; Eaton v. Walker, 76 Mich. 579, 43
N.W. 638; Merchants & M. Bank v. Stone, 38 Mich. 779; Haas v. Bank of Commerce, 41 Neb. 754,
60 N.W. 85; 17 Am. & Eng. Ency. of Law, 866, and numerous cases there cited; 4 Thomp. Corp. §
5275; Morawetz, Priv. Corp. (1st ed.), §§ 141, 142; Angell & A. Corp. § 635. In Cook, Stock, §
637, the rule is laid down and supported by many authorities, to the effect that, with few
exceptions not including the case under consideration, no one is allowed to assert that the
corporation was illegally incorporated until that result has been decreed by a court in a proceeding
instituted for that purpose by the state; that where persons do business in good faith as a
corporation, without having any legal existence as such, it is called a de facto corporation, and
only the state is allowed to question its existence. So, a party contracting with such a corporation
cannot defeat his obligation by saying that the corporation was never legally incorporated.

The foregoing citation of authorities has been carried to great length, but warranted, in my
judgment, from the importance of the question involved. After carefully examining such
authorities and the reasoning on which the doctrine discussed is based, I am unable to understand
how any other conclusion can be reached than that a decision cannot be made that plaintiff in this
case can attack the existence of the agricultural association as a corporation, if it were such de
facto, without holding in direct conflict with the decision in John V. Farwell Co. v. Wolf, ante, p.
10, which is supported by the highest authorities in this country, and which the court certainly
would not wish to question. True, there are some authorities still holding to the ancient doctrine
that any one can challenge the existence of a corporation or the legality of its acts, but the trend
of modern authority is to fence in, within constantly narrowing limits, the cases where private
persons can attack either the existence of a corporation or the legality of its exercise of powers;
and in the humble opinion of the writer, the theory that a private person can so attack a
corporation will disappear altogether in the near future, either by the courts that adhere to the
ancient doctrine voluntarily changing their rule on the subject, or by its being changed by statute.

Illinois has adhered as rigidly as any state to the doctrine that a creditor may raise the question of
want of legal incorporation, yet, in the recent case of Winget v. Quincy B. & H. Asso. 128 Ill. 67,
21 N.E. 12, it was held that, if a person contracts with a corporation de facto and receives the
benefit of such contract, he cannot be permitted to allege any defect in the organization of the
corporation as affecting its capacity to make the contract, even if the law under which it was
organized was unconstitutional; that objection to the corporate existence is available only on
behalf of the sovereign power of the state. That is carrying the doctrine under discussion further
than is necessary for the purposes of this case, and beyond the general rule that there cannot be
a de facto corporation under an unconstitutional law, because it is absolutely necessary to the
existence of a de facto corporation that there be a valid law under which it might exist de jure.

So we say the law is that he who deals with a de facto corporation cannot attack its legal
existence, though in administering it courts do not agree as to all the reasons for the doctrine. By
some it rests on the ground that courts can only enforce contracts actually made by parties--
cannot make contracts for them; by others upon the ground of estoppel; by others upon the
broad, universally established principle that only the state can question the existence of a
corporate organization, or the legality of its exercise of powers; and by still others upon the
ground that broad principles of justice and public policy require that persons who, in good faith,
assume to exercise corporate powers and have a de facto right so to do, should not be compelled,
in all their business transactions, in all courts and places, to be ready to successfully meet attacks
upon their right in this regard; that so long as the law exists under which they might legally do
the very thing they assume to do, and the failure to comply with the law is a mere usurpation of
power, which only concerns the community in its sovereign capacity without prejudice to the
individual members of the state, justice and the certainty of contracts, upon which prosperous
business in the complicated, practical affairs of life depend, require that such persons as against
all but the state shall be regarded as that which they assume to be, and might in fact be, except
for some act on their part not attributable to bad faith. In our judgment, all of the reasons
strongly support the

1060

doctrine, and either is sufficient, particularly the one sanctioned by this court in John V. Farwell
Co. v. Wolf, ante, p. 10, that only the state can question the legality of corporate existence when
there is a colorable right to so exist.

It only remains to be considered whether the association in question was a de facto corporation.
My brethren say no, and, as I understand it, because there was a failure to perform some
condition precedent to its being a corporation de jure. I must assume that such is really not the
doctrine of this court, for the essential element of a mere corporation de facto is failure to comply
with some provision of law requisite to its legal existence. Where such conditions are all complied
with, then the corporation becomes an organization de jure, as well as de facto, and the doctrine
pertaining to the latter class of official bodies has no application whatever. If it were the law that
a corporation must be such de jure in order to be such de facto, obviously, the doctrine pertaining
to the latter, upon which much learning has been displayed by the courts and text writers, would
stand as the result of much useless expenditure of mental energy. The true doctrine is that it is
sufficient to constitute a corporation de facto, as against one who has recognized its corporate
existence, that there be a law under which it might exist de jure, an attempt in good faith to
organize under such law, and a subsequent user of the assumed corporate powers. This is not an
open question in this state. In Evenson v. Ellingson, 67 Wis. 634, 31 N.W. 342, the question was
considered, and in an opinion by Mr. Justice ORTON the rule was laid down, in effect, as above
stated, and the case has been since approvingly cited by standard text writers and by many of the
highest courts of the country as a correct exposition of the law. I might rest this opinion on the
subject of whether the association in question was a de facto corporation, upon the principle there
laid down, but, inasmuch as the subject is one of considerable importance, and one which the
court will be liable to consider on some future occasion, some general treatment of the subject is
necessary to meet the purposes of this opinion. The transaction of business by corporate bodies
has become so very general, and the system is growing so rapidly, that just what is necessary in
order that persons assuming to exercise corporate powers may safely consider themselves a
corporation de facto is of the highest importance to the safe conduct of the multitude of business
operations conducted by such bodies, and to an understanding by such persons of their legal
liability.

One of the earliest and best considered cases on this subject is Methodist E. U. Church v. Pickett,
19 N.Y. 482. The corporation claimed to exist under a general law. Such law required the making,
acknowledging, and recording of a certificate of organization, showing certain facts. That was
complied with, except that the certificate did not show the existence of all facts requisite to a legal
corporation. After acting as a corporation for some time, in an action brought as such to which a
private person was a party, its corporate existence was challenged. On the question thus
presented, Mr. Justice SELDEN, speaking for the court, said: "It has been repeatedly held that, as
against all persons who have entered into contracts with bodies assuming to act in a corporate
capacity, it is sufficient for such bodies to show themselves to be corporations de facto, and to
that end two things are necessary: (1) The existence of a charter or some law under which a
corporation with the powers assumed might lawfully be created; and (2) a user by the party to
the suit of the rights claimed to be conferred by such charter or law. The rule established by law,
as well as by reason, is that parties recognizing the existence of corporations, by dealing with
them, have no right to object to any irregularity in their organization. As long as it is overlooked
or tolerated by the state, it is not for individuals to call it in question." And further, in effect, that
if the law exists, and the record exhibits a bona fide attempt to organize under it, or there is even
a slight evidence of user, that is all that is required to establish the corporation de facto; and
evidence, in a contest between it and one who has dealt with it as a corporation, of defects in its
organization, short of such as would show a want of good faith on the part of those concerned in
the proceedings, would be wholly immaterial. Judge SELDEN refers to numerous earlier decisions
in New York on the subject, particularly to U. S. Bank v. Stearns, 15 Wend. 314, Trustees of
Vernon Soc. v. Hills, 6 Cow. 23, and Brouwer v. Appleby, 1 Sandf. 158, where OAKLEY, C. J.,
discussing the same subject, said: "The defendant, as a contracting party with this corporation,
cannot object to the want of the requisite organization, and any defect in that respect, if valid, is
only available in behalf of the sovereign power of the state."

Vanneman v. Young, 52 N.J.L. 403, 20 A. 53, touches the instant case at every point. The
condition precedent which defendants here failed to perform was that as to filing in the office of
the register of deeds of their constitution and certificate of organization. They recorded their
articles of organization, which were adopted, in form, under the general incorporating act, not
that relating specially to agricultural societies; so that the record, speaking with reference to the
papers required to be on file with the register of deeds, was not merely defective; it did not exist
at all. Now it may be contended that, while such official record need not show that all the steps
requisite to the organization of the corporation were taken, in order to give it colorable existence,
an official record of some sort, showing an attempt to comply with the law, is necessary. In
Methodist E. U. Church v. Pickett, supra, the following language is used: "If the law exists, and
the record exhibits a bona fide attempt to organize under it," that is

1061

sufficient. This may be deemed to signify that the record referred to must be an official record,--
the record which the law requires shall be made. The same language is used in Angell & A. Corp.
§ 635, but a careful examination of the authorities will clearly show that the record intended is not
the record of the corporation papers required by law. The word "record" refers solely to the acts
shown by the evidence to have been actually done by the persons assuming to act as a
corporation, by way of complying with the law authorizing its organization. Such facts constitute
the record, in a legal sense, of their doings, and by such record it must appear that they, in good
faith, intended to acquire corporate power.

In Vanneman v. Young, supra, there was, as here, an absolute failure to comply with the law in
respect to the official record. The certificate of incorporation was not filed in the office of the
secretary of state. That, under the New Jersey law, was essential to corporate existence. Plaintiff
sold to the pretended corporation some merchandise, and, upon payment therefor not being
made, suit was brought by him against the members of the corporation, to charge them
personally as partners, upon the ground that the corporation had no legal existence. In deciding
the question thus presented, Mr. Justice DIXON said, in effect: 'The statute authorized the
incorporation of the associates. They attempted to organize under its provisions. The contract was
entered into by plaintiff on the assumption that he was dealing with a corporation de jure. The
failure of the associates to comply with the statute did not, in the least, impair the rights which
the plaintiff intended to secure by his contract. Under these circumstances, the plaintiff cannot
bring into question the legality of the corporation. Where the law authorizes a corporation, and
there is an effort in good faith to organize under the law, and, as a result of such effort, corporate
functions are assumed and exercised, the organization becomes a corporation de facto, . . . and
its existence can only be inquired into in a direct proceeding brought in the name of the state. No
private person having dealings with a de facto corporation can be permitted to say that it is not a
corporation de jure .'

In Georgia S. & F. R. Co. v. Mercantile T. & D. Co. 94 Ga. 306, there was a general law under
which the organization might have been incorporated. It organized under a special law that was
held unconstitutional. There was an entire absence, it will be observed, of any official record of
any act done under the general law. It was held that the special law was unconstitutional and
void; hence that the organization had no de jure existence; nevertheless, that it was a corporation
de facto; that the essentials of a de facto corporation were all present: (1) A law under which the
organization might have been incorporated; (2) a bona fide attempt to become incorporated; and
(3) an assumption and exercise of the powers of a corporation, unchallenged by the state.

The foregoing authorities are believed to fairly state the law in respect to what is necessary to
constitute a corporation de facto. The very meaning of the term "de facto" indicates that nothing
more is necessary to the existence of a de facto corporation than the exercise of corporate powers
in good faith. Corporation de facto,--that is, a corporation from the fact that it is acting as such
under color of right in good faith. The existence of the law, and some attempt to comply with it,
are essential, because without them there can be no assumption of the right to corporate
existence in good faith. Persons cannot be said to honestly claim the right to corporate existence,
in the absence of any law authorizing the organization, or in the absence of some honest attempt
to comply with such law, if one exists. The law and such attempt, or user of the franchise,
whatever mistakes may be made in so doing,--such as the filing of articles of organization when
they are required to be recorded, or the recording of articles when they are required to be filed, or
the filing of such articles in the wrong office, or any other of the numerous mistakes that might be
made,--make a corporation good everywhere, in all courts and places, till successfully challenged
by the state. There is hardly any end of authority, all in harmony on this subject, but we content
ourselves by referring to the following additional cases: Haas v. Bank of Commerce, 41 Neb. 754,
60 N.W. 85; East Norway Lake N. E. L. Church v. Froislie, 37 Minn. 447, 35 N.W. 260; Snider's
Sons Co. v. Troy, 91 Ala. 224, 8 So. 658; Stout v. Zulick, 48 N.J.L. 599, 7 A. 362; McCarthy v.
Lavasche, 89 Ill. 270; Hudson v. Green Hill Seminary Corp. 113 Ill. 618; St. Louis v. Shields, 62
Mo. 247; Central A. & M. Asso. v. Alabama G. L. Ins. Co. 70 Ala. 120; Palmer v. Lawrence, 3
Sandf. 161; North v. State ex rel. Pate, 107 Ind. 356, 8 N.E. 159.

From the foregoing, I am warranted in asserting that, by well-settled principles of law, the
agricultural association with whom plaintiff contracted was a de facto corporation. Every element
necessary to make it such appears clearly by the record. There was a law under which it might
have existed. The association prepared their constitution, and adopted it in the form of ordinary
articles of organization, under the general incorporating act, and by mistake they filed it for
record, and it was recorded and returned, instead of filing it to be left in the office, as the law
requires. They supposed that they had corporate existence by reason of the recording of their
articles of organization. They assumed to act as a corporation, and exercised corporate powers for
a considerable length of time, and, for aught that appears, in the utmost good faith. Certainly, the
existence of the law, the making and recording of articles of organization in an honest attempt to
become a corporation, and the honest assumption and exercise of corporate powers, prima facie,
establishes good faith.

1062

Plaintiff supposed that the corporation was a corporate body till long after his contract relations
with the association ceased. Now to allow him to come in and say that the corporation did not
exist which all supposed had legal existence; that, though the officers of the association and
plaintiff contracted for a corporate liability on the part of the former, it shall be held, nevertheless,
that the members of such association are bound as partners, in direct violation of the well-settled
law that such an association, under the circumstances, was a de facto corporate body; and that,
as between the parties, the relations are the same in all respects as though the corporation had a
de jure existence, and contrary to the settled doctrine, as I believe, of this and most other
courts,--is what the judgment in this case does, in my opinion.

I think the judgment of the circuit court, holding the defendants liable as partners, was wrong,
and that it should be reversed, and the cause remanded for a new trial.
010 BERGERON v. HOBBS
96 Wis. 641
1897

Topic: De Facto Corporations

Facts:
The members of a corporation failed to file its certificate of organization as required by statute in
the office of the register of deeds of the county.
1. Bayfield Agricultural Association (Defendant) employed several persons to perform labor in
improving their grounds and in erecting fences and buildings. It assigned to Plaintiff time checks
for such operation. Now Plaintiff brought an action to recover the amount for time checks, alleging
that the defendants were a co-partnership.
2. Defendants did not rebut the unpaid debt to Plaintiff, but denied co-partnership and alleged
that they were liable as a corporation
3. Upon trial, it appeared that (Defendant) Bayfield County Agricultural Association’s articles of
organization and a certificate showing the election of officers had been recorded in the office of
the register of deeds of Bayfield, but were not on file there. They had been deposited and
recorded, but failed to remain.
4. Circuit Court: Directed defendant to pay amount of time checks
5. Defendants appealed

Issue:
1. Can mere recording of the AoI, with certificate of the election of officers, sufficiently comply
with the statute (for the organization of the corporation to be complete as upon a proper filing of
the papers themselves)? NO
2. For failure to put the papers on file, Bayfield is not considered as a de facto corporation? YES.
They are personally liable to plaintiffs. Liable only as co-partners.

Ruling:
1. NO. The filing of the proper papers in the proper office is made a condition precedent to the
vesting of the corporate powers according to statute (Sec. 1460, Rev.St.).
Mere recording and removal of the papers from the office fails to serve the full purpose which the
legislature intended to accomplish
The term “filing” and the verb “to file,” as related to this subject, include the idea that the paper is
to remain in its proper order on file in the office (delivered and received by the proper officer).
Strict observance is required.
2. Liable only as co-partners for having omitted a substantial step/proceeding required by the
statute. There was no bona fide attempt and that, therefore, there was no de facto corporation.
Defendant cannot assume to be a de facto corporation (and therefore cannot seek immunity from
individual liability). Their right to be a corporation cannot be inquired in a collateral action but only
in a direct action. Until the AoI is filed in the office of the register of deeds of the country, there is
no color of legal right to act as a corporation.
Bayfield is not under a color of right since the AoI must 1st be filed as condition precedent. With
this, they are neither de jure nor de facto. Co-partnership of Defendant was established by
implication of law.

Held:
Denied. Affirmed Circuit Court

Dissenting: MARSHALL, J.
1. Can mere recording of the AoI, with certificate of the election of officers, sufficiently comply
with the statute (for the organization of the corporation to be complete as upon a proper filing of
the papers themselves)? NO
2. For failure to put the papers on file, Bayfield is not considered as a de facto corporation? NO. It
is a de facto corporation. Reverse Circuit Court decision. Remand case for New Trial
Beach and Thomp. agree that a pretended corporation is personally liable for not being a
corporation in fact. Judge Thompson, however, states that if a corporation never came into being
(and failing to comply with all conditions precedent) it is personally liable as a de facto
corporation. However, he further says that if the corporation does exist, it escapes personal
liability. Such theory lacks harmony. If such were the case (and applied in other states) nothing
would qualify as a de jure corporation.
It is therefore held that Defendant is a de facto corporation. The elements of such clearly appear
on record:
a. There’s a law under which it might have existed
b. By mistake, it was recorded and returned instead of leaving it at the register of deeds as the
law required
c. It exercised corporate powers
Such elements prima facie established good faith.
Plaintiff cannot deny such in their relations, supposing that the corporation was a corporate body
till long after his contract relations with the Defendant association ceased.
168 F. 187 (8th Cir. 1909)

HARRILL

v.

DAVIS et al.

No. 2,805.

United States Court of Appeals, Eighth Circuit.

March 2, 1909

188

(Syllabus by the Court.)

The general rule is that parties who associate themselves together and conduct a business for
profit under a name adopted or used by them for that purpose are liable as partners for the debts
they incur under that name.

This general rule governs if the name used be that of a supposed corporation which the associates
have attempted but failed to organize according to law.

But a compliance by such associates with the statutes authorizing them to become a corporation
exempts them from other individual liability than that prescribed by such laws for debts incurred
after they become a corporation authorized to do business as such.

Two exceptions to the general rule that corporators failing to organize legally are individually
liable are: (1) Where such associates procure a charter or file articles of incorporation under a
general enabling act, secure thereby the color of a corporation, believe they are such, and use the
supposed franchise of their corporation, and third parties deal with them as a corporation, they
become a de facto corporation, which exempts them from individual liability to such parties,
although there are defects in their incorporation. (2) Projectors of a corporation to be organized
who inform third parties that they are contracting for such a corporation and assure them that the
obligations incurred will become the obligations of the future corporation may escape individual
liability to such third parties for obligations thus incurred for services necessary to effect the
corporate organization and for machinery and other property necessary to the commencement of
the contemplated business of the corporation, where the corporation is subsequently organized,
takes the benefit of such contracts, and assumes the obligations.

When the fact appears that parties associated themselves together and incurred liabilities in the
conduct of a business under a certain name, the legal presumption is that they are governed by
the general rule and are liable as partners, and the burden is on them to prove that they are duly
incorporated or that they fall under some exception to the general rule.

Color of legal organization as a corporation, such as a charter or the filing of articles of

incorporation under some law, and user of the supposed corporate franchise in good faith, are
indispensable to the existence of a de facto corporation which will exempt from individual liability
those who actively conduct it.

Neither the execution of articles which are not filed, nor statements nor beliefs of the promoters
that they are a corporation, nor the treatment of themselves by themselves and by those who
deal with them as a corporation, nor all these together, will exempt those who actively conduct
the business under the assumed name of such a nonexistent corporation from individual liability
for the debts they incur.

One who deals with a corporation de facto may be estopped from denying its existence as a
corporation de jure.

But no one is estopped by dealing with parties as a corporation who are actively conducting
business for profit under an assumed corporate name when they have no charter, have filed no
articles of incorporation, and procured no color of legal organization as a corporation, from
denying that they constitute a corporation of any kind or from enforcing their individual liability for
the debts they incur under such a name.

A corporation organized for the purpose of 'buying, selling, leasing and dealing in lands, securities,
bonds, notes, stocks and other negotiable paper and also buying and selling general merchandise'
has no corporate power to build and operate cotton gins or to subscribe for stock in and form
another corporation for that purpose.

The adoption of a statute previously in force in some other jurisdiction is presumed to be the
adoption of the interpretation thereof which had been theretofore placed upon it by the judicial
tribunal whose duty it was to construe it.

The fatuous choice of a fancied remedy that never existed, and the futile pursuit of it until the
court adjudges that it never had existence, is no defense to an action to enforce an actual remedy
inconsistent with that first invoked.

The four defendants agreed in April or June, 1902, to take specified shares in a $10,000
enterprise for the purpose of building a cotton gin and carrying on the business of buying, ginning,
and selling cotton, and to organize a corporation for this purpose. In June or July, 1902, they
commenced to buy material and labor of the plaintiff and to build their cotton gin. In September,
1902, they commenced to buy cotton, and in the first days of October to operate their cotton gin.
They transacted a business with the plaintiff consisting of the purchase of lumber, materials, and
labor for their buildings and of dealing in cotton with it which amounted to several tens of
thousands of dollars, and they remained indebted to it over $5,000, of which $4,700 was incurred
prior to December 22, 1902, when they first filed articles of incorporation in one of two places
required by the statute. During all this time they treated themselves, and the plaintiff treated
them, as a corporation.

Held: The defendants did not become a corporation de jure because they failed to file their articles
in both the places required by the statute; (2) they did not become a corporation de facto before
they filed their articles on December 22, 1902, to such an extent as to exempt them from
individual liability because they did not before that time secure any color of legal organization as a
corporation under any charter or enabling act; (3) they were liable individually as partners for that
part of the plaintiff's claim incurred prior to the filing of their articles.

The Western Investment Company brought this action for a balance due it upon an account for
lumber and materials sold, cotton handled, and services rendered to Walter B. Mann, Frank M.
Davis, Robert S. Davis, and James G. Knight, as partners doing business under the firm name

189

the 'Coweta Cotton & Milling Company.' The defendants denied the partnership and their liability,
and averred that the indebtedness in question was that of the milling company and that that
company was a corporation. The evidence established these facts: One Naylor was the president,
and Frank M. Davis was the vice president and general manager, and Naylor, Davis, Edwards, and
Wallace were directors, of the Western Investment Company. There were 1,000 shares of the
capital stock of that company, of which Naylor owned 520, Davis, Edwards, and Wallace 80 each.

In April or June, 1902, Mann, Frank M. Davis, Robert S. Davis, and Knight agreed to embark in a
$10,000 enterprise for the purpose of building a cotton gin, buying, ginning, and selling cotton,
that Mann should take two-fifths of this undertaking and the other three members one-fifth each,
and that Frank M. Davis should take his fifth for the Western Investment Company. Neither the
Western Investment Company nor any of its directors ever authorized Davis to take this stock on
its behalf, and he never reported to the company that he had so taken it until January, 1903, after
the indebtedness here in question had been incurred, and at about the time when the milling
company ceased to operate its gin. He testified that he had some conversation with Edwards and
Wallace about his taking this stock for the corporation, but that he never mentioned it to Naylor,
the president, who held a majority of the stock. In February, 1903, after the milling company had
ceased to operate its gin, Davis caused an entry of a credit of $1,150 to that company to be
entered upon the account books of the investment company on account of this stock, and the
investment company subsequently repudiated this charge and charged the $1,150 back to the
milling company.

In April or June, 1902, F. M. Davis, on behalf of the investment company, agreed with the other
defendants to furnish to them materials to build the

190

cotton gin, and in June or the following month the plaintiff commenced to furnish materials and to
render its services for this purpose, which were received by Knight as the representative of the
defendants and used by him to construct the cotton gin and to carry on the business which the
defendants were conducting. The price of these materials and services were charged upon the
books of the investment company to Coweta Gin Company and the Coweta Gin cotton account.

On September 3, 1902, three of the defendants met and signed articles of incorporation as the
'Coweta Cotton & Milling Company' and a declaration of the purpose of the incorporation, which
the statutes required to be verified by the signers and to be filed with the clerk of the Court of
Appeals and with the clerk of the judicial district in which the contemplated corporation was to do
business. This declaration was verified by Mann on November 10, 1902, and by Frank M. Davis on
December 10, 1902, and it was filed with the clerk of the Court of Appeals on December 22, 1902,
and was never filed elsewhere. The balance of indebtedness due to the investment company is
about $5,000 and interest, and all of it but a few hundred dollars was incurred before the articles
of incorporation were filed. Frank M. Davis, as general manager of the investment company,
treated the milling company as a corporation all the time during which this indebtedness was
contracted, and never charged any of it to himself or his associates. He and other witnesses
testified that the milling company received the benefit of all materials and services furnished by
the plaintiff, and that the defendants received no benefit from them, and that they acted in good
faith and without any intent to deceive or defraud any one. The entire amount of money paid into
the milling company by the corporators was not more than $4,950. That company never had any
stock book and never issued any stock. The defendants commenced to buy cotton and to operate
their gin under the name of the milling company in October, 1902, and they ceased to operate
their cotton gin in January, 1903. Knight managed the construction of the cotton gin and the other
improvements for the defendants and the business of the defendants and the milling company
from June, 1902, when he commenced the buildings, until January, 1903. About $3,000 of the
claim in suit was for lumber and labor furnished, and for this amount the investment company
filed a claim for a mechanic's lien verified by the successor of Frank M. Davis in May, 1903, in
which there is a statement that the milling company is a corporation. Upon this state of facts the
trial court directed a verdict for the defendants, and refused to instruct the jury that the plaintiff
was entitled to recover the portion of the debt incurred prior to the filing of the articles of
incorporation on December 22, 1902.
R. C. Allen (J. C. Pinson, on the brief), for plaintiff in error.

Geo. A. Murphey (S. M. Rutherford, W. T. Hutchings, and W. P. Z. German, on the brief), for
defendants in error.

Before SANBORN and VAN DEVANTER, Circuit Judges, and W. H. MUNGER, District Judge.

SANBORN, Circuit Judge (after stating the facts as above).

The patent and indisputable facts in this case are that the four defendants associated themselves
together, and from June, 1902, until December 22, 1902, actively engaged in purchasing lumber,
material, and labor of the plaintiff, and in constructing a cotton gin under the name 'The Coweta
Gin Company,' and in conducting the business of buying, selling, and ginning cotton for profit
under the name 'The Coweta Cotton & Milling Company,' and that during this time they incurred
more than $4,700 of the indebtedness of $5,145.48 for which this action was brought. On
December 22, 1902, they made their first real attempt to incorporate, and for the first time took
on the color or appearance of a corporation. On that day they filed articles

191

of incorporation with the clerk of the Court of Appeals, but they never filed any duplicate of them
with the clerk of the judicial district in which their place of business was located, as required by
the statutes in order to constitute them a legal corporation and to authorize them to do business
as such.

Act Feb. 18, 1901, c. 379, 31 Stat. 794; Mansfield's Dig. Laws Ark. Secs. 960, 968, 979.

The general rule is that parties who associate themselves together and actively engage in
business for profit under any name are liable as partners for the debts they incur under that
name. It is an exception to this rule that such associates may escape individual liability for such
debts by a compliance with incorporation laws or by a real attempt to comply with them which
gives the color of a legal corporation, and by the user of the franchise of such a corporation in the
honest belief that it is duly incorporated. When the fact appears, as it does in the case at bar, by
indisputable evidence that parties associated and knowingly incurred liabilities under a given
name, the legal presumption is that they are governed by the general rule, and the burden is
upon them to prove that they fall under some exception to it. Owen v. Shepard, 59 F. 746, 8
C.C.A. 244; Wechselberg v. Flour City National Bank, 64 F. 90, 94, 12 C.C.A. 56, 60, 61, 26 L.R.A.
470; Clark v. Jones, 87 Ala. 474, 6 So. 362.

Counsel for the defendants argue with much force and persuasiveness that they escape liability
because they became a corporation de facto, although they concede that they never became a
corporation de jure, and in support of this position they cite, among other cases: Wells Company
v. Gastonia Cotton Mfg. Co., 198 U.S. 177, 25 Sup.Ct. 640, 49 L.Ed. 1003; Andes v. Ely, 158 U.S.
312, 322, 15 Sup.Ct. 954, 39 L.Ed. 996; New Orleans Debenture Redemption Co. v. Louisiana,
180 U.S. 320, 327, 21 Sup.Ct. 378, 45 L.Ed. 550; Gartside Coal Co. v. Maxwell (C.C.) 22 F. 197;
Johnson v. Okerstrom, 70 Minn. 303, 73 N.W. 147; Tennessee Automatic Lighting Company v.
Massey (Tenn. Ch. App.) 56 S.W. 35; Finnegan v. Noerenberg, 52 Minn. 239, 53 N.W. 1150, 18
L.R.A. 778, 38 Am.St.Rep. 552; Doty v. Patterson, 155 Ind. 60, 56 N.E. 668; Merchants' National
Bank v. Stone, 38 Mich. 779; Gow v. Collin Lumber Company, 109 Mich. 45, 66 N.W. 676, 678;
Eaton v. Aspinwall, 19 N.Y. 119; Leonardsville Bank v. Willard, 25 N.Y. 574; Cahall v. Citizens'
Mutual Bldg. Ass'n, 61 Ala. 232; Fay v. Noble, 7 Cush. (Mass.) 188, 192, 193; Snider Sons'
Company v. Troy, 91 Ala. 224, 8 So. 658, 11 L.R.A. 515, 24 Am.St.Rep. 887; Cochran v. Arnold,
58 Pa. 399, 404; Laflin & Rand Powder Co. v. Sinsheimer, 46 Md. 315, 321, 24 Am.Rep. 522;
Rutherford v. Hill, 22 Or. 218, 29 P. 546, 17 L.R.A. 549, 29 Am.St.Rep. 596. But in every one of
these authorities articles of incorporation had been filed under a general enabling act, or a charter
had been issued and there had been a user of the franchise of the supposed corporation which
had been colorably created by the filing of the articles or the issue of the charter before the
indebtedness in question was created, while nothing of this nature had been done before the debt
for the $4,700 which we are now considering was incurred. The authorities which

192

have been recited rest upon the proposition that where parties procure a charter or file articles of
association under a general law, thereby secure the color of a legal incorporation, believe that
they are a corporation, and use the supposed franchise of the corporation in good faith, and third
parties deal with them as a corporation, they become a corporation de facto and exempt from
individual liability to such third parties, although there are unknown defects in the proceedings for
their incorporation.

The statement of Morawetz on Corporations, at section 748, upon which counsel seem to rely,
that:

'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 of
the association cannot be charged as parties to the contract, either severally or jointly, or as
partners. This is equally true whether the association was in fact a corporation or not, and
whether the contract with the association in its corporate capacity was authorized by the
Legislature or prohibited by law, or illegal'

-- is too broad to be sound. Parties who actively engage in business for profit under the name and
pretense of a corporation which they know neither exists nor has any color of existence may not
escape individual liability because strangers are led by their pretense to contract with their
pretended entity as a corporation. In such cases they act as the agents of a principal that they
know does not exist, and they are liable under a familiar rule, because there is no responsible
principal. 2 Kent's Commentaries (14th Ed.) 630; Queen City Furniture & Carpet Co. v. Crawford,
127 Mo. 356, 364, 30 S.W. 163. The burden is not on the strangers who deal with them as a
corporation, but on themselves who act under the name of a pretended corporation, to see that it
is so organized that it exempts them from individual liability, and if they fail in this they must pay
the liabilities they incur, even in the absence of fraud or bad faith, upon the salutary principle that
where one of two parties must suffer he must bear the loss whose breach of duty caused it.

There are cases in which stockholders who took no active part in the business of a pretended
corporation which was acting without any charter or filed articles, who supposed that the
corporation was duly organized, have been held exempt from individual liability for the debts it
incurred; but if they had been actively conducting its business with knowledge of its lack of
incorporation, those decisions must have been otherwise. Seacord v. Pendleton, 55 Hun, 579, 9
N.Y.Supp. 46; Fuller v. Rowe, 57 N.Y. 23, 26.

Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the
signing of articles of incorporation which are not filed, where filing is requisite to create the
corporation, nor the user of the pretended franchise of such a nonexistent corporation, will
constitute such a corporation de facto as will exempt those who actively and knowingly use its
name to incur obligations from their individual liability to pay them. Color of legal organization as
a corporation under some charter or law and user of the supposed corporate franchise in good
faith are indispensable to such exemption.

193

Under the general law of Arkansas in force in the Indian Territory, the filing of articles of
incorporation with the clerk of the Court of Appeals was a sine qua non of any color of a legal
corporation. Without that there was not, and there could not be, an apparent corporation or the
color of a corporation. Agreements to form one, statements that there was one, signed articles of
association to make one, acts as one, created no color of incorporation, because there could be no
incorporation or color of it under the law until the articles were filed. Johnson v. Corser, 34 Minn.
355, 25 N.W. 799; Finnegan v. Noerenberg, 52 Minn. 239, 243, 244, 53 N.W. 1150, 1151, 18
L.R.A. 778, 38 Am.St.Rep. 552; Taylor on Private Corporations, p. 145, Roberts Mfg. Co. v.
Schlick, 62 Minn. 332, 64 N.W. 826. In Finnegan v. Noerenberg, supra, Chief Justice Gilfillan well
said:

'To give to a body of men assuming to act as a corporation, where there has been no attempt
to comply with the provisions of any law authorizing them to become such, the status of a de
facto corporation, might open the door to frauds upon the public. It would certainly be impolitic to
permit a number of men to have the status of a corporation to any extent merely because there is
a law under which they might have become incorporated, and they have agreed among
themselves to act, and they have acted, as a corporation. That was the condition in Johnson v.
Corser, 34 Minn. 355, 25 N.W. 799, in which it was held that what had been done was ineffectual
to limit the individual liability of the associates. They had not gone far enough to become a de
facto corporation. They had merely signed articles, but had not attempted to give them publicity
by filing for record, which the statute required.'

The defendants cannot escape individual liability for the $4,700 on the ground that the Coweta
Cotton & Milling Company was a corporation de facto when that portion of the plaintiff's claim was
incurred, because it then had no color of incorporation, and they knew it and yet actively used its
name to incur the obligation. Owen v. Shepard, 8 C.C.A. 244, 59 F. 746; Wechselberg v. Flour
City National Bank, 64 F. 90, 94, 12 C.C.A. 56, 60, 61, 26 L.R.A. 470; Abbott v. Omaha Smelting
& Refining Co., 4 Neb. 416, 423, 424; Garnett v. Richardson, 35 Ark. 144; Johnson v. Corser, 34
Minn. 355, 357, 25 N.W. 799; Queen City Furniture & Carpet Co. v. Crawford, 127 Mo. 356, 364,
30 S.W. 163; Bigelow v. Gregory, 73 Ill. 197, 202; Parsons on Partnership, p. 544; Hill v. Beach,
12 N.J.Eq. 31; Kaiser v. Lawrence Savings Bank, 56 Iowa, 104, 8 N.W. 772, 41 Am.St.Rep. 85;
Pettis v. Atkins, 60 Ill. 454; Coleman v. Coleman, 78 Ind. 344; Lawler v. Murphy, 58 Conn. 313,
20 A. 457, 8 L.R.A. 113; Hurt v. Salisbury, 55 Mo. 310, 314; Beach on Private Corporations, Sec.
16, p. 25; Martin v. Fewell, 79 Mo. 401, 411; Smith v. Warden, 86 Mo. 382, 399; McVicker v.
Cone, 21 Or. 353, 28 P. 77.

Another contention is that the defendants are released from liability because the materials and
labor for which the $4,700 became due were furnished to them while they were promoting the
organization of the corporation for the future corporation, and that the latter has received the
benefit of them and ratified their purchase; and in support of this position they cite Whitney v.
Wyman, 101 U.S. 396, 25 L.Ed. 1050; Little Rock & Ft. Smith R.R. Co. v. Perry, 37 Ark. 164;
Paxton Co. v. First National Bank, 21 Neb. 621, 33 N.W. 271,

194

59 Am.St.Rep. 852; Stanton v. New York R.R. Co., 59 Conn. 272, 22 A. 300, 21 Am.St.Rep. 110;
Davis v. Montgomery, 101 Ala. 127, 8 So. 496; Reichwald v. Commercial Hotel Co.,

106 Ill. 439; Wall v. Niagara Co., 20 Utah, 474, 59 P. 399; Lancaster Co. v. Murray Co., 19
Tex.Civ.App. 110, 47 S.W. 387; Kaeppler v. Redfield Co., 12 S.D. 483, 81 N.W. 907; Chase v.
Redfield, 12 S.D. 529, 81 N.W. 951.

In Whitney v. Wyman, after the articles of incorporation were signed, but before they were filed,
three promoters of the incorporation wrote to the plaintiff that the company was so far organized
that by direction of its officers they ordered seven lathes and the necessary fixtures for clasping.
These lathes were necessary to enable the corporation to commence its contemplated business,
were received and used by it, and the Supreme Court held that the promoters were not
individually liable for their purchase price.

Little Rock & Ft. Smith R.R. Co. v. Perry was an action against the corporation, and the liability of
the promoters was not in issue. The court declared that the rule here invoked grew out of
decisions in equity that contracts necessarily made by promoters on behalf of a future corporation
in order to obtain its charter or to complete its organization would be specifically enforced against
it, as in Stanley v. Birkenhead Railway Co., 9 Simons, 264, 16 Eng.Ch.Rep. 264, where the
projectors of a railroad seeking a charter agreed with a landed proprietor, on behalf of the
proposed company, in consideration that he would withdraw his opposition to their bill, to pay him
. . . 20,000 for the portion of his estate required by the road, and the court enforced the specific
performance of this obligation against the corporation when the charter had been granted, and, as
in Edwards v. Grand Junction Railway Company, 1 Mylne & C. 650, Preston v. Liverpool,
Manchester, etc., Railway Co., 7 Eng.L. & Eq. 124, Webb v. Direct London & Portsmouth Railway
Company, 9 Hare, 129, Low v. Ct. & Passumpric Railway, 45 N.H. 375, which are there cited, and
the Arkansas court held that in order to recover of such a corporation the plaintiff must show
'either an express promise of the new company, or that the contract was made with persons then
engaged in its formation and taking preliminary steps thereto, and that the contract was made on
behalf of the new company, in the expectation on the part of the plaintiff and with the assurance
on the part of the projectors that it would become a corporate debt, and that the company
afterwards entered upon and enjoyed the benefit of the contract, and by no other title than that
derived through it. ' But there is no evidence that the materials and labor furnished to the
defendants prior to December 22, 1902, were sold by the plaintiff with the assurance on their
part, or with the expectation on its part, that their price would not be paid by them, but would
become the debt or obligation of a corporation to be organized in the future. On the other hand,
Davis, who sold these articles for the plaintiff, and Knight, who bought them for the defendants,
both testified that in the purchase and the sale of all of them they treated themselves as a
corporation before, as completely as after, the filing of their articles. The rule of law here invoked
applies to contracts preliminary and incidental to the organization or to the commencement of the
business of a contemplated

195

corporation, and this debt for $4,700 was not the result of any such contract.

It is part of the balance of an account of many tens of thousands of dollars which arose out of the
conduct of a business preliminary, not to its commencement, but to its close. The business of the
defendants was the buying and ginning of cotton. They commenced to construct their buildings in
June, to buy cotton in September, to operate their gin in the first days of October, they filed their
articles on December 22d, and ceased to operate their gin in the following January. They cannot
escape liability for debts incurred in this business prior to December 22d on the ground that their
construction of buildings and their dealing in and ginning cotton for two months and a half were
necessary preliminaries to the organization of their corporation or to the commencement of their
business, nor on the ground that the claim of the plaintiff was incurred on their assurance that it
was for and should become the debt of a corporation to be formed, because these grounds are not
sustained by the evidence.

Counsel insist that the defendants are not liable here because one who deals with a corporation de
facto is estopped from denying its existence as a corporation; but the true meaning and legal
effect of this rule is that such a dealer is estopped from denying its existence on the ground that it
was not legally incorporated. One who deals with parties who masquerade under a name which
represents no corporation de facto is no more estopped from denying that it is a corporation than
he would be from denying that they constituted or acted for the Union Pacific Railroad Company,
or any other well-known corporation, when they did not. The fact that the plaintiff dealt with and
treated the Coweta Cotton & Milling Company as a corporation did not estop it from denying that
it was such before the defendants filed their articles of incorporation, because it was not a
corporation de facto before that time and because the indispensable elements of an estoppel in
pais, ignorance of the truth and absence of equal means of knowledge of it by the party who
claims the estoppel, and action by the latter induced by the misrepresentation of the party against
whom the estoppel is invoked, do not exist in the case at bar. Bigelow on Estoppel (4th Ed.) p.
679. The plaintiffs did not, and the defendants did, represent that the milling company was a
corporation when it was not. The defendants had better means of knowledge of the fact than the
plaintiff, and they knew it was not a corporation, and they were not induced to act on any
representation of the plaintiff that it was such, or by its treatment of it as such.

Nor was the plaintiff estopped by the fact that its general manager stated under oath in its claim
for a lien in May, 1903, that the milling company was a corporation, first, because the defendants
were not induced to take any action by this statement from which they can suffer any injury by
the proof of the truth, and, second, because one is not estopped from pursuing his true legal
remedy by a mistaken attempt to pursue a supposed remedy that does not exist. Standard Oil
Company v. Hawkins, 20 C.C.A. 468, 472, 74 F. 395, 398, 399, 33 L.R.A. 739;

196

Barnsdall v. Waltemeyer, 73 C.C.A. 515, 520, 142 F. 415, 420; Bunch v. Grave, 111 Ind. 351, 12
N.E. 514, 517.

It is said that the plaintiff is estopped from denying the existence of the defendant's supposed
corporation because it was one of its promoters and stockholders, but the evidence fails to
convince us that it was ever either. F. M. Davis was the general manager of the plaintiff. He
testified that in June, 1902, he agreed with the other defendants to take a $2,000 share for the
plaintiff in a corporation to be organized with a capital of $10,000 for the purpose of ginning and
dealing in cotton, that Mann agreed to take a $4,000 share, R. S. Davis and James G. Knight a
share of $2,000 each, that in September he signed the articles of incorporation and subscribed for
this stock, that the other defendants also subscribed, that these subscribers paid the first
assessment of $3,750 on $10,000 of the stock in the fall of 1902, that the second assessment of
$2,000 was made in January, 1903, that he never reported this stock to the plaintiff until January,
1903, but that in the summer and fall of 1902 he talked with Edwards and Wallace, two of the
directors, who had 80 shares of stock each in the plaintiff, about this stock which he was to take
and which he had taken, that the plaintiff and they acquiesced in his action and told him to do the
best he could with it, but that they did not direct or instruct him to take the stock or agree that he
should take it, and that he did not talk with the president, who was the owner of the majority of
the stock of the plaintiff, although another witness testified that some time in the fall of 1902 he
told Naylor that Davis had taken stock in the milling company for the plaintiff. Davis, however,
subscribed for the stock in his own name, and the plaintiff did not. He testified that he paid the
first assessment in the fall of 1902, but he never charged the plaintiff and credited himself with
that payment; but, on the contrary, on February 23, 1903, after the milling company had ceased
to operate its gin, he caused an entry to be made on the books of the investment company
charging it and crediting the milling company with $1,150, the amount of the two assessments on
his stock, an entry which the plaintiff subsequently repudiated. There are two reasons why, under
the evidence in this record, the plaintiff never became a holder, either in law or in equity, of any
share in the defendant's enterprise or company, either as a stockholder or otherwise. In the first
place, the construction and operation of a cotton gin was beyond the powers of the plaintiff
corporation, the nature of whose business was declared and limited by its articles to 'buying,
selling, leasing and dealing in lands, securities, bonds, notes, stocks and other negotiable paper,
and also buying and selling general merchandise. ' In the second place, if by any conceivable
interpretation the construction and operation of a cotton gin and the formation of the corporation,
and the taking of stock therein to accomplish that purpose, could be deemed to be within the
powers of this corporation, they are so far beyond the scope of its ordinary business that a
general manager could be authorized to commit his corporation to them only by the express
authority of its board of directors, or of its principal officers, after a full disclosure to them of all
the facts relating to the proposed enterprise, and the desultory

197

talks which Davis had with the two directors fall far short of any evidence of such authority.

Much is made in argument of the testimony of Davis and Knight that they acted in good faith, that
the defendants never received any benefit from the materials and labor for the purchase price of
which the plaintiff sues, but good faith and the use of a name which they know represents no
corporation as the name of a corporation under which they do business creates a partnership, and
neither a corporation de jure nor de facto. And the defendants had all the benefit there was from
the materials and labor furnished by the plaintiff, for the milling company never issued any stock,
and these defendants owned their respective shares in its property, and whatever it had they had,
and, as far as they have not disposed of it, they still have. The fact is that during this entire
transaction while Davis was the general manager of the plaintiff he was the partner of the
defendants, and, in all transactions between the plaintiff and the defendants, was pecuniarily
interested adversely to his principal.

The sum of the whole matter is that the defendants agreed in April or June, 1902, to take certain
shares in a $10,000 enterprise for the purpose of building a cotton gin, and buying, ginning, and
selling cotton, and to organize a corporation to carry on this business they bought between June
and December 22, 1902, materials and labor with which they built the cotton gin, and between
September 15th and December 22d operated their cotton gin and carried on the business of
buying, ginning, and selling cotton with the plaintiff to the amount of several tens of thousands of
dollars, and there remains a balance of about $4,700 due the plaintiff on this account. They never
issued any stock, but in September, November, and December they signed articles of
incorporation which they filed with the clerk of the Court of Appeals on December 22, 1902.
During this time they treated themselves and the plaintiff dealt with them as a corporation. They
represented themselves to be a corporation when they knew they were not; under the name of a
corporation which did not exist they purchased these goods and services.

And our conclusion is that the defendants never became a corporation de facto prior to December
22, 1902, that they never became a corporation de jure, that the indebtedness here in question
was not incurred under any promise or assurance of the defendants as promoters that it should
become the obligation of a corporation to be formed, that a large part of it was incurred in the
conduct of a general commercial business, and not to prepare for the commencement of such a
business or for the organization of a corporation, and that the trial court below should have
instructed the jury that the defendants were individually liable for that portion of the plaintiff's
claim which was incurred prior to December 22, 1902. Its failure to do so was a fatal error which
necessitates a reversal of the judgments below.

In view of the conclusion which has now been reached, it is unnecessary to discuss at length or to
determine other questions which are presented in this record. It is sufficient to say regarding the
portion of the plaintiff's claim incurred subsequent to December 22, 1902, that while there is a
conflict of authority upon the question whether

198

or not incorporators or stockholders remain personally liable after the filing of articles in one office
only where the statute requires them to be filed in two offices as a condition of incorporation or of
the commencement of business (Mokelumne Hill Canal & Mining Co. v. Woodbury, 14 Cal. 265,
267), the statute under which this case arose was brought into the Indian Territory from the state
of Arkansas, and the Supreme Court of that state had held, before it was adopted in the Indian
Territory, that such corporators or stockholders remain individually liable under this statute unless
and until their articles of incorporation are filed in both offices.
Garnett v. Richardson, 35 Ark. 144. This conclusion is sustained by eminent authority
(Wechselberg v. Flour City National Bank, 12 C.C.A. 56, 60, 61, 64 F. 90, 94, 26 L.R.A. 470, and
authorities there cited), and it is an established rule of statutory construction that the adoption of
a statute previously in force in some other jurisdiction is presumed to be the adoption of the
interpretation thereof which had been theretofore placed upon it by the judicial tribunal whose
duty it was to construe it. Black, Interpretation of Laws, p. 159, Sec. 70; McDonald v. Hovey, 110
U.S. 619, 628, 4 Sup.Ct. 142, 28 L.Ed. 269; Sanger v. Flow, 1 C.C.A. 56, 58, 48 F. 152, 154;
Blaylock v. Incorporated Town of Muskogee, 54 C.C.A. 639, 117 F. 125.

The judgments of the courts below must be reversed, and the case must be remanded to the
proper court for a new trial; and it is so ordered.
Harrell v. Davis, 198 S.W.2d 180 (Ark. 1946)
Supreme Court of Arkansas

Filed: December 16th, 1946

Precedential Status: Precedential

Citations: 198 S.W.2d 180, 210 Ark. 939

Docket Number: No. 4-8029

Author: Ed F. McFaddin

The appellee recovered judgment for seven hundred dollars as damages for breach of contract,
and appellants have appealed, urging as grounds for reversal: (1) that the verdict of the jury is
contrary to the evidence; and (2) that the verdict is based on conjecture rather than evidence.

Since the verdict was in favor of the appellee, this court on appeal accepts that version of the
testimony most favorable to the appellee. Potashnick Local Truck System v. Archer, 207 Ark. 220,
179 S.W.2d 696, and authorities there cited. Therefore, the question we now consider is, whether
the evidence, as so viewed, is sufficient to show (a) defendants' breach of contract, and (b)
plaintiff's consequential damages.

I. Breach of Contract. The defendants (appellants) were engaged in constructing a levee in

Conway county, and they made a contract with the plaintiff (appellee) whereby, for an agreed
price, the latter was to furnish men and materials, and complete the work of sodding the levee;
which, in this case, was the process of placing grass-covered earth on the exposed top and slopes
of the constructed embankment. It is admitted by both sides that a contract was made; but the
question in dispute is, who first breached the contract. The plaintiff testified that he actually
worked one day under the contract, and then delayed a few days, at defendants' request, because
of bad weather conditions; and that when he started to resume operations, the defendants told
him they had contracted with another person. On the other hand, the defendants claimed that the
plaintiff started the work, but abandoned it, and that the defendants were forced to contract with
another person to sod the levee. The testimony is in irreconcilable conflict, even as to dates.
There was made a sharply disputed question of *Page 941 fact as to who first breached the
contract; but the plaintiff's evidence was sufficient to support the jury's verdict as rendered.

II. Consequential Damages. The plaintiff sought damages, not only for (a) money paid in
assembling equipment, and a crew of men to do the work, but also for (b) the profits he would
have made under the contract. Regarding the profits: the plaintiff testified that he would have
received a gross amount of $2,267, and that his total expenses for all labor, materials, etc., (duly
itemized) would have been $1,312. He thus claimed a net profit of $995. His figures were strongly
disputed, and severely challenged, but we cannot say that the jury committed error in awarding
the plaintiff a total of $700 for all damages. The plaintiff had worked one day under the contract,
and had collected and banked the sod along the base of the levee, in several places, and had
already secured his crew and all equipment. Therefore, he had removed some of the doubtful and
speculative elements inherent in profits as the basis of recovery. The court charged the jury that
profits, to be recoverable as damages, "must be found from the testimony to be certain, both in
their nature and in respect to the cause from which they proceed." That instruction is not
complained of in this court, so we presume it is as favorable to the appellants as they desire. The
rule of the cases on this point is stated in Ford hardwood Lbr. Co. v. Clement,97 Ark. 522, 135
S.W. 343:

"`Where plaintiff entered into a contract to perform certain work for the defendant, which he was
prevented from doing by the fault of defendant, plaintiff is entitled to recover the profits which the
evidence makes it reasonably certain that he would have made had defendant carried out its
contract.' Beekman Lumber Co. v. Kittrell, 80 Ark. 228,96 S.W. 988; Hurley v. Oliver, 91 Ark.
427, 121 S.W. 920; Singer Mfg. Co. v. W. D. Reeves Lumber Co., 95 Ark. 363, 129 S.W. 805.
See, also, Spencer v. Hall, 78 Ark. 336, 93 S.W. 985; Border City Ice Coal Co. v. Adams, 69 Ark.
219, 62 S.W. 591." See, also, *Page 942 the cases collected in West's Arkansas Digest,
"Damages," 40.

On the whole case, we conclude that there was sufficient evidence to sustain the jury verdict, both
as to breach of the contract and consequential damages. Therefore, the judgment of the circuit
court is in all things affirmed.
G.R. No. L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,

vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA BROWN,
HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and Commercial Co.,
Inc., respondents.

Claro M. Recto for petitioners.

Ramon Diokno and Jose W. Diokno for respondents.

BENGZON, J.:

This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First
Instance of Leyte and to enjoin the respondent judge from further acting upon the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and
acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial
Co., Inc., organized to engage in a general lumber business to carry on as general contractors,
operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that
23,428 shares of stock had been subscribed and fully paid with certain properties transferred to
the corporation described in a list appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to
do business with the adoption of by-laws and the election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the office of the
Securities and Exchange Commissioner, for the issuance of the corresponding certificate of
incorporation.

(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid
governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered 381,
entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have it
dissolved because of bitter dissension among the members, mismanagement and fraud by the
managers and heavy financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.

(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company;
and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000
bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of
the receiver, but the respondent judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this court. It is based upon two main
propositions, to wit:

(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a quo warranto
proceeding instituted in accordance with section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation
but only a partnership.

Discussion: The second proposition may at once be dismissed. All the parties are informed that
the Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation begins to
exist only from the moment such certificate is issued — not before (sec. 11, Corporation Law).
The complaining associates have not represented to the others that they were incorporated any
more than the latter had made similar representations to them. And as nobody was led to believe
anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is
not an instance requiring the enforcement of contracts with the corporation through the rule of
estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law applies,
and therefore the court had not jurisdiction to take cognizance of said civil case number 381.
Section 19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporation under this
Act and its right to exercise corporate powers shall not be inquired into collaterally in any private
suit to which the corporation may be a party, but such inquiry may be had at the suit of the
Insular Government on information of the Attorney-General.

There are least two reasons why this section does not govern the situation. Not having obtained
the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its
stockholders — may not probably claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a certificate
of incorporation by the Director of the Bureau of Commerce and Industry which calls a corporation
into being. The immunity if collateral attack is granted to corporations "claiming in good faith to
be a corporation under this act." Such a claim is compatible with the existence of errors and
irregularities; but not with a total or substantial disregard of the law. Unless there has been an
evident attempt to comply with the law the claim to be a corporation "under this act" could not be
made "in good faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See also
Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for dissolution;1
but that question does not affect the court's jurisdiction, and is a matter for decision by the judge,
subject to review on appeal. Whkch brings us to one principal reason why this petition may not
prosper, namely: the petitioners have their remedy by appealing the order of dissolution at the
proper time.

There is a secondary issue in connection with the appointment of a receiver. But it must be
admitted that receivership is proper in proceedings for dissolution of a company or corporation,
and it was no error to reject the counter-bond, the court having declared the dissolution. As to the
amount of the bond to be demanded of the receiver, much depends upon the discretion of the trial
court, which in this instance we do not believe has been clearly abused.

Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction
heretofore issued will be dissolved.
Hall vs. Piccio Case Digest

Hall vs. Piccio

[GR L-2598, 29 June 1950]

Facts: On 28 May 1947, C. Arnold Hall and Bradley P. Hall, and Fred Brown, Emma Brown,
Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of
incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a
general lumber business to carry on as general contractors, operators and managers, etc.
Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties transferred to the corporation described in a
list appended thereto. Immediately after the execution of said articles of incorporation, the
corporation proceeded to do business with the adoption of by-laws and the election of its officers.

On 2 December 1947, the said articles of incorporation were filed in the office of the Securities
and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation. On
22 March 1948, pending action on the articles of incorporation by the aforesaid governmental
office, Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the
Court of First Instance of Leyte the civil case, alleging among other things that the Far Eastern
Lumber and Commercial Co. was an unregistered partnership; that they wished to have it
dissolved because of bitter dissension among the members, mismanagement and fraud by the
managers and heavy financial losses. C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss,
contesting the court's jurisdiction and the sufficiently of the cause of action.

After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and
at the request of Brown, et. al., appointed Pedro A. Capuciong as the receiver of the properties
thereof, upon the filing of a P20,000 bond. Hall and Hall offered to file a counter-bond for the
discharge of the receiver, but Judge Piccio refused to accept the offer and to discharge the
receiver. Whereupon, Hall and Hall instituted the present special civil action with the Supreme
Court.

Issue: Whether Brown, et. al. may file an action to cause the dissolution of the Far Eastern
Lumber and Commercial Co., without State intervention.

Held: The Securities and Exchange Commission has not issued the corresponding certificate of
incorporation. The personality of a corporation begins to exist only from the moment such
certificate is issued — not before. Not having obtained the certificate of incorporation, the Far
Eastern Lumber and Commercial Co. — even its stockholders — may not probably claim "in good
faith" to be a corporation. Under the statue it is to be noted that it is the issuance of a certificate
of incorporation by the Director of the Bureau of Commerce and Industry which calls a corporation
into being. The immunity if collateral attack is granted to corporations "claiming in good faith to
be a corporation under this act." Such a claim is compatible with the existence of errors and
irregularities; but not with a total or substantial disregard of the law. Unless there has been an
evident attempt to comply with the law the claim to be a corporation "under this act" could not be
made "in good faith."

This is not a suit in which the corporation is a party. This is a litigation between stockholders of
the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for its dissolution between stockholders,
without the intervention of the state.
HALL vs. PICCIO DIGEST
December 21, 2016 ~ vbdiaz

ARNOLD HALL vs. EDMUNDO PICCIO

G.R. No. L-2598 / June 29, 1950

FACTS:

On May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents Fred
Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in
Leyte, the articles of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized
to engage in a general lumber business to carry on as general contractors, operators and
managers, etc. Attached to the articles was an affidavit of the treasurer stating that 23,428
shares of stock had been subscribed and fully paid with certain properties transferred to the
corporation described in a list appended thereto.

Immediately after the execution of said articles of incorporation, the corporation proceeded to do
business with the adoption of by-laws and the election of its officers. On December 2, 1947, the
said articles of incorporation were filed in the office of the Securities and Exchange Commission
for the issuance of the corresponding certificate of incorporation.

On March 22, 1948, pending action on the articles of incorporation by the SEC, respondents Fred
Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed a suit against petitioners
before the Court of First Instance of Leyte alleging among other things that the Far Eastern
Lumber and Commercial Co. was an unregistered partnership; that they wished to have it
dissolved because of bitter dissension among the members, mismanagement and fraud by the
managers and heavy financial losses.

The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss,
contesting the court’s jurisdiction and the sufficiency of the cause of action.

After hearing the parties, the Hon. Edmundo S. Piccio ordered the dissolution of the company; and
at the request of plaintiffs, appointed the respondent Pedro A. Capuciong as receiver of the
properties thereof, upon the filing of a P20,000 bond.

The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the
receiver, but the respondent judge refused to accept the offer and to discharge the receiver.

Hence, this petition.

ISSUE:

Whether or not the trial court has jurisdiction over the case?

HELD:

No. The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a quo warranto
proceeding instituted in accordance with section 19 of the Corporation Law.

Under our statute it is to be noted that it is the issuance of a certificate of incorporation by the
Director of the Bureau of Commerce and Industry which calls a corporation into being. The
immunity of collateral attack is granted to corporations ‘claiming in good faith to be a corporation
under this act.’

Further, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the state.

WHEREFORE, the petition is dismissed.

9 N.W. 527 (Mich. 1881) - NO DIGEST

46 Mich. 482

EMPIRE MANUF'G CO. OF GRAND RAPIDS

v.

STUART.

Supreme Court of Michigan

July 1, 1881

Where a corporation that could be legally organized has attempted in good faith to organize, and
given its negotiable paper, it cannot, when sued thereon, set up as a defence its defective
organization. Where, after giving a promissory note in its corporate name, a corporation
discovered defects in its organization, and thereupon was dissolved, and a new corporation
organized under a different name, held, that the creditors could not be deprived by the dissolution
from following up and looking to the old organization for payment. Evidence of indorsements held
sufficient.

Error to Kent.

Eugene Carpenter, for plaintiff in error.

[46 Mich. 483] Stuart & Sweet, for defendant in error.

MARSTON, C.J.

The plaintiff in error was sued upon a promissory note given by it in its corporate name. The
principal defence relied upon was that the company, by mistake, was not, at the time of giving the
note, properly organized under any law of this state; that afterwards, upon ascertaining this fact,
the corporation was dissolved and a new corporation formed under a different name. This
corporation was one that could have been legally organized under laws existing at the time of its
formation. The business for which it was organized, that of manufacturing, was one authorized,
and having attempted to organize in good faith, and having in the course of its business given
negotiable paper in its corporate name, it could not afterwards

528

repudiate the transaction or evade responsibility when sued [46 Mich. 484] thereon, by setting up
its own mistake, affecting its original organization. Merchants', etc., Bank v. Stone, 38 Mich. 779.

The dissolution would not deprive the creditors of still following and looking to the old organization
for payment. Our statute allows three years after the dissolution for certain purposes, in winding
up the affairs. 1 Comp.Laws, § 3435. The execution of the note sued upon was not denied at the
time of joining issue, but it was still insisted that this did not admit or dispense with proof of the
indorsements thereon. Proof of the indorsements was given and the only question relates to the
sufficiency of the same. The evidence introduced was competent for such purpose. A more [46
Mich. 485] stringent rule is not required for the protection of the defendant.

As we discover no error in the record the judgment must be affirmed with costs.
(The other justices concurred.)
180 P. 734 (Kan. 1919)

104 Kan. 729

THE LOWELL-WOODWARD HARDWARE COMPANY, Appellee,

v.

G. R. WOODS et al., Partners as THE SUPERIOR LEASING COMPANY (ED. SEMKE, Appellant)

No. 21,920

Supreme Court of Kansas

May 10, 1919

Decided January, 1919.

Appeal from Jewell district court; RICHARD M. PICKLER, judge.

Judgment affirmed.

SYLLABUS

SYLLABUS BY THE COURT.

1. CORPORATION--Payee of Promissory Note--Maker Estopped to Deny Corporate Existence. One

who has signed a promissory note running to a payee described by a name appropriate to a
corporation, although not employing that term, cannot, in an action brought against him thereon
by such payee, in which it alleges itself to be a corporation, be heard to question the plaintiff's
corporate existence, unless upon a showing that his obligation to make payment would be thereby
affected.

2. PROMISSORY NOTE--Appellant a Member of Partnership--Evidence. The evidence held to

support a finding that the appellant was a member of the partnership in whose name the note
sued upon was executed.

W. R. Mitchell, of Mankato, for the appellant.

R. W. Turner, and Donald F. Stanley, both of Mankato, for the appellee.

OPINION

MASON, J.:

An action was brought in the name of the Lowell-Woodward Hardware Company, describing itself
as a Colorado corporation, against several persons alleged to constitute a partnership, upon a
promissory note. One of the defendants, Ed. Semke, filed an answer consisting of a verified
general denial. Judgment was rendered for the plaintiff, and Semke appeals.

1. The appellant's contention is that there was no competent evidence of the plaintiff's corporate
existence, or of his being a [104 Kan. 730] member of the partnership described. A witness for
the plaintiff testified that it was a corporation, over an objection that the question called for a
conclusion, and the ruling is complained of. On cross-examination he stated in full the basis of his
opinion, so that the first answer was not prejudicial. ( Insurance Office v. Woolen-mill Co., 72
Kan. 41, 82 P. 513.) He said that the plaintiff was running a hardware store; that he inferred it
was a corporation from its name and its mode of doing business; and that a bank president had
told him it was a corporation. Possibly this evidence did not tend to show even the de facto
existence of the corporation--which is all that could be required (7 R. C. L. 105)--but that will not
avail the appellant. One who enters into a written contract with a party described therein as a
corporation is precluded, in an action brought thereon by such party under the same designation,
from denying its corporate existence. (7 R. C. L. 105, 106; 10 Cyc. 521.) Here the payee was
styled in the note, "The Lowell-Woodward Hardware Company," a title which prima facie imports a
corporation. (3 Ency. of Ev. 599; 7 R. C. L. 699; Note, Ann. Cas. 1912 A 969, 2d column.) There
is some difference of opinion as to whether one contracting with an organization styling itself a
"company," there being nothing further in the language used to indicate its character, the term
"corporation" not being employed, can be heard to deny its corporate capacity when sued by it
upon the contract. The cases bearing on the question are collected in Ingle System Co. v. Norris &
Hall, 132 Tenn. 472, 178 S.W. 1113, which holds, in accordance with what it regards as the
weight of authority, that such defense cannot be made. (See also Toledo Computing Scale Co. v.
Young, 16 Idaho 187, 101 P. 257; Bremen Foundry & Machine Works v. Boswell, 22 Ga.App. 434,
96 S.E. 182 [Ga.]; Lumber Co. v. Cotton, 12 Colo.App. 375, 55 P. 610.) In the leading case to the
contrary (The Welland Canal Company v. Hathaway, 8 Wend. 480, annotated in 24 Am. Dec. 51),
the decision turns upon the fact that some of the elements of equitable estoppel, according to the
accepted definition, are lacking. We agree that no full, formal, technical estoppel to deny
corporate existence arises from such a state of facts, but we think it accords with modern views of
good practice and tends to promote substantial justice to hold, and we do hold, that one who has
signed a promissory note [104 Kan. 731] running to a payee described by a name appropriate

735

to a corporation, although not employing that term, cannot, in an action brought against him
thereon by such payee under the same name, in which it alleges itself to be a corporation, be
heard to question the plaintiff's corporate existence, unless upon a showing that his obligation to
make payment would be thereby affected. The defendant, having given his promise to pay the
sum indicated to the payee named, should not be permitted to escape or delay performance by
raising an issue as to the character of the organization to which he is indebted, unless his
substantial rights might be thereby affected, which would only be under exceptional conditions. It
is thoroughly settled that in such a situation the defendant cannot attack the regularity of the
plaintiff's organization, or take any advantage of the fact that it has no legal standing as a
corporation. No good reason is apparent why, having explicitly promised to make payment to the
concern by which he is sued, he should be permitted to question its de facto, any more than its de
jure, character--to inject into the case an issue having no bearing on his obligation to make
payment.

2. Evidence was introduced to the effect that the defendants were engaged in business as a firm,
operating a mine in Colorado, under the name, "Superior Leasing Company," which was signed to
the note sued on; that the appellant was a member of the company and had put money into it
and helped do some work in connection with its business; and that he had signed several notes in
its behalf. He himself testified, in effect, that he had been a member of the company until 1912,
but had withdrawn from it in November of that year. If his withdrawal under the circumstances
stated by him would have released him from liability on the note sued on, the court must be
deemed to have found that he had not withdrawn. The decision in favor of the plaintiff was
therefore supported by the evidence.

The judgment is affirmed.

The Lowell-Woodward Hardware Company v. G. R Woods, et. al. Partners as the Superior Leasing
Company
Supreme Court of Kansas, 1919. 104 Kan. 729, 180 p. 734

FACTS
Lowell-Woodward Hardware Company (Plaintiff), describing itself as a Colorado corporation,
brought an action against several persons alleged to constitute a partnership, upon a promissory
note. Judgment was rendered for the plaintiff.

On appeal, one of the defendants, Ed. Semke, denied the plaintiff’s corporate existence, or him
being a member of the partnership described.

A witness for the plaintiff testified that it was a corporation. He said that the plaintiff was running
a hardware store and that he inferred it was a corporation from its name and its mode of doing
business and that a bank president had told him it was a corporation.

Apparently, the defendant in this case issued a promissory note in favor of the payee indicated as
“The Lowell-Woodward Hardware Company.”

ISSUE
Whether the defendant can deny the existence of the corporation in order to escape his liability
from the promissory note.

HELD
No. One who enters into a contract with a party described therein as a corporation is precluded, in
an action brought thereon by such party under the same designation, from denying its corporate
existence.

In accordance with modern views of good practice and to promote substantial justice, the court
ruled that one who has signed a promissory note running to a payee described by a name
appropriate to a corporation, although not employing that term, cannot, in an action brought
against him thereon by such payee, in which it alleges itself to be a corporation, be heard to
question the plaintiff's corporate existence, unless upon a showing that his obligation to make
payment would be thereby affected.

The payee was styled in the note, "The Lowell-Woodward Hardware Company," a title which prima
facie imports a corporation.

There is some difference of opinion as to whether one contracting with an organization styling
itself a "company," there being nothing further in the language used to indicate its character, the
term "corporation" not being employed, can be heard to deny its corporate capacity when sued by
it upon the contract.

The defendant, having given his promise to pay the sum indicated to the payee named, should not
be permitted to escape or delay performance by raising an issue as to the character of the
organization to which he is indebted, unless his substantial rights might be thereby affected,
which would only be under exceptional conditions.

It is thoroughly settled that in such a situation the defendant cannot attack the regularity of the
plaintiff's organization, or take any advantage of the fact that it has no legal standing as a
corporation. No good reason is apparent why, having explicitly promised to make payment to the
concern by which he is sued, he should be permitted to question its de facto, any more than its de
jure, character--to inject into the case an issue having no bearing on his obligation to make
payment.
Defendants were engaged in business as a firm in Colorado under “Super Leasing Company”
which was signed to the note sued on and that the appellant was a member of the company. He
also testified that he had been a member until 1912 but had withdrawn from it.

Decision in favor of plaintiff was supported by evidence. Judgment is affirmed.

G.R. No. 22106 September 11, 1924

ASIA BANKING CORPORATION, plaintiff-appellee,

vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant.

Charles C. De Selms for appellant.

Gibbs & McDonough and Roman Ozaeta for appellee.

OSTRAND, J.:

This action is brought to recover the sum of P24,736.47, the balance due on the following
promissory note:

P37,757.22

MANILA, P. I., Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia Banking Corporation, or order, the sum of
thirty-seven thousand seven hundred fifty-seven and 22/100 pesos at their office in Manila, for
value received, together with interest at the rate of ten per cent per annum.

No. ________ Due __________

THE STANDARD PRODUCTS CO., INC.

By (Sgd.) GEORGE H. SEAVER

By President

The court below rendered judgment in favor of the plaintiff for the sum demanded in the
complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the rate of 10 per
cent per annum, and the costs. From this judgment the defendant appeals to this court.

At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the
parties and the appellant insists that under these circumstances the court erred in finding that the
parties were corporations with juridical personality and assigns same as reversible error.

There is no merit whatever in the appellant's contention. The general rule is that in the absence of
fraud a person who has contracted or otherwise dealt with an association in such a way as to
recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny
its corporate existence in any action leading out of or involving such contract or dealing, unless its
existence is attacked for cause which have arisen since making the contract or other dealing relied
on as an estoppel and this applies to foreign as well as to domestic corporations. (14 C. J., 227;
Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)

The defendant having recognized the corporate existence of the plaintiff by making a promissory
note in its favor and making partial payments on the same is therefore estopped to deny said
plaintiff's corporate existence. It is, of course, also estopped from denying its own corporate
existence. Under these circumstances it was unnecessary for the plaintiff to present other
evidence of the corporate existence of either of the parties. It may be noted that there is no
evidence showing circumstances taking the case out of the rules stated.
The judgment appealed from is affirmed, with the costs against the appellant. So ordered.
Asia Banking Corp. vs. Standard Products Co.
G.R. No. 22106; September 11, 1924

FACTS:
The plaintiff corporation sued defendant corporation for failure to pay the promissory note.
Trial court rendered judgment in favor of plaintiff. Defendant appealed and its defense was that
the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant
insists that under these circumstances the court erred in finding that the parties were corporations
with juridical personality and assigns same as reversible error.

ISSUE:
WON plaintiff was unable to prove its corporate existence.

HELD:
NO. The general rule is that in the absence of fraud a person who has contracted or
otherwise dealt with an association in such a way as to recognize and in effect admit its legal
existence as a corporate body is thereby estopped to deny its corporate existence in any action
leading out of or involving such contract or dealing, unless its existence is attacked for cause
which have arisen since making the contract or other dealing relied on as an estoppel and this
applies to foreign as well as to domestic corporations.
Hence, the defendant is estopped from denying its own corporate existence. It is also
estopped from denying the other’s corporate existence.
CRANSON
v.
INTERNATIONAL BUSINESS MACHINES CORPORATION
[No. 245, September Term, 1963.]

Court of Appeals of Maryland.

Decided April 30, 1964.

*479 The cause was argued before HENDERSON, HAMMOND, HORNEY, MARBURY and SYBERT, JJ.

William J. Brannan, Jr., with whom were Kardy, Brannan & Neumann on the brief, for the
appellant.

Henry J. Noyes for the appellee.

HORNEY, J., delivered the opinion of the Court.

On the theory that the Real Estate Service Bureau was neither a de jure nor a de facto corporation
and that Albion C. Cranson, Jr., was a partner in the business conducted by the Bureau and as
such was personally liable for its debts, the International Business Machines Corporation brought
this action against Cranson for the balance due on electric typewriters purchased by the Bureau.
At the same time it moved for summary judgment and supported the motion by affidavit. In due
course, Cranson filed a general issue plea and an affidavit in opposition to summary judgment in
which he asserted in effect that the Bureau was a de facto corporation and that he was not
personally liable for its debts.

The agreed statement of facts shows that in April 1961, Cranson was asked to invest in a new
business corporation which was about to be created. Towards this purpose he met with other
interested individuals and an attorney and agreed to purchase stock and become an officer and
director. Thereafter, upon being advised by the attorney that the corporation had been formed
under the laws of Maryland, he paid for and received a stock certificate evidencing ownership of
shares in the corporation, and was shown the corporate seal and minute book. The business of the
new venture was conducted as if it were a corporation, through corporate bank accounts, with
auditors maintaining corporate books and records, and under a lease *480 entered into by the
corporation for the office from which it operated its business. Cranson was elected president and
all transactions conducted by him for the corporation, including the dealings with I.B.M., were
made as an officer of the corporation. At no time did he assume any personal obligation or pledge
his individual credit to I.B.M. Due to an oversight on the part of the attorney, of which Cranson
was not aware, the certificate of incorporation, which had been signed and acknowledged prior to
May 1, 1961, was not filed until November 24, 1961. Between May 17 and November 8, the
Bureau purchased eight typewriters from I.B.M., on account of which partial payments were
made, leaving a balance due of $4,333.40, for which this suit was brought.

Although a question is raised as to the propriety of making use of a motion for summary judgment
as the means of determining the issues presented by the pleadings, we think the motion was
appropriate. Since there was no genuine dispute as to the material facts, the only question was
whether I.B.M. was entitled to judgment as a matter of law. The trial court found that it was, but
we disagree.

The fundamental question presented by the appeal is whether an officer[1] of a defectively

incorporated association may be subjected to personal liability under the circumstances of this
case. We think not.

Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively
incorporated association with the corporate attribute of limited liability. The first, often referred to
as the doctrine of de facto corporations, has been applied in those cases where there are elements
showing: (1) the existence of law authorizing incorporation: (2) an effort in good faith to
incorporate under the existing law; and (3) actual user or exercise of corporate powers.
Ballantine, Private Corporations, § 23; 8 Fletcher, Cyclopedia of the Law of Private *481
Corporations, § 3777; 13 Am. Jur., Corporations, §§ 49-56; 18 C.J.S., Corporations, § 99. The
second, the doctrine of estoppel to deny the corporate existence, is generally employed where the
person seeking to hold the officer personally liable has contracted or otherwise dealt with the
association in such a manner as to recognize and in effect admit its existence as a corporate body.
Ballantine, op.cit., § 29; Machen, Modern Law of Corporations, §§ 278-282; 18 C.J.S., op.cit., §
109.

It is not at all clear what Maryland has done with respect to the two doctrines. There have been
no recent cases in this State on the subject and some of the seemingly irreconcilable earlier cases
offer little to clarify the problem.[2]

In one line of cases, the Court, in determining the rights and liabilities of a defectively organized
corporation, or a member or stockholder thereof, seems to have drawn a distinction between
those acts or requirements which are a condition precedent to corporate existence and those acts
prescribed by law to be done after incorporation. In so doing, it has been generally held that
where there had been a failure to comply with a requirement which the law declared to be a
condition precedent to the existence of the corporation, the corporation was not a legal entity and
was therefore precluded from suing or being sued as such. Boyce v. M.E. Church, 46 Md. 359
(1877); Regester v. Medcalf, 71 Md. 528, 18 A. 966 (1889); Bonaparte v. Lake Roland R.R. Co.,
75 Md. 340, 23 A. 784 (1892); Jones v. Linden Building Asso., 79 Md. 73, 29 A. 76 (1894);
Maryland Tube Works v. West End Imp. Co., 87 Md. 207, 39 A. 620 (1898); Cleaveland v. Mullin,
96 Md. *482 598, 54 A. 665 (1903); National Shutter Bar Co. v. Zimmerman, 110 Md. 313, 73 A.
19 (1909). These cases appear to stand for the proposition that substantial compliance with those
formalities of the corporation law, which are made a condition precedent to corporate existence,
was not only necessary for the creation of a corporation de jure, but was also a prerequisite to the
existence of a de facto corporation or a corporation by estoppel.

In the Boyce case, an action in assumpsit against a defectively incorporated religious society, the
Court (at p. 373 and p. 374), in holding that the society was not estopped to deny its corporate
existence, said:

"We think it would be extending the doctrine of estoppel to an extent, not justified by the
principles of public policy, to allow it to operate through the conduct of the parties concerned, to
create substantially a de facto corporation, with just such powers as the parties may by their acts
give to it.

***

"The statute law of the State, expressly requiring certain prescribed acts to be done to
constitute a corporation, to permit parties indirectly, or upon the principle of estoppel, virtually to
create a corporation for any purpose, or to have acts so construed, would be in manifest
opposition to the statute law, and clearly against its policy, and justified upon no sound principle
in the administration of justice."

In the Maryland Tube case, an action by a corporation for specific performance of a contract to
convey land which it had entered into prior to its becoming a legal entity, the Court, having cited
(at p. 217) the statements in Jones v. Aspen Hardware Co., 40 P. 457 (Colo. 1895),[3] with
approval for the *483 proposition that "`the doctrine of estoppel cannot be successfully invoked,
unless the corporation has at least a de facto existence,'" that "`a de facto corporation can never
be recognized in violation of a positive law'" and that "`there is a broad distinction between those
acts made necessary by the statute as a prerequisite to the exercise of corporate powers, and
those acts required of individuals seeking incorporation but not made prerequisite to the exercise
of such powers,'" went on to say (at p. 218) that "these principles were clearly recognized and
applied" in the Boyce case.

In the National Shutter Bar case, an action by a corporation for an alleged libel which had
occurred before the performance of a condition precedent necessary for legal incorporation, it was
held — citing the Maryland Tube case for the proposition that statutory conditions precedent must
have been complied with to give existence to corporations formed under general laws — that the
corporation had no legal existence at the time of the alleged libel. In referring to the Boyce case,
it was said (at p. 320) that "it has been held by our predecessors that a corporation cannot be
actually or virtually created by estoppel in Maryland." And, on the basis of the statements in Jones
v. Aspen Hardware Co., supra (also relied on in the Maryland Tube case), it was concluded that
the corporation could not maintain the action.

On the other hand, where the corporation has obtained legal existence but has failed to comply
with a condition subsequent to corporate existence, this Court has held that such nonperformance
afforded the State the right to institute proceedings for the forfeiture of the charter, but that such
neglect or omission could never be set up by the corporation itself, or by its members and
stockholders, as a defense to an action to enforce their liabilities. C. & O. Canal Co. v. B. & O.
Railroad Co., 4 G. & J. 1 (1832); Hammond v. Straus, 53 Md. 1 (1880); Murphy v. Wheatley, 102
Md. 501, 63 A. 62 (1906).

*484 In the Hammond case, an action by a creditor against a stockholder of a state bank on his
statutory liability, the Court, after stating that a corporation or a stockholder could not defeat an
action by showing noncompliance with the requirements of the corporation law unless the acts
required are conditions precedent to corporate existence, said (at p. 15):

"By holding otherwise, parties might avail themselves of the powers and privileges of a
corporation, without in any manner subjecting themselves to its duties and obligations, and might
set up their own neglect of duty, of wilful omission to comply with the requirements of the statute,
as means of discharge from all their just obligations under the law. This is forbidden by every
principle of law and justice, and hence such a defense could never be tolerated."

It seems clear therefore that when a defect in the incorporation process resulted from a failure to
comply with a condition subsequent, the doctrine of estoppel may be applied for the benefit of a
creditor to estop the corporation, or the members or stockholders thereof, from denying its
corporate existence. See Brune (Herbert M., Jr.), Maryland Corporation Law and Practice (rev.
ed.), § 339.

In another line of Maryland cases which determined the rights and liabilities of a defectively
organized corporation, or a member or stockholder thereof, the Court, apparently disregarding the
distinction made between those requirements which are conditions precedent and those which are
conditions subsequent to corporate existence, has generally precluded, on the grounds of estoppel
or collateral attack, inquiry into the question of corporate existence. Maltby v. Northwestern Va.
R.R. Co., 16 Md. 422 (1860); Franz v. Teutonia Building Asso., 24 Md. 259 (1866); Grape Sugar &
Vinegar Mfg. Co. v. Small, 40 Md. 395 (1874); Laflin & Rand Powder Co. v. Sinsheimer, 46 Md.
315 (1877); Keene v. Van Reuth, 48 Md. 184 (1878); Bartlett v. Wilbur, 53 Md. 485 (1880); Pott
& Co. v. Schmucker, 84 Md. 535, 36 A. 592 (1897). In the Grape Sugar case, an action against a
defectively organized corporation to *485 recover the balance due for work done and materials
furnished, the Court said (at p. 400):

"The second prayer proceeds upon the assumption that the [corporation] is not liable, provided
the work was done prior to the recording of the certificate of incorporation. It is true, that under
the general incorporation law of this State, the recording of the certificate was necessary to
constitute the [corporation] a body politic. If, however, the contract was made with the [creditor]
through * * * [the] President of the [corporation], after the certificate had been signed by the
members of the proposed corporation, but before it was recorded, and the company, after its
incorporation was complete, accepted the work done under the contract, it will be estopped, both
in law and equity, from denying its liability, on account of the same."

Cf. Hammond v. Straus, supra. And see to the contrary Boyce v. M.E. Church, supra, which might
be distinguishable in that it involved an effort to impose liability on a religious society and not a
business corporation.

In the Laflin & Rand case, decided in the same year (1877) as the Boyce case, the Court, in an
action against certain members of a corporation to make them individually liable for goods sold
and delivered to the corporation, said (at p. 321):

"[The company] has been clothed with all the forms of a corporation by the laws of a
neighboring State, and was in the exercise and use of the franchises conferred upon it. It was a
corporation de facto at the time the goods were sold and delivered to it * * * and its existence as
a corporation cannot be collaterally drawn into question.

"To permit a recovery against the defendants, and thereby to say that they are to be regarded
in law as a voluntary unincorporated association, would be a departure from all the cases. The
debt was not created with them individually, but with a company acting *486 under a formal
incorporation, and in the exercise of its corporate powers. This [creditor] dealt with it and gave it
credit as a corporation. If its assets are not ample to pay, it is the misfortune of the creditor."[4]

See also the Franz case at p. 270 (of 24 Md.) and the Bartlett case at p. 498 (of 53 Md.) for
similar statements of the law. From these cases it appears that where the parties have assumed
corporate existence and dealt with each other on that basis, the Court will apply the estoppel
doctrine on the theory that the parties by recognizing the organization as a corporation were
thereafter prevented from raising a question as to its corporate existence.

When summarized, the law in Maryland pertaining to the de facto and estoppel doctrines reveals
that the cases seem to fall into one or the other of two categories. In one line of cases, the Court,
choosing to disregard the nature of the dealings between the parties, refused to recognize both
doctrines where there had been a failure to comply with a condition precedent to corporate
existence, but, whenever such noncompliance concerned a condition subsequent to incorporation,
the Court often applied the estoppel doctrine. In the other line of cases, the Court, choosing to
make no distinction between defects which *487 were conditions precedent and those which were
conditions subsequent, emphasized the course of conduct between the parties and applied the
estoppel doctrine when there had been substantial dealings between them on a corporate basis.

Whether or not the decisions in the Boyce and Maryland Tube cases had the effect of repudiating
the de facto doctrine in this state, as some of the text writers seem to think, is a question we do
not reach in this case and therefore need not consider at this time. On the other hand, since it is
clear that the Maryland Tube and National Shutter Bar cases are inconsistent with other Maryland
cases insofar as they held (in relying on the statements in Jones v. Aspen Hardware Co., supra)
that the doctrine of estoppel cannot be invoked unless a corporation has at least a de facto
existence, both cases — Maryland Tube and National Shutter Bar — should be, and are hereby,
overruled to the extent of the inconsistency. There is, as we see it, a wide difference between
creating a corporation by means of the de facto doctrine and estopping a party, due to his conduct
in a particular case, from setting up the claim of no incorporation. Although some cases tend to
assimilate the doctrines of incorporation de facto and by estoppel, each is a distinct theory and
they are not dependent on one another in their application. See 8 Fletcher, op.cit., § 3763; France
on Corporations (2nd ed.), § 29; 18 C.J.S., op.cit., § 111h. Where there is a concurrence of the
three elements necessary for the application of the de facto corporation doctrine, there exists an
entity which is a corporation de jure against all persons but the state. On the other hand, the
estoppel theory is applied only to the facts of each particular case and may be invoked even
where there is no corporation de facto. Accordingly, even though one or more of the requisites of
a de facto corporation are absent, we think that this factor does not preclude the application of
the estoppel doctrine[5] in a proper case, such as the one at bar.

*488 I.B.M. contends that the failure of the Bureau to file its certificate of incorporation debarred
all corporate existence. But, in spite of the fact that the omission might have prevented the
Bureau from being either a corporation de jure or de facto,[6]Jones v. Linden Building Asso.,
supra, we think that I.B.M. having dealt with the Bureau as if it were a corporation and relied on
its credit rather than that of Cranson, is estopped to assert that the Bureau was not incorporated
at the time the typewriters were purchased. Laflin & Rand Powder Co. v. Sinsheimer, supra. See
also Tulane Improvement Co. v. S.A. Chapman & Co., 56 So. 509 (La. 1911). In 1 Clark and
Marshall, Private Corporations, § 89, it is stated:

"The doctrine in relation to estoppel is based upon the ground that it would generally be
inequitable to *489 permit the corporate existence of an association to be denied by persons who
have represented it to be a corporation, or held it out as a corporation, or by any persons who
have recognized it as a corporation by dealing with it as such; and by the overwhelming weight of
authority, therefore, a person may be estopped to deny the legal incorporation of an association
which is not even a corporation de facto."

In cases similar to the one at bar, involving a failure to file articles of incorporation, the courts of
other jurisdictions have held that where one has recognized the corporate existence of an
association, he is estopped to assert the contrary with respect to a claim arising out of such
dealings. See, for example, Tarbell v. Page, 24 Ill. 46 (1860); Magnolia Shingle Co. v. J.
Zimmern's Co., 58 So. 90 (Ala. 1912); Lockwood v. Wynkoop, 144 N.W. 846 (Mich. 1914); John
Lucas Co. v. Bernhardt's Estate, 100 So. 399 (La. 1924).

Since I.B.M. is estopped to deny the corporate existence of the Bureau, we hold that Cranson was
not liable for the balance due on account of the typewriters.

Judgment reversed; the appellee to pay the costs.

Cranson vs. International Business Machines Corp.
234 MD. 477, 200 A. 2D 33; 1964

FACTS:
Cranson was asked to be an investor in a new business corporation and after he acceded,
there are other people who had formed the corporation with him. A stock certificate evidencing his
ownership of shares in the corporation was given to him. The transactions were done as if it were
a corporation and eventually Cranson was elected president and all the dealings with IBM were
conducted by him for the corporation. At no time did he assume personal obligation or pledge his
individual credit to IBM. But the lawyers of the corporation made an oversight of not filing the
certificate of incorporation and when claim for payment were charged against the Real Estate
Service Bureau, IBM charged Cranson in his personal capacity.

ISSUE:
WON a defectively incorporated association would warrant a charge against officers in their
personal capacity.

HELD:
NO. Traditionally, two doctrines have been used by the courts to clothe an officer of a
defectively incorporated association with the corporate attribute of limited liability. The first, often
referred to as the doctrine of de facto corporations, has been applied in those cases where there
are elements showing: (1) the existence of law authorizing incorporation: (2) an effort in good
faith to incorporate under the existing law; and (3) actual user or exercise of corporate powers.
The second, doctrine of estoppel: employed when the person seeking to hold the officer personally
liable has contracted or otherwise dealt with the association in such a manner as to recognize and
in effect admit its existence as a corporate body.
When there is a concurrence of the three elements necessary for the application of the de
facto corporation doctrine, there exists an entity which is a corporation de jure against all persons
BUT THE STATE. On the other hand, the estoppel theory is applied only to the facts of each
particular case and may be invoked even when there is no corporation de facto.
IBM, having dealt with the Bureau as if it were a corporation and relied on its credit rather
than that of Cranson, is estopped to assert that the Bureau was not incorporated at the time the
typewriters were franchised.
Where one has recognized the corporate existence of an association, he is estopped to
assert the contrary with respect to claim arising out of such dealings.