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Bluebook 21st ed.

Pre-Incorporation Contracts other Than Stock Subscriptions, 10 TEMP. L.Q. 300 (1936).

ALWD 7th ed.

, Pre-Incorporation Contracts other Than Stock Subscriptions, 10 Temp. L.Q. 300
(1936).

APA 7th ed.

(1936). Pre-incorporation contracts other than stock subscriptions. Temple Law
Quarterly, 10(3), 300-311.

Chicago 17th ed.

"Pre-Incorporation Contracts other Than Stock Subscriptions," Temple Law Quarterly
10, no. 3 (May 1936): 300-311

McGill Guide 9th ed.

"Pre-Incorporation Contracts other Than Stock Subscriptions" (1936) 10:3 Temp LQ 300.

AGLC 4th ed.

'Pre-Incorporation Contracts other Than Stock Subscriptions' (1936) 10(3) Temple Law
Quarterly 300

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"Pre-Incorporation Contracts other Than Stock Subscriptions." Temple Law Quarterly,
vol. 10, no. 3, May 1936, pp. 300-311. HeinOnline.

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 TEMPLE LAW QUARTERLY

Pre-Incorporation Contracts Other Than Stock Subscriptions

The treatment of pre-incorporation contracts other than stock subscriptions1
has been the source of much criticism from law commentators 2 and the judiciary.$
Concern has been expressed not particularly with the conclusions reached
(that the corporation either does or does not become a party to such' contract),
but with the theories used in reaching such conclusions. No niche in the long list
of legal relations could be found that was adaptable in theory to this compara-
tively newly born group, but the American courts finding it advisable and desir-
able to permit and foster pre-incorporation activity, decided that it was better to
have the right hand covered by the left glove rather than permit the hand to go
bare. And in the past ten years the slightly uncomfortable fit has been the subject
of considerable adverse criticism. The borrowing and application of concepts
that have emanated from factual relations resembling but different from the one
under consideration has been consistently decried. The various legal dogma
have been made the subject of much critical analysis from a theoretical viewpoint
with the resulting conclusion that for the new child there should be new clothes,
one noted writer suggesting statutory regulation of the activities of these pre-
incorporation contractors.'
Various theories have been advanced. Dependent upon the jurisdictional
supervision of the contract involved, the corporation may do one of five things:
It may adopt the contract of its promoter 8 ; it may receive the benefits of the
contract through its designation as beneficiary 6 ; it may ratify the agreement 1;
it may be the additional party to a novation 8 ; or it may be the offeree of a con-
tinuing offer made by the third party.'
That these principles are misapplied is readily seen by carrying the various
applications to their respective conclusions. One cannot willy-nilly "adopt" the
contract of another 10; a beneficiary is not liable on the contract, though he may
act to receive its benefits; a principal cannot ratify the agreements of its agent
when such principal is not in existence at the time of the contract's creation; a
novation demands the consent of all the parties involved; and an offer may be
accepted only by one to whom it is made, and certainly not by an offeree non-
existent at the time of the offer.1"
The English courts recognizing the difficulties involved demand an entirely
new contract between the corporation and the third party.1 2 However, along
I. The rights of creditors being directly involved in stock subscription cases, these con-
tracts have'been generally excluded from those articles discussing the rationale employed in
promoter transactions. And for the same reason such cases have been omitted from this
study.
2. Ehrick and Bunzl, Promoter's Contracts (1929) 38 YALE L. J. loII; Isaacs, The
Promoter; A Legislative Problem (1925) . 38 HARV. L. Rnv. 887; Note (1933) 8i U. OF PA.
L. REV. 746; (1930) I8 Ky. L. J. 184.
3. Stone v. Walker, 2o Ala. 130, 77 So. 554 (1917) ; Hackbarth v. Wilson Lumber Co.,
36 Idaho 628, 212 Pac. 969 (1923).
4. Isaacs, loc. cit. supra note 2.
5. Boatright v. Steinite Corp., 46 F. (2d) 385 (C. C. A. ioth, 2932) ; Kridelbaugh v.
Aldrehn Theatres Co., 295 Iowa 147, 191 N. W. 803 (1923).
6. Irwin Glass Co. v. Buchanan, 289 Fed. 348 (C. C. A. 3d, 1923).
7. Buidler's Duntile Co. v. Dunn Mfg. Co., 229 Ky. 569, 17 S. W. (2d) 715 (i929).
8. Heard v. Monroe Sand & Gravel Co., 9 La. App. 568, 121 So. 642 (2928); i WL-
LISTON, CONTRACrS (1920) § 3o6.
9. Hackbarth v. Wilson Lumber Co., 36 Idaho 628, 212 Pac. 969 (1923).
2o. And no such doctrine exists. 2 ME H M, AGENCY (2d ed. 1914) § 382.
12. Excepting offers of reward and cases of a similar nature.
12. Mehhado v. Portos Alegre, 43 L. J. 253 (1874) ; North Sidney Invest & Tromay
Co. v. Higgins, [18991 A. C. 263; In re Dale & Plant, Ltd., 61 L. T. R. (N. s.) 2o6 (1899);
Its re English & Colonial Produce Co., 2 Ch. 435 (19o6). See also In re National Motor
Mail Coach, 77 L. J. 790 (1908).
 NOTES AND LEGISLATION

with this confusion of theory, the American courts have been consistent in de-
manding that some act of adoption, acceptance, ratification or novation be per-
formed by the corporation, and lip service has been given to the requirement of
an act in addition to mere incorporation."8
There has arisen a large residuary category, somewhat quasi-contractual in
nature, designated as "acceptance of benefit"; and it has been stated with pleasing
regularity that a' corporation may be bound by its acceptance of the benefits of
the pre-incorporation agreement."4 Other elements have been given considera-
tion and, depending upon the parties involved, are stated to be of primary impor-
tance. Thus where the corporation brings an action to enforce the agreement
of its promoter, the inquiry is made as to whether the other party had knowledge
of the corporate evolution of the plaintiff.' 5 The question of reliance upon cor-
porate or promoter credit is deemed important when the third party acts against
the promoter on the contract. 16
This note is concerned primarily with the conclusions reached rather than
with the theories employed. Observation has been made of those elements given
written consideration by the courts, and of those present but generally not men-
tioned; and an objective numerical evaluation has been made of the weight given
by the courts to those both mentioned and unmentioned.
The cases naturally fall into categories indicated by the parties involved in
the suit. The third party may bring his action against the corporation or against
the promoter "; and the promoter 18 or the corporation may sue the third party.
Due to a dearth of cases against the third party, only suits by the third party are
treated in this paper.
THIRD PARTY VERSUS THE CORPORATION"1

Fifty-eight cases involving suit by a third party against the corporation were
analysed. Three questions were asked of the facts of each case: (I) What was
13. "It is our opinion that a promoter's contract as such cannot upon any theory, ipso
facto by the incorporation of the company in contemplation, become the contract of the cor-
poration. The legal entity itself must act in its corporate capacity before it shall be held
liable. ." Kirkup v. Anaconda Amusement Co., sg Mont. 469, i97 Pac. ioo5, ioo7
(1ga1).
14. Seacoast Railroad Co. v. Wood, 65 N. J. E. 530, 56 At]. 337 (1903).
15. McClintic v. J. D. Young Corp., 41 S. W. (2d) 686 (Tex. Civ. App. 1931).
6. Queen City Furniture & Carpet Co. v. Crawford, 127 Mo. 356, 30 S. W. 163 (x895).
17. Those cases in which there has been an unsuccessful attempt to create a de jure
corporation (and no de facto corporation resulted) have been omitted. The liability of the
individuals would be that of incorporators rather than contractors. Harrill v. Davis, x68
Fed. 187 (C. C. A. 8th, I909).
18. The promoter may bring his action against the third party for non-performance. 14
C. J. 275. And it is there stated: "But the rights under the contract are the rights of the
corporation, and the right of action thereon is in it, and not in the promoter or promoters,
where, by ratification or adoption and novation, the contract has become the contract of the
corporation." Contra: Eden v. Miller, 37 F. (2d) 8 (C. C. A. 2d, I93O) where the pro-
moter was permitted to recover for breach of a contract to invest in the corporation after the
corporation had partially performed in accordance with the terms of the contract. But cf.
Smith v. Parker, 148 Ind. 127, 45 N. E. 770 (1897) where the promoter was not permitted to
recover for breach of a contract to invest in the corporation.
xg. There has been omitted from this section a group of cases in which the promoter, by
virtue of an unperformed agreement with the other promoters, assumes the position of the
third party and acts against the corporation. The promoter's fiduciary relation creates ele-
ments for the consideration of the courts that are foreign to this study. However, in con-
nection with these cases, this was observed. In eight of twelve cases the promoter was not
permitted to recover, and in all eight, stockholders other than the promoters were members
of the corporation. Dunlap v. Twin City Power Co., 226 Fed. 161 (C. C. A. 4th, 1915),;
 TEMPLE LAW QUARTERLY

the subsequent relation of the promoter to the corporation? (II) What was the
nature of the contract involved? (III) Were there any acts of adoption by the
corporation?
The cases were then classified with respect to the answer of each question:
Of the first question: According to whether the promoter became the
principal stockholder, 20 or an officer or director, or neither stockholder nor
officer nor director.
Of the second question: According to the time of performance, that is,
whether before or after incorporation; with further subdivision according
to the necessity of the contract (from the viewpoint of the corporation),
and its subject matter.
Of the third question: According to the presence or absence of acts of
adoption; ard, if present, subdivided according to the manner or method of
adoption.
Holding of the Court
Corporation ' Corporation
Held Subse- Held Subse-
quently a quently not
Party to a Party to
the Contract the Contract
CHART
I. Promoter's Subsequent Relation to the Cor-
poration
i. Principal Stockholder ................ 34 5
. Officer or Director ................... 22 3
3. N one .............................. 2 2

58 IO
II. The Nature of the Contract Involved
i. Post-Incorporation Performance
(i) Personal Services ............... o. 0
(2) Tangible Property .............. 7 1
(3) Miscellaneous .................. 4 0

58 1o

Plains Iron Works Co. v. Haggott, 68 Colo. 12, 288 Pac. 735 (i92o); Kirkuip v. Anaconda
Amusement Co., 59 Mont. 469, 197 Pac. 105 (192i) ; Munson v. Syracuse G. & C. Ry., o3
N. Y. 59, 8 N. E. 355 (1886) ; Adams v. Empire Laundry Machinery Co., 4 N. Y. Supp. 738
(Sup. Ct. 1889); Martin v. Remington-Martin Co., 95 App. Div. 8, 88 N. Y. Supp. 573
(19o4) ; Bonner v. Traveler's Hotel Co., Inc., 276 Pa. 492, 2O Atl. 467 (1923) ; Williams v.
McNally, 39 Wyo. 130, 270 Pac. 41 '(1928). In the four cases permitting recovery by the
promoters, they (other than the litigant) were the principal if not the sole stockholders of the
corporation.. Battelle v. Northwestern Cement & Concrete Pavement Co., 37 Minn. 89, 33
N. W. 327 (1887); Rogers v. N. Y. & T. Land Co., 134 N. Y. 197, 32 N. E. 27 (1892);
Phil H. Pierce Co. v. Rude, 291 S. W. 974 (Tex. Civ. App. 1927) ; Dealers Granite Cor-
poration v. Faubion, 18 S. W. (2d) 737 (Tex. Civ. App. 1929).
20. Control by minority holding is, of course, not infrequent. But the difficulty of de-
termining from the report of the case whether such a situation existed is apparent. "Prin-
cipal stockholder" applies to numerical acquisition only.
21. "Corporation Liable" and "Corporation not Liable" was discarded as a designation of
court decision. What is of interest is whether the corporation became a party to the contract,
and not if the corporation became a responsible party. Its responsibility or liability would be
determined by ordinary contractual rules.
 NOTES AND LEGISLATION

2. Pre-Incorporation Performance
a. Necessary to the Formation or Purpose
of the Corporation
(i) Personal Services .............. 13 I
(2) Tangible Property ............ Io I
(3) Loans ...................... . 5 0
(4) Miscellaneous ................ 3 0
b. Not Necessary to the Formation etc.
(i) Personal Services ............. I 4
(2) Tangible Property ............ 5. 2
(3) M iscellaneous ................ 0
III. Acts of Adoption
i. Present
(i) Acknowledgment or Resolution ... 5 0
(2) Performance by the Corporation .. 19 4
(3) "Acceptance of Benefits" . ....... 25 6
2. Absent ............................... 9 0
8
5 IO

The discussion hereinafter given will be more readily followed if its purpose
is kept clearly in mind, namely, to ascertain which factor or combination of factors
is sufficiently influential and important to cause a court to hold a corporation to be
a subsequent party to the promoter's contract.
Promoter's Subsequent Relation to the Corporation
Apparently, to merely consider the promoter's subsequent relation to the cor-
poration is not decisive. In the ten cases in which the corporation was held not
to have become a subsequent party to the contract, the promoter in eight became
either the principal stockholder, or officer or director of the corporation. And
conversely, the corporation was held a subsequent party to the contract in two
cases though the promoter had no subsequent relation to it.22
Acts of Adoption
28
The presence and character of an act of adoption, or the absence thereof,
is likewise an insufficient criterion. In all ten cases in which the corporation was
held not to have become a subsequent party to the contract of its promoter, some
act of adoption was present. Conversely, in nine cases in which no act of adop-
tion could be found, the corporation was nevertheless held to have become a
subsequent party to the contract.
Nor does a correlation of items I and III, the "promoter's subsequent rela-
tion to the corporation", and acts of "adoption", provide a more decisive criterion.
The corporation was held not to have become a party to the contract in eight

22. In those cases marked "None" on the chart, it is quite possible that the promoter had
some subsequent relation to the corporation, but this was not apparent from the report of the
case. Bridgeport Electric & Ice Co. v. Meader, 72 Fed. 115 (C. C. A. sth, i895) ; Rideout v.
National Homestead Ass'n, 14 Cal. App. 349, 112 Pac. 192 (igio) ; Streator Independent
Tel. Co. v. Continental Tel. Const. Co., 217 Ill. 577, 75 N. E. 546 (1905) ; Wight v. St. Louis
Sugar Co., 146 Mich. 555, io9 N. W. io62 (x9o6).
23. Absence of acts of adoption means inactivity of the corporation, and silence of the
officers or directors. Only cases involving personal services were placed within this division.
 TEMPLE LAW QUARTERLY

case 24 in which the promoter had some subsequent relation to the corporation
and in which there was also some act of adoption. It cannot be concluded, there-
fore, that if the promoter has some subsequent relation to the corporation and
the corporation performs some act of adoption, it will then become a party to
the contract.
There remains for examination and correlation only the question of the
nature of the contract involved.
The Nature of the Contract Involved
x. Post-IncorporationPerformance
The chart indicates rather conclusively that if the contract is performed
after incorporation, the corporation will be held to have become a subsequent
party to the contract, irrespective of the promoter's subsequent relation to the
corporation,1 5 regardless of the subject2 6 matter of the contract, and notwithstand-
ing the absence of an act of adoption.
In only one case of post-incorporation performance was the corporation
not held to be a subsequent party to the contract, and that was the Indiana case
of Davis & Rankin Bldg. and Mfg. Co. v. Hillsboro Creamery Co. 27 There, a
group of individuals associated together and contracted with it construction com-
pany for the erection of a butter and cream factory. The contract stipulated that
a certain amount of money should be subscribed to the enterprise; that each
person should be liable for the amount of. the subscription placed beside his
name on the contract; and that a corporation should be formed. The agreement
further provided that the factory was to be erected upon a site to be chosen by
a committee to be selected, and that the building would be completed ninety days
after the total amount of the subscription had been paid. The agreement was
performed by the individual subscribers and the construction company. After
completion, title to the factory was transferred to the corporation which was
in possession at the time action was brought to recover the unpaid balance due
for the construction of said factory. It was not shown whether the
corporation had made any payments under the contract. The court, in
deciding that the corporation was not a party to the contract, reas-
oned that the liability was intended to be several, and that if it should hold
the corporation to be a responsible party to the contract, it would add to the
several liability a joint one; that the parties had not intended the corporation
to be a party, the form of organization being merely to facilitate the management
of the factory; and that a simple acceptance of benefits would not make the
corporation a party to the contract.
24. Little Rock & Fort Smith R. R. v. Perry, 37 Ark. 164 (1881) ; Davis & Rankin Bldg.
& Mfg. Co. v. Hillsboro Creamery Co., IO Ind. App. 42, 37 N, E. 549 (2894) ; Tryber v.
Girard Creamery & Cold Storage Co., 67 Kan. 489, 73 Pac. 83 (i9o3) ; John L. Whiting &
Sons Co. v. Barton, 2o4 Mass. i69, 9o N. E. 528 (i9io) ; Speedograph Corp. v. Maier, 92
N. J. E. 125, 111 Atl. 325 (192o) ; B. F. C. Morris Co. v. Mason, 17i Okla. 589, 39 P. (2d)
1 (i934) ; B. E. Tift v. Quaker City National Bank, 141 Pa. 550, 21 Ati. 66o (189i) ; Robin-
son v. Puritan Stores, Inc., et al., 48 R. I. 131, 136 Ati. 243 (I927).
25. There were two cases in which the promoter had no subsequent relation to the cor-
poration and the corporation was held to be a subsequent party to the contract. In both cases
the contract was performed after incorporation. Streator Independent Tel. Co. v. Cont. Tel.
Const. Co., 217 Ill. 577, 75 N. E. 546 (i905) ; Bridgeport Elec. & Ice Co. v. Meader, 72 Fed.
'15 (C. C. A. 5th, i895).
26. In five cases where the contract was performed after incorporation there was no act
of adoption and yet the corporation was determined to be a party to the contract. McArthur
v. Times Printing Co., 48 Minn. 319, 51 N. W. 216 (1892) ; Mesinger v. Mesinger Bicycle
Saddle Co., 44 App. Div. 26, 6o N. Y. Supp. 431 (i89) ; Morgan v. Bon Bon Co., Inc., 222
N. Y. 22, 1 8 N. E. 205 (1917) ; Harris Tourist Bed Co. v. Whitbeck, 147 Okla. 1o9, 294 PaC.
Soo (93o) ; Moskowitz v. A. B. Kirschbaum Co., 89 Pa. Super. 274 (1926).
27. io Ind. App. 42, 37 N. E. 549 (1894).
 NOTES AND LEGISLATION

This case may be criticized in the light of the decision in Chicago Bldg. &
Mfg. Co. v. Talbotton Creamery & Mfg. Co.,2" where a printed contract identical
in form with that of the Davis & Rankin case was involved. Here the construc-
tion company brought an action to impress a lien on the factory. The court,
in finding against the corporation, decided that the liability of the corporation
relieved the individuals of their several liability. It stated further that there
was no doubt the parties intended that if a corporation were formed, it was to be
liable, and if not formed, the individuals were to be severally liable. This court
did not regard the stipulation that a corporation was to be formed as denoting
merely a solicitous anxiety on the part of the construction company that the
property of the other should be well managed. It appears that this result is
more in accord with the intention of the parties,-the plaintiff being secured
by a lien on the building, and the individuals, having once paid the amount of
their subscription to the corporation, being relieved of further liability to the
construction company.
2. Pre-IncorporationPerformance
Where the contract is necessary to the formation or purpose of the corpora-
tion, it appears that the corporation will be held a party to the contract even
though fully performed before incorporation. The subject matter of tke contract
is not material; nor is an act of adoption necessary.29 However, since in all the
cases investigated by the writer involving pre-incorporation performance of
necessary contracts, the promoter had some subsequent relation to the corpora-
tion, it cannot be conclusively stated that the corporation will be held a party to
the. contract where such is not the case. The data compiled do not permit an
inference one way or the other. But as indicated above, it can safely be said that
where the promoter is subsequently substantially connected with the corporation,
the corporation will be held a party to the contract if it was necessary to the
corporate formation or purpose, even though completely performed prior to
incorporation.
In only two of the cases reviewed was the holding otherwise. In the one,
Tryber v. Girard Creamery & Cold Storage Co., 0 a Kansas case, the facts were
analogous in all respects to the Davis-Rankin 81 case discussed above except that
the performance was prior to incorporation. The criticism of the Davis-Rankin
case applies equally to this case.
In the other case, Tift v. Quaker City National Bank,"2 the Pennsylvania
court required the majority of promoters acting in concert as a prerequisite to
binding the corporation as a subsequent party to the contract3" Conceptually it
should make no difference if a majority or minority of the promoters contract.

28. io6 Ga. 84, 31 S. E. 8og (1898).

29. In four cases where the contract was necessary to the formation or purpose of the
corporation there were no acts of adoption, yet the corporation was held to be a subsequent
party to the contract. Expansion Gold Mining & Leasing Co. v. Campbell, 62 Colo. 41o, 163
Pac. 968 (1917) ; Meyer v. Nator Holding Co., 2O2 Fla. 689, 136 So. 636 (ig3I) ; Gordon v.
House of Childhood, Inc., 83 Misc. 74, 144 N. Y. Supp. 685 (913) ; Ramsey v. Brooke
County B. & L. Ass'n, lO2 W. Va. 119, 135 S. E. 249 (1926).
30. 67 Kan. 489, 73 Pac. 83 (1903).
31. io Ind. App. 42, 37 N. E. 549 (1894).
32. 141 Pa. 550, 21 At. 66o (i89i).
33. Early Pennsylvania cases mention the necessity of a majority of promoters contract-
ing. Bell's Gap R. R. v. Christy, 79 Pa. 54 (1875). But cf. Penn Electrical Engineering Co.
v. Penn Silk Throwing Co., 281 Pa. 196, 126 Atl. 237 (1924), where two of five promoters
contracted for the delivery of various electrical equipment, and the court in binding the cor-
poration made no mention of the number of contracting promoters.
 TEMPLE LAW QUARTERLY

If the corporation is to become a subsequent party to the contract, it will do so

because of its own activity and not that of the promoters."4
Thus far, then, it has been indicated that neither the promoter's subsequent
relation to the corporation, nor acts of adoption, nor a combination of these ele-
ments, of and by themselves are decisively important. But if the contract is
performed after incorporation, then that alone is sufficient to make the corpora-
tion a subsequent party to the contract, and all other elements are apparently
unimportant. The same is true if the contract, though performed prior to
incorporation, is necessary to the formation or purpose of the corporation, and
the promoter is a principal stockholder, or officer or director of the company.
Whether the latter element is an essential factor is undetermined from the data
compiled.
There remains one more situation to be examined; that of contracts per-
formed prior to incorporation not necessary to the corporate formation or pur-
pose. Here the subject matter of the contract is important. If personal services
were involved the corporation will, in all probability, be held not to have become
a party to the contract, irrespective of an act of adoption,3 5 and irrespective of
the promoter's subsequent relation. "'
But, if the contract involves tangible property, it appears that the corporation
will be considered a contracting party. However, in all seven of the examined
cases in this category, there was some subsequent promoter relation to the corpo-
ration, and some act of adoption. In five of the cases the corporation was held
to have become a party to the contract; in two of them, not a party. Let us
examine these latter two cases.
The case of John L. Whiting & Sons v. Barton 7 involved an action of
replevin against the trustee of the bankrupt corporation to recover merchandise
sold to the corporation. The promoters of the corporation had ordered mer-
chandise from the plaintiff to be delivered to the corporation they intended to
form. Prior to delivery one of the promoters approached the treasurer of the
plaintiff and represented that the corporation was in existence, and that the
material could be shipped directly to it. As a matter of fact, corporate existence
did not begin until three days later, the promoters becoming its principal stockhold-
ers.. The material was shipped and four months credit was given to the corpora-
tion. Subsequently the plaintiff sold other merchandise to the corporation, and
during the course of business apparently no mention was made of any irregularity
in the first shipment. Six months after delivery of the goods, an assignment for
benefit of creditors was made, and bankruptcy followed. It was not shown
whether the corporation had made any payments after the credit period expired.
The court allowed the plaintiff to replevy and stated that since the corporation
was not in existence at the time the contract was made and the goods delivered,
no title passed to it.
Ordinarily a decision that the third party may recover would indicate that
the corporation has become a subsequent party to the contract. However, since
in the Whiting case, the action was replevin, a decision in favor of the third
party meant that no contractual relation existed between it and the corporation.
34. McArthur v. Times Printing Co., 48 Minn. 319, 5I N. W. 216 (1892).
35. In four cases the corporation was not a subsequent party to the contract, and in all of
them there was some act of adoption. Wright v. St. Louis Sugar Co., r46 Mich. 555, 109
N. W. io62 (i9o6) ; Speedograph Corp. v. Maier, 92 N. J. E. 125, II Ati. 325 (i92o) ; B. F.
C. Morris Co. v. Mason, 171 Okla. 589, 39 P. (2d) I (1934) ; Robinson v. Puritan Stores,
Inc., 48 R. I. 13, 136 Alt. 243 (1927).
36. In three cases the promoter became either the principal stockholder, officer or di-
rector: Speedograph Corp. v. Maier; B. F. C. Morris Co. v. Mason; Robinson v. Puritan
Stores, Inc. In one, there was no subsequent relation found: Wright .v. St. Louis Sugar Co.,
all cited note 35, supra.
37. 204 Mas9. 169, 9o N. E. 528 (igio).
 NOTES AND LEGISLATION

The propriety of this view is questioned. In construing the rights and

liabilities of the corporation and the third party, it should make no difference
whether the promoter represents that the corporation is in existence and therefore
shipments can be made directly to it, or that the corporation will shortly be in
existence but shipment may be made immediately in its name. In either case, the
parties intend that the corporation shall be a party to the contract. Moreover, the
corporation desired to become a party to the contract. Assuming the con-
trary, that it resisted the action of the third party who was attempting to make
it a party to the contract, the court might well have found that the corpora-
tion had accepted the benefits of the contract, and that the parties intended that
it should become a subsequent party to the contract, particularly in view of the fact
that the corporation and the third party had numerous subsequent dealings and
no mention was made of the irregularity of the first transaction.
The LittleRock & Fort Smith Ry. v. Perry8 case involved an action for work
done and material furnished. The X R. R. was insolvent and unable to complete
the roadbed. The bond and stockholders of the company, desiring to continue
the road, acquired new capital and purchased the property of the X. R. R. at a
foreclosure sale. Prior to the incorporation of the present defendant, an agent
of the bondholders approached the plaintiff intending to purchase stone and
lumber from him, with which to continue the laying of the road. The plaintiff
refused to sell this material if the X R. R. was the purchaser, believing it to be
a bad credit risk. The agent represented that the bondholders would be liable
for the purchase price, and with this assurance the plaintiff sold the material and
laid part of the roadbed. The defendant corporation was organized, the bond and
stockholders of the X R. R. becoming the bond and stockholders of the defend-
ant corporation, and the corporation made part payments under the contract.
The court decided that the corporation did not become a responsible party to the
contract, and held that the plaintiff relied solely on the individual credit of the
promoters, and had no intention of looking to the corporation for payment-not-
withstanding the fact that he had accepted part payment from the corporation.
It is submitted that questions of reliance upon individual credit and intention
to bind the corporation are immaterial when the identity of the promoters and
the corporation is the same. 9 In such a case, there exists, in effect, but one
source of payment. However, in the foregoing case, although the promoter's
subsequent relation to the corporation was that of "principal stockholder"-it
may be inferred from the fact that the corporation was a railroad, and that new
capital had been invested in the enterprise, that individuals other than the pro-
moters were interested in the corporation. If so, then the conclusion reached by
the court is a desirable one.
Summary
No conclusive comment upon pre-incorporation contracts (exclusive of stock
subscriptions) can be made solely from the results of a study of suits by the
third party against the corporation; correlation is necessary with those obtained
from a study of suits by the third party against the promoter. Nevertheless, a
summary at this point might be helpful.
38. 37 Ark. 164 (I88I).
39. New England Oil Refining Co. v. Wiltsee, 3 F. (2d) 424 (C. C. A. Ist, 1925), where
the third party expressly told the promoter, who had become the principal stockholder of the
corporation, that he intended to look to him for compensation, but in an action against the
corporation, the third party was permitted to recover. And cf. Balfour, Guthrie & Co. v.
Breslauer, Ramsey & Co., Inc., go Wash. 441, 156 Pac. 398, 399 (1916), a case in this sub-
division binding the corporation. The plaintiff had no knowledge of the formation of the
corporation, and in the subsequent action against it for the balance due under a contract for the
sale of salt delivered to the promoters, the court stated: ". . . but it must be remembered
that no one other than these three persons had anything to do with the organization of the
corporation, nor did anyone else become, in any manner, interested in the corporation, either
as officer or stockholder."
 TEMPLE LAW QUARTERLY

It appears that the corporation will be considered a subsequent party to the

contract if such contract is (i) performed after incorporation, or (2) performed
prior to incorporation but is necessary to the formation or purpose of the cor-
poration. And this conclusion follows irrespective of the relation the time of
performance bears to such other factors as acts of adoption, or the promoter's
subsequent relation to the corporation. Moreover, the promoter's subsequent
relation to the corporation, standing alone, is not a conclusive element, nor is the
presence of an act of adoption decisive.
However, if the contract is performed prior to incorporation and is not
necessary to the formation or purpose of the corporation, then' the subject matter
of the contract must be considered, and if such subject matter be personal services
then the corporation will probably not be held a subsequent party to the contract,
regardless of the promoter's subsequent relation to it, and of whether or not there
has been an act of adoption. If the subject be tangible property, then the other
elements must be considered. Unfortunately in the cases studied having these
characteristics there was present some subsequent relation of the promoter to
the corporation and some act of adoption, so that the importance of either one
of these elements without the other cannot be estimated. It should be noted in
this connection that the corporation was held a party to the contract in five cases.
In all but one of these cases, the act of adoption was merely the acceptance of
benefits, that is,, the retention of the property, and "an analysis of the cases
decided on the theory of acceptance of benefits discloses that the majority of the
corporations involved were closely held, and that the promoters, the directors,
and the stockholders were practically identical." 40
Holding of the Court
Promoter Promoter
Held Liable Held Not
Liable
THIRD PARTY VERSUS THE PROMOTER
CHART.
I. Promoter's Subsequent Relation to the Cor-
poration
i. Principal Stockholder ................ 13 2
2. Officer or Director ................... 2 6
3. None ............................. o 3
II. The Nature of the Contract Involved
i. Post-Incorporation Performance
(i) Personal Services ............... 2 2
(2) Tangible Property ............... 2 4
2. Pre-Incorporation Performance
a. Necessary to the Formation or Purpose
of the Corporation
(i)Personal Services .............. 1 0
(2) Tangible Property ............ 7
(3) Notes Signed by Promoter ..... 1 3
b. Not Necessary to the Formation etc.
(i) Personal Services ............. 1o
(2) Tangible Property ............. 2 I
III. Subsequent Acknowledgment of Claim
i. By the Promoter .................... 3 0
2. By the Corporation (acts of adoption).. 4 7
4o. Ehrich and Bunzl, supra note 2, at 1034. To the same effect, Hall v. Herter Bros.,.
157 N. Y. 694, 5i N. E. iogi (x898).; Heard v. Monroe Sand & Gravel Co., 9 La. App. 568,
121 So. 642 (1928).
 NOTES AND LEGISLATION

'The Nature of the Contract Involved

Let us consider first the nature of the contract. It will be seen from the
above chart (Item II) that a consideration of the contract alone is not decisive.
The promoter may be liable whether the contract is necessary to the corporation
or not, whether it is performed prior or subsequent to formation, or whether it be
for tangible material or personal services. It appears useless to attempt to corre-
late the scattered results obtained from a study of this item.
Promoter'sSubsequent Relation to the Corporation
A consideration of the promoter's subsequent relation to the corporation
will frequently be decisive. The more removed the promoter is from stock con-
trol of the corporation, the greater is the probability that he will not be liaible
on the contract. Thus, in thirteen of the fifteen cases in which he became the
principal stockholder, he was held liable on the contract; in two of the eight
cases in which he became an officer or director, he was liable; but in no case
was he liable in which he had no subsequent relation to the corporation. If
we want to say, as we do, that the promoter is liable on the contract should
he subsequently become the principal stockholder of the corporation, but not if
he become an officer or director or has no subsequent relation to the corporation,
then we must be prepared to explain four cases, two in which he was held not
liable although he was a principal stockholder 4 2 ; and two in which he was liable
although only an officer or director.4" The holdings in the latter two cases are
readily explained; the First NationalBank of Marshalltown case,4" because there
existed a statutory prohibition of corporate liability for the type of contract
created by the promoter; and in the Shanks v. Clark case,45 because the corpora-
tion had been dissolved prior to litigation.
There remains, therefore, for explanation only the two cases in which the
promoter was held not liable on the contract although a principal stockholder in
the corporation. Probably other elements were present which rendered them
exceptions to the rule. However, these elements ar not to be found in the contract
involved; one case concerned liability upon notes signed by the promoter, with
performance prior to incorporation; and the other involved tangible property
and performance after incorporation. On the other hand, in both cases the
corporation had subsequently acknowledged the claim of the third party (adopted
the contract), and the third party had accepted part payment from the corpora-
tion. However, part payment by the corporation does not necessarily release
the promoter from liability. In four cases in which the corporation subse-
46

quently acknowledged the claim of the third party by partially performing under
the contract, the promoter was held liable; in three 41 of the four the promoter
became the principal stockholder of the corporation.
Thus it appears that if the promoter becomes the principal stockholder in
the corporation, that alone is sufficient to make him liable, regardless of the
41. Whitney v. Wyman, 1O U. S. 392 (1879) ; Hersey v. Tully, 8 Colo. App. i1o, 44
Pac. 854 (1896) ; Burress v. Montgomery, et al., 23 Ga. App. 590, 99 S. E. 143 (1919).
42. Ivy v. Binswanger & Co., 141 Tenn. 568, 284 S. W. 74 (i919); Am. Iron & Wire
Works v. Fischer, iog Wash. 279, 186 Pac. 877 (920).
43. Shanks v. Clark, 175 Ark. 883, 300'S. W. 453 (1927) ; First National Bank of Mar-
shalltown v. Church Fed. of Am., 129 Iowa 268, io5 N. W. 578 (z9o6).
44. Ibid.
45. 175 Ark. 883, 300 S. W. 453 (1927).
46. First National Bank of Marshalltown v. Church Fed. of Am., 129 Iowa 268. 105
N. W. 578 (19o6) ; Tobias v. Wierck, 21 Misc. 763, 48 N. Y. Supp. 146 (1897) ; Wells v.
J. A. Fay & Egan Co., 143 Ga. 732, 85 S. E. 873 (1915) ; Fentress v. Steele & Sons, 11o Va.
578, 66 S. E. 870 (1910).
47. Tobias v. Wierck; Wells v. J. A. Fay & Egan Co.; Fentress v. Steele & Sons, all
cited note 46, supra.
 TEMPLE LAW QUARTERLY

nature of the contract involved. Whether this is true irrespective of the subse-
quent acknowledgment of the claim by .partial performance or payment on the
part of the corporation, cannot be stated with positive assurance.
For the sake of uniformity in the chart, certain other factual elements in the
cases were not itemized, to wit, the signature on the contract, and the condition
of the corporation at the time of the litigation. Had they been included, the
cases would have been grouped in the following manner:
Promoter Promoter
Held Liable Held Not
Liable
Signature on the Contract
I. Official Capacity ................. 7 8
2. As Individual ................... 8 3
Condition of Corporation
I. Solvent ......................... 5 8
2. Insolvent . ...................... 7 2
It will be seen that these elements are not decisive, of and by themselves.
It may be remarked here that "Signature on the Contract" and "Subsequent
Acknowledgment of Claim," (see chart) are fore- and hindsight indications of
an intention to rely upon the corporate or individual credit, which factor is stated
to be of primary importance in an action by the third party against the promoter.' 8.
CONCLUSION
In a study of this nature, one is apt to lose his way in the maze of particular
instances and come to the. inevitable conclusion that each case rests upon its
particular facts. However, the constant recurrence of certain facts warrants
a few pertinent generalizations.
Upon examination of the results of this study concerning pre-incorporation
contracts other than stock subscriptions, it appears that:
i. The corporation will be held to have subsequently become a party to
the contract when:
(a) The contract is performed after incorporation; or
(b) The contract is performed prior to incorporation but is neces-
sary to the formation or purpose of the corporation; or
(c) The contract is performed prior to incorporation, is not neces-
sary to the corporation, but involves tangible property, and the promoter
has some subsequent relation to the corporation.
48. In this connection see O'Rourke v. Geary, 207 Pa. 240, 242, 56 Atl. 541, 542 (19o).
The court states the promoter may: "(i) Take on its (corporation) behalf an offer from the
other, which, being accepted after the formation of the company, becomes a contract. (2)
Make a contract at the time binding himself, with the stipulation or understanding that if a
corporation is formed it will take his place, and that then he shall be relieved of responsibil-
ity, or (3) bind himself personally without more and look to the proposed corporation, when
formed, for indemnity." The court then disposes of the first possibility in the instant case
by pointing out that: ". . . the writing is not a mere naked offer . . ., because work was
certainly to be begun and probably completed before it was possible that this corporation
should come into existence." This appears to eliminate all opportunity for the promoter to
escape liability under a contract requiring pre-incorporation performance unless there is some
stipulation or understanding to that effect. It may be noted that in only two of the cases
marked on this chart in which the promoter was not liable on the contract, did the contract
stipulate that the promoter was to be relieved of liability. [Ivy v. Binswanger & Co., 141
Tenn. 568, 214 S. W. 74 (igig) ; Burress v. Montgomery, 23 Ga. App. 59o, 99 S. E. 143
(1919) note 41.] Whether an oral understanding that the promoter would be relieved of
liability, made in conjunction with a written contract would be of any value to the promoter,
see Fentress v. Steele & Sons, 1io Va. 578,'66 S. E. 870 (1910).
 NOTES AND LEGISLATION

2. The corporation will not be held to have subsequently become a party

to the contract when it is performed prior to incorporation; is not necessary
to the corporate formation or purpose, and involves personal services,-
apparently irrespective of the promoter's subsequent relation to the corpo-
ration.
3. The promoter will be held the responsible party to the contract when
he has become the principal stockholder in the corporation.
4. The promoter will not be held the responsible party to the contract
when:
(a) He has subsequently become merely an officer or director; or
(b) Has no subsequent relation to the corporation.
Certainly these charts show that the corporate activity in adopting the pre-
incorporation contract of its promoter is an unimportant consideration in the
decisions of the courts. It is unfortunate that the cases should be inconsistent
within themselves-the rationale demanding the presence of certain elements, the
conclusion ignoring them. As has been aptly remarked, " , . . this process
nullifies the salutary effect of these modem decisions as precedents and tends
to weaken the very rules of law they seek to uphold." 4
S. B.C.

Rights of Adopted Children to Inherit From Adoptive Relatives in

Cases of Intestacy
The authorities agree that adoption was unknown to the common law.'
Any right which an adopted child has to inherit from its adopting parents or
from its adoptive relatives depends entirely upon statutory provisions. Legal
adoption was unknown in Pennsylvania prior to the Act bf 1855.2 By that Act
an adopted child was given the right to inherit from its adopting parents on an
equal basis with natural children $; and further, natural children and adopted
children were given the right to inherit from and through each other.' In 1917
the Pennsylvania legislature removed the matter of inheritance from the adoption
statutes, and thereafter inheritance by adoption in cases of intestacy was con-
trolled by the Intestate Act.5
In discussing the rights adopted children have, in cases of intestacy, to inherit
from the relatives of the adopting parents, it is essential that the words of the
relevant section of the Intestate Act of 1917 be carefully noted.
Section i6 provides 1:
"(a) Any minor or adult persons adopted according to law, and the
adopting parent or parents shall, respectively, inherit and take, by devolution
from and through each other, personal estate as next of kin, and real estate
as heirs, under the provisions of this act, as fully as if the person adopted
had been born a lawful child of the adopting parent or parents.
49. Ehrich and Bunzl, supra note 2, at io46.

x. Ballard v. Ward, 89 Pa. 358 (1879) ; Session's Estate, 70 Mich. 297, 38 N. W. 249
(x888) ; Butterfield v. Sawyer, 187 Ill. 598, 58 N. E. 6o2 (i9oo).
2. Act of May 4, 1855, P. L. 43o, repealed by Act of April 4, 1925, P. L. 127, 1 P. S. § i.
3. Leinbach's Estate, 241 Pa. 32, 88 Ati. 67 (1913).
4. Senft's Petition, i5 D. & C. 792 (Pa. 1930) ; Burnett's Estate, 219 Pa. 599, 69 AtI.
74 090o8).
5. Act of June 7, 1917, P. L. 429, § 16, 20 P. S. §§ 101, 102.
6. Ibid.