Thank You For Submiting Feedback!
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, 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.
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. International Business Machines was granted summary judgment in the lower court on the theory that a defectively-formed corporation was neither a de jure nor a de facto corporation, and that Cranson, as a partner, was personally liable for its debts, namely, the balance due on electric typewriters purchased by the corporation.
May an officer of a defectively incorporated association be subjected to personal liability under the circumstances of this case?
After examining the doctrine of de facto corporations, the court reversed, holding that, even though one or more of the requisites of a de facto corporation were absent, application of the estoppel doctrine was not precluded. Neglect in defective formation could not be used by a corporation as a defense to an action to enforce its liabilities, and, since estoppel was based upon the inequity of permitting the denial of corporate existence by those dealing with it as such, International Business Machines was estopped from denying the legality of that which was not even a corporation de facto.