Humphreys v. Mooney

5 Colo. 282, 1 Colo. L. Rep. 193

• Court: Supreme Court of Colorado
• Decided: December 15, 1880
• Status: Published

Opinion

Stone, J.

The first question presented in this case, is whether the appellee, the plaintiff in the court below, could question the validity of the corporation, in a suit upon a contract he had made with it.

A few cases may be found in which, under the given facts, the legal existence of a corporation has been allowed to be questioned in a collateral proceeding; but as a general rule it seems quite well settled that the validity of the existence of a corporation cannot be questioned collaterally.

Several distinctions, however, have been made in the cases covered by both the general rule and the exceptions, dependent upon the conditions of the charter, the terms of a general incorporation statute, whether the suit is between the coloration and one of its members, or a stranger, what the particular object of the suit may be, and whether the de jure existence of the corporation is sought to be questioned, or whether it be the regularity of the organization of a de faeto corporation that is attacked.

Without going into an examination of the cases to illustrate all these distinctive phases of the subject, it is sufficient to notice only the most important distinctions bearing upon the case in hand—the difference between the illegal existence of a corporation ab imitio on the one hand, and on the other hand an assumed corporation based upon a charter or statute lawfully authorizing it, but irregularly or defectively organized.

In the former case it has been held that one dealing with a corporation is not estopped to deny its legal existence on the ground that there was no valid law or authority for the organization, or that the assumed organization was in the face of a prohibition by statute nisi, in that there was a failure to comply with an express condition precedent requiring certain acts to be performed before the corporation can be considered m esse, or its transactions possess validity. Mokelumne H. M. Co. v. Woodbury, 14 Cal. 427; Lessee of Frost et al. v. Frosburg Coal Co. 24 How. 283; Heaston v. Cincinnati, etc. R. R. Co. 16 Ind. 279; Abbott v. Omaha Smelting Co. 4 Neb. 423; Hildreth v. McIntire, 19 Am. Deci’s and notes, 67; Stowe v. Flagg, 72 Ill. 401.

In Heaston v. Cincinnati R. R. Co. supra, it is said that the issue of mil tiel corporation is upon the existence of a cle facto corporation where it is de jiore authorized, and that upon this fact rests the doctrine of estoppel to deny the existence of the corporation in certain cases, the estoppel goes to the mere defacto organization, not to the question of legal authority to organize.

While some diversity of opinion is found in the courts of different States as to when the existence of a corporation may be questioned, if at all, in a collateral proceeding, the authorities are almost unanimous in holding that such collateral inquiry cannot be made touching the corporate existence of a de facto corporation where there was lawful authority for its creation. Cochran v. Arnold, 58 Pa. St. 405; Rondell v. Fay, 32 Cal. 351; Baker et al. v. Adm'r of Backus, 32 Ill. 110; Tarbell v. Page et al. 24 Ill. 46; Jones v. Cin. Type Foundery, 14 Ind. 89; Hubbard v. Chappel, Ibid. 601; Heaston v. Cin. etc. R. R. Co. 16 Ind. 279; Mokelumne H. M. Co. v. Woodbury, supra; Washington College v. Duke, 14 Iowa, 17; Slocum v. Providence, etc. Co. 10 R. I. 114; 1 Redfield Law of Railways (5 Ed.), 73; Ang. & Am. Corp. (10 Ed.) Sec. 635.

In the case before us, the appellee, Mooney, brought an action against Humphrey, together with other persons, members of an assumed corporation, to recover a sum of money due upon an obligation given therefor by said company, through its agent, and it is sought to hold the defendant, Humphrey, individually liable as a partner, the defendants being declared against as partners. Defendant’s answer denies the alleged partnership, and sets up the corporation, organized under the general incorporation law of Colorado as the Trenton Dressing and Smelting Company. Plaintiff replies, averring the non-existence of the corporation. The evidence in support of this averment rests upon certain omissions in the articles of incorportion, and alleged irregularities in the organization of the company as a corporation.

In the case of Baker et al. v. The Adm’r of Backus, supra, where a bill was filed against certain defendants, who purported to form a corporation, but who, as alleged, had not complied with the statutes, and the 'prayer of the bill was that the company be decreed to be a general co-partnership; or if it should be declared a corporation, then to be dissolved by order of court, the opinion gives, besides the general rule that a direct proceeding on behalf of the State is necessary in such case, the additional reason that the corporation should be made a party defendant to the action. “ All bodies should be allowed the privilege of being present at their own dissolution,” is the rather striking and forcible language used by Mr. Justice Breese upon this point.

The principal point relied upon as ground for alleged noncompliance with the statute and consequent illegality of the corporation, is based on the latter clause of Sec. 98 of the corporation law of Colorado relating to mining companies, and which reads as follows:

“ The certificate of incorporation of any such company, in addition to the other matters required in this act to be stated therein, shall contain a statement that the stock of such company is either assessable or non-assessable, and each certificate of stock issued by any such company shall have plainly printed on the face thereof the word £assessable’ or £non-assessable,’ as the case may be.”

This statement was omitted in the articles of incorporation of the Trenton Dressing and Smelting Company, and this is urged as fatal to the legal existence of the company as a cor poration.

By reference to the 2nd and 3rd sections of the Corporation Act, it will be seen that after enumerating the specifications which the articles of association shall contain, itis provided that a copy shall be filed with the Secretary of State, and a copy wiih. the recorder of each of the counties where the principal business is to be carried on,'and that when so filed the Secretary of State shall record and preserve the same in his office, and that a certified copy thereof under the seal of the State shall be evidence of the existence of the company.

It will be observed that none of the statements which the certificate of incorporation is directed to contain, are required to be made as condition precedent to the commencement or continuance of business by the corporation.

In the case of Abbott v. The Omaha Smelting Company, supra, cited by the appellee as an authority against the validity of the corporation, the decision turned upon the particular language of the statute of Nebraska, which required that the corporation “ previous to the commencement of any business except its own organization”* * * must adopt articles of incorporation and have them recorded in the office of the clerk of the county, etc., and it was held that the company was not in existence for the purpose of transacting business as a corporation until such record had been made, and the court point out the distinction between that case .and the California case of the Mokelumne Co. v. Woodbury, supra, wherein it is laid down that “ there is a broad and obvious distinction between such acts as are declared to be necessary steps in the process of incorporation, and such as are required of the individuals seeking to become incorporated, but which are not made prerequisite to the assumption of corporate powers. In respect to the former, any material omission will be fatal to the existence of the corporation, and may be taken advantage of collaterally in any form in which the fact of incorporation can be called in question. In respect to the latter, the incorporation is responsible only to the government in a direct proceeding to forfeit the charter. The right * * * to be considered a corporation and the exercise of corporate powers depends upon the fact of the performance of the particular acts named in the statute as essential to its corporate existence.”

The case before us certainly falls within this latter class. The specification respecting the assessability of the stock cannot, in the absence of fraudulent intent, be regarded as essential to the corporate existence in this case. "What the relative importance may be in the several statements directed to be set forth in the articles or certificate of incorporation, or whether the omission of any one or more of them might be considered fatal to the existence of an assumed corporation, or its right to the exercise of corporate powers when inquired into by a direct proceeding for that purpose, we need not now determine.

The evidence in the case embracing a certified copy of the duly recorded certificate of incorporation, containing all the statements enumerated in the statute, except the one in controversy, together with acts of user, at the place where the works of the company were located, was sufficient to establish the conclusion that the company was, at the date of the transaction with Mooney, a corporation de faeto, vested with the power and right to the exercise of all the acts contemplated under its franchise, so far as regards the relation between it and the plaintiff, whose contract with it as such, estops him to now deny its existence as such defacto corporation. Eaton v. Aspinwall, 19 N. Y. 121; Buffalo R. R. Co. v. Carey, 25 N. Y. 77, and cases cited, supra.

Since the validity of the corporation to make the contract in question is thus clearly established, it follows that the defendant, Humphrey, asa member of the corporation contracted with, cannot be held liable as a partner, nor indeed does it follow as a rule of law, if, the legal existence of the corporation could be attacked and overthrown collaterally or otherwise, that the members of such de faeto corporation would be liable as members of a copartnership. The facts in a given case may sometimes warrant a holding of partnership liability, as where an already constituted partnership seeks to become incorporated, and exercises corporate powers without color of right, or where an associated company by deceit or misrepresentation, fraudulently attempts to evade individual liability through a false assumption of pretended corporate authority, or where in respect to the transaction in controversy a corporation in fact intended to assume partnership liability, and especially where in consideration of such known or supposed intent the other party was induced to act in entering into the contract.

I am aware that there is considerable diversity of opinion in the decided cases upon this point. The case of Fuller v. Rowe, 57 N. Y. 26, is an authority for the broad doctrine that parties assuming to act in a corporate capacity without a legal organization as a corporate body, are liable as partners, with the limitation only that the party so held liable must have been a member of the company at the time the contract was made.

In the case of Whipple v. Parker, 29 Mich. 380, where a company organized as a partnership in fact, and had been doing business as such some time prior to the execution of articles for a corporation, the court say: “ Certainly if they were already a partnership before the attempt to form a corporation, they would not by the failure of this attempt cease to be a partnership, but the attempt failing, the partnership continued.”

If the opinion thus expressed was decisive of the question under consideration, and it seems to be intended as such, it greatly weakens the force of what the court immediately add, as follows: “ But suppose they were not a partnership and had not acquired property or done business until these articles were executed, if the articles failed to make them a corporation, then I am inclined to think they would in legal effect, by thus associating themselves together in the purchase of the property for the purpose of carrying on the business, and in carrying it on, become partners in that business.”

It is to be remarked, however, that the suit in that case was for the purpose of equitably settling the respective rights of members of the company to property contributed to the gen eral fund.

In the case of Abbott v. The Omaha Smeltiny Company, cited supra, which involved the question of the partnership liability of Abbott as a member of a company which was held not to have been a corporation either cié jure or defacto, the court upholds the instruction of the court below which submitted the question of such partnership liability to the jury, as a fact to be determined upon the evidence touching that point.

It is held in Tarbell v. Page et al. 24 Ill. 47, that the dissolution of a corporation does not change the relation of the stockholders to the creditors of the company”; that it does not operate to convert them into mere partners; and that their liability as stockholders is not.changed beyond that imposed by statute.

The case of Stowe v. Flagg et al. 72 Ill. 397, is very like that of Whipple v. Pearson, supra, involving the property rights, i/nter sese, of parties who had associated in writing for a manufacturing purpose, and had failed in an attempt to become a corporate body, and the court held that the property involved had never been changed into corporate property, but that under the facts in the case, belonged to the parties as an association under their united agreement.

In Hubbard and Wife v. Chappel, 14 Ind. 601, it is held, that if the name in which the contract may have been made simply prima faeie, imply a corporation, while in fact the company is not assuming to be a corporation, but only a partnership, this fact may be shown.

The case of Fay et al. v. Noble et al. 7 Cush. 189, is a strong authority and directly in point, that a partnership liability does not attach to the members of an irregularly organized or illegally assumed corporation.

In the case at bar there is no charge of concealment, misrepresentation or fraud on the part of the company nor any of its members, nor the agent through whom the contract was made. There is no evidence of intent on the part of the company to assume a partnership liability, nor that the appellee supposed there was any1’ such assumption. He accepted the obligation of the company as the engagement of a corporation clothed with a statutory liability only. Treating with it as such, he is presumed to have known the extent of that liability, and to have acted with reference thereto. The doctrine of a partnership liability in such a case is not founded in law or reason, and is repugnant to the very purposes of the statute authorizing a corporation, one object of which is to limit individual liability. “It cannot be, in tbe absence of all fraudulent intent, that such a legal result follows as to fasten on parties involuntarily for such a cause, the enlarged liability of copartners; a liability neither contemplated nor assented to by them. The very statement oft he proposition carries with it a sufficient refutation. * * * Corporations are known and recognized legal entities, with rights and powers clearly defined and well understood, and wholly distinct and different from those of individuals and copartnerships. Persons who subscribe for and take stock in them are subject to certain fixed and limited liabilities which they voluntarily assume, and those liabilities are not to be enlarged so as to affect innocent parties beyond the letter of the law. A copartnership cannot take upon itself the functions of a corporation, nor can the latter or its members be made subject to the liabilities of a copartnership in the absence of statutory provisions imposing such liabilities. The personal liability of a joint stock company or copartnership is inconsistent with the character and nature of a corporation, of which the law properly recognizes only the creature of the charter, and knows not the individuals.” Fay v. Noble, supra.

Looking into the statutes, to the provisions of which the corporation in question was made subject, we find various enactments by which officers and members are made individually liable for debts contracted by corporations in case of noncompliance with certain requirements, but no provision is made by which such individual liability attaches by reason of any omission to organize in the manner prescribed by the incorporation law. The statute, it is true, prescribes the mode of organization, and what the articles of incorporation or charter certificate shall contain, but annexes no penalty or liability to the neglect or omission to strictly comply with it.

Corpoi’ations as a rule, and especially in this Staté, where so very many are created under our general incorporation law representing and controlling the largest share of the wealth and industries of the State, and bearing either good or bad fruit, according to the character and purpose of the body, should be held to a strict accountability for their corporate acts. Many of these doubtless are liable to a decree of dissolution and forfeiture of their franchise in a proceeding for that purpose; while on the other hand, considering not alone the mere legal rights of corporations, but that owing to the peculiar nature of our mineral and other resources of wealth and industry, that depend for their successful development upon such aggregation of capital, intelligence and unity of action, wherever a body of persons becomes lawfully incorporated or makes a bona fide attempt so to do, and by actual user and honest intent, evinces the legitimate purpose of such organization, no strained construction ought to be interposed against affording acknowledged protection to the corporate rights of stockholders who contribute their means to irseful enterprises.

It is also objected against the validity of the Smelting Company that its corporators and officers were non-residents of this State; that the subscription and acknowledgment of the articles of incorporation were made, and meetings of the officers were held at a place without the State. These objections, we think, are not well founded. There is nothing in the statutes requiring corporators and officers, any more than stockholders, to be residents of the State granting the charter, and, indeed, it would be a rather strange law if there were such an one. But even such a provision would, in the case of a de facto corporation, be met by the authority of the Supreme Court of Pennsylvania in the Delaware & Hudson Canal Co. v. The Penn. Coal Co. 21 Pa. St. 131, 146, where it is held, that “conceding that the president aud managers of the Pennsylvania Coal Co. at the time of entering into the contract were resident citizens of New York, and not residents or citizens of Pennsylvania, and that they were therefore ineligible, it does not follow that the agreement is not binding on the defendant. The officers may have been ineligible, but this cannot be taken advantage of in this collateral proceeding. It is sufficient for the plaintiff and all third persons that they have dealt in good faith with the officers defactoP

The subscription and acknowledgment of the articles of incorporation, properly authenticated, may, we think, be made without as well as within the State. The corporation submits itself to the laws of Colorado when it assumes to incorporate and act thereunder in substantial compliance with the statute.

Our statute does not in terms require the certificate of incorporation to be executed within the limits of the State,-nor does it in terms require a meeting of the corporators prior to the execution of the certificate.

The essential pre-requisites to the formation of a corporation are a certificate in form and substance as prescribed by statute; that it be signed by the corporators; that it be acknowledged before some officer competent to take acknowledgments of deeds, and that it be filed in the office of the Secretary of State, and a copy in the office of the recorder of deeds of the county in which the principal business is to be carried on. The chapter on conveyances provides the manner in which, and the officers before whom conveyances and contracts aifecting title to real property may be acknowledged without the State, as well as within the State. The execution of a certificate of incorporation under the statute, is analogous to the execution of a deed of conveyance, and neither instrument is of any validity without a delivery.

It is the filing of the certificate that brings the corporation into existence. This instrument may contain all that the statute requires, its execution may be wholly regular, but the performance of these acts does not constitute a corporation. The mere certificate, like an undelivered deed, is without validity or force—it may be retained by one of the makers, or it may be destroyed—but when filed as the law requires, and recorded in the office of the Secretary of State, the statute declares that ‘‘a copy thereof, duly certified by the Secretary of State, under the great seal of the State of Colorado, shall be evidence of the existence of such company.”

As respects the holding of meetings of directors beyond the limits of the State, section 18 of the Corporation Act provides that such meetings may be lawfully held, provided such provision is made in the certificate of incorporation.

Upon examining the copy of the certificate set out in the record,.it is found to contain in its statement of the places where the business and operations of the company are to be carried on, the following provisions : “ Sixth—The operations of our said company shall be carried on at or near Golden City, Jefferson county, State of Colorado, where the principal office shall be kept, with the privilege of a branch office in the city of Trenton, State of New Jersey, for the holding of meetings of stockholders and directors, and for the transaction of such business as the 'best interests of the company nw require.” Meetings, therefore, of the directors were regular without the State.

Section 6 of the corporation law provides for the election of the directors annually by the stockholders, “at such time and place as shall be directed by the by-laws of the company.” Conceding that meetings of the stockholders without the State, although so directed by the by-laws of this company, are not within the saving clause of the 18 th section of the statute referred to, and.were therefore irregular or illegal, such act, while a violation of the statute, being such, not by express inhibition, but by construction of its contemplated meaning and upon principle, comes within the rule already laid down respecting irregular organization,—that it cannot be taken advantage of in a collateral proceeding by either the corporation or one contracting with it as such.

It is also to be observed that the persons who are named by the corporators in the certificate as directors of the company for the first year, are created such directors by operación of law, and not by election of the stockholders after the corporation is formed, and hence it might be possible for the corporation to begin and go on in business for a year without any meeting of the stockholders, such directors, under the provisions of sections 5, 6, 7 and 8, being empowered to choose the president and other officers, adopt by-laws, and “ manage the affairs of such company for the first year of its existence.”

The omission to record a duplicate of the certificate in the county where operations of the company were carried on, is met by the case of the Mokelumne H. M. Co. v. Woodbury, 14 Cal. 426, and also by the case of Tarbell v. Page, 24 Ill. 46, which is still stronger, there being in that case no certificate filed with the Secretary of State, and the court say:

“Whilst it may be true that a failure to file this certificate in the Secretary of State’s office may be such a nomcompliance with the law as would authorize the People to sustain a writ of guo wa/rranto or seire facias, and to oust the corporators from the exercise of their franchises, it does not necessarily follow that it is not, as to third persons, a corporation.”

The judgment in favor of appellee rendered by the court below is for these reasons erroneous, and must be reversed.

Judgment reversed.