290 S.W. 391 (Tenn. 1926), Crouch v. Gray
| Date | 20 November 1926 |
| Citation | 290 S.W. 391,154 Tenn. 521 |
| Docket Number | . |
| Parties | CROUCH v. GRAY. |
| Court | Tennessee Supreme Court |
Page 391
Certiorari to Court of Appeals.
Suit by Adam B. Crouch against Jos. P. Gray. Judgment for defendant was reversed by the Court of Appeals. On writs of certiorari and supersedeas. Judgment of the Court of Appeals reversed, and suit dismissed.
Wautauga Ice Cream Company was duly incorporated in this state in August, 1921, with a capital stock fixed in the charter at $12,000. After organization and election of officers a creamery plant, formerly owned and operated by one of them, was acquired by the corporation at an agreed valuation of $6,000, in exchange and payment for an equivalent amount of the capital stock. The record shows that the plant property so acquired was needed for the corporate business and that it was not unreasonably valued. The defendant was one of the incorporators, and, at the time of the filing of this bill, a director and the president of the corporation.
Complainant was the landlord of the corporation, and during the two years of its operation collected rent for his premises from the corporation, paid from time to time by its checks. There is no evidence of fraudulent misrepresentations inducing credit from him. Upon the bankruptcy of the corporation, after two years of operation, complainant brings this suit against the defendant, as an officer of the corporation, seeking to enforce individual liability against him for a balance of unpaid rent upon the ground that the capital stock fixed in the charter had not been fully subscribed.
The chancellor denied relief. The Court of Appeals reversed the chancellor and held the defendant liable. Writs of certiorari and supersedeas have been granted, and the cause is before this court for review. The Court of Appeals has decreed liability on the ground that, until the entire capital stock fixed by the charter had been subscribed, the corporation was not authorized to proceed with the general business for which it was chartered, and that those individuals who did business in the corporate name incurred individual liability for the corporate debts.
Two cases recently decided by this court are referred to and relied on to support this holding, the unreported case of Reynolds Tobacco Co. et al. v. Staples & Dyer, Washington Equity, and Eastern Products Corporation v. Tenn. Coal Iron & Railway Co., 151 Tenn. 259, 269 S.W. 4, 40 A. L. R. 1483. In the first of these it was found that the concern purporting to do business as a corporation
Page 392
had never become incorporated. It appeared that less than the five requisite names had been signed to the application for the charter--a fatal defect going to the existence of the corporation. While it appears that the chancellor found also that there was a lack of provision for capital stock, and in his memorandum expressed the opinion that either of these infirmities was fatal, it does not appear that this court did more than affirm the decree of the chancellor in general terms, without specific reference to or discussion of the second ground; and whatever may have been otherwise the scope and effect of the holding of this court in the Eastern Products Case, supra, this court in that case clearly repudiated the doctrine that the obtaining of subscriptions to the capital stock is a condition precedent to the legal existence of the corporation. On page 279 (269 S.W. 4) of the opinion, it was expressly stated that this court does not subscribe to that proposition. With much emphasis the writer of that opinion stressed the distinction between the denial of the legal existence of a corporation and the denial of the right of the corporation, on grounds of public policy, to proceed to create obligations before having made provision therefor in the form of stock subscriptions. This distinction is vital and is supported by quotations from numerous text-books and decisions, referred to in that opinion, and in so far as the holding of the Court of Appeals may be construed to rest upon the proposition that there was no corporation, and that therefore those doing the business incurred individual liability, it is unsupported by that opinion and is apparently without substantial text-book or decision support otherwise. None of the decisions examined go to the extent of holding that the failure to secure subscriptions to the amount of the capital fixed in the articles of incorporation is of itself and alone fatal to the creation of a corporation, in the absence of statutory stipulations to such effect.
However, while apparently recognizing the distinction above referred to, the learned Court of Appeals, giving application to the declaration of this court in the Eastern Products Case that, although fully existing as a corporation, the capital stock fixed in the charter must be fully subscribed before the corporation can lawfully proceed with its general business, reaches the conclusion that, if the business is proceeded with without subscription in full of the capital stock, the officers and directors become individually liable for the debts created. No such question was presented or discussed in the Eastern Products Case, and no such holding was announced. This court in that case went so far only as to refuse, largely on grounds of public policy, to enforce an executory contract of a corporation with a capital fixed in its charter at $2,000,000, when only $800 thereof had been paid or subscribed, which contract involved a liability of approximately $500,000 on the part of the corporation. It was neither held that individual liability attached to the officers of the corporation, nor that a corporation without fully paid or subscribed stock was not itself bound for its debts, nor that it might not enforce a contract which had been executed on its part. Whatever may be the liability effect on the incorporators or officials of proceeding with the general business and creating obligations prior to the obtaining of stock subscriptions, it is clear that no determination of this question has heretofore been announced by this court.
In the Eastern Products Case, having found, as above indicated, that practically no stock had been subscribed as a basis for credit in substitution of individual liability, and finding that the authorities in this country were practically agreed that corporate business should not be proceeded with until this condition subsequent to incorporation had been complied with, the holding of this court was that it would refuse in equity to enforce a purely executory contract. This was by analogy to the refusal of our courts to enforce a contract at the instance of a corporation which was proceeding to do business without the license required for any specific business, such as our statutes exact for the doing of a real estate business, or of a loan business under the act of 1925 (Acts 1925, c. 134). In other words, neither an individual nor a corporation, however completely organized and existent, may enforce rights in the courts when proceeding in disregard of our statutes, or against public policy. However, as before indicated, the opinion in Eastern Products Case, expressions quoted therein from Mr. Justice Lurton in Railroad v. Parks, 86 Tenn. 560, 8 S.W. 842, and from Mr. Justice Beard in Sweeney v. Railroad, 118 Tenn. 314, 100 S.W. 732, and other decisions of this and other courts, and copious excerpts directly in point from text-books, are undoubtedly authority for the proposition that a corporation is proceeding unlawfully in doing its general business and incurring liabilities without having made provision for its capital stock; and in Tennessee, in the absence of any statutory provision for doing business with less subscribed than the amount fixed in the charter, it is held to be unlawful to so proceed until the capital stock fixed by the charter has been fully subscribed. See directly on this point quotations from Green's Brice's Ultra Vires, found in the opinion in the Eastern Products Case, beginning on page 279 (269 S.W. 4).
But, the question now squarely presented for the first time in Tennessee is whether or not individual liability is incurred by the incorporators or officers when the business of the corporation is proceeded with thus unlawfully.
Page 393
An examination of the text-books and authorities outside of Tennessee reveals some confusion on this subject. For example, it is said in Fletcher on Corporations, vol. 1, pp. 607, 608, that incorporators will be held liable individually for debts where no stock has been subscribed. (However, this is not upon the ground that this failure destroyed the validity of the incorporation that there was no corporation to be bound, for on page 605 of the same volume it is expressly stated that the existence of a corporation cannot be attacked on the ground of failure to subscribe stock, which is very properly held to be a condition subsequent.) In support of his text to the effect that individual...
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