Cranson v. International Business Machines Corp.

• Decision Date: 30 April 1964
• Docket Number: No. 245,245
• Parties: Albion C. CRANSON, Jr. v. INTERNATIONAL BUSINESS MACHINES CORPORATION.
• Court: Maryland Court of Appeals

Page 477

234 Md. 477

200 A.2d 33

Albion C. CRANSON, Jr. v. INTERNATIONAL BUSINESS MACHINES CORPORATION.

No. 245.

Court of Appeals of Maryland.

April 30, 1964.

William J. Brannan, Jr., Silver Spring (Kardy, Brannan & Neumann, Silver Spring, on the brief), for appellant.

Henry J. Noyes, Rockville, for appellee.

Before HENDERSON, HAMMOND, HORNEY, MARBURY and SYBERT, JJ.

HORNEY, Judge.

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 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 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. Trustees of etc. Methodist Episcopal Church, 46 Md. 359 (1877); Regester v. Medcalf, 71 Md. 528, 18 A. 966 (1889); Bonaparte v. Baltimore, H. & Lake Roland R. R. Co., 75 Md. 340, 23 A. 784 (1892); Jones v. Linden Building Ass'n, 79 Md. 73, 29 A. 76 (1894); Maryland Tube & Iron Works v. West End Imp. Co., 87 Md. 207, 39 A. 620, 39 L.R.A. 810 (1898); Cleaveland v. Mullin, 96 Md 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 of 46 Md.), 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 of 87 Md., at p. 623 of 390) the statements in Jones v. Aspen Hardware Co., 21 Colo. 263, 40 P. 457, 29 L.R.A. 143 (1895), ³ with approval for the propositions 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 prerequisites to the exercise of such powers," went on to say (at p. 218 of 87 Md., at p. 623 of 39A) 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 of 110 Md., at p. 22 of 73A) 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. Chesapeake & O. Canal Co. v. Baltimore & O. Railroad Co., 4 Gill. & J. 1 (1832); Hammond v. Straus, 53 Md. 1 (1880); Murphy v. Wheatley, 102 Md. 501, 63 A. 62 (1906).

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 stock holder 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 of 53 Md.):

'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, or wilful omission to comply with the...