Harrill v. Davis

• Decision Date: 02 March 1909
• Docket Number: 2,805.
• Citation: 168 F. 187
• Parties: HARRILL v. DAVIS et al.
• Court: U.S. Court of Appeals — Eighth Circuit

168 F. 187

HARRILL v. DAVIS et al.

No. 2,805.

United States Court of Appeals, Eighth Circuit.

March 2, 1909

(Syllabus by the Court.)

The general rule is that parties who associate themselves together and conduct a business for profit under a name adopted or used by them for that purpose are liable as partners for the debts they incur under that name.

This general rule governs if the name used be that of a supposed corporation which the associates have attempted but failed to organize according to law.

But a compliance by such associates with the statutes authorizing them to become a corporation exempts them from other individual liability than that prescribed by such laws for debts incurred after they become a corporation authorized to do business as such.

Two exceptions to the general rule that corporators failing to organize legally are individually liable are: (1) Where such associates procure a charter or file articles of incorporation under a general enabling act, secure thereby the color of a corporation, believe they are such, and use the supposed franchise of their corporation, and third parties deal with them as a corporation, they become a de facto corporation, which exempts them from individual liability to such parties, although there are defects in their incorporation. (2) Projectors of a corporation to be organized who inform third parties that they are contracting for such a corporation and assure them that the obligations incurred will become the obligations of the future corporation may escape individual liability to such third parties for obligations thus incurred for services necessary to effect the corporate organization and for machinery and other property necessary to the commencement of the contemplated business of the corporation, where the corporation is subsequently organized, takes the benefit of such contracts, and assumes the obligations.

When the fact appears that parties associated themselves together and incurred liabilities in the conduct of a business under a certain name, the legal presumption is that they are governed by the general rule and are liable as partners, and the burden is on them to prove that they are duly incorporated or that they fall under some exception to the general rule.

Color of legal organization as a corporation, such as a charter or the filing of articles of incorporation under some law, and user of the supposed corporate franchise in good faith, are indispensable to the existence of a de facto corporation which will exempt from individual liability those who actively conduct it.

Neither the execution of articles which are not filed, nor statements nor beliefs of the promoters that they are a corporation, nor the treatment of themselves by themselves and by those who deal with them as a corporation, nor all these together, will exempt those who actively conduct the business under the assumed name of such a nonexistent corporation from individual liability for the debts they incur.

One who deals with a corporation de facto may be estopped from denying its existence as a corporation de jure.

But no one is estopped by dealing with parties as a corporation who are actively conducting business for profit under an assumed corporate name when they have no charter, have filed no articles of incorporation, and procured no color of legal organization as a corporation, from denying that they constitute a corporation of any kind or from enforcing their individual liability for the debts they incur under such a name.

A corporation organized for the purpose of 'buying selling, leasing and dealing in lands, securities, bonds notes, stocks and other negotiable paper and also buying and selling general merchandise' has no corporate power to build and operate cotton gins or to subscribe for stock in and form another corporation for that purpose.

The adoption of a statute previously in force in some other jurisdiction is presumed to be the adoption of the interpretation thereof which had been theretofore placed upon it by the judicial tribunal whose duty it was to construe it.

The fatuous choice of a fancied remedy that never existed, and the futile pursuit of it until the court adjudges that it never had existence, is no defense to an action to enforce an actual remedy inconsistent with that first invoked.

The four defendants agreed in April or June, 1902, to take specified shares in a $10,000 enterprise for the purpose of building a cotton gin and carrying on the business of buying ginning, and selling cotton, and to organize a corporation for this purpose. In June or July, 1902, they commenced to buy material and labor of the plaintiff and to build their cotton gin. In September, 1902, they commenced to buy cotton and in the first days of October to operate their cotton gin. They transacted a business with the plaintiff consisting of the purchase of lumber, materials, and labor for their buildings and of dealing in cotton with it which amounted to several tens of thousands of dollars, and they remained indebted to it over $5,000, of which $4,700 was incurred prior to December 22, 1902, when they first filed articles of incorporation in one of two places required by the statute. During all this time they treated themselves, and the plaintiff treated them, as a corporation.

Held: The defendants did not become a corporation de jure because they failed to file their articles in both the places required by the statute; (2) they did not become a corporation de facto before they filed their articles on December 22, 1902, to such an extent as to exempt them from individual liability because they did not before that time secure any color of legal organization as a corporation under any charter or enabling act; (3) they were liable individually as partners for that part of the plaintiff's claim incurred prior to the filing of their articles.

The Western Investment Company brought this action for a balance due it upon an account for lumber and materials sold, cotton handled, and services rendered to Walter B. Mann, Frank M. Davis, Robert S. Davis, and James G. Knight, as partners doing business under the firm name the 'Coweta Cotton & Milling Company.' The defendants denied the partnership and their liability, and averred that the indebtedness in question was that of the milling company and that that company was a corporation. The evidence established these facts: One Naylor was the president, and Frank M. Davis was the vice president and general manager, and Naylor, Davis, Edwards, and Wallace were directors, of the Western Investment Company. There were 1,000 shares of the capital stock of that company, of which Naylor owned 520, Davis, Edwards, and Wallace 80 each.

In April or June, 1902, Mann, Frank M. Davis, Robert S. Davis, and Knight agreed to embark in a $10,000 enterprise for the purpose of building a cotton gin, buying, ginning, and selling cotton, that Mann should take two-fifths of this undertaking and the other three members one-fifth each, and that Frank M. Davis should take his fifth for the Western Investment Company. Neither the Western Investment Company nor any of its directors ever authorized Davis to take this stock on its behalf, and he never reported to the company that he had so taken it until January, 1903, after the indebtedness here in question had been incurred, and at about the time when the milling company ceased to operate its gin. He testified that he had some conversation with Edwards and Wallace about his taking this stock for the corporation, but that he never mentioned it to Naylor, the president, who held a majority of the stock. In February, 1903, after the milling company had ceased to operate its gin, Davis caused an entry of a credit of $1,150 to that company to be entered upon the account books of the investment company on account of this stock, and the investment company subsequently repudiated this charge and charged the $1,150 back to the milling company.

In April or June, 1902, F. M. Davis, on behalf of the investment company, agreed with the other defendants to furnish to them materials to build the cotton gin, and in June or the following month the plaintiff commenced to furnish materials and to render its services for this purpose, which were received by Knight as the representative of the defendants and used by him to construct the cotton gin and to carry on the business which the defendants were conducting. The price of these materials and services were charged upon the books of the investment company to Coweta Gin Company and the Coweta Gin cotton account.

On September 3, 1902, three of the defendants met and signed articles of incorporation as the 'Coweta Cotton & Milling Company' and a declaration of the purpose of the incorporation, which the statutes required to be verified by the signers and to be filed with the clerk of the Court of Appeals and with the clerk of the judicial district in which the contemplated corporation was to do business. This declaration was verified by Mann on November 10, 1902, and by Frank M. Davis on December 10, 1902, and it was filed with the clerk of the Court of Appeals on December 22, 1902, and was never filed elsewhere. The balance of indebtedness due to the investment company is about $5,000 and interest, and all of it but a few hundred dollars was incurred before the articles of incorporation were filed. Frank M. Davis, as general manager of the investment company, treated the milling company as a corporation all the time during which this indebtedness was contracted, and never charged any of it to himself or his associates. He and other witnesses testified that the milling company received the benefit of all materials and services furnished by the plaintiff, and that ...