Hearth Corp. v. C-B-R Development Co., Inc.

• Decision Date: 19 September 1973
• Docket Number: C-B-R,No. 55753,55753
• Citation: 210 N.W.2d 632
• Parties: HEALTH CORPORATION, Appellant, v.DEVELOPMENT CO., INC., Appellee.
• Court: Iowa Supreme Court

Page 632

210 N.W.2d 632

HEALTH CORPORATION, Appellant, v. C-B-R DEVELOPMENT CO., INC., Appellee.

No. 55753.

Supreme Court of Iowa.

Sept. 19, 1973.

Marlyn S. Jensen, Des Moines, for appellant.

Jerry P. Alt, Duncan, Jones, Riley & Finley, Des Moines, for appellee.

Heard before MOORE, C.J., and MASON, REES, REYNOLDSON and HARRIS, JJ.

MASON, Justice.

Plaintiff, an Iowa corporation, appeals from an adverse ruling on defendant's motion for summary judgment in a law action instituted by plaintiff to recover judgment on an alleged contract. Plaintiff endeavors to enforce a contract entered into during the period of time in which its corporate charter had been cancelled for failure to file an annual report required by sections 496A.121 and 496A.122, The Code.

In one division of its petition filed March 15, 1972, Hearth Corporation declared on a theory defendant breached a written contract purportedly executed on or about December 17, 1971. In the second division it asked recovery on the theory the breach was of an implied contract. In its amended answer, defendant, C-B-R Development Co., Inc., alleged plaintiff 'had ceased to be a corporation competent to enter into any binding agreements cognizable under the laws of the State of Iowa,' and subsequently moved for summary judgment on that ground. Plaintiff responded by way of motion to strike and resistance to defendant's motion for summary judgment.

The record discloses plaintiff's certificate of incorporation was cancelled pursuant to chapter 496A, The Code, on November 19, 1971, and was not reinstated until March 22, 1972. The following portion of section 496A.130 is relevant to the case before us:

'Upon the issuance of the certificate of cancellation, the corporate existence of the corporation shall terminate, subject to right of reinstatement as herein provided and the corporation shall cease to carry on its business, except insofar as may be necessary for the winding up thereof or for securing reinstatement and the right of the corporation to the use of its name shall cease * * *. The cancellation of the certificate of incorporation of a corporation shall not take away or impair any remedy available to or against such corporation, its directors, officers or shareholders for any right or claim existing or any liability incurred prior to such cancellation, but no action or proceeding thereon may be prosecuted by such corporation until it shall have been reinstated. * * * Unless the corporation is reinstated, the corporation, upon issuance of the certificate of cancellation, shall proceed to liquidate its business and affairs as provided by this chapter in cases of dissolution * * *.'

The trial court sustained defendant's motion for summary judgment without ruling on the motion to strike. Plaintiff appeals assigning two errors for reversal: (1) the trial court erred in sustaining defendant's motion for summary judgment; and (2) the trial court erred in not striking that portion of defendant's amended answer challenging plaintiff's competency to sue.

I. Plaintiff raises four distinct arguments in support of its first assigned error.

First, it contends 'corporate existence' may be attacked only by the state in a quo warranto action, unless the action is brought by one of those parties specified in section 496A.6, The Code, or the issue is raised as an 'emergent' issue in fraud or comparable cases.

It has been held an action in quo warranto under rule 299, Rules of Civil Procedure, is appropriate to test the legality of the corporate existence of a corporation, provided the public interest requires such action. State ex rel. Maley v. Civic Action Comm., 238 Iowa 851, 28 N.W.2d 467.

Plaintiff relies on Sherwood v. Greater Mammoth Vein Coal Co., 193 Iowa 365, 378--379, 185 N.W. 279, 284--285, wherein the plaintiff sought an injunction against a corporation. The trial court held for defendant and this court affirmed, stating as follows:

'* * * The instant case is an action in equity and for injunction, in which appellant seeks to test the existence of the coal company as a corporation. The statute in regard to injunctions is section 4354. The action of quo warranto is provided for by section 4313 of the Code. Under this an ordinary action in the name of the state may be brought against a corporation acting as such, or exercising powers not covered by law, and so on. We held in Harvey v. Kirton, 182 Iowa 973, 164 N.W. 888, and Nelson v. School District, 181 Iowa 424, 164 N.W. 874, that in such a case the action of quo warranto is exclusive. In both cases an injunction was asked and denied, because the matter of testing the legality of a corporation or the election of officers therein must be determined by an action in quo warranto by the state. In the Nelson case we said, 181 Iowa, at page 434, 164 N.W. 878:

"We think the rule equally well settled and sound that private citizens cannot raise such question by any form of direct attack. Quo warranto is the proper, and in the absence of statute the exclusive, proceeding to determine the question of the legal existence or validity of the organization of a public corporation. * * * The essential point is that the right to draw in question the legality of an existent body of the character mentioned is the prerogative of the state, and not of private litigants. * * * It is an application of the principle that public rights are to be vindicated by public authority. * * * The private litigant should not be permitted to reach the same result by a change of form of action." (Emphasis supplied)

Sherwood is precedential support for the proposition the legal existence or validity of a corporate organization, whether public or private, must be tested by an action in the nature of quo warranto. Walling v. Iowa Ins. Co., 228 Iowa 503, 513--514, 292 N.W. 157, 162--163. The rationale of Sherwood is well stated by the emphasized portion of the above quotation from the Nelson case.

If a party seeks merely to test the legality of the corporation, his exclusive remedy is by quo warranto. Here, however, defendant did not institute an equitable proceeding to redress a public wrong, to test the legality of plaintiff's existence. Rather, it urged as a defense the fact plaintiff lacked corporate existence because of the action by the state pursuant to chapter 496A, The Code, it did not have capacity to enter into the alleged contract and sought a summary judgment in light of that fact. As this court stated in Walling, supra, quo warranto is not the exclusive remedy 'when the challenge to corporate legality is merely a casual issue in a case involving enforcement solely of private rights which do not relate to questions of a public interest.' Id. 228 Iowa at 516, 292 N.W. at 163.

Sherwood and Walling both indicate that a question as to corporate existence can be raised by a private litigant in an action involving private rights; an action in the nature of quo warranto is appropriate only when public interests are involved. The applicable rule is stated in State ex rel. Robbins v. Shellsburg Co., 243 Iowa 734, 737, 53 N.W.2d 143, 144, in this manner: 'Quo warranto or an action in the nature of quo warranto is a special proceeding and strictly statutory in character. It is available only where the act complained of is of a public interest and may not be invoked for the redress of a private right or grievance. * * * (citing authorities).' The foregoing principle was approved in Berger v. Amana Society, 250 Iowa 1060, 1071, 95 N.W.2d 909, 916. See also State ex rel. Maley v. Civic Action Comm., 238 Iowa at 860, 28 N.W.2d at 471.

Plaintiff's lack of capacity to enter into the alleged contract declared on is neither being urged by defendant to conserve or protect the public interest nor in an attempt to have the court terminate plaintiff's corporate existence, but only as a defense in defendant's private interest.

Neither our rules of procedure nor other statutory provisions relating to actions in the nature of quo warranto bar defendant from raising plaintiff's lack of capacity to enter into the alleged contract as a defense.

II. Plaintiff next argues defendant has estopped itself from denying the corporate existence of plaintiff by its dealing with plaintiff.

It contends section 496A.6 provides by implication that a party to a contract with a corporation is estopped from denying the latter's corporate existence in his defense. See section 491.65, The Code.

Iowa currently has two chapters under which corporations may incorporate; the provisions of the chapter under which a particular corporation is incorporated govern the actions and affairs of that corporation. Since plaintiff was incorporated under chapter 496A, The Code, only its provisions govern litigation involving plaintiff. Section 491.65 has no application to the case before us.

Plaintiff inferentially concedes section 496A.6 is nothing more than a statutory restriction of the defense of ultra vires. No cases support plaintiff's position relative to estoppel.

In Brooks v. Owen, 200 Iowa 1151, 202 N.W. 505, relied on by plaintiff, the defendant lodges permitted default judgments to be taken on notes given by them for money borrowed to finance building construction. The notes were executed in 1907 and the judgment was rendered in 1919. '* * * (I)t was not until 1923, after efforts to collect the judgment by garnishing the tenants of the building owned by the lodges, that the claim was first advanced that they lacked the legal capacity to be sued, and that for that reason the judgment was void. The objection comes too late. The question could, in a proper manner, have been raised in the original action; but even then it must have been done before judgment. * * * (citing authorities).' Id. 200 Iowa at 1154, 202 N.W. at 506.

The court refused to decide whether defendant lodges were estopped under the code to deny their corporate existence at the time the notes were...