HARRILL v. DAVIS et al. No. 2,805 Circuit Court of Appeals, Ei!t! Circuit 168 F. 187"
#$0$ %.S. App. LE&IS ''('
)arc! 2, #$0$ PRIOR HISTORY:
*++# I- Error to t!e %-ite States Court of Appeals i- t!e I-ia-
/erritor. CORE TERMS: stoc1,
e facto, fac to, cotto-, color, articles of i-corporatio-, i-corporatio-, illi-, i-iviual lia3ilit, c!arter, activel, suppose, prooters, estoppe, i--i-, 3ui-, coe-cee-t, stoc1!oler, fra-c!ise, fra-c!ise, i-, cotto- i-, selli-, e-eral a-aer, oo fait!, prete-e, assura-ce, e4ept, cler1, i-cur, user, user, estoppel
COUNSEL: R.
C. Alle- 6. C. 7i-so-, o- t!e 3rief, for plai-tiff i- error.
9eo. A. )urp!e S. ). Rut!erfor, :. /. Hutc!i-s, a- :. 7. ;. 9era-, o- t!e 3rief, for efe-a-ts i- error. OPINION BY: SAN<=RN OPINION
*+#$0
/!e Co?eta 9i- Copa-,> Copa-,> a- i- co-ucti- t!e 3usi-ess of 3ui-, selli-, a- i--i- cotto- for profit u-er t!e -ae >/!e Co?eta Cotto- @ )illi- Copa-,> a- t!at uri- t!is tie t!e i-curre ore t!a- ',B00 of t!e i-e3te-ess of 5,#'5.'8 for ?!ic! t!is actio- ?as 3rou!t. =- Dece3er 22, #$02, t!e ae t!eir first real attept to i-corporate, a- for t!e first tie too1 o- t!e color or appeara-ce of a corporatio-. =- t!at a t!e file articles *+#$# of i-corporatio- ?it! t!e cler1 of t!e Court *++2 of Appeals, 3ut t!e -ever file a- uplicate of t!e ?it! t!e cler1 of t!e uicial istrict i- ?!ic! t!eir place of 3usi-ess ?as locate, as reuire 3 t!e statutes i- orer to co-stitute t!e a leal corporatio- a- to aut!orie t!e to o 3usi-ess as suc!. Act Fe3. #8, #$0#, c. (B$, (# S tat. B$'" )a-sfielGs Di. La?s Ar1. $0, $8, $B$. /!e e-eral rule is t!at parties ?!o a ssociate t!eselves toet!er a- activel e-ae i3usi-ess for profit u-er a- -ae are lia3le as part-ers for t!e e3ts t!e i-cur u-er t!at -ae. It is a- e4ceptio- to t!is rule t!at suc! associates a escape i-iviual lia3ilit for suc! e3ts 3 a coplia-ce ?it! i-corporatio- la?s or 3 a real attept to copl ?it!
t!e ?!ic! ives t!e color of a leal corporatio-, a- 3 t!e user of t!e fra-c!ise of suc! a corporatio- i- t!e !o-est 3elief t!at it is ul i-corporate. :!e- t!e fact appears, as it oes i- t!e case at 3ar, 3 i-isputa3le evie-ce t!at parties associate a- 1-o?i-l i-curre lia3ilities u-er a ive- -ae, t!e leal presuptio- is t!at t!e are over-e 3 t!e e-eral rule, a- t!e 3ure- is upo- t!e to prove t!at t!e fall u-er soe e4ceptioto it. =?e- v. S!epar, *++( 5$ Fe. B', 8 C.C.A. 2''" :ec!sel3er v. Flour Cit Natio-al If a- associatio- assues to e-ter i-to a co-tract i- a corporate capacit, a- t!e part eali- ?it! t!e associatio- co-tracts ?it! it a s if it ?ere a corporatio-, t!e i-iviual e3ers of t!e associatio- ca--ot 3e c!are as parties to t!e co-tract, eit!er severall or oi-tl, or as part-ers. /!is is euall true ?!et!er t!e associatio- ?as i- fact a corporatioor -ot, a- ?!et!er t!e co-tract ?it! t!e associatio- i- its corporate capacit ?as aut!orie 3 t!e Leislature or pro!i3ite 3 la?, or illeal> is too 3roa to 3e sou-. 7arties ?!o activel e-ae i- 3usi-ess for profit u-er t!e -ae a- prete-se of a corporatio- ?!ic! t!e 1-o? -eit!er e4ists -or !as a- color of e4iste-ce a -ot escape i-iviual lia3ilit 3ecause stra-ers are le 3 t!eir prete-se to co-tract ?it! t!eir prete-e e-tit as a corporatio-. I- suc! cases t!e act as t!e ae-ts of a pri-cipal t!at t!e 1-o? oes -ot *++ e4ist, a- t!e are lia3le u-er a failiar rule, 3ecause t!ere is -o respo-si3le pri-cipal. 2 e-tGs Coe-taries #'t! E. (0" MueeCit Fur-iture @ Carpet Co. v. Cra?for, #2B )o. (5, (', (0 S.:. #(. /!e 3ure- is -ot
o- t!e stra-ers ?!o eal ?it! t!e as a corporatio-, 3ut o- t!eselves ?!o act u-er t!e -ae of a prete-e corporatio-, to see t!at it is so ora-ie t!at it e4epts t!e fro i-iviual lia3ilit, a- if t!e fail i- t!is t!e ust pa t!e lia3ilities t!e i-cur, eve- i- t!e a3se-ce of frau or 3a fait!, upo- t!e salutar pri-ciple t!at ?!ere o-e of t?o parties ust suffer !e ust 3ear t!e loss ? !ose 3reac! of ut cause it. /!ere are cases i- ?!ic! stoc1!olers ?!o too1 -o active part i- t!e 3usi-ess of a prete-e corporatio- ?!ic! ?as acti- ?it!out a- c!arter or file articles, ?!o suppose t!at t!e corporatio- ?as ul ora-ie, !ave 3ee- !el e4ept fro i-iviual lia3ilit for t!e e3ts it i-curre" 3ut if t!e !a 3ee- activel co-ucti- its 3usi-ess ?it! 1-o?lee of its lac1 of i-corporatio-, t!ose ecisio-s ust !ave 3ee- ot!er?ise. Seacor v. 7e-leto-, 55 Hu-, 5B$, $ N.K. Supp. '" Fuller v. Ro?e, 5B N.K. 2(, 2. Neit!er t!e !ope, *++B t!e 3elief, -or t!e statee-t 3 parties t!at t!e are i-corporate, -or t!e si-i- of articles of i-corporatio- ?!ic! are -ot file, ?!ere fili- is reuisite to create t!e corporatio-, -or t!e user of t!e prete-e fra-c!ise of suc! a -o-e4iste-t corporatio-, ?ill co-stitute suc! a corporatio- e facto as ?ill e4ept t!ose ?!o activel a- 1-o?i-l use its -ae to i-cur o3liatio-s fro t!eir i-iviual lia3ilit to pa t!e. Color of leal ora-iatio- as a corporatio- u-er soe c!arter or la? a- user of t!e suppose corporate fra-c!ise i- oo fait! are i-ispe-sa3le to suc! e4eptio-. *+#$( %-er t!e e-eral la? of Ar1a-sas i- force i- t!e I-ia- /erritor, t!e fili- of articles of i-corporatio- ?it! t!e cler1 of t!e Court of Appeals ?as a si-e ua -o- of a- color of a leal corporatio-. :it!out t!at t!ere ?as -ot, a- t!ere coul -ot 3e, a- appare-t corporatio- or t!e color of a corporatio-. Areee-ts to for o-e, statee-ts t!at t!ere ?as o-e, si-e articles of associatio- to a1e o-e, acts as o-e, create -o color of i-corporatio-, 3ecause t!ere coul 3e -o i-corporatio- or color of it u-er t!e la? u-til t!e articles ?ere file. 6o!-so- v. Corser, (' )i--. *++8 (55, 25 N.:. B$$" Fi--ea- v. Noere-3er, 52 )i--. 2($, 2'(, 2'', 5( N.:. ##50, ##5#, #8 L.R.A. BB8, (8 A. St. Rep. 552" /alor o- 7rivate Corporatio-s, p. #'5, Ro3erts )f. Co. v. Sc!lic1, 2 )i--. ((2, ' N.:. 82. I- Fi--ea- v. Noere-3er, supra, C!ief 6ustice 9ilfilla- ?ell saiJ >/o ive to a 3o of e- assui- to act as a corporatio-, ?!ere t!ere !as 3ee- -o attept to copl ?it! t!e provisio-s of a- la? aut!orii- t!e to 3ecoe suc!, t!e status of a e facto corporatio-, i!t ope- t!e oor to fraus upo- t!e pu3lic. It ?oul certai-l 3e ipolitic to perit a -u3er of e- to !ave t!e status of a corporatio- to a- e4te-t erel 3ecause t!ere is a la? u-er ?!ic! t!e i!t !ave 3ecoe i-corporate, a- t!e !ave aree ao- t!eselves to act, a- t!e !ave acte, as a corporatio-. /!at ?as t!e co-itio- i- 6o!-so- v. Corser, (' )i--. (55, 25 N.:. B$$ , i- ?!ic! it ?as !el t!at ?!at !a 3ee- o-e ?as i-effectual to liit t!e i-iviual lia3ilit of t!e associates. /!e !a -ot o-e far e-ou! to 3ecoe a e facto corporatio-. /!e !a erel si-e articles, 3ut !a -ot attepte to ive t!e pu3licit 3 fili- for re cor, ?!ic! t!e statute reuire.> /!e *++$ efe-a-ts ca--ot escape i-iviual lia3ilit for t!e ',B00 o- t!e rou- t!at t!e Co?eta Cotto- @ )illi- Copa- ?as a corporatio- e facto ?!e- t!at portio- of t!e plai-tiffGs clai ?as i-curre, 3ecause it t!e- !a -o color of i-corporatio-, a- t!e 1-e? it a- et activel use its -ae to i-cur t!e o3liatio-. =?e- v. S!epar, 8 C.C.A. 2'', 5$ Fe. B'" :ec!sel3er v. Flour Cit Natio-al
Ill. #$B, 202" 7arso-s o- 7art-ers!ip, p. 5''" Hill v. eit!er ae4press proise of t!e -e? copa-, or t!at t!e co-tract ?as ae ?it! perso-s t!ee-ae i- its foratio- a- ta1i- prelii-ar steps t!ereto, a- t!at t!e co-tract ?as ae o- 3e!alf of t!e -e? copa-, i- t!e e4pectatio- o- t!e part of t!e plai-tiff a- ?it! t!e assura-ce o- t!e part of t!e proectors t!at it ?oul 3ecoe a corporate e3t, a- t!at t!e copa- after?ars e-tere upo- a- e-oe t!e 3e-efit of t!e co-tract, a- 3 -o ot!er title t!a- t!at erive t!rou! it.>
3usi-ess of a co-teplate *+#$5 corporatio-, a- t!is e3t for ',B00 ?as -ot t!e result of a- suc! co-tract. It is part of t!e 3a la-ce of a- accou-t of a- te-s of t!ousa-s of ollars ?!ic! arose out of t!e co-uct of a 3usi-ess prelii-ar, -ot to its coe-cee-t, 3ut to its close. /!e 3usi-ess of t!e efe-a-ts ?as t!e 3ui- a- i--i- of cotto-. /!e coe-ce to co-struct t!eir 3uili-s i- 6u-e, to 3u cotto- i- Septe3er, to operate t!eir i- i- t!e first as of =cto3er, t!e file t!eir articles o- Dece3er 22, a- cease to operate t!eir i- i- t!e follo?i- 6a-uar. /!e ca--ot escape lia3ilit for e3ts i-curre it!is 3usi-ess prior to Dece3er 22 o- t!e rou- t!at t!eir co-structio- of 3uili-s a- t!eir eali- i- a- i--i- cotto- for t?o o-t!s a- a !alf ?ere -ecessar prelii-aries to t!e ora-iatio- of *++#' t!eir corporatio- or to t!e coe-cee-t of t!eir 3usi-ess, -or o- t!e rou- t!at t!e clai of t!e plai-tiff ?as i-curre o- t!eir assura-ce t!at it ?as for a- s!oul 3ecoe t!e e3t of a corporatio- to 3e fore, 3ecause t!ese rou-s are -ot sustai-e 3 t!e evie-ce. Cou-sel i-sist t!at t!e efe-a-ts are -ot lia3le !ere 3ecause o-e ?!o eals ?it! a corporatio- e facto is estoppe fro e-i- its e4iste-ce as a corporatio-" 3ut t!e true ea-i- a- leal effect of t!is rule is t!at suc! a ealer is estoppe fr o e-i- its e4iste-ce o- t!e rou- t!at it ?as -ot leall i-corporate. =-e ?!o eals ?it! parties ?!o asuerae u-er a -ae ?!ic! represe-ts -o corporatio- e facto is -o ore estoppe fro e-i- t!at it is a corporatio- t!a- !e ?oul 3e fro e-i- t!at t!e co-stitute or acte for t!e %-io- 7acific Railroa Copa-, or a- ot!er ?ellO1-o?corporatio-, ?!e- t!e i -ot. /!e fact t!at t!e plai-tiff ealt ?it! a- treate t!e Co?eta Cotto- @ )illi- Copa- as a corporatio- i -ot estop it fr o e-i- t!at it ?as suc! 3efore t!e efe-a-ts file t!eir articles of i-corporatio-, 3ecause it ?as -ot a corporatioe facto 3efore t!at tie a- 3ecause t!e *++#5 i-ispe-sa3le elee-ts of a- estoppel ipais, i-ora-ce of t!e trut! a- a3se-ce of eual ea-s of 1-o?lee of it 3 t!e part ?!o clais t!e estoppel, a- actio- 3 t!e latter i-uce 3 t!e isreprese-tatio- of t!e part aai-st ?!o t!e estoppel is i-vo1e, o -ot e4ist i- t!e case at 3ar.
stoc1 i- t!e fall of #$02, t!at t!e seco- ass esse-t of 2,000 ?as ae i- 6a-uar, #$0(, t!at !e -ever reporte t!is stoc1 to t!e plai-tiff u-til 6a -uar, #$0(, 3ut t!at i- t!e suer a- fall of #$02 !e tal1e ?it! E?ars *++#B a- :allace, t?o of t!e irectors, ?!o !a 80 s!ares of stoc1 eac! i- t!e pla i-tiff, a3out t!is stoc1 ?!ic! !e ?as to ta1e a- ?!ic! !e !a ta1e-, t!at t!e plai-tiff a- t!e acuiesce i- !is actio- a- tol !i to o t!e 3est !e coul ?it! it, 3ut t!at t!e i -ot irect or i-struct !i to ta1e t!e stoc1 or aree t!at !e s!oul ta1e it, a- t!at !e i -ot tal1 ?it! t!e presie-t, ?!o ?as t!e o?-er of t!e aorit of t!e stoc1 of t!e plai-tiff, alt!ou! a-ot!er ?it-ess testifie t!at soe tie it!e fall of #$02 !e tol Nalor t!at Davis !a ta1e- stoc1 i- t!e illi- copa- for t!e plai-tiff. Davis, !o?ever, su3scri3e for t!e stoc1 i- !is o?- -ae, a- t!e plai-tiff i -ot. He testifie t!at !e pai t!e first assesse-t i- t!e fall of #$02, 3ut !e -ever c!are t!e plai-tiff a- creite !iself ?it! t!at pae-t" 3ut, o- t!e co-trar, o- Fe3ruar 2(, #$0(, after t!e illi- copa- !a cease to operate its i-, !e cause a- e-tr to 3e ae ot!e 3oo1s of t!e i-veste-t copa- c!ari- it a- creiti- t!e illi- copa- ?it! #,#50, t!e aou-t of t!e t?o assesse-ts o- !is stoc1, a- e-tr ?!ic! t!e plai-tiff su3seue-tl repuiate. /!ere are t?o reaso-s ?!, u-er *++#8 t!e evie-ce i- t!is recor, t!e plai-tiff -ever 3ecae a !oler, eit!er i- la? or i- euit, of a- s!are i- t!e efe-a-tGs e-terprise or copa-, eit!er as a stoc1!oler or ot!er?ise. I- t!e first place, t!e co-structio- a- operatio- of a cotto- i- ?as 3eo- t!e po?ers of t!e plai-tiff corporatio-, t!e -ature of ?!ose 3usi-ess ?as eclare a- liite 3 its articles to >3ui-, selli-, leasi- a- eali- i- la-s, securities, 3o-s, -otes, stoc1s a- ot!er -eotia3le paper, a- also 3ui- a- selli- e-eral erc!a-ise.> I- t!e seco- place, if 3 a- co-ceiva3le i-terpretatio- t!e co-structio- a- operatio- of a cotto- i- a- t!e foratio- of t!e corporatio-, a- t!e ta1i- of stoc1 t!erei- to accoplis! t!at purpose, coul 3e eee to 3e ?it!i- t!e po?ers of t!is corporatio-, t!e are so far 3eo- t!e scope of its ori-ar 3usi-ess t!at a e-eral a-aer coul 3e aut!orie to coit !is corporatio- to t!e o-l 3 t!e e4press aut!orit of its 3oar of irectors, or of its pri-cipal officers, after a full isclosure to t!e of all t!e facts relati- to t!e propose e-terprise, a- t!e esultor *+#$B tal1s ?!ic! Davis !a ?it! t!e t?o irectors fall far s!ort *++#$ of a- evie-ce of suc! aut!orit. )uc! is ae i- arue-t of t!e testio- of Davis a- -i!t t!at t!e acte i- oo fait!, t!at t!e efe-a-ts -ever receive a- 3e-efit fro t!e aterials a- la3or for t!e purc!ase price of ?!ic! t!e plai-tiff sues, 3ut oo fait! a- t!e use of a -ae ?!ic! t!e 1-o? represe-ts -o corporatio- as t!e -ae of a corporatio- u-er ?!ic! t!e o 3usi-ess creates a part-ers!ip, a- -eit!er a corporatio- e ure -or e facto. A- t!e efe-a-ts !a all t!e 3e-efit t!ere ?as fro t!e aterials a- la3or fur-is!e 3 t!e plai-tiff, for t!e illi- copa- -ever issue a- stoc1, a- t!ese efe-a-ts o?-e t!eir respective s!ares i- its propert, a- ?!atever it !a t!e !a, a-, as far as t!e !ave -ot ispose of it, t!e still !ave. /!e fact is t!at uri - t!is e-tire tra-sactio- ?!ile Davis ?as t!e e-eral a-aer of t!e plai-tiff !e ?as t!e part-er of t!e efe-a-ts, a-, i- all tra-sactio-s 3et?ee- t!e plai-tiff a- t!e efe-a-ts, ?as pecu-iaril i-tereste aversel to !is pri-cipal. /!e su of t!e ?!ole atter is t!at t!e efe-a-ts aree i- April or 6u-e, #$02, to ta1e certai- s!ares i- a #0,000 e-terprise for t!e purpose of 3uili- *++20 a cotto- i-, a- 3ui-, i--i-, a- selli- cotto-, a- to ora-ie a corporatio- to carr o- t!is 3usi-ess t!e 3ou!t 3et?ee- 6u-e a- Dece3er 22, #$02, aterials a- la3or ?it! ?!ic! t!e 3uilt t!e cotto- i-, a- 3et?ee- Septe3er #5t! a- Dece3er 22 operate t!eir cottoi- a- carrie o- t!e 3usi-ess of 3ui-, i--i-, a- selli- cotto- ? it! t!e plai-tiff to t!e aou-t of several te-s of t!ousa-s of ollars, a- t!ere reai-s a 3ala-ce of a3out ',B00 ue t!e plai-tiff o- t!is accou-t. /!e -ever iss ue a- stoc1, 3ut i- Septe3er, Nove3er, a- Dece3er t!e si-e articles of i-corporatio- ?!ic! t!e file ?it! t!e
cler1 of t!e Court of Appeals o- Dece3er 22, #$02. Duri- t!is tie t!e treate t!eselves a- t!e plai-tiff ealt ?it! t!e as a corporatio-. /!e represe-te t!eselves to 3e a corporatio- ?!e- t!e 1-e? t!e ?ere -ot" u-er t!e -ae of a corporatio- ?!ic! i -ot e4ist t!e purc!ase t!ese oos a- services. A- our co-clusio- is t!at t!e efe-a-ts -ever 3ecae a corporatio- e facto prior to Dece3er 22, #$02, t!at t!e -ever 3ecae a corporatio- e ure, t!at t!e i-e3te-ess !ere i- uestio- ?as -ot i-curre u-er a- proise or assura-ce *++2# of t!e efe-a-ts as prooters t!at it s!oul 3ecoe t!e o3liatio- of a corporatio- to 3e fore, t!at a lare part of it ?as i-curre i- t!e co-uct of a e-eral coercial 3usi-ess, a- -ot to prepare for t!e coe-cee-t of suc! a 3usi-ess or for t!e ora-iatio- of a corporatio-, a- t!at t!e trial court 3elo? s!oul !ave i-structe t!e ur t!at t!e efe-a-ts ?ere i-iviuall lia3le for t!at portio- of t!e plai-tiffG s clai ?!ic! ?as i-curre prior to Dece3er 22, #$02. Its failure to o so ?as a fatal error ?!ic! -ecessitates a reversal of t!e ue-ts 3elo?. I- vie? of t!e co-clusio- ?!ic! !as -o? 3ee- reac!e, it is u--ecessar to iscuss at le-t! or to eteri-e ot!er uestio-s ?!ic! are prese-te i- t!is recor. It is sufficie-t to sa reari- t!e portio- of t!e plai-tiffGs c lai i-curre su3seue-t to Dece3er 22, #$02, t!at ?!ile t!ere is a co-flict of aut!orit upo- t!e uestio- ?!et!er *+#$8 or -ot i-corporators or stoc1!olers reai- perso-all lia3le after t!e fili- of articles i- o-e office o-l ?!ere t!e statute reuires t!e to 3e file i- t?o offices as a co-itio- of i-corporatioor of t!e coe-cee-t of 3usi-ess )o1elu-e Hill Ca-al @ )i-i- *++22 Co. v. :oo3ur, #' Cal. 25, 2B, t!e statute u-er ?!ic! t!is case arose ?as 3rou!t i-to t!e I-ia- /erritor fro t!e state of Ar1a-sas, a- t!e Supree Court of t!at state !a !el, 3efore it ?as aopte i- t!e I-ia- /erritor, t!at suc! corporators or stoc1!olers reaii-iviuall lia3le u-er t!is statute u-less a- u-til t!eir articles of i-corporatio- are file i- 3ot! offices. 9ar-ett v. Ric!arso-, (5 Ar1. #''. /!is co-clusio- is sustai-e 3 ei-e-t aut!orit :ec!sel3er v. Flour Cit Natio-al
