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refuse to allow any one but the state to call attention to any slip that was made in the attempt to form the corporation? At first blush the doctrine seems harmless and commendable, to be
67 Wis. 634; Davis v. Stevens, 104 Fed. Rep. 235. Cf. Smith v. Sheeley, 12 Wall. (U. S.) 358.
If there is a law authorizing the formation of such a corporation, it is not fatal that the attempt to incorporate was under a different law. Georgia Co. o. Mercantile Co., 94 Ga. 306. Cf. Welch v. Old Dominion Co., 10 N. Y. Supp. 174.
A de jure corporation may be formed under a law passed by a de facto legislature. U. S. v. Insurance Companies, 22 Wall. (U. S.) 99.
3. There must have been user of some of the powers which such a corporation would possess. Without user there would be no assumption of corporate power. See Emery v. De Peyster, 77 N. Y. App. Div. 65, 67 ; Elgin Co.v. Loveland, 132 Fed. Rep. 41, 45.
4. The persons seeking to prevent collateral attack must have acted in good faith. In defining the limits of the de facto doctrine, the courts have sometimes made no express mention of good faith. Owensboro Co. v. Bliss, 132 Ala. 253; Baker v. Neff, 73 Ind. 68; Doty v. Patterson, 155 Ind. 60, 64; Finnegan v. Noerenberg, 52 Minn. 239; Gibbs' Estate, 157 Pa. St. 59, 69; Toledo Co. v. Continental Trust Co., 95 Fed. Rep. 497, 508. But in these cases no contention was made that the associates had not acted in good faith.
Express mention of good faith is usual. Duggan v. Colorado Co., 11 Colo. 113; American Co. v. Minnesota Co., 157 III. 641, 652; Stanwood v. Sterling Co., 107 III. App. 569; Williamson v. Kokomo Ass'n, 89 Ind. 389; Hasselman v. U. S. Mortgage Co., 97 Ind. 365; Haas v. Bank of Commerce, 41 Neb. 754 ; Vanneman v. Young, 52 N. J. L. 403; Elizabethtown Co. v. Green, 49 N. J. Eq. 329, 338; Hagerman v. Ohio Ass'n, 25 Oh. St. 186, 200; Society Perun v. Cleveland, 43 Oh. St. 481; Marsh v. Mathias, 19 Utah 350; Gilkey v. How, 105 Wis. 41, 45; Tulare District v. Shepard, 185 U. S. 1, 16.
If the attempt at incorporation is not made in good faith, but persons purchase the alleged stock in good faith, they should not be held personally liable to those who have contracted with the corporation. American Co. v. Heidenheimer, 80 Tex. 344 (see note 33). In Minor v. Mechanics Bank, 1 Pet. (U. S.) 46, 66, Story, J., said : “ It would be extremely difficult to maintain, upon general principles of law, that a private fraud, between the original subscribers and commissioners, could be permitted to be set up, to the injury of subsequent purchasers of the stock, who became bona fide holders, without any participation or notice of the fraud.”
Ordinarily, the same result will be reached whether good faith is required in those who attempted incorporation or in those who now seek to prevent collateral attack upon incorporation. But it is submitted that American Co. v. Heidenheimer is a decision within the limits of the de facto doctrine, and that therefore the requirement as to good faith may properly be stated in the form used in the text.
The doctrine of de facto corporations usually arises where there has been an attempt to incorporate under a general law. But it is not confined to such cases. The legislature might by special act grant a charter which was to take effect upon the performance of certain conditions precedent. Such charter, it is submitted, would supply the place of the first and second requirements stated in the text. See Lucas v. Bank of Georgia, 2 Stew. (Ala.) 147 ; Gaines v. Bank of Mississippi, 12 Ark. 769; Middlesex Husbandmen v. Davis. 3 Met. (Mass.) 133; Utica Co. v. Tilman, 1 Wend. (N. Y.) 555; Turnpike Co. v. McCarson, i Dev. & B. (N. C.) 306; Searsburgh Co. v. Cutler, 6 Vt. 315, 322; Bank of Manchester v. Allen, 11 Vt. 302.
intended merely to save examination into all the details of the formation of corporations.14
In answer. In the first place, it is to be noted that, if the existence of a corporation is only collaterally in issue, it is well settled that proof of facts sufficient to satisfy the requirements of the de facto doctrine is sufficient to make a primâ facie case.16 In
14 It would be easy to accumulate dicta in support of such a doctrine. See, for example, Doty v. Patterson, 155 Ind. 60, 64 (but of the decisions in Busenback v. Attica Co., 43 Ind. 265; Indianapolis Co. v. Herkimer, 46 Ind. 142); Buffalo Co. v. Cary, 26 N. Y. 75, 77 (but cf. the decisions in Dorris v. Sweeney, 60 N. Y. 463, 467 ; N. Y. Cable Co. v. N. Y., 104 N. Y. 1, 43); Cochran v. ld, 58 Pa. St. 399, 405 (but cf. the decision in Guckert v. Hacke, 159 Pa. St. 303) ; Gilkey v. How, 105 Wis. 41, 46 (but cf. the decision in Slocum v. Head, 105 Wis. 431); New Orleans Co. v. Louisiana, 180 U. S. 320, 328 (but of. the more restrained language by the same learned justice in Tulare District v. Shepard, 185 U. S. 1, 14, 17).
In New Jersey it has been laid down that equity will not, at the instance of a private individual, enjoin a de facto corporation from the exercise of powers which it would possess if a de jure corporation. Elizabethtown Co. v. Green, 49 N. J. Eq. 329, 331, 332. Equity is no doubt loath to determine questions as to the legal formation of corporations (cf. the determination of questions as to the title of real estate); and, moreover, should not entertain a bill by a private individual which is, in substance, a quo warranto proceeding (see second paragraph of note 12). But equity has jurisdiction to determine whether a corporation has been legally formed. The question was determined in the early case of Hill v. Beach, 12 N. J. Eq. 31, and again in Union Water Co. v. Kean, 52 N. J. Eq. III, 122, where Pitney, V. C., upholds the jurisdiction in an elaborate opinion. (Cf. the language of the court in National Docks Co. v. Central Rail. road Co., 32 N. J. Eq. 755; West Jersey Co. v. Cape May Co., 34 N. J. Eq. 164; Terhune v. Midland Co., 38 N. J. Eq. 423; Attorney-General v. American Tobacco Co., 55 N. J. Eq. 352, 368; aff. 56 N. J. Eq. 847 ; Cumberland Co. v. Clinton Co., 64 N. J. Eq. 521, 523.) And a bill to restrain the assertion of a corporate right directly against complainant will not ordinarily be in substance a quo warranto proceeding. It might as well be argued that the plea of nul tiel corporation may never be permitted at law, because it is, pro tanto, a quo warranto proceeding.
Now, Hampton v. Clinton Co.,65 N. J. L. 158 (see note 28) shows that at law there is no sweeping rule against collateral attack. See also Trenton Co. v. United Co., 60 N. J. Eq. 500. Is the New Jersey law that, if a de facto corporation institutes proceed. ings to take A's land by eminent domain, he may successfully resist such proceedings, but that, even if immediate irreparable injury is being threatened, he may not resort to equity for an injunction ? It is submitted that National Docks Co. v. Central Co., 32 N. J. Eq.755, does not necessitate such a decision (see fourth paragraph of note 12).
See also Denver Co. v. Denver Co., 2 Colo. 673; Independent Order Foresters v. United Order, 94 Wis. 234, 241.
15 Lucas v. Bank of Georgia, 2 Stew. (Ala.) 147 ; Gaines v. Bank of Mississippi, 12 Ark. 769; Memphis Co. v. Rives, 21 Ark. 302; Mix v. Bank of Bloomington, 91 Ill. 20; Eakright v. Logansport Co., 13 Ind. 404; Middlesex Husbandmen v. Davis, 3 Met. (Mass.) 133 ; Barrett v. Mead, 10 Allen (Mass.) 337 ; Merchants’ Bank v. Glendon Co.. 120 Mass. 97 ; Utica Co. v. Tilman, 1 Wend. (N. Y.) 555; Eaton v. Aspinwall, 19 N. Y. 119, 121; U. S. Vinegar Co. v. Schlegel, 143 N. Y. 537, 543; Turnpike Co. v. McCarson, i Dev. & B. (N. C.) 306; Searsburgh Co. v. Cutler, 6 Vt. 315, 322 ; Bank of Manchester v. Allen, 11 Vt. 302.
the second place, it is to be noted that most failures to conform strictly to statutory provisions are not fatal to the formation of the corporation. (a) If a provision of the statute has not been exactly followed, the court may hold that there has been substantial compliance. 16 (6) If some provision of the statute has not been followed at all, the court may hold such provision to be merely directory.17 @ If some mandatory provision has not been followed at all, the court may nevertheless hold that performance of the acts specified in such provision was not intended to be a condition precedent to the existence of the corporation, - that non-performance was intended at most to be a ground for declaring the corporate existence forfeited.18 In all these cases the associates gain authority to act as a corporation.
See also Willard v. Trustees, 66 Ill. 55; Peoria Co. v. Peoria Co., 105 Ill. 10; Cozzens v. Chicago Co., 166 Ill. 213; Hager's Town Co. v. Creeger, 5 Har. & J. (Md.) 122; Bartlett v. Wilbur, 53 Md. 485, 498 ; Narragansett Bank v. Atlantic Silk Co., 3 Met. (Mass.) 282; Packard v. Old Colony Co., 168 Mass. 92 ; Canal Co. v. Paas, 95 Mich. 372; Williams v. Bank of Michigan, 7 Wend. (N. Y.) 539; Wood v. Jefferson Bank, 9 Cow. (N. Y.) 194; Bank of Toledo v. International Bank, 21 N. Y. 542; Williamsburgh Bank v. Solon, 136 N. Y. 465, 475; Augusta Co. v. Vertrees, 4 Lea (Tenn.) 75; Reynolds v. Myers, 51 Vt. 444 .
16 Van Pelt v. Home Ass'n, 79 Ga. 439 ; Eakright v. Logansport Co., 13 Ind. 404 ; Thornton v. Balcom, 85 Ia. 198 ; Seaton v. Grimm, 110 Ia. 145; Buffalo Co. v. Hatch, 20 N. Y. 157, 160; Ogdensburgh Co. v. Frost, 21 Barb. (N. Y.) 541 ; Thompson v. N. Y. Co., 3 Sandf. Ch. (N. Y.) 625, 652; Carpenter v. Frazier, 102 Tenn. 462; Rogers v. Danby Society, 19 Vt. 187, 191.
17 Judah v. American Co., 4 Ind. 333; McClinch v. Sturgis, 72 Me. 288, 296 ; Newcomb v. Reed, 12 Allen (Mass.) 362 ; Braintree Co. v. Braintree, 146 Mass. 482, 488; Mead v. Keeler, 24 Barb. (N. Y.) 20, 25; Rassbeck v. Desterreicher, 55 How. Pr. (N. Y.) 516; Ossipee Co. v. Canney, 54 N. H. 295, 312 ; Grays v. Turnpike Co., 4 Rand. (Va.) 578, 581. See also Cross v. Pinckneyville Co., 17. III. 54; Busenback v. Attica Co., 43 Ind. 265, criticizing Eakright v. Logansport Co., 13 Ind. 404. On whether the state may take advantage of failure to follow a directory provision, see Rose Flill Co. v. People, 115 Ill. 133; Jackson v. Crown Co., 21 Utah 1. Cf. Bank of U. S. v. Dandridge, 12 Wheat. (U. S.) 64, 80.
18 Sparks v. Woodstock Co., 87 Ala. 294 ; Brown v. Wyandotte Co., 68 Ark. 134, 140; Mitchell v. Rome Co., 17 Ga. 574; Boise City Co. v. Pinkham, i Idaho 790 ; Chiniquy v. Bishop of Chicago, 41 Ill. 148 (a corporation sole); Walton v. Riley, 85 Ky. 413 (overruling 81 Ky. 300); Portland Co. v. Bobb, 88 Ky. 226; South Bay Co. v. Gray, 30 Me. 547 ; Lord v. Essex Ass'n, 37 Md. 320, 326; Hammond v. Straus, 53 Md. 1, 14; Merrick v. Reynolds Co., 101 Mass. 381 ; Hawes v. Anglo-Saxon Co., 101 Mass. 385, 395; McGinty v. Athol Co., 155 Mass. 183, 185; Narragansett Bank v. Atlantic Co., 3 Met. (Mass.) 282, 288; Boston Co. v. Moring, 15 Gray (Mass.) 211; Shakopee Co., 37 Minn. 91 ; Granby Co. v. Richards, 95 Mo. 106; St. Joseph Co. v. Shambaugh, 106 Mo. 557, 567 ; Vanneman v. Young, 52 N. J. L. 403 ; Plank Road Co v. Chamberlain, 32 N. Y. 651, 655 ; Society of Cutchogue, 131 N. Y. (also 41 Barb. (N. Y.) 568 ; 1 Sandf (N. Y.) 158, 168); Hughesdale Co. v. Vanner, 12 R. I. 491; Cheraw Co. v. White, 14 S.C. 51; Harrod z. Hamer, 32 Wis. 162; Minor v. Mechanics'
We are dealing, therefore, only with a case where the court, on a sound construction of the statutes, finds the intent of the legislature to have been that performance of a certain act should be a condition precedent to incorporation.19 The legislature might, indeed, have authorized the formation of two kinds of corporations, one good against the world, and one good against all but the state. But such statutes are rare.20 The legislature has authorized the formation only of a corporation good against the world. It has declared that a certain act shall be performed before any such corporation shall come into existence. The act has not been performed. Is it proper, notwithstanding, for the court to allow the assertion of rights dependent upon incorporation?
It is not for the court to create a corporation. The franchise to
Bank, 1 Pet. (U. S.) 46, 65; Wells Co. v. Gastonia Co., 198 U. S. 177 ; Young Co. v. Young Co., 72 Fed. Rep. 62; Ryland v. Hollinger, 117 Fed. Rep. 216. See also Southern Bank v. Williams, 25 Ga. 534; Hastings v. Amherst Co., 9 Cush. (Mass.) 596, 600; Quincy Canal v. Newcomb, 7 Met. (Mass.) 276, 282; Raegener v. Hubbard, 167 N. Y. 301, 306; Waterford Co. v. Dalbiac, 6 Exch. 443.
19 For instances of such construction see Allman v. Havana Co., 88 Ill. 521, 526; Loverin v. McLaughlin, 161 III. 417, 425; McIntire v. McLain Ass'n, 40 Ind. 104; Kaiser v. Lawrence Bank, 56 Ia. 104; Field v. Cooks, 16 La Ann. 153; Utley v. Union Co., 11 Gray (Mass.) 139, 141 ; Jersey City Co. v. Dwight, 29 N. J. Eq. 242, 247 ; Crocker v. Crane, 21 Wend. (N. Y.) 211 ; People v. Nelson, 46 N. Y. 477, 480; N. Y.Co. v. N. Y., 104 N. Y. 1, 43; Card v. Moore, 68 N. Y. App. Div. 327, 331 ; aff. 173 N. Y. 598; Guckert v. Hacke, 159 Pa. St. 303 ; Bergeron v. Hobbs, 96 Wis. 641 ; Elgin Co. v. Loveland, 132 Fed. Rep. 41, 45.
20 In California, § 6 of Laws of 1850, c. 128, as amended by Laws of 1862, c. 124, provided : “The question of the due incorporation of any company, claiming in good faith to be a corporation under the laws of this state and doing bu ness as such corporation, or of its right to exercise corporate powers, shall not be inquired into, collaterally, in any private suit to which such de facto corporation may be a party." This was substantially reënacted as $ 358 of the Civil Code. For decisions since the enactment of this statute, see 22 Cal. 434 ; 26 ibid. 286; 37 ibid. 354; 37 ibid. 538; 51 ibid. 406; 55 ibid. 98 ; 67 ibid. 526; 70 ibid. 163; 72 ibid. 379; 80 ibid. 181 ; 82 ibid. 184; 90 ibid. 22; 97 ibid. 276 ; 100 ibid. 87; 102 ibid. 55; 103 ibid. 506; 104 ibid. 334 ; 126 ibid. 541 ; 128 ibid. 136; 130 ibid. 27 ; 137 ibid. 441 ; 141 ibid. 713; 4 Sawy. (U. S.) 133; 46 Fed. Rep. 709. See also § 2892, Comp. L. Dakota, cited in Davis v. Stevens, 104 Fed. Rep. 235, and Code of Georgia (1895), § 1862, and 108 Ga. 345; 109 ibid. 666; 121 ibid. 513
The Code of Iowa (1897), § 1636, which substantially reënacts the provision first adopted in $ 704 of the Code of 1851, provides : “No person or persons acting as a cor. poration shall be permitted to set up the want of a legal organization as a defense to an action against them as a corporation, nor shall any person sued on a contract made with such an acting corporation, or sued for an injury to its property, or a wrong done to its interests, be permitted to set up a want of such legal organization in his defense." There is a similar statute in Kentucky. Comp. Stat. 1903, $ 566. Except so far as these statutes dispense with the requirements for a de facto corporation (see third paragraph of note 13), it is submitted that they are only declaratory (see notes 24, 25, and 33).
be a corporation can be granted only by the legislature. Is the court not to respect this division of powers, but to make itself, de facto, a legislature?
It may well be answered that it is not for the courts to create public officers any more than to create corporations; and yet the doctrine of de facto public officers is well established, and a doctrine of de facto corporations for the benefit of third persons has also found its place in the law.21
The question therefore reduces itself at last to a question of judgment. Are there considerations of public policy so urgent as to make it proper for the courts to allow persons to assert the right to be a corporation even when, on a sound construction of the legislative enactments, they have no such right? Considerations tending to an affirmative answer are that the courts should save time by refusing to go into the details of incorporation; and that they should encourage the use of the corporate device by establishing a consolation doctrine to the effect that, if persons try to form a corporation and pretty nearly succeed, they shall have pretty nearly as many rights as though they had succeeded. Considerations tending to a negative answer are that the courts should not, directly or indirectly, take to themselves powers belonging to the legislature, and that it is anomalous to bridge a legal gap even in favor of a person who has made an expenditure in good faith.
If there is a doctrine of de facto corporations, remedial to the associates themselves, the courts ought to enter upon it not lightly, but discreetly, advisedly.
This is not to say that there may never be circumstances in which it is proper to apply such a doctrine. Suppose that A, owner of land, purports for a consideration to grant it to a de facto corporation, and ejectment is brought, in the name of the corporation, against X, a stranger to the title. The associates, even if unincorporated, would, it is submitted, at least be entitled in equity to require a conveyance from A, and at law to maintain ejectment in the name of A.2 And it is the better opinion that full effect
21 See note 2.
22 There is authority that if a deed of real estate purports to run to a corporation, and there is no such corporation authorized by the state, the deed is void, and the grantor may successfully assert title to the land against the associates. Harriman v. Southam, 16 Ind. 190 (overruled in Snyder v. Studebaker, 19 Ind. 462); Douthitt v. Stinson, 63 Mo. 268 (distinguished in Reinhard v. Virginia Co., 107 Mo. 616, and White Oak Society v. Murray, 145 Mo. 622); White v. Campbell, 5 Humph. (Tenn.) 38; Russell v. Topping, 5 McLean (U. S.) 194, 202 (but this cannot stand after Smith v.