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Cranson v. International Business Machines Corp.

Decided: April 30, 1964.


Appeal from the Circuit Court for Montgomery County; Moorman, J.

Henderson, Hammond, Horney, Marbury and Sybert, JJ. Horney, J., delivered the opinion of the Court.


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*fn1 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 Page 481} 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.*fn2

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. M. E. Church, 46 Md. 359 (1877); Regester v. Medcalf, 71 Md. 528, 18 Atl. 966 (1889); Bonaparte v. Lake Roland R. R. Co., 75 Md. 340, 23 Atl. 784 (1892); Jones v. Linden Building Asso., 79 Md. 73, 29 Atl. 76 (1894); Maryland Tube Works v. West End Imp. Co., 87 Md. 207, 39 Atl. 620 (1898); Cleaveland v. Mullin, 96 Md. 598,

54 Atl. 665 (1903); National Shutter Bar Co. v. Zimmerman, 110 Md. 313, 73 Atl. 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), in holding that the society was not ...

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