§ 1856. Defense that the Charter was Obtained by Fraud. It cannot be shown as a defense to such an action that the charter of the company was obtained by fraud, and it is proper to exclude evidence tendered for this purpose, provided it appear that the shareholder participated in the business of the company, voted to accept an amendment of its charter, acted as a director, etc. But it has been held that "where a charter has been obtained by means of fictitious subscriptions for part of the stock, and a fraud has been committed on a bona fide subscriber, by which he has either sustained or might sustain injury, no action can be maintained against him by the corporation for the amount of his subscription, unless such subscriber has accepted the charter and by his own acts has assisted in putting it in operation.' "2 In the same case the doctrine on which we are commenting was said not to apply in cases where the corporation never had any legal existence, but was a sham, and where a large portion of the stock was fraudulently and fictitiously created, for the mere purpose of being used as a decoy to induce other people to subscribe. Accordingly, where the affidavits, required by the law as a condition precedent to the issuing of the license by the Secretary of State, were shown never to have been filed, and where the $5,000 in cash of the capital stock, as required by the statute, had not been paid in by the subscribers at the time the license was issued, it was held that the corporation could not maintain an action against a subscriber to enforce his stock subscription.3 § 1857. Illustrations. It follows that it is not necessary for the corporation, in order to maintain such an action, to prove that the corporation is authorized by law and is still in existence. In the case of a railroad company it was held no defense that the articles of confiding, and then be heard to say, ** * * precedent all demand that appellant should be estopped from denying the constitutionality of the law." 1 Smith v. Heidecker, 39 Mo. 157. 2 Occidental Ins. Co. v. Ganshorn, 2 Mo. App. 205, 208. Ibid. See also Wells v. Jones, 41 Mo. App. 1. 4 South Georgia R. Co. v. Ayres, 56 Ga. 230. incorporation were defective in not definitely stating the termini of the road or the counties through which it passed; since, notwithstanding the defect, the shares of stock to which his subscription entitled him were shares in a corporation de facto. And generally, a subscriber to the capital stock of a railroad company, when sued for his subscription, cannot set up in defense any mere irregularity in the organization of the company, provided it is a corporation de facto, proceeding without interference of the State authorities in the construction, completion and maintenance of its road.2 So, it is no defense to an action by a mutual insurance company to collect assessments, to show that it met and chose officers before its charter went into effect, if, subsequently to that time, persons were found, with the consent and under the authority of the designated corporators, and without objection on the part of the commonwealth, actually exercising the corporate powers, and claiming and using the franchise.3 4 § 1858. Where the Proceeding against the Stockholder is by or on Behalf of the Creditors of the Corporation. When the stockholders in a body which has acted and held itself out as a corporation are proceeded against by creditors, they are equally estopped by their own conduct from denying that they are a corporation; for it would be palpably wrong to permit a defendant, who is one of the owners of the capital stock of a de facto corporation, which operates and sues for his benefit, to set up a failure of its organizers to perform a duty initiatory to its legal existence, when the plaintiff, if sued by the corporation for the defendant's benefit, could not set up the same fact as a defense to the suit. Their own acts," says Brickell, C. J., "vitalized the corporation, gave it credit, and induced dealings with it; and it is true conservatism and sound policy, promotive 1 Cayuga Lake R. Co. v. Kyle, 64 N. Y. 185. 2 Monroe v. Fort Wayne &c. R. Co., 28 Mich. 272. 3 Appleton &c. Ins. Co. v. Jesser, 5 Allen (Mass.), 446. 4 Eaton v. Aspinwall, 19 N. Y. 121; Mead v. Keeler, 24 Barb. (N. Y.) 20; Abbott v. Aspinwall, 26 Barb. (N. Y.) 202; Slocum v. Providence Steam &c. Co., 10 R. I. 112; Chubb v. Upton, 95 U.S. 665; Methodist Episcopal Church v. Pickett, 19 N. Y. 482; Upton v. Hansbrough, 3 Biss. (U. S.) 417; McCarthy v. Lavasche, 89 Ill. 270; s. c. 31 Am. Rep. 83; 10 Chi. Leg. N. 342; Buffalo &c. R. Co. v. Cory, 6 N. Y. 75; McHose v. Wheeler, 45 Pa. St. 32; Rice v. Rock Island &c. R. Co., 21 Ill. 93; Tarbell v. Page, 24 Ill. 47, 48; Wheelock v. Kost, 77 Ill. 296. 5 Eaton v. Aspinwall, 19 N. Y. 119, 122. of right and equity, to seal their lips against contradiction and denial of that which they must be taken to have affirmed to the injury of strangers who have trusted the affirmation." 1 § 1859. Illustrations. Defenses of this kind have been held unavailing in the following cases: The statute required the filing of a certificate of incorporation, stating, among other things, "the number of trustees, and their names, who should manage the concerns of the company for the first year," after which the persons therein named should become a body corporate, etc., and the certificate contained no such statement, but the company went into operation, and continued in operation for about twenty years, until dissolved by the judgment of a court, and a shareholder was afterwards sued on one of its contracts. The statute was held to be directory only, and the defendant was estopped from urging this defense. The making of such a certificate has been held not a condition precedent to the existence of the corporation, and a failure to make it cannot be set up as a defense by the corporation against a creditor; 3 nor by a stockholder against a creditor; 4 nor could the corporation set up, as a defense to an action against it, its falsehood, if made.5 So, where the statute provided that, where a certificate of incorporation should be filed, and ten per cent. of the capital should be paid in, the persons named should become a body corporate, etc., a shareholder, when sued upon a corporate indebtedness, could not urge that ten per cent. of the capital named had not been paid in. Such a company, though not a valid corporation in point of law, might carry on its enterprises, have its day in court, and divide its revenue among the holders of the shares of its capital, until the State should interpose and ask that it should be dissolved. The only real necessity for complying with the statute in relation to the payment of the ten per cent. was to prevent proceedings in behalf of the people from putting an end to its corporate functions. The fact that such a company kept a public office, transacted business in its corporate name, kept the usual corporate books, upon which the defendant appeared as a shareholder before the contracting of the debt sued on,-raised the inference that the 1 Central Ag. Asso. v. Alabama &c. Co., 70 Ala. 120, 133; s. c. 9 Am. Corp. Cas. 8, 13. And see McCarthy v. Lavasche, 89 Ill. 270; s. c. 31 Am Rep. 83. 2 Mead v. Keeler, 24 Barb. (N. Y.) 20. 3 Merrick v. Reynolds Engine Co., 101 Mass. 381. Tarbell v. Page, 24 Ill. 46. Dooley v. Cheshire Glass Co., 15 Gray (Mass.), 494. See Boston Acid Co. v. Moring, 15 Gray (Mass.), 211; Newcomb v. Reed, 12 Allen (Mass.), 362; Narragansett Bank v. Atlantic Silk Co., 3 Metc. (Mass.) 385. credit was given on the faith, not only of the liability of the corporation as such, but ultimately of the several shareholders of its capital, and the defendant was hence estopped from making such a defense.1 § 1860. Illustrations Continued.- Neither is it competent for a stockholder to avoid payment of an execution levied upon his property, under the provisions of a statute of Rhode Island,2 by showing that the fee or tax required by another statute to be paid to the treasurer of the State, before its charter should take effect, had never been paid. Although, by reason of the non-payment of this fee, the act of incorporation never went into effect,3 yet the shareholder was estopped to show this fact. Durfee, J., in giving the judgment of the court, said: "The plaintiff, in order to have the relief which he seeks, ought to satisfy us, not only that his company is not a corporation, but also that he is entitled to show the fact against its creditors. We assume, as we think the bills warrant us in assuming, that the plaintiff is a stockholder in the American Steam and Gas Pipe Company, though he has done nothing as such except hold his stock. The question, then, is whether a stockholder, who does nothing but hold his stock, is estopped, when pursued by a creditor of the supposed corporation, from denying its existence. We think he is so estopped. By becoming and continuing a stockholder, he holds himself out as a corporator, and so contributes to the belief that the company with which he is associated is a corporation. To permit a person who has so held himself out to say that he is not a corporator, when legally pursued as such, would be to permit him to take advantage of his own wrong. He is like a person who, having held himself out, or suffered himself to be held out, as a copartner, may be charged with the copartnership debts. Or he is like a person who, without authority as executor or administrator, intermeddles with the property of a decedent, and so becomes chargeable as an executor in his own wrong. The plaintiff having assumed the character of a corporator, where he is sought to be charged as such, ought not to be heard to say that the character was falsely or unlawfully assumed. The fact that he was not active in the business of the company cannot avail him; for it is the assumption to hold the stock, as if he were a corporator, which makes the 1 Eaton v. Aspinwall, 19 N. Y. 119; 8. p., Abbott v. Aspinwall, 26 Barb. (N. Y.) 202; McHose v. Wheeler, 45 Pa. St. 32. See ante, § 1216, et seq. 2 Rev. Stat. R. I. ch. 128, §§ 11, 12. This statute requires the filing with the town clerk of a certain annual certificate or statement, in default of which the members are jointly and severally liable for all debts of the corporation. 3 Union Horseshoe Works V. Lewis, 1 Abb. (U. S.) 518. mischief. It might easily happen that the stockholder whose name contributed most to the credit of the supposed corporation was least active in its business, and it would be plainly unjust to exempt him from liability to the creditors merely because of his inactivity." The same ruling has been made in Pennsylvania.2 § 1861. Illustrations Continued.-Upon like grounds, where an insurance company attempted to increase its capital stock; filed papers for that purpose in the office of the auditor of State; received subscriptions for and sold its capital stock under such assumed increase; received part payment thereon, and incurred large liabilities upon policies of insurance bearing upon their face evidence of such increase ;- this was held sufficient to constitute the company a corporation de facto, so that neither it nor its stockholders could object that it was not a corporation de jure, or that it had no power to issue such an increase of stock.3 For stronger reasons, where a director visited the plaintiff at his place of business, and represented that the corporation had been legally organized, and that he was a director in it, and the plaintiff, on the strength of this representation, sold goods to the corporation and accepted the notes in settlement, such director was estopped from setting up its defense, in a suit for the corporate debt, that the corporation was never legally organized, and that, therefore, he could not be personally held liable for its debts.4 § 1862. Estoppel to Set up Non-Existence of Corporation at Time of Subscription. We have already seen that subscriptions to the capital stock of a corporation, made before its organization, inure to its benefit when it is once formed, and become in judgment of law, contracts between the subscriber and the corporation,- though the courts have rested this conclusion on various theories and refinements." In their struggles with this question the courts have sometimes rested their con 1 Slocum v. Providence Steam and Gas Pipe Co., 10 R. I. 112, 114. 2 Patterson v. Wyamissing Co., 40 Pa. St. 117. 3 Upton v. Hansbrough, 3 Biss. (U. S.) 417. "To the public," said Hopkins, J., in this case, "this company had all the external indicia of being a corporation, and legally entitied to exercise the rights and privileges it assumed to exercise. A party voluntarily taking stock in such a company is not in a position, when sued for the balance due for such stock, for the benefit of the creditors of such company, to deny the authority of the company to issue such stock, and to transact business lawfully." 4 Corey v. Morrill, 61 Vt. 598; s. c. 17 Atl. Rep. 840. Ante, § 1170, et seq. |