Cranson v. International Business Machines Corp.

Court of Appeals of Maryland · 1964 · Corporations

CorporationsDefective incorporationCorporation by estoppelDe facto corporationdefective incorporationcorporation by estoppelde facto corporationlimited liability

Facts

Cranson agreed to invest in and serve as an officer and director of a new Maryland business corporation after being told by an attorney that the corporation had been formed. He paid for stock, received a stock certificate, was shown the corporate seal and minute book, and the business operated in corporate form through corporate bank accounts, corporate books, and a corporate lease. All of Cranson's dealings with IBM were as president of the corporation, and he never assumed personal liability or pledged his own credit. Unknown to Cranson, the attorney failed to file the signed and acknowledged certificate of incorporation until after the Bureau had purchased typewriters from IBM, leaving an unpaid balance.

Issue

May an officer of a defectively incorporated business association be held personally liable for its debt when the creditor dealt with the association as a corporation and relied on the association's credit, even though the certificate of incorporation had not yet been filed?

Rule

The doctrine of estoppel to deny corporate existence is distinct from the de facto corporation doctrine and may be applied even when there is no de facto corporation. Where a party has dealt with an association as if it were a corporation and relied on its credit rather than the individual officer's, that party is estopped to deny the association's corporate existence in order to impose personal liability on the officer.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Baltimore, Dana Mercer agreed to invest in Harbor Research Analytics, Inc. after the group's lawyer told her the company had been formed. The business opened a corporate bank account, issued Dana stock, and signed purchase orders with Blue Cedar Office Supply under the company name, but the lawyer had forgotten to file the charter papers. Blue Cedar later sued Dana personally for unpaid invoices, even though all invoices were addressed to the company and Blue Cedar never asked Dana for a personal promise to pay.

Is Dana most likely personally liable for the unpaid invoices?

Explanation. The majority held that corporation by estoppel is distinct from de facto corporation and may apply even when there is no de facto corporation. Where the creditor dealt with the association as a corporation and relied on its credit rather than the individual's, the creditor is estopped to deny corporate existence in order to impose personal liability on the officer.