CRANSON v.

INTERNATIONAL BUSINESS MACHINES CORPORATION

Facts: Real Estate Service Bureau purchased electric typewriters from IBM. IBM sued Albion Cranson for the balance due on the purchase on the premise that Real Estate was neither a de jure nor a de facto corporation and that Cranson was a partner in said business, hence he was personally liable for the business debts. In April 1961, Cranson was asked to invest in a new business corporation about to be created. He met with other interested individuals and an attorney; he agreed to purchase stocks and become an officer and director. The corp was formed under the laws of Maryland and Cranson received a stock certificate. Cranson was elected president and all transactions by him for the corp were in his capacity as an officer. Unknown to Cranson, the certificate of incorporation which was signed and acknowledged prior to May 1 1961, was not filed by the attorney until Nov 24 1961. Between May 17 and Nov 8, Real Estate purchased 8 typewriters from IBM, with a balance of $4.3k after partial payments, for which this suit is brought.

Issue: WON an officer of a defectively incorporated association may be subjected to personal liability Held: NO There are 2 doctrines used to clothe an officer of a defectively incorporated association with the corporate attribute of limited liability: o Doctrine of DE FACTO CORPORATIONS, elements: (1) existence of law authorizing incorporation, (2) effort in good faith to incorporate under the existing law, (3) actual use or exercise of corporate powers o Doctrine of ESTOPPEL TO DENY CORPORATE EXISTENCE is 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 admits its existence as a corporate body. Two line of cases 1st: distinguishes acts or requirements which are condition precedent from condition subsequent to corporate existence for the applicability of the two doctrines; 2nd: applies the doctrines as long as the elements are present 1st line of cases o CONDITION PRECEDENT NOT COMPLIED WITH - failure to comply with a requirement declared by law to be a condition precedent to the existence of the corporation, does not give rise to a corporation, whether it be de jure, de facto or by estoppel. o CONDITION SUBSEQUENT NOT COMPLIED WITH - where the corporation has obtained legal existence but has failed to comply with a condition SUBSEQUENT to corporate existence, gives rise to a de facto corporation. And it is only when a de facto corporation exists that the doctrine of estoppel can be applied.
2nd line of cases

Disregarded the distinction made between those requirements which are conditions precedent and those which are conditions subsequent to corporate existence. The defectively formed corporations, once they assume corporate existence and dealt with other parties on that basis, were generally precluded, on the grounds of estoppel or collateral attack, to question the corporate existence. In one case, the Court held that while the general incorporation law of Maryland required the recording of the certificate to constitute the corporation a body politic, if the contract was made with the creditor through the President, after the certificate had been signed by the members of the proposed corporation, but before it was recorded, and the company, after its incorporation was complete , it will be ESTOPPED from denying its liability, on account of the same."

The Court chose to apply the 2nd line of cases. It held that where the three elements necessary for the application of the de facto corporation doctrine are present, there exists an entity which is a corporation de jure against all persons but the state. On the other hand, the estoppel theory is applied only to the facts of each particular case and may be invoked even where there is no corporation de facto. I.B.M., having dealt with the Bureau as if it were a corporation and relied on its credit rather than that of Cranson, is estopped to assert that the Bureau was not incorporated at the time the typewriters were purchased. As such, where one has recognized the corporate existence of an association, he is estopped to assert the contrary with respect to a claim arising out of such dealings.

Cranson is not liable for the balance. Judgment reversed.