§ 829 ACTIONS ON JOINT AND PARTNERSHIP LIABILITY. 927 CHAPTER XXIX. ACTIONS ON JOINT AND PARTNERSHIP LIABILITY OF MEMBERS. § 829. Of increasing importance. 830. Forms of individual liability distinguished. 831. The true test of the doctrine of estoppel. 832. Defects in organization rendering the alleged incorporators personally liable. 833. Fraud usually the basis of liability. 834. Knowledge of real relation immaterial. 835. Members are liable where no potential legality. 836. Whether intention of incorporators can be inquired into collaterally. 837. Only promoters and actual organizers liable. § 829. Of increasing importance.-Contracting in a corporate capacity has always been considered as implying a limited liability. The immunity afforded by thus doing business and contracting and incurring obligations, rather than in an individual capacity, has frequently been sufficient inducement for unscrupulous men of nominal reputation for integrity and fair dealing to become the real actors behind the scenes in the perpetration of the most shameful and ruinous frauds on the public and upon private individuals through the machinery of a pretended corporation held forth as their principal. Until a comparatively recent date, courts have been reluctant to abandon the technical common law rules in such cases. But within the last decade, and notably within two or three years, they have taken long strides away from technicalities and precedents which had only age and long acquiescence to entitle them to respect, and have shown a willingness to allow a high sense of justice to govern them. They have placed the plea of estoppel on its true merits as in other cases, refusing to lend it support where it was sought to be used as a shield for cunning and dishonesty. They have, when necessary, refused to fix their attention upon the corporate entity as the principal, and the promoters and schemers as only its agents and cestuis que trust; but have searched out the real motives for organizing or pretending to organize the corporation, and held the real actors rather than the fictitious being responsible for all wrongs done and losses suffered by persons misled by the corporate dummy. The principle firmly established by the great preponderance, if not the unquestioned result of recent authority, is that where parties hold themselves out as a corporation in disregard of the rights of others, or conduct themselves fraudulently, after a simulated compliance with legal requirements, they incur an individual liability.2 1 In Ward v. Brigham, 117 Mass. 24, the court said: "Those who acted as agents for the inchoate corporation acted without a principal behind them because there was no body corporate capable of appointing agents, and so became principals in the transaction." 2 See Fresno Canal Co. v. Warner, 72 Cal. 379; Lehman v. Warner, 61 Ala. 455; Close v. Glenwood Cemetery, 107 U. S. 477; Oregonian Ry. Co. v. Oregon R. & N. Co., 10 Sawy. 470; Bigelow on Estoppel, 4th Ed., p. 527; Lakeside Ditch Co. v. Crane, 80 Cal. 181. But there can be no corporation de facto for any purpose in the absence of a law authorizing associated parties to file their articles of association or to become incorporated. Nor does the carrying on of business in a corporate name under such circumstances constitute evidence of user, which can be considered in aid of legal corporate existence. Eaton v. Walker, 76 Mich. 579; 6 L. R. An. 102. See also, Doyle v. Misner, 42 Mich. 332; Meth. Epis. U. Ch. v. Pickett, 19 N. Y. 482, 485; Heaston v. R. Co., 16 Ind. 190; U. S. Bank v. Stearns, 15 Wend. 314; Childs v. Smith, 55 Barb. 45. The cloaked machinery of a corporation will not be allowed to shield parties from the consequences of fraud. Colton L. & W. Co. v. Raynor, 57 Cal. 593; Raynor v. Mintzner, 67 Cal. 161-2; Warddell v. Railroad Co., 107 U. S. 651; Lawler v. Murphy, 58 Conn. 294; Davidson v. Holden, 55 Conn. 103; Hitchcock v. Buchanan, 105 U. S. 416. If a corporation, though legally formed, is used as a mere agency for perpetrat § 830. Forms of individual liability distinguished.--It is necessary to distinguish between frauds committed by officers and agents of a legally incorporated company organized for legitimate purposes and those just mentioned. Whether they or the corporation are liable will, in the former case, depend upon whether they were acting within the scope of their real or apparent authority, and within the corporate powers; while in the case of a corporation set on foot as an instrument of fraud, the questions of ultra vires and of authorization are of no importance. § 831. True test of the doctrine of estoppel.-The true office of an estoppel is to prevent the perpetration of fraud by a change of relation, or by the retraction of a statement to the injury of another who has relied upon the original statement, act or status of persons and things. Applying this definition, not claimed to be technically complete and accurate but substantially so, there is no proper place for its invocation where parties have formed a paper corporation and used it as a shield and cloak to perpetrate a fraud, any more than where one seeks the protection of the statute of frauds to enable him to retain the benefits of dishonest and fraudulent practices. In other words, to allow it would be not only to ignore the definition but to defeat the sole object and purpose for which the doctrine of estoppel was received, and has been retained in our jurisprudence. ing fraud, the corporate entity will be disregarded and the parties behind it held to personal liability. Shorb v. Beaudry, 56 Cal. 446; Cornell v. Corbin, 64 Cal. 198, 200. If a mutual benefit society does business as a corporation without having complied with the insurance law, no corporate liability is created and they are personally liable. Farmers' Co-op. Trust Co. v. Floyd (Ohio), 26 N. E. 110; on question of estoppel, Lawler v. Murphy, 58 Conn. 291; 20 Atl. 457; Bartholomew v. Bentley, 15 Ohio, 659, a strong case. A certificate of incorporation legally defective not admissible in evidence. McCallion v. Sav. Bank, etc., 70 Cal. 163; 12 P. 114. 1 Infra, Ch. XXXIV. 59 There is no inconsistency, with this view, in the rule that one who has in his hands funds belonging to a de facto corporation will not be allowed to defeat an action therefor by the corporation, by the plea that the corporation was not duly incorporated.1 To disallow such a plea is an extension and not a contradiction of the doctrine of estoppel. With no less reason can it be said that parties who have as individuals obtained the funds of individuals though ostensibly as corporators will not be allowed to hold up the latter character to defeat a recovery from themselves, the real recipients.2 1 Knutz v. Paola T. Co., 20 Kan. 397. 2 In O. & V. R. R. Co. v. Plumas Co., 37 Cal. 354, 361. The court say: "This provision (sec. 358, Civ. Code) does not go to the extent of precluding a private person from denying the existence de jure or de facto of an alleged corporation. It cannot be true that the mere allegation that a party is a corporation puts the question, whether it is such a corporation, beyond the reach of inquiry in a suit with a private person. It must be a corporation either de jure or de facto, or it has no legal capacity to sue or be sued, nor any capacity of any kind. It is an indispensable allegation, in an action brought by a corporation, that the plaintiff is a corporation; and it results from the logic of pleading that the opposite party may deny the allegation. Were this not so, any number of different bodies of men, each body styling itself the directors of a given railroad company, might bring separate actions against the county, and it is impossible to see why each would not succeed in the action, upon showing that it was the duty of the Board of Supervisors to subscribe to the capital stock of the given corporation, and issue the county bonds. It is not contemplated that the allegation that the company was duly organized should put the fact beyond dispute and dispense with all evidence. It is declared that the due incorporation of any company shall not be inquired into collaterally in any private suit, etc., in a certain case; that is, when the company claims in good faith to be a corporation under the laws of this state, and is doing business as such corporation. The alleged corporation must both claim in good faith that it is such corporation. and must be doing business as such corporation; and then its due incorporation cannot be inquired into collaterally. To say that the 'due incorporation' cannot be inquired into collaterally does not mean that no inquiry can be made as to whether it is a corporation. Many of the acts required to be performed in order to make a complete organization of the corporation may have been irregularly performed, or some of them may have been entirely omitted, and the rule of the statute is, that such irregular or defective performance shall not defeat the incorporation when drawn into question collaterally. The omission of the names and number of the first trustees from the articles of association, the failure to file a duplicate of the articles of association with the secretary of state, an incorrect statement of the length of the road, an omission of the statement of the principal place of business and many other irregularities of the kind men § 832. Defects in organization rendering the alleged incorporators personally liable. But aside from all questions of fraud and good faith, certain acts and tioned in Spring Valley Water Works v. San Francisco. 22 Cal. 440, the insufficient acknowledgment of the articles of incorporation (Dannebroge Mining Company v. Allment, 26 Cal. 286), are irregularities that will not defeat the corporation, when its organization is collaterally called in question." See also Grayson v. Willoughby, 78 Iowa, 83; 42 N. W. 591. In this case the plaintiff was held not estopped. He had not only dealt with the pretended new company held out to him for a fraudulent and ultra vires purpose, but had made application to become a member of it. It was held that he was not estopped, and that the so-called directors were personally liable. The laws of Texas absolutely prohibiting the doing of business by mercantile corporations and the alleged corporators never having formally organized as a corporate body, a creditor who dealt with them as a corporation is not thereby estopped from denying their corporate capacity and may hold them liable as partners. Empire Mills v. Alston Groc. Co. (Tex., 1891), 15 S. W. 505. In Lawler v. Murphy, 58 Conn. 294, the opinion sheds so much light on the entire subject of individual liability in such cases as to justify a liberal quotation. SEYMOUR, J., delivering the opinion, said: "The defendants assign for further cause for demurrer that it appears from the contract declared on that the defendants made no personal agreement upon which they were personally liable, but that the contract was signed by them only as officers of the organization mentioned therein. This issue is raised, not as a question of fact, but as a question of law upon the pleadings. As a matter of law, does the contract upon its face show that the defendants made no personal contract upon which they were personally liable? The complaint alleges that they were jointly engaged in carrying on a life-insurance business, under the name of the Connecticut State Insurance Fund, and that they entered upon the contract sued upon. If the facts are so, should they not be held liable? Does the contract, as a matter of law, preclude that state of facts? If they had simply been sued as individuals, upon a contract headed with a name of the association, and signed by them, respectively, as president, secretary and treasurer, as appears to have been the case in Hitchcock v. Buchanan, 105 U. S. 416, cited by the defendants, and the complaint had contained no allegation that they were carrying on the insurance business under a certain name, and made the contract with Thomas Lawler, the question would be a different one, especially if it appeared that the association was incorporated. But under the decision of Davidson v. Holden, 55 Conn. 103, the defendants certainly might be liable on a contract signed by them as officers of an organization. If, as the statute permits, the organization consisting simply of individuals united under a distinguishing associate name for business purposes, they did not thereby acquire either corporate power or immunity from individual liability. Consequently it could not appear, as a matter of law. from the contract declared on, that the defendants made no personal contract or agreement upon which they were personally liable. The case of Davidson v. Holden was a suit against certain individuals, who were, in fact, the president and secretary of an unincorporated association. This court held that, “as a matter of law, the plaintiff, in giving credit to the associate name, gave credit |