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cases is, that the services must have been necessary and reasonable, and must have been performed under a contract with the promoter or promoters of the corporation assuming to act in its behalf, and with the intention and expectation that they shall be paid for by the future corporation, and not as mere gratuities,1 nor on the mere credit of the individuals at whose immediate request they are rendered. In a case involving this question, which was before it on a second appeal, the Supreme Court of Arkansas, speaking through Eakin, J., have said: "It was there announced [referring to the opinion delivered on the former appeal] that the doctrine cannot apply to cases in which private persons, contracting exclusively upon their individual credit, afterwards created a corporation for the more convenient management and enjoyment of the benefits acquired by the contract. This is obvious from the consideration that the enhanced value of the property so benefited, or the rights so acquired by individuals, are estimated and allowed by the corporation subsequently taking it, and shares are issued accordingly. It would be unjust to other stockholders to require the corporate body to pay again for the labor or material which enhanced this value. That obligation should still rest upon the original contractors, upon whose credit the work was done or the material furnished. It may be illustrated by supposing that the proprietors of an eligible site for a manufactory should contract, upon their individual responsibility, for the erection of suitable buildings, the addition of the necessary appurtenances, and the acquisition of water privileges and rights of way, with a view to forming a corporation for manufacturing; and should afterwards form one with others, who subscribe for shares and put in their property for shares at its enhanced value. It would be unjust, in the absence of any claim of lien, to hold the corporate body liable for the improvements. The services performed must be intended at the time to inure to the benefit of the future corporation; must be made or done in its behalf, and with the expectation

1 "Of course, to entitle the plaintiff to recover, such services must have been necessary and reasonable, and rendered not gratuitously, but with

the understanding and expectation that they were to be paid for." Bellows, J., in Low v. Connecticut &c. R. Co., 45 N. H. 370, 378.

and confidence that the company will be bound, and not the credit of the individuals.1

§ 487. Services Rendered at the Request of all the Corporators. The view has been put forward, and upon grounds which seem just, that where an association of individuals unite to carry on a certain business, and, before being incorporated, contract debts, and afterwards become incorporated without taking in any outside persons or outside capital, the corporation may be liable in equity for the payment of such debts. "Under such circumstances the property of no one but those who contracted the debts and were originally liable would be taken or subjected to the payment of it. The same persons continue the same business, with the same property, with no substantial change except in name. In such a case there is no reason why, in equity, the corporation should not be primarily liable for the debts, as it has succeeded to the property of the association." a

§ 488. Rule not Applicable where Third Persons Join the Corporation. But it has been pointed out that this rule could have no just application where a corporation is formed with a capital consisting in part of the property of the pre-existing association, and in part of the property contributed by new corporators, who had no connection with the association. Speaking with reference to such a state of facts, it was said: "If the rule contended for by counsel for appellant be the law, the property of a stranger to the contract of indebtedness, who may have no knowledge of its existence, or even the means of ascertaining it, would be subjected to the payment of the liabilities of individuals with whom he may have associated himself in a common enterprise or business. The injustice of such a rule is so apparent that no subtlety of reason can well disguise it. The general rule of law is that none are liable upon contract except those who are parties to it; but here it is sought to charge an entire stranger to the contract with the responsibility of discharging it. The case of an incoming partner is analogous

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1 Perry v. Little Rock &c. R. Co., 44 Ark. 383, 395.

Paxton v. Bacon Mill &c. Co., 2

Nev. 257, 260, opinion by Lewis, C. J.
Compare ante, §§ 265, 375.

to this, and it is universally held that he is not chargeable with the liabilities of the firm contracted before he became a member. If, instead of incorporating, the proprietors of the mill and Bacon mining ground had formed a partnership, the authorities are uniform, that, without a promise by the new firm, the mill proprietors would not be holden for the debts of the old firm." 1 It was also pointed out that any liens upon the property of the associates would follow it into the hands of the corporation; and further, that the members of the original association continued personally liable as if no incorporation had taken place, and that their interest in the corporation might be seized and sold on execution.2

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§ 489. Distinction between Cases where the Remedy is in Equity and at Law. Where the contract made by the promoters is intended to inure to the benefit of the future corporation when organized, the other contracting party may, under circumstances, acquire an equity to have the contract carried into effect. But it becomes a legal right only where the corporation affirms the contract, or does some act from which an affirmance may be implied. At law the rule obtains that corporations can not be bound merely by acts done or promises made by others in their behalf before they come into existence, and this on the simple conception that there is no privity of contract.3

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§ 490. Illustrative Cases where the Corporation was Held Liable on the Theory of Estoppel. It may be useful to refer to some other cases, where the corporation was held liable on the theory of implied contract, or of estoppel, or on the reason that it could not

1 Paxton v. Bacon Mill &c. Co., 2 Nev. 260, opinion by Lewis, C. J.

2 Ibid. See Chicago Coffin Co v. Fritz, 41 Mo. App. 389.

3 This principle is stated in Perry v. Little Rock &c. R. Co. 44 Ark., 383, 394. It was the ground of decision in Bommer v. American Spiral &c. Co., 81 N. Y. 469, where an action in the nature of an action at law was sustained on the ground of a ratification. See also Perry v. Little Rock &c. Co. (on a former appeal), 37 Ark. 164,

where there is a full discussion of the

subject. It was there announced that the doctrine cannot apply to cases in which private persons, contracting exclusively for their individual benefit, afterwards create a corporation for the more convenient management and enjoyment of the benefits acquired by the contract. The same doctrine is found in the leading case of Low v. Connecticut &c. R. Co., 45 N. H. 370; ante, § 485.

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accept and retain the benefit and at the same time deny the liability. After articles of association had been signed by the promoters of a cattle company, but before they were recorded or filed, the promoters elected a president of the corporation, who, in their presence and with their approval, executed and delivered to A. a promissory note in payment of property, which A. sold and delivered professedly to the corporation. The corporation subsequently used the property in its business. note having passed into the hands of a bank by indorsement, it was held, in a suit by the bank against the corporation on the note, that the corporation was liable.1 On like grounds, it has been held that an agreement among parties owning a mine, who expect to become incorporated but have not become so, that a person shall be entitled to a certain number of shares of stock of the proposed company, cannot be enforced against the corporation after its organization in an action for damages for the conversion of the shares, because it is not the contract of the corporation.2 A hotel company was organized with a capital of $160,000, which was all subscribed by one of the corporators, except three shares of $100 each, none of which were ever paid. At the time of the organization the principal stockholder, who was elected president, was the owner of a large amount of hotel furniture, subject to a chattel mortgage of $115,000. This he turned over to the company in payment of his subscription, in pursuance of an arrangement made prior to the organization; and the company, in pursuance of the same arrangement, gave its notes, secured by a chattel mortgage on the same property, to release it from the prior incumbrances; and such property constituted the sole assets of the company. It was held that, so far as the hotel company was concerned, it had received a full consideration for the notes and mortgage given, and that they were valid obligations.3

1 Paxton Cattle Co. v. First Nat. Bank, 21 Neb. 621; s. c. 33 N. W. Rep. 271.

2 Morrison v. Gold Mining Co., 52 356

Cal. 306; Hawkins v. Mansfield Gold
Mining Co., Id. 513.

3 Reichwald v. Commercial Hotel Co., 106 Ill. 439.

SECTION

CHAPTER XI.

IRREGULAR AND DE FACTO CORPORATIONS.

ART. I. DE FACTO CORPORATIONS, §§ 495-513.
II. CORPORATIONS BY ESTOPPEL, §§ 518-533.

ARTICLE I. DE FACTO CORPORATIONS.

495. Divergence of views on the subject of de facto corpora

tions.

496. When rightfulness of corporate existence presumed.

497. Presumed from user of corporate

powers.

498. Especially where rights have been acquired thereunder.

499. Corporations by prescription or

user.

500. What necessary to give rise to this presumption.

501. Validity of corporate existence
not litigated collaterally.

502. Limitations of this doctrine.
503. What is meant by existing de
facto.

504. Rule under California civil
code.

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SECTION

505. Rule applies only where the corporation might exist.

506. Effect of this doctrine upon the rights of shareholders and

creditors.

507. Validates irregularities in organization.

508. Except where the thing to be
done is a condition precedent.
509. Further observatlons and illus-
trations.

510. State precluded by lapse of time
from questioning regularity of
corporate organization.
511. Corporation suing for rights
which can only inhere in it as a
corporation.

512. Corporations by legislative recog

nition.
513. Illustrations.

§ 495. Divergence of Views on the Subject of de Facto Corporations. It is impossible to formulate a rule on the subject of de facto corporations, which will be applicable in all American jurisdictions, or which will receive uniform support from the decisions in any one such jurisdiction. Those decisions oscillate between two extreme views: 1. That where a body of men act as a corporation and in the ostensible possession of corporate powers, it will be conclusively presumed, in all cases except in a direct proceeding against them by the State to vacate their franchises, that they are a corporation. 2. That the con

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