question in every suit to which it was a party, or in which rights were involved springing out of its corporate existence. No judgment could be rendered which would settle the question finally. But when the government intervenes by an appropriate proceeding, the judgment is final and conclusive, putting an end to controversy.

3

§ 503. What is Meant by Existing De Facto. It is frequently said that in controversies between citizens generally and a corporation, the existence of the latter, when put in issue, is established by showing a corporation de facto. By this it is not to be understood that evidence of user alone will be conclusive of the question of corporate existence. Otherwise, as just suggested, corporations might spring into existence without any warrant of law. "The least proof which has been held sufficient," said Savage, C. J., " is the production of an exemplification of the act incorporating the plaintiffs, and evidence of user under their charter." It has been said by an eminent writer, in explanation of this principle, that if it appear to be acting under color of law, and is recognized by the State as such, such a question should be raised by the State itself, by quo warranto or other direct proceeding. And the rule would not be different if the constitution itself prescribed the manner of incorporation. Even in such a case, proof that the corporation was acting as such under legislative sanction would be sufficient evidence of right, except as against the State; and private parties could not enter upon any question of irregularity. This doctrine has met with frequent judicial approval.5

§ 504. Rule Under California Civil Code. The Civil Code of California declares that "the due incorporation of any company,

1 Central &c. Asso. v. Alabama &c. Co., 70 Ala. 120, 133; s. c. 9 Am. Corp. Cas. 8, 13.

2 McAuley v. Chicago &c. R. Co., 83 Ill. 348; Reisner v. Strong, 24 Kan. 410; Wilcox v. Toledo &c. R. Co., 43 Mich. 584; Swartwout v. Michigan &c. R. Co., 24 Mich. 389.

3 United States Bank v. Stearns, 15 Wend. (N. Y.) 314. See also Metho

dist Epis. Church v. Pickett, 19 N. Y. 482; Searsburgh Turnp. Co. v. Cutler, 6 Vt. 315, 323; Heaston v. Cincinnati &c. R. Co., 16 Ind. 275, 279.

4 Cooley Const. Lim. 254.

5 St. Louis v. Shields, 62 Mo. 247, 252. The rule applies to religious societies as well as to others. Trustees v. Hills, 6 Cow. (N. Y.) 23; s. c. 16 Am. Dec. 429.

1

claiming in good faith to be a corporation, and doing business as such, shall not be inquired into collaterally, in any private suit to which such de facto corporation may be a party." This statute has been the subject of frequent interpretations. It has been held that it does not go to the extent of precluding a private person from denying the existence, de jure or de facto, of an alleged corporation. The mere allegation that a party is a corporation cannot put the question whether it is such a corporation, beyond the reach of inquiry in a suit with private persons. It has been further reasoned that the allegation that the plaintiffs are a corporation is an indispensible allegation in any action brought by them; and necessarily the adverse party may deny it. The statute does not contemplate that the mere allegation that the company has been duly organized should put that fact beyond dispute: but only that when the evidence establishes that the company claims in good faith to be a corporation, and is actually doing business as such, then its due incorporation shall not be inquired into collaterally, Irregularities or defects in the mode of performing the acts prescribed by law as constituting a corporation, cannot be set up by a private individual. But he may show that those acts have not been performed at all. Hence upon an application for a mandamus to compel county authorities to complete their subscription to the stock of plaintiff's railroad company, the defendants may deny the plaintiff's incorporation; and may deny that they have complied with the provisions of the law prescribing their organization, or are doing business as a railroad company. And where, in an action by persons suing in a corporate name, against an individual, there is no ground to doubt that the plaintiffs claim in good faith to be a corporation, and are doing business as such corporation, neither the validity of the incorporation, nor the right to exercise corporate powers can be questioned by the defendant. More definitely speaking, where it appears that the plaintiff was recognized in the community as a corporation, and its records show that it was acting as such, that in all its dealings it was so styled, and that it had held corporate meetings, and pursued corporate forms of action, sufficient is shown to bring it within the statute.5

1 Cal. Civ. Code, § 358. This section seems to be the same as the California statute of 1862, p. 110, § 6. The act of 1862 was not limited to corporations existing at the time of its passage, but extended to corporations afterwards created. Pacific Bank v. De Ro, 37 Cal. 538.

2 Bakersfield Town Ha'l Assoc. v. Chester, 55 Cal. 98.

3 Oroville &c. R. Co. v. Plumas County, 37 Cal. 354. 4 Ibid.

5 Lakeside Ditch Co. v. Crane, 80 Cal. 181; s. c. 22 Pac. Rep. 76.

505. Rule Applies only where the Corporation Might Exist. A limitation of the doctrine is that the rule under discussion extends only to those cases where there is a law under which the corporation might exist. If there is no law under which it might exist, its non-existence may be set up even in a collateral proceeding;1 and the rule is the same where there is only an unconstitutional law.2 "To be a corporation de facto, it must be possible to be a corporation de jure, and acts done in the former case must be legally authorized to be done in the latter, or they are not protected or sanctioned by the law. Such acts must have an apparent right." It is an easy step from this view to the general rule that, to establish the existence of a de facto corporation, a charter or law authorizing the existence of the corporation must be shown, and user under such authority.*

5

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§ 506. Effect of this Doctrine upon the Rights of Shareholders and Creditors. An application of this principle is moreover found in a class of cases relating to the banking associations organized under an unconstitutional law in Michigan. They were not de facto corporations in such a sense as enabled their receivers to maintain actions to collect debts due to them, or to foreclose mortgages given to secure such debts." Nor

1 Heaston v. Cincinnati &c. R. Co., 16 Ind. 275, 278; Krutz v. Paola Town Co., 20 Kan. 397; Eaton v. Walker, 76 Mich. 579; s. c. 6 Law. Rep. Ann. 102; 43 N. W. Rep. 638.

Eaton v. Walker, supra; Green v. Graves, 1 Doug. (Mich.) 351; Hurlbut *. Britain, 2 Doug. (Mich.) 191; State . How, 1 Mich. 512; Heaston v. Cincinnati &c. R. Co., 16 Ind. 275, 278; Harriman v. Southam, 16 Ind. 192; Brown v. Killian, 11 Ind. 449; Snyder . Studebaker, 19 Ind. 462 (overruling on this point Evansville &c. R. Co., . Evansville, 15 Ind. 395).

3 Everson v. Ellingson, 67 Wis. 634, opinion by Orton, J. To establish the existence of a corporation de facto, the mere acting as a corporation, for any length of time, is not sufficient. A charter, or law which of itself creates, upon its acceptance, a corpora

tion, is necessary; or, if the law provides that a corporation may be formed upon a subsequent compliance with prescribed regulations and forms, some of those regulations and forms must have been observed, although others have been omitted. De Witt v. Hastings, 40 N. Y. Superior Ct. 463.

4 Abbott v. Omaha Smelting Co., 4 Neb. 416; Miami Powder Co. v. Hotchkiss, 17 Ill. App. 622; post, Ch. 184. It has been held that nul tiel corporation may be pleaded in an action by a corporation where the incorporating act does not unconditionally create the corporation. Mahony v. Bank, 4 Ark.

620.

5 Compare post, Ch. 156.

6 Green v. Graves, 1 Doug. (Mich.)

351.

Hurlbut v. Britain, 2 Doug. (Mich.) 191.

could shareholders in a banking corporation organized under an unconstitutional banking law, be made liable as partners upon the obligations of the pretended bank.1 But these decisions stumble upon technical difficulties. The judges who rendered them were unable to find a way by which an obligation which ought in good conscience to be enforced, could be enforced when there was technically no payee or obligee. Neither could they understand how a body of co-adventurers who had organized themselves as a banking corporation under an unconstitutional law could be made liable for the obligations of the pretended bank, when the very issue of such obligations was forbidden by law. They therefore allowed the adventures to escape liability upon their obligations, and allowed the losses to fall upon the innocent public, a shameful instance of the sacrifice of justice to mere theories. In a subsequent case, reviewing these decisions, it was suggested by Mr. Justice Cooley, that if the business" had not been illegal, possibly it might have been held that those who assumed to carry on banking business in the name of an association not empowered to do so, were personally responsible as joint promisors to those who had trusted them." The court,

in the last cited case, further concluded that, while a corporation organized under a void law cannot enforce obligations made to it, yet if not organized for unlawful purposes, a receiver of its assets can demand in equity an accounting for the debt purported to be secured by a mortgage made to it. It is a strik

1 State v. How, 1 Mich. 512.

2 Burton v. Schildbach, 45 Mich. 504, 511; citing Medill v. Collier, 16 Oh. St. 599.

3 Ibid. The court, in struggling with this question, said, in its opinion by Cooley, J.: "When persons in good faith proceed to organize what they intend shall be a corporation, contemplating a lawful business, and the organization proves ineffectual, but the money jointly contributed by the members associated finds its way into the hands of one of their number, or of some third person, it ought not to be in the power of such person to retain what he has thus received, and

3

to refuse to account to those who were equitably entitled. There is an injustice in such conduct which equity ought to be able to correct. If the money has been obtained in good faith, in the mistaken belief that a corporation existed, it ought not to be retained when the mistake is discovered, and the corporators, who cannot sue at law, ought to be at liberty to come into equity for an accounting. We know of no principle of equity that would be violated by giving such redress; and, on the other hand, there is ground for the argument that it would be entirely competent for the legislature retrospectively to affirm

ing illustration of the backward state of the law that we still find eminent and enlightened judges struggling with such difficulties. The simple and true view is, that if men undertake to form themselves into a business company which the State cannot recognize as a corporation, or which is even forbidden by the State, and in that character contract debts which would be valid and enforcible if contracted by individuals, the courts of justice should hold them liable as partners.1 It is intolerable that A. B. & C., by merely assuming a corporate name and pretending to be a corporation, can incur with innocent members of the public obligations which would be valid if incurred by them individually, and then escape liability because the law forbids them to act as a corporation in the incurring of such obligations. A simple rule, and one which should apply to all cases is that, where the obligations of a pretended corporation are neither inequitable nor immoral, the judicial courts should enforce them against the corporations as partners.2 So to do would be strictly consonant with public policy, because if business adventurers learn that, unless their corporate organization is lawful and valid they are liable as partners, this will deter them from attempting to form illegal or prohibited corporations. The Supreme Court of Michigan, abandoning its early conceptions, has recently held that, whilst a law of that State which provides for the organization of corporations, is void, on account of its title not being within the constitutional provision; whilst an association under its provisions, each member sharing in the profits and losses of the business in proportion to the money he has put into the capital stock, will not constitute the parties thereto a corporation de facto; and whilst their carrying on business in the corporate name is not evidence of user which can be considered in aid of their legal existence, yet they are liable as partners for debts contracted by them.3

and validate the promise to repay, so that a suit at law in the name of the association might be brought upon it." Ibid.; citing Lewis v. McElvain, 16 Oh. 347; Savings Bank v. Allen, 28 Conn. 97; Parmelee v. Lawrence, 48 Ill. 331; Town of Danville v. Pace, 25

Gratt. (Va.) 1; Thompson v. Morgan,

6 Minn. 292.

1 Ante, § 416.

2 As was done in Hill v. Beach, 12 N.J. Eq. 31. See also ante, § 417, et seq. 8 Eaton v. Walker, 76 Mich. 579; 43 N. W. Rep. 638.