Story Case

The general incorporation law of a certain state provided that corporations might be formed for general purposes by complying with the requirements set forth in the law. Among other requirements established, the incorporators were required to publish their articles of association in some weekly newspaper at least four times before the corporation began business; and further, that the certificate of the purpose of the corporation be filed in the office of the Circuit Court clerk. Certain persons organized under the name of the Red Valley Brick Company. All requirements were met except the two above mentioned. No publication of the articles of association was made; and a certificate of the purpose of the organization was not filed in the manner required. For several months they conducted business under the name of the Red Valley Brick Company. Mr. J. H. Mason had sold to them a piece of land upon which their brick plant was established. When payment was not made thereon, he brought this action against the incorporators as partners. They claimed that they were not partners, but were a corporation, if not a de jure, at least a de facto corporation. What should be the decision of the Court in this case?

Ruling Court Case. Finnegan Vs. Knights Of Labor Building Association, Volume 52 Minnesota Reports, Page 239, And Volume 18 Lawyers' Reports Annotated, Page 778

The Knights of Labor in Minneapolis built a club house or assembly, for which Finnegan furnished the plumbing. To finance the building, eight of the members signed articles for a corporation, and subscriptions to the stock were taken, directors and officers elected, and contracts made in the corporate name. Finnegan, however, sued the persons who had signed the stock subscriptions, alleging that they were partners, doing business under the name of the Knights of Labor Building Association. He maintained that they had not incorporated, because, first, the law under which they had acted was unconstitutional and void, second, they had incorporated for a purpose not authorized by the law, and third, the articles did not state where the principal place of business was to be.

Mr. Chief Justice Gilfillan, delivering the opinion of the Court, said: "It is unnecessary to consider whether this was a de jure corporation, so that it could defend against a quo warranto, in behalf of the state; for, although an association may not be able to justify itself when called on by the state to show by what authority it assumes to be and act as a corporation, it may be so far a corporation that, for reasons of public policy, no one but the state will be permitted to call in question the lawfulness of its organization. Such is what is termed a corporation de facto - that is, a corporation from the fact of its acting as such, though not in law or of right a corporation. There must be a law under which the corporation might have been formed, an attempt to comply with that law, and an exercise of the functions of a corporation. Enough must be done so that there is "colorable organization," that is, an endeavor in good faith to comply with the law. It would certainly be impolitic to permit a number of men to have the status of a corporation to any extent merely because there is a law under which they might have become incorporated, and they agree to act as a corporation, and they do act as a corporation. In an earlier Minnesota case, Johnson vs. Corser, the members signed the articles but did not attempt to give them the publicity required by the statute, by filing them for record. This public record is an important item in the process of incorporation, designed for the information and protection of the persons dealing with the corporation, and to omit it is to forfeit the right to claim the protection of the corporate franchise. But the omission here to state the place of business in the articles does not amount to the sort of defect in the organization which would prejudice third persons. Although it might prevent this from being a de jure corporation, it will not prevent it from becoming a de facto corporation. There was a colorable attempt to organize, and there was a user or exercise of the franchise. As to the third requirement, the law under which they could have become incorporated, we believe that is also satisfied. It has been held in some states that if the law is found to be unconstitutional it shall be regarded as if there had never been any such law on the statute books, and all attempted incorporations shall be wholly ineffective. But we do not believe that result sound or desirable. Until the law has been tested and found invalid, and while it remains on the books and is being administered by the officers of the state, it should protect those who rely in good faith on its provisions. In an action of quo warranto, proof of the unconstitutionality of the law would prevail against the validity of the corporation's charter, but in a question of de facto incorporation, we think the constitutionality of the law should not be gone into."

Because there was a law under which they could have incorporated, because they had in good faith made a colorable attempt to secure a charter, and because they had acted as a corporation in the transaction, the individual members were not liable, and judgment was given for the defendants.

Ruling Law. Story Case Answer

In order to establish the existence of a corporation de facto three things must be shown: (1) It must be shown that there was a valid law under which a de jure corporation might have been formed. If there is no valid law under which a de jure corporation might have been organized, then no corporation de facto can exist. (2) The incorporators must have made a bona fide, substantial attempt to comply with the laws in respect to the creation of a corporation. No absolute rule can be formulated which will always determine what constitutes a substantial compliance with the incorporating laws. In the Story Case, however, the failure to publish the articles of association and file the certificate of the purpose of the corporation, in the manner required by law, are so essential that a substantial compliance has not been had; and for that reason not even a de facto corporation resulted from the efforts of the incorporators; and accordingly, they may be held as partners. (3) Finally, the organization must have acted as a corporation; there must have been a user as a corporation. Some definite act by the corporation must indicate unequivocally that corporate powers and rights were intended to be exercised.