Tanner v. Sinaloa Land & Fruit Co.

MoOABTY, O. J. (after stating the facts as above.) Counsel for appellant contends with much earnestness that the judgment is not only unsupported by, but is contrary to, the evidence, and that it is against law. Viewing the facts in the light most favorable to respondent, they wholly fail to' establish any legal liability on the part of the corporation for the services which he claims that he rendered it in preparing the articles of incorporation and the contracts mentioned in the foregoing statement of facts. We will first consider the — 21 — merits of tbe claim of respondent for $250 for services which, he claims he rendered the corporation in preparing the articles of incorporation. The record shows that, after respondent Harding and Barlow obtained the option on the land mentioned in the above statement of facts, they, the three promoters, formed a partnership for the purpose of disposing of the option in small interests to prospective purchasers; each of the three partners retaining a small interest therein. Harding and Barlow did most of the soliciting for purchasers in their business ventures, and they represented to the parties whom they solicited and induced to purchase interests in the land covered by the option that the partnership-, comprising Tanner, Harding, and Barlow, would attend to the incorporation of the company, and that each purchaser “would receive his stock without any additional expense.” On this point, Harding testified': “The stockholders looked to the partnership to have the company incorporated. Q. How do you know they did ? A. We represented it that way. Q. Who did ? A. Mr. Barlow represented it.” Mr. Barlow testified, in part, as follows: “I will further state that we so informed the members on that point; at least I did, and I am satisfied Mr. Harding did, because we worked together a great deal.” And again he said: “I will state further that we so told these subscribers that they should secure their stock without any further expense.” 1 It thus appears that at least two of the three members of the partnership agreed with a considerable number of the subscribers for interests in the land covered by the option that the partnership would' attend to the detail work and bear the expense of forming a corporation to take over the land mentioned. This agreement being within the scope of the partnership business, Tanner, respondent, was bound thereby; he being a member of the partnership in whose interest the agreement was made. Bespondent, in answer to the following question. “You three (Tanner, Harding, and Barlow), wasn’t it a part of your plan and scheme to-incorporate so as to turn the land over to the company and — 22 — thereby make your profit?” said, “That is what we did.” While respondent testified that he prepared the articles of incorporation at the request of some of the subscribers, parties who had purchased interests in the land covered by the option, and with the expectation of being paid a reasonable fee for his services,he nevertheless admitted that no one promised him that he 'would be paid for the work. Nor is there any evidence tending to show that the board of directors, by resolution or otherwise, assumed the payment of the obligation, if it can, under the circumstances, be called an obligation. There is a conflict in the authorities regarding the circumstances under which a corporation is or may become liable for contracts entered into by its promoters before the corporation comes into existence. Some courts have held that services rendered in the drawing and filing of the articles of incorporation and the expenses necessarily incurred in its ■creation are proper charges against a corporation, provided the services were rendered and the expenses incurred with the understanding and expectation that they would be paid for by the company when incorporated. Lowe v. Railroad Co., 45 N. H. 370; Farmers’ Bank, etc., v. Smith, 105 Ky. 816, 49 S. W. 810, 88 Am. St. Rep. 341; Freeman Imp. Co. v. Osborn, 14 Colo. App. 488, 60 Pac. 730. It has also been held that, in order to bind a corporation "by contracts made in its behalf before it comes into existence, the making of such contracts must be authorized by at least a majority of the promoters. Bell’s Gap R. Co. v. Christy, 79 Pa. 54, 21 Am. Rep. 39; Tift v. Quaker City Nat. Bank, 141 Pa. 550, 21 Atl. 660. 2 The great weight of authority, however, holds that parties who undertake to organize a corporation cannot bind the corporation by their contracts and agreements made before the company is incorporated. The authorities, however, practically all agree that a corporation may by corporate action adopt the contracts of its promoters, especially those that were necessary to effect its creation. In Cook on Corporations, section 707, the author says: — 23 — “Great difficulty has arisen in determining whether a corporation is liable on contracts made in its behalf by its promoters before the incorporation took place. The decided weight of authority holds that the corporation is not bound thereby. Any other rule would be dangerous in the extreme, inasmuch as promoters are proverbially profuse in their promises, and, if the corporation were to be bound by them, it would be subject to many unknown, unjust, and heavy expenses. The only protection of the stockholders, and of subsequent corporate creditors, against such a result lies in the rule that the corporation is not bound by the contracts of its promoters. The rule is just and should not be weakened. . . . It is entirely legal, however, for the corporation to ratify, confirm, or adopt the contracts of its promoters. A promoter’s contract may be adopted by the corporation in any way in which a contract may be made by the corporation.” In 10 Cyc. 262, 263, tbe rale is stated as follows: “Those who undertake to organize a corporation are not in any sense its agents before it comes into existence. They cannot affect it by their declarations or representations, or bind it by their engagements made in its behalf; but after coming into existence the corporation may make their engagements its own by express agreement or by ratification; and this ratification or adoption may be by express corporate action or by any of the other modes by which corporations may ratify or adopt the unauthorized or officious acts of others made in their behalf, as where the corporation voluntarily accepts the benefits accruing to it from the engagement of its promoters, after full knowledge, and having full liberty to decline the same.” In 1 01. & Mar. Pri. Corps, section 101a, it is said: “Since a-corporation has no existence, and cannot have an agent, until it has been created or organized, to such an extent, at least, as to become a corporation cLe facto, it necessarily follows that until then it cannot engage in business or enter into a contract. Its promoters are not its agents, and cannot contract for it. A corporation, therefore, when it has been organized, and has thus acquired corporate existence, is not liable upon a contract made by its promoters, or by agents appointed by them, before its organization, even though the contract may have been made in its name and with the understanding that it would perform the same, unless it has expressly or impliedly ratified or adopted the same since its organization, or unless liability is imposed upon it by its charter or by some other statute. It can make no difference in the application of this principle that the promoters who made the contract are the — 24 — ■only stockholders or members of the corporation; for the corporation, as we have seen, is a legal entity and artificial person distinct from its stockholders or members as individuals.” In Tuttle v. Tuttle, 101 Me. 287, 64 Atl. 496, 8 Ann. Cas. 260, this rule, which, is a wholesome one and- which rests upon sound legal principles, is tersely stated in the following language: “A corporation is not liable in the absence of ratification or adoption or of a charter or statutory provision imposing liability, for the salary of a superintendent or other person for services performed for it before its organization under a contract made by its promoters, although the contract may have been made on its behalf and with the understanding that it should be bound, and although the promoters who made it have become its stockholders and officers.” This doctrine was recognized and followed by this court in the case of Wall v. Mining & Smelting Co., 20 Utah, 474, 59 Pac. 399. See, also, Long v. Citizens’ Bank, 8 Utah, 104, 29 Pac. 878; Schreyer v. Turner F. Mills Co., 29 Or. 1, 43 Pac. 719; Sullivan v. Detroit, etc., Ry. Co., 135 Mich. 661, 98 N. W. 756, 64 L. R. A. 673, 106 Am. St. Rep. 403; Rockford, etc., R. Co. v. Sage, 65 Ill. 328, 16 Am. Rep. 587. We invite attention to a somewhat elaborate discussion of the subject found in a note to Tuttle v. Tuttle, supra, reported in 8 Ann. Cas. 262, where the leading English and many American cases are cited in which the doctrine as announced in Tuttle v. Tuttle is upheld. The annotators in their discussion of the question say: “Prior to its existence a corporation can have no agents or representatives, and it would be impossible for a promoter to bind the corporation by contracts made prior to its incorporation. The courts of law have uniformly held that a corporation is not bound to perform a contract entered into by its promoters on its behalf and in contemplation of its organization. ■ And the corporation after-wards formed will not be held liable in law on such contracts, unless there can be shown some intervening circumstances occurring subsequently to the incorporation that would impose the liability. . . . While a contract entered into between the promoters of a proposed corporation and third parties has no binding effect upon the corporation thereafter formed, yet it usually lies within the power of the corporation to adopt the contract and thereby to make, in effect, a new contract with such third parties.” — 25 — Applying the foregoing principle of law to tbe facts in tbis ease viewed in tbe light most favorable to tbe respondent, it necessarily follows that be cannot recover from appellant for services rendered in preparing tbe articles of incorporation. Moreover, tbe record affirmatively shows that there was no agreement whatever to tbe effect that tbe corporation should! pay respondent for those services. And it further clearly ap~. pears that tbe purpose of these three promoters, respondent, Harding, and Barlow, in organizing tbe corporation, was, primarily, to create a purchaser for tbe land covered by their option. From tbe sale of tbis land to tbe corporation tbe partnership expected to and did in fact realize a profit of more than $13,000. Therefore what these parties did towards organizing a corporation was more in tbe interest of tbe partnership than it was in tbe interest of tbe prospective stockholders. In other words, tbe creating of tbe corporation, so far as they were concerned, was merely carrying out tbe scheme of tbe partnership by which it intended to and in fact did dispose of tbe land mentioned. And tbe undisputed evidence shows that in furtherance of tbis scheme respondent’s copartners, Harding and Barlow, as an inducement to others to subscribe and pay for interests in tbe land covered by tbe opinion, promised these prospective stockholders that when the corporation was organized they should receive their pro rata of shares of the capital stock without cost other than the price paid for the respective interests. Therefore whatever service were rendered by respondent in organizing the corporation must be deemed to have been rendered in pursuance of that agreement, and under no rule of law can the services be held to be a proper charge against the corporation. 3 We are also of the opinion that respondent’s claim for services rendered in the copying or having copied the “guaranteed harvest certificates” is as groundless as his claim for services rendered in the drawing up of the articles of incorporation. As we have pointed out in the foregoing statement of facts, the services rendered by him in preparing the certificates were rendered during the time he was president and general manager of the company. And — 26 — the evidence shows that during the time he was drawing a salary of $100 per month as general manager of the company at least a portion of the services was rendered. Furthermore, his own evidence, which we have set forth in the statement of facts, shows that about all respondent did in the preparation, of the certificates was to see to it that copies were made from a form furnished by him by two of the directors. On direct examination respondent testified on this point as follows: “I prepared these contracts; that is, the legal part of them. Mr. Kimball and Shipp prepared the form of the paper.” It thus clearly appears from his own testimony that the services were of the character that a business manager would ordinarily be expected to perform for his company. The judgment is reversed. The admitted facts in this case absolutely preclude respondent from recovering anything from the corporation for the services alleged in the complaint or any part thereof. The trial court is therefore directed to dismiss the action. Costs to appellant. STRAUP and PRICK, JJ., concur.