FACT PATTERN 1: ORGANIZATION OF A CORPORATION- FACT PATTERN 1: ORGANIZATION OF A CORPORATION- DE FACTO CORPORATION AND CORPORATION BY ESTOPPEL

Question 1

What 2 doctrines save a corporation which meant to incorporate, but did not?

Answer 1

de facto corporation and corporation by estoppel

Question 2

Under de facto corporation and corporation by estoppel how is the business treated?

Answer 2

Under these doctrines, the business is treated as a corporation, so shareholders are not liable for what the business did.

Question 3

For both de facto corporation and corporation by estoppel, the person asserting the doctrine must be ___________ of the failure to form a de jure corporation.

Answer 3

unaware

Question 4

What are the requirements of the de-facto corporation doctrine?

Answer 4

1. There is a relevant incorporation statute (there is!).
2. The parties made a good faith, colorable attempt to comply with the statute.
   and
3. Some exercise of corporate privileges (acting like we have a corporation).

Question 5

If the de facto corporation doctrine applies, how will the business be treated?

Answer 5

the business is treated as a corporation for all purposes except in an action by the state. (Such an action would be quo warranto).

Question 6

Incorporators put together the proper documents and mail them to the secretary of state. Unbeknownst to them, the documents are lost in the mail. In the meantime, the business is being operated as a corporation, and enters into a contract. Are the shareholders liable on the contract? Why or why not? Do the entire analysis?

Answer 6

Yes, unless the court applies de facto corporation.

1. There is a relevant incorporation statute (there is one in every state)
2. The parties made a good faith, colorable attempt to comply with the statute. -(Incorporators put together the proper documents and mail them to the secretary of state.)
3. Some exercise of corporate privileges (acting like we have a corporation). -(the business enters into a contract as a corporation)

Question 7

How does corporation by estoppel work?

Answer 7

one who treats a business as a corporation may be estopped from denying that it is a corporation.

Question 8

You do business with people who hold their business out as a corporation. They think it’s a corporation. So do you. You write checks to the “corporation” and deal with it as a corporation. But there is no corporation. You sue the proprietors individually. Can you win? Why or why not?

Answer 8

No, under the corporation by estoppel doctine you cannot win. You are estopped to deny that the business was a corporation.

Why?: one who treats a business as a corporation may be estopped from denying that it is a corporation.

Question 9

What is the effect of corporation by estoppel for when the corporation is not properly funded?

Answer 9

The corporation by estoppel doctrine can also prevent the improperly-formed “corporation” from avoiding liability by saying it was not properly formed.

Question 10

Corporation by estoppel applies only in what kinds of cases?

Answer 10

Contract cases (not tort cases, you need to conscientiously choose to deal with the corp.)

Question 11

What is the status of these two doctrines, de facto corporation and corporation by estoppel, today?

Answer 11

They are abolished in many states. (just point this out in your answer)