Arbo Corp. v. Aidan Marketing/Distribution, Inc.
1986 U.S. Dist. LEXIS 22221, 639 F.Supp. 1512 (1986)
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Rule of Law:
A creditor who knowingly deals with a business as a corporation before its formal incorporation and extends credit solely to the business entity is estopped from later seeking to hold the promoter personally liable for the business's debts, provided the promoter did not misrepresent the entity's corporate status.
Facts:
- In June 1984, Millie Engborg sought to establish a distributor relationship between her proposed company, Aidan, and a manufacturer, Arbo Corporation.
- During their initial meeting and a subsequent phone call, Engborg informed Arbo's president that Aidan had not yet been formally incorporated but was 'in process.'
- Engborg instructed Arbo to invoice all shipments to 'Aidan Distribution Corporation.'
- From August to December 1984, Arbo shipped goods to Aidan, directing all invoices and correspondence to the corporate name and business address.
- Aidan's Articles of Incorporation were officially filed with the Minnesota Secretary of State on November 27, 1984.
- All payments Arbo received were made on Aidan checks drawn from Aidan's bank accounts.
- Prior to the lawsuit, Arbo never sent correspondence to Engborg's personal address, never requested her personal financial statements, and never stated that she was personally responsible for Aidan's debt.
Procedural Posture:
- Arbo Corporation filed a diversity action against Aidan Marketing/Distribution, Inc. and Millie Engborg in the United States District Court for the District of Minnesota.
- The parties settled all claims except for the issue of Millie Engborg's individual liability for a portion of the debt.
- The parties waived their right to a jury trial on the remaining issue.
- The parties submitted the question of Engborg's liability to the court for a decision based on stipulated facts.
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Issue:
Is a promoter personally liable for debts incurred on behalf of a business before its official incorporation when the creditor knew the corporation was 'in process,' extended credit solely to the corporate entity, and the promoter made no misrepresentations about the corporate status?
Opinions:
Majority - Murphy, J.
No. A promoter is not personally liable under the doctrine of corporation by estoppel. This doctrine prevents a party that has dealt with an entity as if it were a corporation from later denying its corporate existence to hold a promoter personally liable. Here, Arbo was fully aware that Aidan was not yet formally incorporated, as Engborg was forthright about its 'in process' status and made no affirmative misrepresentations. Despite this knowledge, Arbo chose to transact business with Aidan as a corporation by invoicing the corporate entity, shipping to the business address, and accepting corporate checks. This course of dealing shows that Arbo extended credit to the corporation, not to Engborg personally. While Minnesota's adoption of the Model Business Corporation Act may have eliminated the doctrine of 'de facto' corporations, it did not eliminate the separate, equitable defense of estoppel, which can apply even where no incorporation documents have been filed.
Analysis:
This decision illustrates the resilience of the corporation by estoppel doctrine as an equitable defense for promoters, even in jurisdictions that have statutorily eliminated the related de facto corporation doctrine. It highlights that a creditor's knowledge and course of conduct are paramount; a creditor cannot knowingly treat a business as a corporation to gain its business and then later deny its existence to pursue personal liability. The case serves as a key precedent distinguishing the estoppel defense, which focuses on the creditor's conduct and belief, from the de facto doctrine, which focuses on the promoters' good faith effort to incorporate. This distinction provides a layer of protection for promoters who act honestly during the pre-incorporation phase.
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