Cranson v. International Business MacHines Corp.
1964 Md. LEXIS 649, 234 Md. 477, 200 A.2d 33 (1964)
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Rule of Law:
A third party who deals with a business as if it were a corporation is estopped from denying its corporate status and holding an officer personally liable for its debts, even if the business failed to meet the requirements for becoming a de jure or de facto corporation.
Facts:
- In April 1961, Albion C. Cranson, Jr., agreed to invest in a new business, the Real Estate Service Bureau, and serve as an officer.
- Cranson's attorney advised him that the corporation had been legally formed under Maryland law.
- Relying on this advice, Cranson paid for and received a stock certificate, was shown the corporate seal and minute book, and was elected president.
- The business was conducted as a corporation, using corporate bank accounts, maintaining corporate records, and entering into a lease under the corporate name.
- Cranson, acting as president, purchased eight typewriters on credit from International Business Machines Corporation (I.B.M.) for the Bureau between May and November 1961.
- Cranson at no time assumed any personal obligation or pledged his individual credit to I.B.M.
- Due to an oversight by the attorney, unknown to Cranson, the certificate of incorporation was not actually filed with the state until November 24, 1961, after the purchases were made.
Procedural Posture:
- International Business Machines Corporation (I.B.M.) sued Albion C. Cranson, Jr., in a state trial court to recover the balance due on typewriters purchased by the Real Estate Service Bureau.
- I.B.M. moved for summary judgment, arguing that the Bureau was not a corporation and Cranson was personally liable as a partner.
- Cranson opposed the motion, arguing the Bureau was a de facto corporation and he was not personally liable.
- The trial court granted summary judgment in favor of I.B.M.
- Cranson, as the appellant, appealed the trial court's judgment to the Court of Appeals of Maryland.
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Issue:
Is an officer of a defectively incorporated association personally liable for its debts to a creditor who dealt with the association as if it were a corporation?
Opinions:
Majority - Hornby, J.
No. An officer of a defectively incorporated association is not personally liable for its debts where the creditor dealt with the business as a corporation and relied on its credit. The doctrine of corporation by estoppel prevents a party that has recognized an entity's corporate status in business dealings from later denying that status to hold an individual liable. The court distinguished the doctrine of estoppel from the de facto corporation doctrine, holding that estoppel can apply even when the requirements for a de facto corporation are not met. Because I.B.M. dealt with the Real Estate Service Bureau as a corporate entity and relied on its credit rather than Cranson's personal credit, I.B.M. is estopped from asserting that the Bureau was not incorporated when the debt was incurred.
Analysis:
This decision solidifies the 'corporation by estoppel' doctrine in Maryland, clarifying that it is distinct from and can be applied independently of the 'de facto corporation' doctrine. It provides significant protection for individuals who act in good faith on the belief that they are operating a validly formed corporation. The ruling shifts the risk to creditors who choose to deal with an entity on a corporate basis, preventing them from later changing their position to seek personal liability from officers or shareholders if a defect in formation is discovered. This case is a leading example of using equitable principles to prevent a creditor from getting a windfall by exploiting a technical, unknown defect in incorporation.
