Hill v. County Concrete Co., Inc.
1996 Md. App. LEXIS 35, 672 A.2d 667, 108 Md. App. 527 (1996)
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Rule of Law:
An individual who knowingly operates a business under an improper corporate name after discovering it is unavailable is acting in bad faith and cannot use the defenses of de facto corporation or corporation by estoppel to avoid personal liability for the business's debts.
Facts:
- In late 1988, Cecil P. Hill and Michael Newman decided to form a construction business to be named 'C & M Builders, Inc.'
- Their attorney advised them the name was available, so they ordered checks, painted trucks, and opened a bank account under that name.
- In February 1989, their attorney informed them that the name 'C & M Builders, Inc.' was already registered to another, unrelated entity and thus was unavailable for their use.
- In May 1989, Hill and Newman properly incorporated their business under a different name, 'H & N Construction, Inc.'
- Beginning in February 1989, around the time they learned the name was taken, Hill and Newman began purchasing concrete from County Concrete Company, Inc. under the name 'C & M Builders, Inc.'
- County Concrete extended credit to what it believed was the corporation 'C & M Builders, Inc.' based on Hill's personal reputation.
- For over two years, from February 1989 to May 1991, Hill and Newman continued to conduct business with County Concrete using the 'C & M Builders, Inc.' name, never disclosing their actual corporate name was 'H & N Construction, Inc.'
- A balance of $55,231.77 remained unpaid on the account with County Concrete.
Procedural Posture:
- County Concrete Company, Inc. filed a complaint against 'C & M Builders, Inc.' in the Circuit Court for Harford County, a trial court.
- County Concrete filed an amended complaint naming Cecil P. Hill, Sr. and Michael Newman as individual defendants.
- A default judgment was entered against Newman, and summary judgment was granted against the entity 'C & M Builders, Inc.'
- The breach of contract claim against Hill proceeded to a non-jury trial.
- The trial court judge found in favor of County Concrete, entering a judgment against Hill personally.
- Hill, as appellant, appealed the trial court's judgment to this court, an intermediate appellate court.
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Issue:
Can an individual who continues to operate a business under a corporate name he knows is unavailable and belongs to another entity shield himself from personal liability by asserting the defenses of de facto corporation or corporation by estoppel?
Opinions:
Majority - Eyler, Judge
No. An individual cannot shield himself from personal liability by asserting the defenses of de facto corporation or corporation by estoppel when he has acted in bad faith. The court reasoned that both defenses are equitable in nature and require good faith on the part of the person asserting them. While Hill may have acted in good faith initially, that good faith ceased when he learned the name 'C & M Builders, Inc.' was unavailable and belonged to another entity, yet continued to use it in dealings with creditors like County Concrete. This knowing misrepresentation and failure to disclose the true identity of his actual corporation ('H & N Construction, Inc.') makes him personally liable as an agent acting for a partially disclosed or undisclosed principal, distinguishing this case from a mere misnomer where the principal's identity is clear.
Analysis:
This decision reinforces that the equitable defenses of de facto corporation and corporation by estoppel are not available to those who act in bad faith. It clarifies that a deliberate, ongoing misrepresentation of a business's identity nullifies the limited liability protections that incorporation is meant to provide. The case serves as a crucial reminder that corporate formalities must be respected and that knowingly misleading creditors about a corporation's name and status can result in the piercing of the corporate veil, imposing personal liability on the individuals involved.
