Paper Products Co. v. Doggrell
261 S.W.2d 127, 195 Tenn. 581, 31 Beeler 581 (1953)
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Rule of Law:
A court will not enforce a law from a sister state under the principle of comity if that law is deemed penal in nature or if it violates the public policy of the forum state.
Facts:
- Doggrell and Konz, Tennessee residents, along with Whitaker, an Arkansas resident, formed an Arkansas corporation named Forrest City Wood Products, Inc.
- The corporation's lawyer directed Whitaker to file the articles of incorporation with the Arkansas Secretary of State and then with the St. Francis County Clerk.
- Whitaker successfully filed the articles with the Secretary of State, which, under Arkansas law, officially began the corporation's existence.
- However, Whitaker inadvertently failed to complete the second step of filing the articles with the St. Francis County Clerk.
- Doggrell and Konz were unaware of this filing omission and received no profits or dividends from the corporation.
- While the county filing was incomplete, Whitaker, on behalf of the corporation, purchased goods on credit from Paper Products Company.
- Paper Products Company dealt with Forrest City Wood Products, Inc. as a corporate entity and did not extend credit based on the personal assurances of Doggrell or Konz.
- Forrest City Wood Products, Inc. subsequently went bankrupt, leaving a substantial debt owed to Paper Products Company.
Procedural Posture:
- Paper Products Company instituted a suit against Doggrell and Konz in the Shelby County, Tennessee Circuit Court (a trial court).
- The Circuit Court entered a judgment in favor of Doggrell and Konz, holding that the Arkansas law was penal and would not be enforced in Tennessee.
- Paper Products Company (appellant) appealed the trial court's judgment to the Tennessee Supreme Court, where Doggrell and Konz were the appellees.
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Issue:
Does Tennessee law require its courts to enforce an Arkansas law that imposes personal liability on corporate stockholders for a mere failure to file incorporation papers in the correct county, when Tennessee considers such liability to be penal in nature and contrary to its own public policy?
Opinions:
Majority - Mr. Justice Tomlinson
No. A Tennessee court will not enforce a sister state's law that it determines to be penal in nature or contrary to its own public policy. The Arkansas rule imposing personal liability on stockholders for a minor, inadvertent filing error is both. First, the rule is contrary to Tennessee's public policy, which protects stockholders from liability when a bona fide effort to incorporate was made, even if flawed. Second, the Arkansas law is penal because it imposes liability regardless of whether a creditor was misled or prejudiced by the filing omission; its purpose is not to compensate for harm but to prescribe a penalty to enforce compliance with a registration statute. Tennessee courts will not enforce the penalties of other states.
Analysis:
This case illustrates a significant limit on the principle of comity, where states generally recognize and enforce each other's laws. It establishes that a forum state has the authority to characterize a sister state's law and refuse enforcement if it conflicts with its own fundamental legal principles. The decision highlights the differing state approaches to corporate formalities, with Tennessee favoring a more lenient standard that protects shareholders who make a good faith effort to incorporate, versus Arkansas's stricter approach. This ruling reinforces that corporate liability shields can vary significantly across state lines and that enforceability of claims may depend on where the suit is brought.
