Thompson & Green MacHinery Co. v. Music City Lumber Co.
1984 Tenn. App. LEXIS 3232, 683 S.W.2d 340 (1984)
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Rule of Law:
Under modern business corporation acts patterned after the Model Act, the common law doctrines of de facto corporation and corporation by estoppel are abolished. Individuals who assume to act as a corporation before the certificate of incorporation is filed are personally, jointly, and severally liable for all resulting debts and liabilities.
Facts:
- Joseph E. Walker served as President of Music City Sawmill Co., Inc. (Sawmill).
- On January 27, 1982, Walker, believing he was acting on behalf of Sawmill, purchased a wheel loader from Thompson & Green Machinery Co., Inc.
- Walker signed a promissory note for $37,886.30, executing it in the name of 'MUSIC CITY SAWMILL, INC.'
- At the time of this transaction, neither Walker nor Thompson & Green was aware that Sawmill's corporate charter had not yet been filed with the Secretary of State.
- The certificate of incorporation for Sawmill was officially filed on January 28, 1982, one day after the purchase and execution of the note.
- Sawmill subsequently defaulted on its payments and returned the wheel loader on August 27, 1982.
- Between January and August 1982, Thompson & Green dealt with Sawmill as if it were a properly formed corporation.
Procedural Posture:
- Thompson & Green Machinery Co., Inc. filed suit against Music City Sawmill Co., Inc. and another corporation in the Chancery Court (trial court) to recover an outstanding debt.
- Upon learning that Sawmill was not incorporated at the time of the sale, Thompson & Green amended its complaint to add Joseph E. Walker as an individual defendant.
- The Chancellor (trial court judge) ruled in favor of defendant Walker, implicitly finding him not personally liable.
- Thompson & Green Machinery Co., Inc. (appellant) was granted an appeal to the Court of Appeals of Tennessee (intermediate appellate court) to review the Chancellor's judgment.
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Issue:
Does the Tennessee General Corporations Act, which imposes personal liability on individuals who assume to act as a corporation without authority, abrogate the common law doctrines of de facto corporation and corporation by estoppel as defenses to personal liability?
Opinions:
Majority - Lewis, Judge
Yes, the Tennessee General Corporations Act abrogates the common law doctrines of de facto corporation and corporation by estoppel. The court reasoned that the Act creates a bright-line rule for corporate existence and liability. Tenn. Code Ann. § 48-1-204 states that a corporation cannot incur indebtedness until its charter has been filed. More importantly, Tenn. Code Ann. § 48-1-1405 explicitly states that '[a]ll persons who assume to act as a corporation without authority so to do shall be jointly and severally liable for all debts and liabilities incurred.' The court found this statutory language to be unambiguous and to contain no exceptions for good faith or for situations where a third party believed it was dealing with a corporation. Citing persuasive authority from other jurisdictions that had adopted similar statutes based on the Model Business Corporation Act, such as Oregon in Timberline Equipment Co. and the D.C. Court of Appeals in Robertson v. Levy, the court concluded that the legislative intent was to eliminate the 'fuzzy' and outdated concepts of de facto corporation and corporation by estoppel. To allow an estoppel defense would effectively nullify the clear mandate of the statute.
Analysis:
This decision marks a definitive shift from flexible, equitable common law doctrines to a strict statutory framework for corporate formation and liability. By abolishing the defenses of de facto corporation and corporation by estoppel, the court establishes a clear, bright-line rule: corporate existence begins only upon the filing of the certificate of incorporation, and personal liability attaches to individuals for all business transacted before that point. This ruling increases certainty and simplifies litigation but also places a significant burden on incorporators to ensure all legal formalities are met before commencing business, as even good faith errors offer no protection. The case serves as a leading example of how modern corporate statutes, based on the Model Business Corporation Act, were intended to displace older, more nebulous legal concepts.
