Timberline Equipment Company, Inc. v. Davenport
1973 Ore. LEXIS 272, 267 Or. 64, 514 P.2d 1109 (1973)
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Rule of Law:
Under the Oregon Business Corporation Act, which is based on the Model Business Corporation Act, the common-law doctrine of de facto corporation is abolished. Persons who have an investment in and actively participate in the policy and operational decisions of an organization that assumes to act as a corporation without a certificate of incorporation are jointly and severally liable for its debts.
Facts:
- Dr. Bennett and two others operated a partnership under the name 'Aero-Fabb Co.'
- On January 22, 1970, Dr. Bennett signed articles of incorporation for 'Aero-Fabb Co.', but the articles were defective.
- Between January 22, 1970 and June 12, 1970, the business entered into equipment rental leases with Timberline Equipment Co.
- During this period, Dr. Bennett was an investor and actively participated in the business by co-signing checks, visiting the site, and meeting with employees.
- The business did not receive a valid certificate of incorporation from the state until June 12, 1970.
Procedural Posture:
- Timberline Equipment Co. (plaintiff) filed an action in a trial court against Dr. Bennett and two others (defendants) to recover payment for equipment rentals.
- Dr. Bennett asserted as a defense that the debts were owed by a de facto corporation, and that the plaintiff was estopped from denying its corporate status.
- The trial court entered a judgment in favor of the plaintiff.
- Dr. Bennett (appellant) appealed the trial court's judgment to the reviewing appellate court.
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Issue:
Does the Oregon Business Corporation Act abolish the de facto corporation doctrine and make an active investor in a defectively incorporated enterprise personally liable for debts incurred by the enterprise before it received a certificate of incorporation?
Opinions:
Majority - Denecke, J.
Yes. An active investor in an enterprise that has not yet received a certificate of incorporation is personally liable for debts incurred during that period because the Oregon Business Corporation Act eliminates the de facto corporation doctrine. The court reasoned that ORS 57.321 and ORS 57.793, adopted from the Model Business Corporation Act, explicitly replaced the common-law doctrine. ORS 57.321 states corporate existence begins only upon issuance of the certificate of incorporation, and ORS 57.793 imposes joint and several liability on 'all persons who assume to act as a corporation' without this authority. The court interpreted this statutory phrase to include investors who actively participate in the policy and operational decisions of the organization, not just passive shareholders. Because Dr. Bennett actively participated in managing the business before it was legally incorporated, he is personally liable for the equipment rental debts.
Analysis:
This decision is significant for definitively abolishing the common-law doctrine of de facto corporations in jurisdictions that have adopted the Model Business Corporation Act. It establishes a clear, bright-line rule that corporate status, and the limited liability that comes with it, begins only upon the issuance of a certificate of incorporation. The case broadens the scope of personal liability for pre-incorporation activities, moving beyond just the individuals who directly incur a debt to include all investors who actively participate in the venture's management. This holding protects creditors and places a strong emphasis on strict compliance with statutory incorporation procedures.
