New York Corporation Law and De facto Corporation

Author: LegalEase Solutions

RESEARCH FINDINGS

De Jure and De Facto Corporations

Under Article 4 of the New York Code of Business Corporation Law:

Upon the filing of the certificate of incorporation by the department of state, the oncopy existence shall begin, and such certificate shall be conclusive evidence that all conditions precedent have been fulfilled and that the corporation has been formed under this chapter, except in an action or special proceeding brought by the attorney-general. Notwithstanding the above, a certificate of incorporation may set forth a date subsequent to filing, not to exceed ninety days after filing, upon which date oncopy existence shall begin.

Id. at § 403.

In New York, when a corporation is formed according to the above statutory requisites, it is known as a “de jure” corporation. When an individual or entity attempts to form a corporation in good faith and somehow fails to properly form a corporation, a court sometimes will recognize a corporation in law and this is known as a “de facto” corporation.

In Lenny Bruce Enterprises, Inc. v Fantasy Records, Inc., 40 Misc 2d 715 (Sup Ct 1963), it was observed by the Court that “[t]he mere execution of the certificate of incorporation, without its filing or prior to its filing as required by statute, does not create a de jure corporation and unless there has been use of the corporate name, it will not be deemed a de facto corporation.” Id. at 717.

In Bankers Trust Co. of W. New York v Zecher, 103 Misc 2d 777 (Sup Ct 1980), the Court held that “in order to establish the existence of a de facto corporation it is necessary to show that there is a law under which the corporation might be organized, an attempt to organize the corporation, and an exercise of corporate powers thereafter.” Id. at 779 (citing Von Longerke v City of New York, 150 AD 98 (1st Dept 1912)).  Moreover, “[i]t is said that without a ‘colorable attempt’ to comply with the statutory requirements there can be no de facto corporation.” Id. at 780 (quoting Kiamesha Dev. Corp. v Guild Properties, Inc., 4 NY2d 378 (1958)).

Furthermore, the New York Court of Appeal in In re Hausman, 13 N.Y.3d 408 (2009), stated that “[u]nder very limited circumstances, courts may invoke the de facto corporation doctrine where there exists (1) a law under which the corporation might be organized, (2) an attempt to organize the corporation and (3) an exercise of corporate powers thereafter.” Id. at 412. The Hausman Court further explained that “[w]here there has been an attempt in good faith to comply with the requirements of the law with respect to filing a certificate of incorporation and a certificate has been filed . . . and there has been use of the corporate name, the corporation will be deemed a corporation de facto ” Id. at 412 (citing Stevens v Episcopal Church History Co., 140 AD 570 (1st Dept 1910).  It was also observed that “the mere execution of a paper which is not filed and does not become a public record is insufficient” Id. at 413 (citing Stevens v Episcopal Church History Co., 140 AD 570 (1st Dept 1910).  The court also stated that “in New York, it is clear that if there is no attempt to formally organize, there will be no de facto corporation.” Id. at 414

Additionally, in Conway v Samet, 59 Misc 2d 666 (Sup Ct 1969), the Court held “there must have been a colorable attempt to comply with the statutes governing incorporation and ‘without any certificate of incorporation having been even prepared or acknowledged’ there can be no de facto corporation.” Id. at 669 (quoting Kiamesha Dev. Corp. v Guild Properties, Inc., 4 NY2d 378 (1958)).  Very importantly, the court further held that an individual having contracted in the name of a nonexistent corporation is personally liable for business done by the “corporation.”  Id.

Also relevant is the Second Department case Farrell v Housekeeper, 298 AD2d 488 (2d Dept 2002). The follow were the undisputed facts:

The plaintiffs, Kevin Farrell and Tamara Farrell, allege that they entered into a contract with the defendant James R. Housekeeper, which required Housekeeper to construct a house for them. The Farrells fired Housekeeper before he completed construction of the house. As a result, Hemlock Construction Co. (hereinafter Hemlock), the name under which Housekeeper did business, but which was a nonexistent corporation, sued the Farrells alleging breach of contract. The Farrells counterclaimed against Hemlock alleging breach of contract. Eventually, the Farrells and Hemlock stipulated to discontinue that action, with each signing a release for the other’s benefit. Hemlock’s release was signed by Housekeeper as president. Subsequently, the Farrells commenced the instant action against Housekeeper alleging, inter alia, that he breached the contract for construction of the house. Housekeeper moved pursuant to CPLR 3211(a)(5) to dismiss the complaint insofar as asserted against him, claiming that the release which the Farrells executed for Hemlock in the prior action barred the instant action against him individually.

Id. at 488-489.

The Second Department  upheld the Supreme Court’s denial of Housekeeper’s motion The Supreme Court correctly denied Housekeeper’s motion to dismiss. Specifically, “[s]ince Hemlock was a nonexistent entity, it could not ‘acquire rights by contract or otherwise, incur debts or other liabilities either in contract or tort, sue or be sued.’” Id. (quoting Kiamesha Dev. Corp. v Guild Props., 4 NY2d 378, 389 (1958)).

Corporation by Estoppel

However, the doctrine of corporation by estoppel was discussed in Sacks v Anne Realty Co., 131 Misc 117 (Sup Ct 1927).  Here, the Court observed that “the plaintiff expressly entered into a contract with a body purporting to be a corporation, and comes under the general rule that a person who has contracted or otherwise dealt with an association in such a way as to recognize it, and in effect admit its legal existence as a body oncopy, is estopped in any action arising out of or involving such contract or dealing to deny its oncopy existence.” Id. at 119.

Later, in L-Tec Electronics Corp. v Cougar Elec. Org., Inc., 198 F3d 85 (2d Cir 1999), the Court held that under New York law “a person who deals with a de facto corporation cannot later deny its existence and proceed against its officers personally.” Id. at 87 (citing Sacks v. Anne Realty Co., 131 Misc. 117 (1927)).

In Nemard Const. Corp. v Deafeamkpor, 21 Misc 3d 320 (Sup Ct 2008), the Court observed that “[o]ne who contracts with or otherwise deals with an entity as a corporation thereby admits that it is a corporation and is estopped to deny the oncopy existence in any action arising out of such contract or dealing.” Id. at 323.  The Court further explained that the“[corporation by estoppel] doctrine relies upon the principle that one who recognizes an organization as a corporation in business dealings, [] should not be allowed to quibble on matters which are of little or no concern and do not affect substantial rights.” Id. at 323.