No. 190 | N.D. Ohio | Apr 12, 1915
This- is a suit in equity, in which infringement of letters patent of the United States No. 792,690 is claimed, with the usual prayer for an injunction and an accounting. The
Such a bill was filed on October 20, 1914, and in this bill the Kardo Company alleged that after the filing of the original bill and the answer, and while the case was pending in this court, to wit, on or about the 28th day of February, 1914, the Kardo Company acquired the entire right, title, and interest in the letters patent in suit from the American Ball Bearing Company. The case came on for final hearing on February 1, 1915, and in the progress of the trial vague suggestions by counsel for the defendant that there was some legal infirmity in the plaintiff, the Kardo Company, and by the counsel for the plaintiff that all was not right with the active defendant in the case, the National Automobile Chamber of Commerce, led the court, of its own motion, to inquire as to the occasion and meaning of such innuen-does. At the suggestion of counsel for the plaintiff, one of them took the witness stand, and stated that he did not think any of the directors of the company were bona fide owners of any shares of the capital stock of the company, but that the real bona fide owners of all of it were the three corporations, the American Ball Bearing Company, the Peerless Motor Car Company, and the Packard Motor Car Company.
After the hearing was concluded, and the court came to a consideration of what its decision should be, the question as to whether the Kardo Company was a lawfully organized corporation, such that it could be a proper party plaintiff in the case, pressed so insistently upon the attention of the court that it was decided to take further testimony upon this point, and accordingly after due notice to all counsel concerned, on March 8, 1915, all parties being represented, the court took further testimony upon this question framed by it, viz.: Is the Kardo Company so organized as a corporation as to make it a proper party plaintiff, competent to present a real and substantial controversy to this court in this cause? On this hearing full opportunity was given, and was availed of, to lay before the court precisely the character of the proposed and actual organization of the Kardo Company. The result of this additional testimony may be stated as follows:
“The three corporations, the American Ball Bearing Company, the Packard Motor Car Company, and the Peerless Motor Car Company, decided to form a corporation under the laws of Ohio, with a capital stock of $1,000,000, In which said corporations were to be equally interested, for the purpose, as stated in the articles of incorporation subsequently filed, of purchasing, leasing, or otherwise acquiring, and of registering, owning, and using inventions, improvements, trade secrets, processes, or interests therein, and applying for and receiving, purchasing, or otherwise acquiring letters patent or patent rights, or interests in or under letters patent, for or upon motors or other vehicles or means of transportation, and for or upon the mechanism, parts of equipment of the same, or the tools or machinery for the manufacture of same, or for selling, granting, or assuming licenses or rights under or In respect of such secrets, processes, inventions, improvements, or patents, and otherwise dealing in respect of or with the same, or either of them, and oí*970 manufacturing, using, And dealing in the vehicles, articles, machinery, equipments, and parts covered by or provided for in said inventions, patents, or improvements, and of doing all things necessary, proper, and incidental to the transaction of said business or any part thereof.”
It however appeared from the testimony of Walter C. Baker, a director of the Kardo Company, on the original hearing, that the prime purpose of organizing the Kardo Company was to transfer to it patents which each of the three companies had on automobile axle' equipment, which apparently interlaced or overlapped one another, so that, if one company gave a license under the patent which it owned, complaints of infringements and threatened suits straightway arose from- one or another of the other companies, and the purpose of the organization was to so place the ownership of these patents in one company, to be organized by the three corporations, that one license could be given on “rear axle patents owned by them.”
The evidence further shows that the following steps were taken for the purpose of organizing the Kardo Company as a corporation under the laws of Ohio:
Articles of incorporation were signed on the 21st day of February, 1914, by five men, all in the employ of the law firm in charge of the organization, and none of them connected otherwise than as attorneys with any of the three companies named as parties to the formation of the Kardo Company. These articles of incorporation were filed with the secretary of state on the 24th day of February, 1914. On the same day each of the subscribers to the articles of incorporation subscribed for one share of the capital stock, and one of them subscribed as trustee for the American Ball Bearing Company for 995 shares of the capital • stock of the proposed company, agreeing to pay for these shares $9,500 in cash and $90,000 by the transfer of patents by the American Ball Bearing Company to the Kardo Company. It further appears from the evidence that $10,000, being 10 per cent, of the $100,000 of stock subscribed for on February 24, 1914, was on the same day paid' for by check of the American Ball Bearing-Company, and that no money whatever was paid by any one of the persons named as incorporators of the company.
Abundant formal,detail of waiver of notice of opening books of subscription to the capital stock in the manner and to the extent stated, of the filing of a certificate of subscription with the secretary of state, and of a waiver of the notice of the first stockholders’ meeting appears in the record. At the first stockholders’ meeting on this same day (February 24, 1914) the five incorporators were present and a code of regulations and by-laws was adopted, article 5 of which provides the number of directors shall be five, that the directors must be holders of stock of the company, and that a majority must be citizens ot the state of Ohio.
A first directors’ meeting was held on the same day, 30 minutes later than the stockholders’ meeting, at which meeting four of the lawyers organizing the company were elected to the offices of president, vice president, secretary, and treasurer, and an elaborate resolution was solemnly passed adopting a proposed form of agreement,between the'
On the 27th day of February a special meeting of the stockholders of the company was called by the same lawyers who signed the articles of incorporation, and at this, meeting the regulations were amended by them to make the number of directors six, instead of five. In the afternoon of the same day, the record shows a meeting of the directors of the Kardo Company, at which the five signers of the articles of incor-poraiion and Walter C. Baker were present, and at that meeting the signers of the articles resigned one after another, as directors and officers, and their places were filled by the officers or directors of the three corporations which had united in the purpose to form a company.
The evidence shows, as has been stated, that the only money paid at the time the company was organized was paid by the American Ball Bearing Company. No one of the persons who acted as a stockholder at the first meeting of stockholders of the company, or who acted as director at any of the meetings of directors of the company up to the time of the trial of this case, had paid any money of his own for any stock of the company. The evidence shows that, when each of the persons acting as an incorporator resigned, he transferred the one share of stock which had been issued to him to his successor, but that the successor did not make any payment for such stock.
ft also appears in the evidence that, alter the question as to the regularity of the organization of the Kardo Company had been raised in this court, the persons who had acted as directors since the election on February 27, 1914, paid, under advice of counsel, each to his company, $100 for the share of stock which had been standing in his name, and by virtue of which he had been acting as a stockholder and director of the company. It also appears from the statement of Mr. .Dorn, one of the directors and treasurer of the Kardo Company, that at the time of the organization counsel advised him that in order to act as a director of the company he must have complete and full ownership of at least one share of stock in the company; but the evidence shows, as I have stated, that the share in his name was not paid for until after the first hearing of the case.
No salaries have ever been paid to any of its officers by the Kardo Company. It has done so little business that it has not even employed a bookkeeper, Mr. Dorn saying that there was s,o little of such work to do that he did it himself without charge. The only office the company has had is that of Mr. Alexander, local patent attorney for the company, and the only business it has done has consisted in becoming a party to this suit and in commencing three other suits for infringer
This state of the-record presents for decision the question: Is the Kardo Company a corporation de jure or de facto, such that it should be. permitted to maintain a suit as party plaintiff in this court ?
“Any number of persons, not less than five, a majority of whom are citizens of this state, desiring to become incorporated, shall subscribe and acknowledge articles of incorporation,” eta G. C. § 8625.
This is obviously a grant of authority to natural persons to organize so as to become invested with corporate franchises; it is not a grant to corporations to so organize. The Ohio law differs from the law of many states, in that the mere filing of articles of incorporation in due form does not create or bring into existence a corporation, notwithstanding the provision of G. C. § 8629, that a certified copy of articles of incorporation shall be prima facie evidence of the existence of the corporation therein named. This is distinctly decided in State ex rel. v. Insurance Co., 49 Ohio St. 440, 31 N. E. 658, 16 L. R. A. 611, 34 Am. St. Rep. 573, the fifth paragraph of the syllabus, of which case reads:
“The making and filing, for the purpose of profit, of articles of incorporation in the office of the secretary of state, do not make an incorporated company; such articles are simply authority to do so. No company exists within the meaning of the statute, until the requisite stoelc has been subscribed and paid in, and the directors chosen.”
Before the plaintiff can maintain this action as a de jure corporation, this rule of law requires an affirmative answer to the question :
“Had the Kardo Company a lawfully constituted and elected board of directors, so that it was an ‘existing’ corporation, when it became a party to this suit?”
Again, the law of Ohio requires that 10 per cent, of the capital stock ©f the proposed corporation .shall be subscribed, and this fact certified by the incorporators to the secretary of state, before an election of ■directors may be held (G. C. §§ 8633, 8635); that, at the time of making a subscription to the capital stock of a corporation, 10 per cent, of ■each .share subscribed for shall be payable (G. C. § 8632); that no person shall vote on a share of stock on which a.n installment is due and unpaid (G. C. § 8636); that all directors and executive officers of corporations shall be holders of stock of the company for which they are chosen in an amount to be fixed by the by-laws (G. C. § 8661); and that “holders of stock” means bona fide owners of it, as is decided in
That these are not merely directory provisions of law, but are mandatory, and must be complied with before a corporation can come into existence under Ohio law, is sufficiently established by Telephone Co. v. Cincinnati, 73 Ohio St. 64, 76 N. E. 392, which decides that:
“Sections 3243 (G. C. § 8632), 3244 (G. C. § 8633) and 3245 (G. C. § 8636), Revised Statutes, taken together, require that an installment of 10 per cent, on each share of stock shall he payable at the time of making the subscription; that as soon as 10 per cent, of the capital stock is subscribed notice for the election of directors may be given; that no person shall vote for director for any share on which any installment is due and unpaid, and the votes of a majority of the number of shares shall be necessary for a choice. Tested by these requirements, the record shows that there had been no legal election of directors, and that the corporation had not been organized in such manner as to entitle it to a decree under section 3461.”
Trust Co. v. Floyd et al., 47 Ohio St. 526, 26 N. E. 110, Syl. par. 3:
“The corporate powers, business, and property of corporations formed for profit must be exercised, conducted, and controlled by a board of directors, who cannot be chosen until 10 por cent, of the capital stock specified in the articles of incorporation has been subscribed.”
See, also, City of Cincinnati v. Queen City Tel. Co., 2 O. N. P. (N. S.) 349_
_ The question we are considering being, “Is the Kardo Company a de jure corporation?” the application of Telephone Co. v. Cincinnati, 73 Ohio St. 64, 76 N. E. 392, is not affected by the fact that this decision proceeds upon the basis of the case under consideration being speh a one that the Ohio rule in eminent domain cases was applied; this for the reason that, if the question of the validity of the Kardo organization may properly be raised and decided at all, then the standard for showing the validity of its corporate organization would be the same in one case as in another.
Omitting the five shares subscribed for by the attorneys engaged in organizing the company, 10 per cent, of the proposed capital stock of the company was not subscribed for when the first board of directors was chosen. No new board has been since elected, except that as the first members resigned others were named by the first claimed board of directors to fill their places.
When applying these principles of Ohio law to the facts of the case at bar, it should be kept in mind that no court in this country has been more resolute than the Supreme Court of Ohio has been in looking through corporate forms to the conduct of the associated men who desire or who pretend to constitute a corporation, and in declaring that the fiction that such men constitute a legal entity, apart from the natm ral persons who compose it, shall not he urged, but shall be disregarded when urged, to an extent and purpose not within the reason: and policy
“The idea that the corporation is an entity, distinct from the corporators who compose it, has been aptly characterized as ‘a nebulous fiction of thought.” * * * When all has been said, it remains that a corporation is not in reality a person or a thing distinct from its constituent parts, and' the constituent parts are the stockholders, as much so in essence and in reality as the several • partners are the constituent parts of the partnership.”
And see Bank v. Trebein, 59 Ohio St. 316, 52 N. E. 834, and Andres v. Morgan, 62 Ohio St. 236" court="Ohio" date_filed="1900-03-06" href="https://app.midpage.ai/document/andres-v-morgan-3785311?utm_source=webapp" opinion_id="3785311">62 Ohio St. 236, 56 N. E. 875, 78 Am. St. Rep. 712.
Looking now through the forms which the organizers of the Kardo Company cast about themselves, we see five men who never had or intended to have one dollar of interest in the corporation which they were solemnly going through' the form of organizing, a-cting as merest “dummies” in complying with the forms of the Ohio statute, to accomplish by indirection for these corporations, which employed them as attorneys at law, that which they could not accomplish -directly for themselves ; that neither the signers of the articles of incorporation nor their successors, in name directors of the proposed company, ever had any financial interest whatever in the company, although the Ohio law and even the regulations adopted by the so-called stockholders required that all directors and executive officers of the company must be bona fide owners of at least one share of stock in the company; that, excluding the five shares subscribed for by the lawyers without having any interest in the proposed company, and who never paid anything upon the account of such subscriptions, 10 per cent, of the proposed capital stock was not subscribed for prior to the election in form of a board of directors ; 'that the 10 per cent, which became due and payable on each share subscribed by the organizers was never paid by any one of them, or by their successors, although these men voted these shares, and now claim that they elected a valid board of directors, the election of which was an indispensable prerequisite to the Kardo Company coming into existence as a valid corporation.
Upon this state of facts and of the law, can it be said that the Kardo Company was a lawfully formed and existing de jure corporation under Ohio laws ? There was no law in Ohio in 1914 which authorized three corporations to organize a fourth corporation. Yet this is precisely what the American Ball Bearing Company, the Peerless Mptor Car Company, and the Packard Motor Car Company attempted to do by going through the forms of organizing the Kardo Company. Not one dollar of money from any source, except from the treasuries of these three companies (indeed, only money from the treasury of the Ball Bearing Company was used for purpose of organization), was applied in payment for Kardo stock, and the men who- acted as directors and stockholders were “dummies” in a most perfect sense.
Convinced as I am that not without sheer acceptance of forms and names for realities and facts can this Kardo Company be considered anything but a voluntary association of agents and representatives of the three corporations which conceived the scheme of organizing it, I am clear in the conclusion that there was no lawful authority in Ohio for the creating of a corporation such as the Kardo* Company claims to be.
“The modem tendency Is to ignore corporate existence in corporations organized merely as a cloak for fraud, and to hold the corporators, including officers and directors, directly liable for its acts. These corporations are usually termed ‘dummy corporations.’ Concerning them the New York Court of Appeals has said: ‘We have of late refused to he always and utterly trammeled by the logic derived from corporate existence where it only serves to distort or hide the truth.’ ” Thomp. Corp. § 1417.
While there is no disposition on the part of the court to impute actual or intended fraud to the parties engaged in this enterprise, yet the law of the case is not different from what it would be if such were the fact. As was held by the Supreme Court of Ohio in Bank et al. v. Trebein, 59 Ohio St. 316, 52 N. E. 834, Syl. 3:
“The good faith of the parties to such a transaction must be determined by its legal effect on the rights of others. If its legal effect works a fraud on their rights, the finding of a court that the parties acted in good faith is simply an erroneous conclusion of law from the facts.”
See Trust Co. v. Floyd, 47 Ohio St. 525, 26 N. E. 110.
It seems to me very clear that the action taken in this case by mere attorneys at law of these three corporations to* bring into existence the form and name of a corporation, which they should forthwith abandon to the custody and control of the officers and directors of the three corporations, was a fraud upon the law of Ohio, no difference if every step was taken in utmost good faith by the men engaged in it.
(a) Because there was no law of Ohio permitting three corporations to combine to organize a fourth corporation to serve their purposes.
(b) Because there was not a bona fide subscription of 10 per cent, of the capital sto'ck of the company, nor a bona fide payment of 10 per cent, of the capital stock of it paid in, when the first election of directors was held, as was required by the law of Ohio.
(c) Because the conditions upon which a corporation may be called into existence are' prescribed by Ohio law, and they had not then been complied with. This law contemplates that the action prescribed shall be taken by five natural persons having an actual and real interest, at least to the extent of one share of the capital stock, in the assets and in the welfare of the corporation (Hoopes v. Basic Co., 69 N. J. Eq. 679, 61 A. 979" court="None" date_filed="1905-08-26" href="https://app.midpage.ai/document/hoopes-v-basic-co-7316632?utm_source=webapp" opinion_id="7316632">61 Atl. 979), and it would be a reproach upon the law for the courts to put their stamp of approval upon so palpable an evasion of this law of Ohio as this record discloses.
I shall consider of this claim briefly as I may. There is no doctrine in corporation law which lacks more of precision of definition as to the principles upon which it proceeds, or as to what its boundaries are, than does this doctrine of de facto corporations. Courts have almost always contented themselves with deciding the case in hand, without attempting to formulate the general principle within which it fell, and text-book writers have treated the subject as “a wilderness of single instances,” which it was hopeless to attempt to classify under general principles of decision.
The only comprehensive discussion of the doctrine of de facto corporations from the point of view of the principles of law involved with which I am acquainted is one by Prof. Edwin H. Warren, found in Harvard Law Review, volume 20, page 456, and volume 21, page 305, and in order that this opinion may not be extended to an undue length, as'it proceeds, I shall adopt several of the conclusions of Prof. Warren, which I think sustained by authority and sound thinking, paraphrasing them only to the extent necessary to apply them to the case at bar.
Persons by their own voluntary action may unite to accomplish any lawful purpose; but it is only union under authority of the state, in the . manner prescribed by it, that gives to such a union the privileges of de jure incorporation,
' Should such a group of men who fail to comply with the law nevertheless enjoy the privileges of incorporation as if they had complied with it? Should they be permitted to affirmatively, assert against a
These decisions develop the doctrine of de facto corporations, and we have it under our law. It is a doctrine without authority or definition in the English courts, which seemingly allow collateral attack upon corporate organization without resulting confusion or inconvenience.
The Supreme Court of the United States in a condensed generalization of the doctrine makes it applicable only (1) where there is in existence a general law under which such a corporation as the one under consideration purports to be might lawfully be organized; (2) when there has been an attempt in good faith to organize thereunder; and (3) when there has been an actual user of the assumed corporate franchise. Even where these conditions are all fulfilled, the courts allow enjoyment of the corporate franchise, where there is not substantial compliance with the regulations of the state, only where considerations of equitable estoppel or of public policy justify it. Upon one or the other of these grounds the decision of each well-considered case applying the doctrine has found its justification.
In the case at bar the parties never contracted together, so that there is no room for application of the doctrine of estoppel,, and the question therefore becomes this, viz.: May the group of men, here attorneys at law of three other corporations, or their successors, who have failed to so comply with the Ohio law as to organize a de jure corporation, apply the de facto doctrine for their own benefit against persons who have never dealt with them as a corporation, and be treated by this court as if they had been lawfully authorized to act as a legal unit? A few principles worked out upon full discussion of the decided cases and upon principle by Prof. Warren seem to me to decide this question in the negative.
It is not for courts to create corporations. Ashley v. Ryan, 153 U.S. 436" court="SCOTUS" date_filed="1894-05-14" href="https://app.midpage.ai/document/ashley-v-ryan-93908?utm_source=webapp" opinion_id="93908">153 U. S. 436, 14 Sup. Ct. 865, 38 L. Ed. 773" court="SCOTUS" date_filed="1894-05-14" href="https://app.midpage.ai/document/ashley-v-ryan-93908?utm_source=webapp" opinion_id="93908">38 L. Ed. 773. The franchise to be a corporation can be granted only by the Legislature, and for courts to assume that power is to proclaim themselves de facto legislators in order to create de facto corporations. Judicial lawmaking is a sufficiently active cause of complaint against the courts to deter them from unnecessarily inviting further criticism, especially just criticism.
When there is a law under which a corporation might be lawfully organized, and an attempt in good faith is made to organize thereunder, and there is an actual user of the corporate franchise (Tulare Irrigation District v. Shepard, 185 U.S. 1" court="SCOTUS" date_filed="1902-03-24" href="https://app.midpage.ai/document/tulare-irrigation-district-v-shepard-95626?utm_source=webapp" opinion_id="95626">185 U. S. 1, 22 Sup. Ct. 531, 46 L. Ed. 773" court="SCOTUS" date_filed="1902-03-24" href="https://app.midpage.ai/document/tulare-irrigation-district-v-shepard-95626?utm_source=webapp" opinion_id="95626">46 L. Ed. 773), the de facto 'doctrine will be applied, whefe the parties to be charged have contracted with the claimed corporation, or where it acts as a conduit for a title to real estate (Society Perun v. Cleveland, 43 Ohio St. 481, 3 N. E. 357), or where the alleged corporation is made defendant in an action in tort. It is believed the well-considered cases do not go beyond the limits thus stated. But such applications
It is true that Baltimore, etc., R. R. Co. v. Fifth Baptist Church, 137 U.S. 568" court="SCOTUS" date_filed="1891-01-05" href="https://app.midpage.ai/document/baltimore--potomac-railroad-v-fifth-baptist-church-92911?utm_source=webapp" opinion_id="92911">137 U. S. 568, 11 Sup. Ct. 185, 34 L. Ed. 784" court="SCOTUS" date_filed="1891-01-05" href="https://app.midpage.ai/document/baltimore--potomac-railroad-v-fifth-baptist-church-92911?utm_source=webapp" opinion_id="92911">34 L. Ed. 784, seems in a single expression to go farther than the limits thus stated, saying that the facts in that case constituted the plaintiff in error a corporation de facto, “which was all that was necessary to maintain an action against any one, other than the state, who has contracted with the corporation, or who has done it a wrong.” But the case called for no such holding, and not one of the cases cited as authority for it involves any question of affirmative seeking of relief by a de facto corporation. If the expression had been “or who has been wronged by it,”, it would have been pertinent to the case under discussion, and would have been justified by authority. Perhaps this is what the writer intended to say.
The doctrine that the existence of a corporation may not be attacked collaterally is often assumed to be the protection, and also the measure of the rights, of a de facto corporation. But this doctrine cannot properly be used to support the application, to such a case as the one at bar, of the proposition that, if certain persons assume to act as a corporation, all but the state must submit to their usurpation of right. We are dealing with a case where the court finds there is no de jure corporation, because there was no Ohio law under which such parties as attempted to organize the Kardo Company could lawfully become incorporated, and also because, under the construction placed upon the Ohio Statutes by the Supreme Court of that state, there was a failure to perform certain legislative conditions indispensably precedent to the calling into existence of a corporation. For these reasons the case does not fall within the scope of the doctrine as quoted herein from the decision of the Supreme Court of the United States.
I cannot think that any inconvenience there may be in investigating the validity and regularity of the corporate organization of the party plaintiff is a consideration of public policy (no other can exist in the case) of sufficient weight to justify courts in granting to persons who have failed to comply with the law substantially all of the rights which they would have- had if they had complied with it. Ohio courts have not found this difficulty insuperable, in a suit by a .de facto^ corporation on a subscription to its stock (Raccoon River Co. v. Eagle, 29 Ohio St. 238" court="Ohio" date_filed="1876-12-15" href="https://app.midpage.ai/document/raccoon-river-navigation-co-v-eagle-6753161?utm_source=webapp" opinion_id="6753161">29 Ohio St. 238), or in eminent domain cases (contrary to the general current of opinion), and generally the doctrine has not been applied where it can be proved that no law existed under which such a corporation as the pretended one could have been organized, or where there was a failure to create a de jure corporation because of lack of good faith (185 U.S. 1" court="SCOTUS" date_filed="1902-03-24" href="https://app.midpage.ai/document/tulare-irrigation-district-v-shepard-95626?utm_source=webapp" opinion_id="95626">185 U. S. 1, 22 Sup. Ct. 531, 46 L. Ed. 773, supra).
Without going more into detail, the Kardo Company, having failed to become a de jure corporation for the reasons in this opinion stated, and having special regard to attitude of Ohio courts towards the fiction of corporate entity, and their refusal to apply the de facto doctrine in many cases in which courts of other states have applied it, I agree with the well worked out conclusion of Prof. Warren that
For the reasons herein stated, I find that the Kardo Company has not legal capacity to maintain this action, and the suit will be dismissed.