Tuesday, February 07, 2012

Hall vs. Piccio

Facts: Petitioners Arnold Hall, Bradley Hall and Private Respondents Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella signed and acknowledged the articles of incorporation of the Far Eastern Lumber and Commercial Co., Inc. organized to engage in a general lumber business to carry on as general contractors, operators and managers. Attached to the articles was an affidavit of the treasurer stating that 23, 428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation.

Immediately after the execution of the articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers.

Then, the articles of incorporation were filed in SEC for the issuance of the corresponding certificate of incorporation.

Pending action on the articles of incorporation, Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella filed a civil case against the Halls alleging among other things that Far Eastern Lumber and Commercial Co, was an unregistered partnership and that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses.

The Halls filed a Motion to Dismiss contesting the court’s jurisdiction and the sufficiency of the cause of action but Judge Piccio ordered the dissolution of the company and appointed a receiver.

(1) Whether or not the court had jurisdiction to decree the dissolution of the company because it being a de facto corporation, dissolution may only be ordered in a quo warranto proceeding in accordance with Section 19.

(2) Inasmuch as the Browns had signed the articles of incorporation, whether or not they are estopped from claiming that it is not a corporation but only a partnership.

(1) YES. The court had jurisdiction but Section 19 does not apply.

First, not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. – even its stockholders – may not probably claim “in good faith” to be a corporation.

The immunity of collateral attack is granted to corporations “claiming in good faith to be corporation under this act.” Such a claim is compatible with the existence of errors and irregularities but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law, the claim to be a corporation “under this act” could not be made “in good faith.”

Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.

(2) NO. The Browns are not estopped. Because the SEC has not yet issued the corresponding certificate of incorporation, all of them know or ought to know that the personality of a corporation begins to exist only from the moment such certificate is issued and not before.

The complaining associates have not represented to the others that they were incorporated any more than the latter had made similar representations to them.

And as nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not apply. This is not an instance requiring the enforcement of contracts with the corporation through the rule of estoppel. 

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