Timberline v. Davenport

FACTS:  Davenport, Bennett and Gorman  signed articles of incorporation for Aero-Fabb Corp., which they hoped to involve in selling airplanes, reconditioning planes, and giving flying lessons.  Land was leased for this purpose and equipment rented from Timberline to level and clear for access and for other construction.  At that time, no certificate of incorporation had issued b/c the original articles were not in accord w/the statutes.  However, subsequently, new articles were filed and a certificate of incorporation was issued.  Timberline eventually sued Davenport, Bennett and Gorman individually for the monies due for equipment rentals.  They alleged as a defense that the rentals were to a de facto corporation and that Timberline was estopped from denying the corporate character of the organization to which it had rented the equipment.  The trial held for Timberline, apparently finding that the contradictory evidence did not prove Timberline had believed it was contracting with a corp. entity.

ISSUE:  Can individuals who assume to act as a corp. w/out a certificate of incorporation be held jointly and severally liable for debts incurred as a result thereof?

HOLDING:  Yes, under Oregon law, which follows the Model Business Corporation Act, those persons who have an investment in and who actively participate in the policy and operational decisions of an organization and who assume to act as a corporation w/out the authority of a certificate of incorporation are jointly and severally liable for all debts and liabilities incurred or arising as a result thereof.  Thus Davenport, Bennett and Gorman are liable here unless Timberline is estopped from denying the corp. existence of Aero-Fabb or the doctrine of de facto incorporation applies.  As to the doctrine of de facto incorporation, Oregon law makes issuance of the articles of incorporation a conclusive presumption of incorporation except as to quo warranto proceedings.  Similar provisions, all based on the Model Business Corp. Act, have been held to do away w/the doctrine of a de facto corp., and that is the proper interpretation.  As to the contention that Timberline is estopped from denying Aero-Fabb corporate existence, the doctrine of corporation by estoppel would be of no use since one element necessary for its application is missing.  The lower court did not find Timberline believed it was contracting with a corporate entity.  Furthermore, it would be inequitable to apply this doctrine.  Therefore, Davenport, Bennett and Gorman are individually and severally liable in this case.  Affirmed.

¨       This case clearly held that various provisions akin to those in the Model Business Corp. act had in fact abolished the de facto corp. defense, but it avoided making a determination of the same kind as to the defense of corp. by estoppel.  Other courts have held that the corp. by estoppel defense has been similarly abolished.

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