Your Business Deserves To Thrive

When a Corporation Fails To Exist (Legally) (Part II)

On Behalf of | Oct 13, 2016 | Business Management, Choice of Entity, Uncategorized

De Facto Corporation

Cantor v. Sunshine Greenery, Inc., a 1979 case out of New Jersey, is one of the best known cases on the doctrine of de facto corporation.[1]  In that case, Cantor was the landlord and Sunshine Greenery the tenant.  On December 16, 1974, Cantor prepared the lease naming Sunshine Greenery as the tenant, which was signed by Brunetti as president of Sunshine Greenery.  Cantor knew that Brunetti was starting a new corporation but did not request a personal guarantee from Brunetti.  For the first month’s rent and the security deposit, Brunetti filled out a blank check, furnished by Cantor, with the name of Brunetti’s bank and signed by him, again, as president of Sunshine Greenery.  Turns out, at the time the lease was signed, Sunshine Greenery was not yet organized; the company’s certificate of incorporation was signed and forwarded to the Secretary of State on December 3, 1974, but for some unknown reason, it was not officially filed until December 18, 1974.  On December 17, 1974, Sunshine Greenery, through its counsel, repudiated the lease.  Cantor sued Brunetti, seeking to hold him personally liable on grounds that there was no corporation at the time the lease was signed.

At trial, the court held that Sunshine Greenery was not a de facto corporation because there were no formal meetings or resolutions or issuance of stock.  The court of appeals disagreed.  The appeals court explained that the absence of such factors was not determinative of the legal or de facto existence of the corporate entity, especially since New Jersey law does not even require a meeting of incorporators.  According to the court of appeals, the act of executing the certificate of incorporation, the good faith effort to file it, and the dealings with Cantor in the name of the corporation show the existence of a de facto corporation.  The court added that it would be unjust to deny such existence because of a mere technicality caused by administrative delay in filing, when Cantor, as a contracting party, expected that it was dealing with a corporation.  Because the court found that Sunshine Greenery existed de facto, and since Cantor looked to the corporation for liability on the lease, the court held that there could be no personal liability of Brunetti.

In short, courts are willing to recognize a de facto corporation, despite some defect in the actual formation process, assuming certain conditions are met—there must be a bona fide attempt to incorporate and use of corporate privileges (that is, carrying on business as a corporation, such as signing a contract in the name of the corporate entity), in good faith, rather than just a failure to file.

This post was the second part of a multi-post blog series on de facto corporation and corporation by estoppel.  In our next post, we will discuss a case where the court did not find a de facto corporation but used the doctrine of corporation by estoppel to avoid imposing personal liability on corporate officers.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] See generally Cantor v. Sunshine Greenery, Inc., 398 A.2d 571 (Sup. Ct. N.J. 1979).  Unless otherwise noted, all references to the case are to this citation.