Story Case

The legislature of the state of Iowa passed a law providing for the organization and incorporation of banking institutions. Under and by virtue of this law certain persons organised and incorporated under the name of the Iowa City State Bank. Having complied with all the requirements of the law the banking institution began business. In the course of its business it made a loan of $1,500 to Mr. Reinch, who gave his promissory note to the bank for that amount. A few months later the Supreme Court of the state of Iowa declared that the law, above mentioned, was void, because it was irregularly passed by the legislature.

Thereafter, the promissory note, above mentioned, fell due and Mr. Reinch failed to satisfy the obligation. The Iowa City State Bank, thereupon, brought suit against Mr. Reinch. He contended that the bank could not sue because it was neither a corporation de jure nor a corporation de facto.

What should be the decision of the Court in the above case?

Ruling Court Case. City Of Cleveland Vs. Society Perun, Volume 43 Ohio State Reports, Page 481

In a proceeding in quo warranto the state of Ohio had secured a judgment depriving Society Perun, a school and library society, of all rights and franchises to be a corporation. This judgment formally declared that the society never had the lawful right to be a body corporate, and that the pretended organization was void because of defects in form in the certificate of incorporation. During the time that the society had considered itself a corporation and had acted as such, it had received considerable real estate and had executed deeds and mortgages. The city of Cleveland had conveyed real estate to the society, and brought this action to enforce their lien for the unpaid purchase price. This lien had not been in any way recorded to the city, and the society had conveyed the land in question in small parcels to many other people. They came into this suit and resisted the right of the city to foreclose the unrecorded lien, claiming that their deeds entitled them to the land. The answer of the city consisted in the fact that the deeds were invalid because of the nonexistence of the supposed grantor, the society, and in proof of this showed the judgment in the quo warranto proceeding.

Mr. Justice Owen, delivering the opinion of the Court, said that the judgment of ouster was an adjudication between the state and the society upon the right of the latter to exercise corporate franchises, but did not settle the question as against other persons. It is well settled in law that third parties cannot question corporate existence in all cases where the state may do so. In any action by or against third persons the existence of the corporation is in question only in a collateral way and must be shown by much different proof than required where it is directly attacked by the state. Where a group of men, claiming to be legally incorporated, have apparently done everything which the statute requires, and are exercising all the powers and functions of a corporation, where their proceedings in that behalf are colorable and have been approved by those officers of the State who are authorized to act in that regard, third persons are not required to ascertain with minuteness the validity of all their acts. They are a corporation de facto, if not de jure. A de facto corporation is a reality. It has an actual and a substantial existence. It is, as the term implies, a corporation, although its pretended corporate existence may be terminated by a proceeding in quo warranto. Until this is done, it has all the rights and powers as against the world in general, that a corporation de jure has. These persons received their deeds before the quo warranto proceedings had been brought, and their title cannot be affected by the absence of de jure incorporation by the society. Under the recording statutes, their rights are prior to the unrecorded lien of the city.

Judgment was given for the defendant.

Ruling Law. Story Case Answer

A corporation which has complied with all legal re-quirements is called a corporation de jure. This means that it is a corporation in law or a corporation by virtue of law. On the other hand, a corporation may exist in fact without being legally constituted; such a corporation is termed a de facto corporation; this means that it exists only in fact without legal approval. A corporation de facto is one which exists for all practical purposes, against every one except the state; so long as the state does not interfere by quo warranto proceedings, the organization may exercise all the powers and privileges that it could have exercised had it been a corporation de jure. On the other hand, a corporation de jure is one which exists against every one, including the state; the state itself cannot deprive it of its corporate existence in violation of the terms of its charter. In the Story Case, the Iowa State Bank has neither a de jure nor a de facto existence; for, as will be seen later, there must be a valid law under which a de jure corporation might have existed, in order that there may be a corporation de facto. Such being the case, the organization is not a corporation as against any one. After the law has been declared unconstitutional the lack of corporate existence may be raised by any one person. Accordingly, the Iowa State Bank has no right to sue on this note as a corporation.