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2)Good faith;

3)Some use of corporate franchise; Then ct will recognize status as to all but state

3.CORPORATION BY ESTOPPEL

a)Definition--estoppel is an equitable evidentiary rule which prevents a party from denying the existence of a fact notwithstanding that he fact is not true. Thus, certain parties are estopped from asserting defective incorporation when they have dealt with the corp as though properly formed.

b)Example--shs who claimed corp status in an earlier transaction are estopped to deny that status in a suit brought against the corp. The estoppel theory normally does NOT apply to bar suits against would-be shs by tort claimants or other involuntary creditors.

c)Overlap With De Facto--many of the facts which we would point to support a claim of de facto status are the same ones we point for estoppel. However, substantial abolition of de facto concept doesn’t necessarily abolish estoppel.

d)De Facto is For All; Estoppel is For One--estoppel depends on relationship between party and corp.

 4.WHO MAY BE HELD LIABLE--when a would-be corp is not a de jure or de facto or a corp by estoppel, the modern trend imposes personal liability against only those owners who actively participated in management of the enterprise.

5.EFFECT OF STATUTES:

a)On De Facto Doctrine--states following the prior version of the Model Act have abolished the de facto doctrine, thus making all purported “shs” jointly and severally liable for all liabilities incurred as a result of the purported “incorporation.” However, statutes based on Revised Model Business Corporation Act require a person acting on behalf of the enterprise to know that there was no incorporation before liability attaches.

b)On Estoppel Doctrine--the effect of both acts is an unsettled issue.

c)On Liability--under the prior Model Act, liability extends to investors who also exercise control or actively participate in policy and operational decisions. It is expected that the Revised Model Act will be interpreted in the same manner.

III.LIABILITIES FOR TRANSACTIONS BEFORE INCORPORATION.

A.PROMOTERS--a promoter participates in the formation of the corp, usually arranging compliance with the legal requirements of formation, securing initial capital, and entering into necessary contracts on behalf of the corp during the time it’s being formed.

a)Fiduciary Duties to Each Other--Full disclosure and fair dealing are required between the promoters and the corp and among promoters themselves.

B.CONTRACTS MADE BY PROMOTERS ON CORP’S BEHALF

1.RIGHTS AND LIABILITIES OF CORPORATION:

a)English Rule--the corp is not directly liable on pre-incorporation contracts even if later ratified. Rationale: the corp was not yet in existence at the time the promoter was acting.

b)American Rule--the corp is liable if it later ratifies or adopts pre-incorporation K.

c)Corporation’s Right to Enforce Contract--under either rule, the corp may enforce the contract against the party with whom the promoter contracted, if it chooses to do so.

2.RIGHTS AND LIABILITIES OF PROMOTERS.

a)Liability on Pre-incorporation Contract--generally, promoters are liable if the corp rejects the pre-incorporation contract, fails to incorporate, or adopts a contract but fails to perform, unless the contracting party clearly intended to contract with the corporation only and not with the promoters individually.

b)Right to Enforce Against the Other Party--if a corp is not formed, the promoter may still enforce the contract.

C.OBLIGATIONS OF PREDECESSOR BUSINESS--a corporation that acquires all of the assets of a predecessor business does not ordinarily succeed to its liabilities, with exceptions:

 a)Exceptions--the successor corp may be liable for its predecessor liabilities if:

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