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Pharmaceutical Sales and Consulting Corporation v. J.W.S. Delavau Co., Inc.

59 F. Supp.2d 408 (D. N.J. 1999)

CORPORATIONS; DE FACTO—The concept of de facto corporate status no longer exists in New Jersey.

Two companies entered into a Sales, Consulting, and Confidential Disclosure Agreement. One of the companies was not a de jure corporation at the time of the agreement. The other company contended that the first company could not sue for breach of contract if it did not have the capacity to enter into the contract as of the date of its execution. In response, the “unincorporated” corporation maintained that it was a de facto corporation, or alternatively it existed by virtue of the “doctrine of corporation by estoppel.” In earlier proceedings, the Court held that, assuming arguendo that the doctrine of de facto corporation was still viable under New Jersey Law after the enactment of New Jersey’s Model Business Corporation Act in 1968, the facts of the case demonstrated that the entity in this case was not, in fact, a de facto corporation. The Court reached that conclusion based on the fact that no attempt was made to incorporate the company until one and one half months after the agreement. Following that ruling, the other company sought to include some of the principals of the “defective corporation” under the theory that, at the time of the contract, the “defective corporation” was to be treated as a partnership. This would give rise to personal liability on the part of those principals. By reason of complications in the underlying facts, the Court was forced to revisit its earlier opinion where it did not rule on the issue of whether the de facto corporation concept was viable under New Jersey law. Therefore, it needed to answer that question to be able to determine whether the principals of the “de facto” corporation would have personal liability. By reviewing the law of other states, the Court found that other legislatures had abolished the concept of a de facto corporation based upon the same or similar language as that found in the New Jersey Business Corporation Law. Moreover, the comments to the New Jersey law state that its provisions “virtually eliminate the distinction between de jure and de facto corporations.” Consequently, the District Court concluded that the concept of de facto corporate status no longer exists in New Jersey. In doing so, it recognized that although at least two New Jersey Appellate Division opinions have discussed or applied the de facto corporation concept since the codification of the Act, the question of the doctrine’s remaining vitality after enactment of the Act was squarely not presented to those courts or addressed in either case. Therefore, the District Court believed that the New Jersey Supreme Court would align itself with those courts which have abolished the de facto corporate concept in view of the language in N.J.S. 14A:2-7(2). Given that ruling, the Court pointed out that under New Jersey law, corporate existence begins upon the “filing” of a certificate of incorporation. Moreover, there is New Jersey authority to support the proposition that “[w]hen a corporation de jure or de facto does not exist, persons doing business in an assumed corporate capacity are partners and liable as partners.” Because of an issue as to the status of the individuals in question, the Court lacked sufficient basis to determine whether each of the alleged “partners” could actually be held liable in that capacity.


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