Opinion
Gen. No. 40,492.
Opinion filed October 3, 1939.
1. CORPORATIONS, § 77 — authority to act for corporation before its incorporation. President of corporation transferring all its assets to new corporation organized to take possession of such assets did not have authority to act for new corporation before it came into existence.
See Callaghan's Illinois Digest, same topic and section number.
2. CORPORATIONS, § 83fn_ — corporation may ratify contract made before its existence. Where president of corporation transferring all its assets to new corporation organized to take possession of assets represented that he had authority to act for new corporation and proposed that if creditor agreed to release old corporation from liability under contract of sale, new company would assume such contract, held new corporation as soon as it came into existence could accept offer and by so doing ratify and adopt action of unauthorized agent.
3. CORPORATIONS, § 442fn_ — sufficiency of consideration for assumption of liabilities by corporation. Failure of creditor of corporation to oppose transfer of its assets to new company nor oppose its reorganization which creditor had legal right to do held sufficient consideration for agreement of new company to assume obligations of contracts which creditor had with old company.
4. NOVATION, § 1fn_ — what constitutes. Novation is contract which discharges immediately duty to make compensation, creates new contractual duty, and includes as party one who had no previous duty or was entitled to its performance.
5. CORPORATIONS, § 443fn_ — when corporation estopped to deny liability for obligations of its predecessor. Complaint which alleged that president of corporation transferring all its assets to new company organized to take over such assets represented that he had authority to act for new corporation and proposed that if creditor of old corporation agreed to release old corporation from liability for unpaid purchase price on contracts for sale of boxes new company would assume such contracts and continue to accept merchandise under contract, that creditor agreed to proposal and did not oppose sale of assets to new company which it had legal right to do, and that new company with full knowledge took possession of assets of old company and proceeded to carry out contracts but subsequently repudiated agreement, stated cause of action against new company for liability under contracts which creditor had with old company on theory that new corporation was estopped to deny there was novation contract.
Appeal by plaintiff from the Circuit Court of Cook county; the Hon. HARRY M. FISHER, Judge, presiding. Heard in the first division of this court for the first district at the December term, 1938. Reversed and remanded with directions. Opinion filed October 3, 1939.
MAYER, MEYER, AUSTRIAN PLATT, of Chicago, for appellant; MILES G. SEELEY and EDWIN A. ROTHSCHILD, both of Chicago, of counsel.
EDWARD GRAFF, of Chicago, for appellee.
Plaintiff filed an amended complaint which on motion of defendant was stricken, with judgment for costs, from which plaintiff appeals. The question for decision is whether the complaint states a cause of action. The complaint shows plaintiff is an Ohio corporation manufacturing paper boxes, that defendant manufacturing company is an Illinois corporation doing business in Chicago. The organization of defendant was completed January 13, 1938, when it took over the assets of LaMode Garment Company, another Illinois corporation, to which it is successor.
The LaMode Garment Company on August 14, 1937, made two contracts with plaintiff, copies of which are attached to the original complaint as exhibits "A" and "B," by which plaintiff agreed to manufacture for and sell to the garment company 25,000 paper boxes at $24.70 per thousand, these boxes to be manufactured at one time and to be shipped as instructed, but all to be taken within six months, on terms of payment stated in the contract, plaintiff reserving the right to overrun or underrun 10 to 20 per cent of the specified quantity, invoices for all unshipped balances to be rendered February 16, 1938. Plaintiff manufactured 29,875 of these boxes. The complaint also avers that September 20, 1937, by contract in writing (copy of which is attached as exhibit "C") plaintiff agreed to manufacture and sell to the garment company and the garment company to buy from the plaintiff 25,000 folding boxes at $49.20 per thousand, to be manufactured at once, 5,000 to be shipped as soon as possible, balance as instructed, and all to be taken within three months from date of order, with the right of plaintiff to overrun or underrun from 10 to 20 per cent as to the specified quantity. Plaintiff manufactured 26,900 of these boxes. Plaintiff at the request of the garment company made shipments on both orders on dates set out in the complaint, and the garment company failed to pay as agreed. The last shipment was made November 20, 1937.
January 3, 1938, plaintiff received notice in writing that the garment company had entered into a contract with one Kurtzon for the sale of all its assets for "a sum equal to 50 per cent of the amount owing to creditors of the vendor for merchandise heretofore delivered to it," and that a corporation would be formed by the vendee to take possession of the assets of the vendor garment company not sooner than 5 days and not later than 20 days after the date of the notice.
January 6, 1938, plaintiff received a notice from a group of creditors of the garment company informing it that the garment company through Gershenow, its president, had advised creditors of its inability to meet current expenses, and that the proposed sale of its assets to a new corporation to be formed by Kurtzon was a "plan of reorganization" to which these creditors had agreed and which they recommended to other creditors.
The amended complaint says this plan of reorganization for the sale of the garment company to Kurtzon, or a new corporation to be organized, was unfair and fraudulent as to plaintiff and would result in hindering and delaying plaintiff for the reason that creditors of the garment company who had delivered all goods sold by them to it would receive one-half of their full claim, whereas the plaintiff (having delivered only a part of the merchandise sold by it to the company) would receive no compensation whatever with respect to the undelivered portion of merchandise; that the garment company was to be stripped of all its assets so that the balance of plaintiff's claim would be totally uncollectible upon completion of the new organization. Plaintiff protested to the garment company on this ground, whereupon Gershenow advised plaintiff that the new corporation would be substantially the same as the old though under a slightly different name, and that he (Gershenow) was to be one of the principals in the reorganized company, had authority to act for it, and proposed that if plaintiff would agree to accept from the reorganized company in settlement of its claim for the purchase price of the boxes delivered 50 per cent of the purchase price, and release the garment company from liability under the contracts, the new company would take over and assume these contracts and would accept delivery of all boxes remaining undelivered and pay for same at the contract price. Relying on these representations plaintiff agreed, refrained from taking any action to prevent the reorganization or sale of assets or to enforce the obligations of the garment company under the contracts.
January 13, 1938, the organization of the LaMode Garment Manufacturing Company had been completed and the assets of the old company conveyed to it. January 17, 1938, defendant, with full knowledge of the agreement between plaintiff and Gershenow, instructed plaintiff to ship to it 2,000 boxes manufactured under the contract of August 14, 1937, and 1,000 of the boxes manufactured under the contract of September 20, 1937. These boxes were shipped to defendant by plaintiff, were accepted and paid for by defendant at the price specified in the contract, thereby, as the complaint avers, ratifying and confirming the authority of Gershenow to agree in its behalf, and thereby taking over and assuming the contract, enjoying the benefits, and agreeing to a novation whereby the old garment company was released and its obligations assumed by defendant. The complaint goes on to state that later defendant repudiated the agreement made in its behalf and refused to carry out the contracts as agreed.
The record does not disclose on what theory the trial judge came to the conclusion that the complaint failed to state a cause of action. It is the theory of plaintiff that under the facts as alleged defendant, as a successor corporation, must be held to have assumed, ratified and adopted the contracts of its predecessor for a valuable consideration, and is therefore bound by the terms of these contracts. Defendant says the complaint does not allege that Gershenow was authorized by defendant to make an agreement for the new corporation which as yet had not been organized. Gershenow, of course, did not have authority to act for an entity not yet in existence. The complaint however says Gershenow said he was to be one of the principals in the reorganized corporation, and that he had authority to act for it. The proposed agreement was presumably to go into effect only on completion of the organization of the new company. The metaphysical difficulty disappears when this fact is recognized. Granting that Gershenow did not have authority at the time his offer was made, the new corporation as soon as it came into existence could accept the offer and by so doing ratify and adopt the action of the unauthorized agent. According to the complaint the offer was that if plaintiff would accept from the new company 50 per cent of the purchase price of the boxes delivered under the contracts with the old company, and release the old company from liability, the new company would take over and assume the obligations of the contracts with the old company, accept delivery of the undelivered boxes and pay for them at the contract price. Plaintiff agreed to this, did not oppose the sale of assets to the new company nor oppose the reorganization, which he had a legal right to do. This was sufficient consideration.
After defendant's organization was completed on January 13, 1938, as LaMode Garment Manufacturing Company (the word "manufacturing" was the only additional word in the name of the new corporation) the assets of the old company were conveyed to it, and four days thereafter, with full knowledge of the agreement as made for it by plaintiff and Gershenow, defendant proceeded to carry out this agreement by ordering 2,000 of the boxes manufactured under the contract of August 14, 1937, and 1,000 boxes manufactured under the contract of September 20, 1937. These boxes were shipped to defendant who paid therefor the price named in the contracts between plaintiff and the predecessor garment company. A week later defendant repudiated the agreement with the new company. In other words, after enjoying all the benefits it disclaimed all obligation.
The pleading avers, as a conclusion of law from the facts stated, that these facts constituted a novation, or at least that defendant under the circumstances is now estopped to deny its liability on the contracts with the old company. Defendant says the mere fact defendant ordered and paid for 3,000 boxes manufactured under the contracts would not constitute an adoption of these contracts, ratification thereof, or a novation. This may be true, but this fact with the other facts alleged, such as the offer, the acceptance, receipt of the consideration with knowledge, amounted to adoption, ratification and, we think, created an estoppel to deny a novation. Defendant was a de facto corporation before it was a de jure corporation. It would serve no useful purpose to discuss the many cases cited in the brief of defendant, most of which are not at all applicable. The Restatement, "Contracts," says: "A novation is a contract that (a) discharges immediately the previous contractual duty or a duty to make compensation, and (b) creates a new contractual duty, and (c) includes as a party one who neither owed the previous duty nor was entitled to its performance." (See Restatement, Contracts, ch. 13, sec. 424, p. 798.) Defendant says the statement of Gershenow could not bind defendant. The defendant could not be immediately bound by a promise of Gershenow made in its behalf when it was not in fact in existence; but when, as the complaint alleges, defendant with full knowledge took possession of all the assets of the garment company, thus depriving plaintiff of the means by which the garment company's obligation to plaintiff could be enforced, and when, as under circumstances alleged in the complaint, it ratified Gershenow's agreement made in its behalf by ordering under the contracts and paying the prices named in the contracts it would seem, irrespective of whether there was a technical novation at the time of the Gershenow promise, that defendant is now estopped to deny the novation. Defendant says the complaint fails to state that defendant acted with knowledge. Defendant is mistaken. The complaint does aver knowledge.
It would be an unprofitable task to discuss all the cases cited by the parties. The principles are elementary and fundamental and are sustained by many well considered cases. Wiggins Ferry Co. v. Ohio M. Ry. Co., 142 U.S. 396, 35 L.Ed. 1055, 12 Sup. Ct. 188; E. E. Taenzer Co. v. Chicago, R.I. P. R. Co., 170 Fed. 240; Chicago Alton R. R. Co. v. Chicago, V. W. Coal Co., 79 Ill. 121; Zanes v. Lehigh Valley Transit Co., 41 F.2d 552, affirmed 46 F.2d 848, cert. denied 284 U.S. 619, 76 L.Ed. 528, 52 Sup. Ct. 8; Swords Co. v. Hogland, 278 Ill. App. 611; In re Ideal Steel Wheel Co., 25 F.2d 651; 1 Fletcher, Corporations, Perm. Ed. 1931, secs. 207, 208; White v. Stevens, 326 Ill. 528; Brownholtz v. Providers Life Assur. Co., 329 Ill. 42; Norris v. Hess Bright Co., 185 Ill. App. 262; Saltonstall v. Mead, 191 Ill. App. 173; Pitts v. D. M. Steele Mercantile Co., 75 Mo. App. 221.
For the reasons stated the judgment is reversed and the cause remanded with directions to enter a rule on defendant to answer the complaint.
Reversed and remanded with directions.
O'CONNOR and McSURELY, JJ., concur.