Story Case

Robert Himes and his two sons were the only stockholders of the Puducah State Bank, a private banking organization. On January 3, 1915, the two sons persuaded Mrs. Mary Roberts to convey her property to the Puducah State Bank, giving her, at the same time, two notes of the bank for $1,000, each, due in one year, as part payment. The father was away when this transaction occurred, and knew nothing about it at the time. On his return, he had the bank company convey the same property to himself, in payment of obligations owing to him.

Now, it happened that the bank was totally insolvent at the time Mrs. Roberts conveyed her property to it, and four months later, a receiver was appointed. Mrs. Roberts failed to collect on the notes and brought an action against Robert Himes, personally, on the notes. He put in defense that the conveyance of the property to himself was in good faith, and that he, personally, was not liable on the notes, nor was the property subject to a payment of the notes. Himes, as an individual, was a man of considerable property. Can Mrs. Roberts collect from him?

Ruling Court Case. Purtell Vs. Donovan, Volume 216 Illinois Reports, Page 629

James T. Donovan was in the real estate and loan business in St. Louis. On his office door was the sign, "J. T. Donovan Real Estate Company, J. T. Donovan, president." In the same room were the headquarters of the Fidelity Realty Company, the Cunliff Realty Company, the Fennimore Realty Company, the Cappa Realty Company and the McKinley Company. These were all distinct corporations, but Donovan, or one of his sons, was president of each one, and the stock was owned by members of the family. Title to land purchased by Donovan would be taken in the name of the company most convenient in keeping it away from creditors, and would be used whenever wanted in paying debts of Donovan or of the J. T. Donovan Real Estate Company, without formality.

Miss Purtell was a domestic who had saved $1,200 from her earnings and this amount she invested through Donovan, whom she trusted because of his affiliations with her church. She was given notes and other obligations in the names of the Fidelity Realty Company and the J. T. Donovan Real Estate Company and the security of real estate which was worth much less than was represented to her. In this suit, she disregarded the mortgages and the notes of the corporations, but sued Donovan, himself, on the ground that he had received her money and ought to repay her. He claimed that she could recover only from the corporations on the notes and contracts.

The opinion of the Court was delivered by Mr. Justice Magruder. It was held that the corporate form could not be used as a cloak for fraud, but that the persons really responsible would be held liable even for debts that were nominally corporate debts. The Court said: "The officer or controlling manager of a corporation can not use it, and its name, for the transaction of his own private business and escape personal liability on his part. The proof tends to show that when the defendant received the plaintiff's money he was not conducting business under a bona fide corporate organization, but was using a corporate entity for the transaction of his private business, and he was, therefore personally liable to the plaintiff for the repayment of her money."

Judgment was given for the plaintiff, Miss Purtell.

Ruling Law. Story Case Answer

The Courts recognize the corporate entity as separate from the members who compose it, as a matter of commercial convenience, so long as this right is not abused. But when a person takes advantage of this to perpetrate a fraud upon a third person, the Courts will disregard the corporate fiction and deal with the person or persons who used the corporation as a dummy, by means of which fraud is practiced.

The proper course, when fraud has been committed, is to bring action for fraud against the individual who has committed the wrong. An agent is always directly liable for his own malfeasance, although it is done in the name of the principal. In the Court Case of Pur-tell vs. Donovan, the Court permitted the unusual procedure of a suit upon the very contract entered into between the individual and the corporation, on the ground that it was, in fact, the act of Donovan.

In the Story Case, the facts do not show distinctly that the act of the sons in taking the property of Mrs. Roberts and giving her the notes was, in fact, the act of the father. Therefore, a suit on the notes against him is of doubtful value. Undoubtedly, in taking the property to himself, he affirmed any fraud the sons may have committed. A direct action for fraud - not an action on the notes - is the better to pursue against Robert Himes.