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Corporation – Corporation By Estoppel – Swimming Pool Loan

Although the Community Youth Center ceased existence in 2000, it continued to function as a corporation, and applying the doctrine of corporation by estoppel, a Greensville County Circuit Court says three corporate officers had the authority to borrow money from a bank in 2005 to build a swimming pool at the community center, and the bank was entitled to foreclose on the property after CYC defaulted on the loan.

If a Virginia corporation fails to pay its annual registration fee in a timely manner, the corporation is automatically dissolved under Va. Code Sec. 13.1-752. Once dissolved, the corporation has a qualified existence, but only for the purpose of liquidation. Under the Virginia Code, when a corporation is dissolved for failure to pay its annual registration fees, the assets of the corporation pass to the directors as trustees in liquidation. The trustees are prohibited from continuing the business of the corporation. Instead, the trustees are charged with collecting the assets of the corporation, selling, conveying and disposing of such of its properties that are not to be distributed in kind to its shareholders, paying, satisfying and discharging its liabilities and obligations, and doing all other acts required to liquidate its business and affairs.

The property at issue in this case, however, was a corporate asset that was used as collateral for a loan secured after the dissolution. The corporation dissolved in 2000, but it continued to operate and hold itself out as a corporation well into 2005, when it obtained the loan. The bank appeared satisfied that CYC was a valid corporation and agreed to fund the loan. The bank never obtained a certificate of good standing from the SCC to verify whether or not CYC was a valid Virginia corporation.

The court first finds the three officer-directors did not have the authority as trustees in liquidation to secure a loan for the purpose of installing a new swimming pool. Installation of a swimming pool does not fit within any of the authorized wind-up activities contained in Va. Code Sec. 13.1-752 or Sec. 13.2-745. Nor could their fellow directors, also acting as trustees in liquidation, permissively ratify such acts.

The court does find, however, that CYC existed as a matter of fact in 2005, even after its legal right to exist had expired in 2000. The three officer-directors who secured the loan were conducing corporate business under CYC’s corporate name. As such, CYC must be held to be a corporation by estoppel, and cannot defeat liability here by alleging that its corporate status had been terminated.

Here, there can be no doubt that it was the duty of the directors, under the provisions of this statute, to wind up the corporation’s business when its corporate existence was automatically terminated. But the facts show that they did not do so. So long as CYC held itself out as a valid corporation and carried on its business and contracted or incurred liabilities with or to third persons dealing with it as an existing corporation, CYC is estopped from denying the existence and viability of its corporate entity.

There is some question as to whether Virginia recognizes the doctrine of corporation by estoppel. The source of this confusion is Virginia’s adoption of the Model Business Corporations Act. In light of Virginia’s adoption of the 1984 Model Business Corporation Act, the court finds that case law in effect prior to the 1950 Model Business Corporation Act which applied the doctrine of corporation by estoppel is still good law.

CYC may not have been a de jure corporation, but the court cannot reasonably ignore the actual existence of such a corporation.

The court finds the president, vice president and treasurer of CYC were capable of entering into an agreement with the bank on CYC’s behalf. The court finds the foreclosure sale to be valid, and the bank, as purchaser at the foreclosure sale, has fee simple title to the property.

First Community Bank N.A. v. Community Youth Center (Sharrett, J.) No. CL 09-128, Dec. 20, 2010; Greensville County Cir.Ct. VLW 010-8-232, 9 pp.

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