Conflict of Laws – Penal Provisions in Foreign Law – Liability of Shareholders in De Facto Corporation

Defendants, residents of Tennessee, while attempting to form a corporation under the laws of Arkansas, inadvertently failed to file the articles of incorporation with the county clerk, although they were filed with the Secretary of State of Arkansas. The resulting business association was an Arkansas de facto corporation. Under Arkansas law the shareholders of a de facto corporation are personally liable for the debts of the corporation. Plaintiff, a creditor who dealt with the corporation, sued in a Tennessee court and asked that the Arkansas rule be applied. The trial court refused to do so on the ground that it was penal in nature, and applied instead the Tennessee rule that shareholders of a de facto corporation are not personally liable for its debts. On appeal, held, affirmed. Plaintiff petitioned for rehearing, alleging conflict with the decision of the Court of Appeals for the Sixth Circuit in Doggrell v. Great Southern Box Co. of Mississippi, which held in deciding the same question that the Arkansas rule was not penal and the courts of Tennessee were therefore bound to apply it by the “full faith and credit” clause of the Constitution. Held, petition denied. Under the test applied by the federal court, as construed by the Tennessee court, the Arkansas rule is penal in nature and against the public policy of Tennessee. Paper Products Co. v. Doggrell, 195 Tenn. 581, 261 S.W. (2d) 127 (1953).