An Unincorporated Entity will be Unable to Recover as a Secured Creditor in Bankruptcy Unless a Court Invokes the Doctrines of De Facto Corporation or Corporation by Estoppel

Abstract

(Excerpt) Under New York law, an entity that has failed to properly incorporate cannot assume liabilities or acquire rights. As a result, unincorporated entities will typically lack capacity to enter into contractual agreements. Within the context of bankruptcy, this may hinder a creditor’s ability to maximize its recovery. A creditor that is adversely affected by a lack of corporate recognition will attempt to persuade a court to impose the doctrines of de facto corporation or corporation by estoppel. These doctrines, which are matters of state law, provide unincorporated entities with the rights and obligations that a legally recognized entity would otherwise have. This article discusses the doctrines of de facto corporation and corporation by estoppel and their bankruptcy implications. Part I compares the two doctrines and analyzes the criteria courts use to determine whether an unincorporated entity should be found to have corporate status. Part II further elaborates on the bankruptcy implications associated with the corporate status of unincorporated entities