Also known as: holding-out theory · fraud theory · holding out · apparent authority by holding out
Written by attorneys · grounded in primary & secondary sources — see below
A theory of shareholder liability for watered stock founded in tort against creditors. Directors and participating shareholders commit fraud by falsely representing that par value has been paid or agreed to be paid in full. Creditors are presumed to have relied on the misrepresentation when extending credit.
Francisco Frost and Faith Fitzgerald cohabited in a condominium for two years after exchanging consents to marry. They used a joint bank account and told community members they were spouses. When Francisco later sought to enforce marital property rights, the court applied the holding-out element to recognize the common law marriage.
Falcon Dynamics sold property to Fisher Foods after misrepresenting its income-producing capacity. Fisher Foods relied on the statements and purchased the property for profit. After discovering the fraud, Fisher Foods recovered lost profits that would have been earned had the property possessed the represented characteristics.
Select any source to read its text and confirm it supports the definition.
Public indications such as using a common last name, maintaining a joint bank account, or telling community members that the parties consider themselves married satisfy the element. No minimum duration is required if consent, cohabitation, and holding out are all present.
The theory treats the false representation that par value has been paid as a fraud on creditors. Shareholders who participate in the misrepresentation are liable in tort to subsequent creditors without notice who extended credit in reliance on the appearance of full capitalization.
No. Early applications of the theory presumed that subsequent creditors without notice were deceived by the misrepresentation of full payment of par value. The presumption supplies the reliance element without requiring proof of actual knowledge.