COMPANY STORES DEV. v. POTTERY WAREHOUSE, Tenn. Ct. App., Judgment, Law, casemine.com

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Attorney(S)

James R. Kniffen, Barnett Alagia, Nashville, for plaintiff-appellant. Harold L. North, Jr., Ray North, P.C., Chattanooga, for defendants-appellees.

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Smart Summary

Factual and Procedural Background

On February 28, 1984, Company Stores Development Corporation (plaintiff-appellant) executed a lease agreement with Pottery Warehouse, Inc. (defendant-appellee) for a five-year term. At the time of signing, Pottery Warehouse had not yet been incorporated; its incorporation occurred on March 29, 1984. The lease was signed by Jane M. Vosseller as "President" of "a corporation to be formed," indicating a future corporate entity. The plaintiff sought to hold Vosseller personally liable under Tennessee Code Annotated (T.C.A.) § 48-1-1405, which imposes liability on persons acting as corporations without authority. The trial court ruled against the plaintiff, and the plaintiff appealed.

Legal Issues Presented

Whether a corporate promoter who signs a lease agreement as an officer of a prospective corporation is personally liable to the lessor under T.C.A. § 48-1-1405.
Whether T.C.A. § 48-1-1405 applies to pre-incorporation contracts entered on behalf of a corporation not yet formed, or whether such contracts are governed by common law principles of promoter liability.

Arguments of the Parties

Plaintiff-Appellant's Arguments

The plaintiff argued that anyone entering into a contract in the name of a corporation that has not been organized is personally liable under T.C.A. § 48-1-1405.
The plaintiff relied on the statutory language imposing joint and several liability on persons assuming to act as a corporation without authority.
The plaintiff cited the case Thompson Green Mach. v. Music City Lumber as rejecting exceptions to this statutory liability.

Defendant-Appellee's Arguments

Vosseller contended that T.C.A. § 48-1-1405 does not apply to pre-incorporation contracts, which are instead governed by common law rules regarding promoter liability.
She argued that the lease was a pre-incorporation contract made solely in the name and credit of a future corporation and that no misrepresentation of corporate existence was made.
Vosseller maintained that the plaintiff intended to look only to the corporation for liability and did not intend to bind her personally.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Thompson Green Mach. v. Music City Lumber, 683 S.W.2d 340 (Tenn. App. 1984)	Interpretation of T.C.A. § 48-1-1405 abolishing the concept of de facto incorporation and imposing liability on those acting as a corporation without authority.	The court held that the statute abolished de facto incorporation but did not address promoter liability on pre-incorporation contracts; thus, its reasoning was distinguished in this case.
Ratner v. Central Nat. Bank of Miami, 414 So.2d 210 (Fla. Dist. Ct. App. 1982)	Distinction between acting as an apparent corporation and promoter liability for pre-incorporation contracts.	Used to support the view that T.C.A. § 48-1-1405 does not govern promoter liability on pre-incorporation contracts absent misrepresentation.
Sherwood Roberts-Oregon, Inc. v. Alexander, 269 Or. 389, 525 P.2d 135 (1974)	Similar principle regarding promoter liability and pre-incorporation contracts.	Reinforced the distinction between statutory liability for unauthorized corporate acts and common law promoter liability.
Heintze Corp. Inc. v. Northwest Tech-Manuals, Inc., 7 Wn. App. 759, 502 P.2d 486 (1972)	Clarification of liability for persons acting as corporations versus promoters on pre-incorporation contracts.	Supported the court’s interpretation limiting the statute’s application.
Molander v. Raugust-Mathwig, Inc., 44 Wn. App. 53, 722 P.2d 103 (1986)	Determination of promoter’s personal liability based on parties’ intent at contract formation.	Applied to establish that promoter liability depends on intent rather than statutory imposition.
Universal Industries Corp. v. Lindstrom, 92 A.D.2d 150, 459 N.Y.S.2d 492 (1983)	Same as above regarding promoter liability and intent.	Supported the common law approach to promoter liability.
Stap v. Chicago Aces Tennis Team, Inc., 63 Ill. App.3d 23, 20 Ill.Dec. 230, 379 N.E.2d 1298 (1978)	Same as above.	Reinforced reliance on intent in determining promoter liability.
Stewart Realty Co. v. Keller, 118 Ohio App. 49, 193 N.E.2d 179 (1962)	Same as above.	Used to confirm the general rule on promoter liability.

Court's Reasoning and Analysis

The court began by interpreting T.C.A. § 48-1-1405, which imposes liability on persons who assume to act as a corporation without authority, referencing its origin in the Model Business Corporation Act and the abolition of de facto incorporation in Tennessee. However, the court distinguished the statutory provision from the common law rules governing pre-incorporation contracts executed by promoters.

The court explained that the statute applies to individuals who act as an apparent corporation where no incorporation exists and where there is misrepresentation of corporate existence. It does not govern contracts made solely in the name and credit of a future corporation absent such misrepresentation.

Relying on case law from other jurisdictions and established legal treatises, the court emphasized that promoter liability on pre-incorporation contracts depends on the intent of the parties at the time of contracting. In this case, the plaintiff was aware the corporation did not yet exist and intended to look only to the corporation for performance, not to hold Vosseller personally liable.

The court found that the lease’s language and circumstances did not show any intention to bind Vosseller personally. Therefore, the statutory liability under T.C.A. § 48-1-1405 did not apply, and the common law principles of promoter liability controlled.

Holding and Implications

The court affirmed the judgment of the trial court, holding that the corporate promoter, Jane M. Vosseller, was not personally liable under T.C.A. § 48-1-1405 for the lease signed on behalf of a corporation not yet formed.

The direct effect of this decision is that promoters who enter into pre-incorporation contracts with clear intent that liability rests solely with the future corporation will not be personally liable under the referenced statute. The opinion clarifies the limited scope of T.C.A. § 48-1-1405 and confirms that promoter liability is governed by common law principles focusing on parties' intent. No new precedent beyond this clarification was established.

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COMPANY STORES DEVELOPMENT CORPORATION, Plaintiff-Appellant, v. The POTTERY WAREHOUSE, INC., and Jane M. Vosseller, Defendants-Appellees.

OPINION

FRANKS, Judge.

This appeal presents the issue of whether a corporate promoter who signed a lease agreement as an officer of a prospective corporation falls within the ambit of T.C.A., § 48-1-1405, and is thus personally liable to the lessor.

T.C.A., § 48-1-1405. Unauthorized assumption of corporate powers. — All persons who assume to act as a corporation without authority so to do shall be jointly and severally liable for all debts and liabilities incurred or arising as a result thereof.

On February 28, 1984, Company Stores Development Corporation executed a lease with Pottery Warehouse, Inc., for the rental of store premises for a term of 5 years. At the time the lease was entered, Pottery Warehouse had not been incorporated and was not incorporated until March 29, 1984. The lease recites the corporation was to be organized and was signed as follows:

THE POTTERY WAREHOUSE, INC.

a corporation to be formed under the laws of the State of Tennessee

BY Jane M. Vosseller

Its President

Plaintiff argues anyone who enters a contract in the name of a corporation which has not been organized is personally liable on the contract, pursuant to T.C.A., § 48-1-1405, but Vosseller argues the statute is inapplicable since the lease is a pre-incorporation contract, which is not governed by statute but by the common law rules of promoter liability.

T.C.A., § 48-1-1405, was adopted from § 146 of the Model Business Corporation Act and contains identical language, and this court, in Thompson Green Mach. v. Music City Lumber, 683 S.W.2d 340 (Tenn. App. 1984), held the statute abolished the concept of de facto incorporation in Tennessee.

The comment to this section provides:

This section is designed to prohibit the application of any theory of de facto incorporation. The only authority to act as a corporation under the Model Act arises from completion of the procedures prescribed in sections 53 to 55 inclusive. The consequences of those procedures are specified in section 56 as being the creation of a corporation. No other means being authorized, the effect of section 146 is to negate the possibility of a de facto corporation.

2 Model Business Corporation Act Annotated, § 146 (2d ed. 1971).

A "person assuming to act as a corporation" within the meaning of the statute refers to individuals who act as an apparent corporation where incorporation is nonexistent. The section does not address promoter liability on pre-incorporation contracts where no misrepresentation that there is an existing corporation has been made and where the contracts are made solely in the name and credit of a future corporation. See Ratner v. Central Nat. Bank of Miami, 414 So.2d 210 (Fla. Dist. Ct. App. 1982); Sherwood Roberts-Oregon, Inc. v. Alexander, 269 Or. 389, 525 P.2d 135 (1974); and Heintze Corp. Inc. v. Northwest Tech-Manuals, Inc., 7 Wn. App. 759, 502 P.2d 486 (1972).

While plaintiff insists Thompson Green Mach. v. Music City Lumber explicitly rejected any exception to the statutory liability imposed on those who assume to act as a corporation without authority, such interpretation is overly broad. In that case, the plaintiff intended to contract with a corporate entity which, in fact, did not exist at the time the party signed the promissory note. The defendant was also unaware the corporation did not exist at the time of contract and argued that, since the plaintiff had dealt with the business as a corporation, plaintiff should be estopped to deny the corporate existence. The court rejected this argument and imposed liability on the defendant. At no point does the court address the issue of a promoter's liability on pre-incorporation contracts.

The general rule is a promoter's personal liability on a pre-incorporation contract entered with a third party is determined by the intent of the parties at the time of contract. Molander v. Raugust-Mathwig, Inc., 44 Wn. App. 53, 722 P.2d 103 (1986); Universal Industries Corp. v. Lindstrom, 92 A.D.2d 150, 459 N.Y.S.2d 492 (1983); Stap v. Chicago Aces Tennis Team, Inc., 63 Ill. App.3d 23, 20 Ill.Dec. 230, 379 N.E.2d 1298 (1978); Stewart Realty Co. v. Keller, 118 Ohio App. 49, 193 N.E.2d 179 (1962). Accord: 18 Am.Jur.2d, Corporations, § 136; 18 C.J.S., Corporations, § 132; and 1A Fletcher Cyclopedia, Corporations, § 215 (perm. ed. 1983). See also Annot., 41 ALR2d 477.

In the instant case, the stipulations of fact establish the plaintiff intended to look solely to Pottery Warehouse, Inc., for satisfaction of the obligation arising under the lease at the time of execution. At the time the lease was signed, plaintiff was aware of the nonexistence of the corporate entity and did not require Vosseller to sign the agreement in an individual capacity but as a president of a future corporate entity. The lease imputes no intention on the part of Vosseller to be bound personally.

Accordingly, we affirm the judgment of the trial court and remand, with cost of appeal assessed to appellant.

GODDARD, and ANDERSON, JJ., concur.

COMPANY STORES DEV. v. POTTERY WAREHOUSE