FACTS: Goodman (Defendant), a real estate agent, agreed to renovate an apt. building he had sold to DDS (Plaintiff), a general partnership. Defendant informed Plaintiff that he would be forming a corp. to limit his personal liability. When the renovation K was executed b/w Plaintiff and Defendant, Plaintiff knew that Defendant’s corp. was not yet in existence. Defendant subcontracted the work, which was not completed w/in the required time and was allegedly of poor quality. Not until after this apparent default did Defendant file articles of incorp. and receive his corporate license. Plaintiff made 5 progress payments on the K, making out the checks to both Defendant and the corp. After the default, Plaintiff served Defendant w/a demand for arbitration pursuant to the K, naming both Defendant and his corporation. Defendant moved for a stay of arbitration and an order dismissing him as an individual from the arbitration, which the trial court granted. Plaintiff appealed and the court of appeals reversed. Defendant appealed.
ISSUE: Where a corp. is contemplated but has not yet been organized at the time when a promoter makes a K for the benefit of the contemplated corp., is the promoter personally liable on it, even though the K will also benefit the future corp.?
HOLDING: Yes, where a corp. has not yet been organized at the time when a promoter makes a K for the benefit of the contemplated corp., the promoter is personally liable on it even though the K will also benefit the future corp. An exception to the general rule is that if the contracting party knew that the corp. was not in existence at the time of the contracting but nevertheless agreed to look solely to the corp. for performance, the promoter will not be held a party to the K. Defendant has the burden of proving that such an agreement existed with Plaintiff. Defendant argues that the contractual language indicating that the corp. was “in formation” was an expression by the parties of their intent to make the corp. alone a party to the K. Here, the trial court relied on 3 considerations to show that the parties agreed to release Defendant from the K:
- 1. Plaintiff knew of the corp.’s existence;
- 2. Defendant told Plaintiff that he was forming the corp. to limit his personal liability; and
- 3. The progress payments were made to the corp.
BUT the fact that a contracting party knows that a corp. is nonexistent does not indicate any agreement to release the promoter. To the contrary, such knowledge alone would seem to show that Plaintiff intended to make Defendant a party to the K. Defendant’s assertions that he was incorporating to limit his liability also is not dispositive of Plaintiff’s intentions. Plaintiff had no duty to correct or even perceive Defendant’s mistaken interpretation of the promoter liability rules in his belief that incorporation would limit his liability. Also, the progress payment checks were written to the corp. only after Plaintiff expressly instructed them to be made, and this evidence does not show w/reasonable certainty that Plaintiff intended to K only w/the corp. The trial court erred in dismissing Defendant from arbitration proceedings. Remanded.