Jacobson v. Stern

Facts:  Stern brought action for unpaid architectural services for development of hotel and casino, Kings Castle, in Nevada against Jacobson.

Jacobson earlier asked Stern to draw plans of a new casino.  Jacobson consequently provided this service.

At the same time, Jacobson purchased stock of A.L.W. (Corp. that previously operated casino at this site), formed a new corp., Lake Enterprise, (Jacobson was the sole stockholder), and formed a general partnership with other investors, Kings Castle, where he was the most substantial investor ($3 millions).

Stern was paid $30K for some of his services by checks from A.L.W and one check from Jacobson.

Two years later, A.L.W., the owner of the casino, filed for bankruptcy. Stern sued. Trial court awarded Stern $132K. Jacobson appealed arguing that (1) he had no personal liability (2) A.L.W. adopted Jacobson’s obligation because of a contract novation (substitution of an old contract for a new one).

Issue:  Is the promoter (Jacobson) is personally liable?  Was there a contract novation?

Rule:   A contract with the promoter is not one with the corporation, absent some subsequent agreement with a corporation.  A corporation may expressly or impliedly ratify the contract and, thus, make it a valid obligation.  Where there is a valid express or implied novation, the corporation is substituted for the promoter as a party to the contract, and the promoter is divested of his liability.

Court’s Reasoning:   Here, A.L.W accepted the benefit of the contract and adopted contractual obligations. However, liability of the corporation does not, absent a novation, end the liability of the promoter to the third party.  Kings Castle, LP and Lake Enterprise did not exist when Jacobson contracted Stern; and A.L.W. had no connection with the contract.  Thus, none of these entities could have Jacobson contract for them.

Holding:  The trial court’s finding that there was no novation was corrected. Affirmed.

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