Opinion ID: 2633445
Heading Depth: 2
Heading Rank: 1

Heading: validity of post-dissolution contracts

Text: ¶ 24 Individuals are generally personally liable for contractual liabilities flowing from their business dealings. Creation of the corporate shield, however, provides an exception to this general rule. See Black's Law Dictionary 341 (7th ed.1999). A defining feature of a corporation is the limitation of the liability of the individuals involved to the sums voluntarily contributed. 18 Am.Jur.2d § 5 Contribution (1985) (citations omitted). ¶ 25 In order to invoke corporate protection, individuals forming a corporation must comply with the formalities required by relevant constitutional or statutory provisions. Deviation from these formalities might render shareholders unable to claim protection under a corporate shield. In an attempt to protect individuals who had inadvertently failed to comply with the formalities of incorporation, the common law developed the doctrines of de facto corporations and corporation by estoppel. The ultimate effect of these doctrines was to provide corporate protection under principles of equity to deserving individuals. ¶ 26 The URBCA became effective on July 1, 1992. It was adapted from the Revised Model Business Corporation Act (RMBCA). Prior thereto, the Utah Business Corporation Act (UBCA) was in effect. It had been adapted from the Model Business Corporation Act (MBCA). In a case arising under the UBCA, the Utah Court of Appeals held that the common law doctrine of de facto corporations was specifically preempted by sections 16-10-51 and 139 of the UBCA because of its inconsistent application. American Vending Servs., Inc. v. Morse, 881 P.2d 917 (Utah Ct.App.1994); see Murphy v. Crosland, 886 P.2d 74 (Utah Ct.App.1994); see also RMBCA official comment § 2.04 (RMBCA is intended to eliminate the lack of clarity caused by cloudy interpretations of corporations de facto). Elimination of the doctrine makes individuals entering into obligations in the name of a nonexistent corporation personally liable. Importantly, this liability is not a punishment for failure to properly create a corporation, but it simply revokes the right of individuals to assert the equitable existence of a corporation as protection from personal liability. ¶ 27 The URBCA provision eliminating the de facto common law principle is section 16-10a-204, which, together with its title, states: Liability for Preincorporation Transactions. All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this chapter, are jointly and severally liable for all liabilities created while so acting. Although the title indicates preincorporation activity as the type of covered conduct, we have previously held that the predecessor to section 16-10a-204, which was section 16-10-139 of the UBCA, also applied to post-dissolution situations. [1] See Steenblik v. Lichfield, 906 P.2d 872 (Utah 1995). Utah is not alone in this conclusion. At least five other states with similar or identical statutes have held principals liable in post-dissolution situations. See Murphy, 886 P.2d at 81 (citing authority in five other states, with statutes identical or equivalent to section 16-10-139 that have held the statutes apply to situations in which a corporation's authority has been restricted or terminated after incorporation.) In those states, despite corporate dissolution, a principal who attempted to act on behalf of a corporation was held personally liable. ¶ 28 In Steenblik, Lichfield, a principal of Zephor Advisors, Inc. (Zephor), was held liable for a number of securities violations incurred by Lichfield, who entered into debt obligations with Steenblik after Zephor had been suspended by the State of Utah. Id. 906 P.2d at 873-75. Lichfield argued that because the corporation was suspended at the time he entered into the obligations, the contract was void. This court noted that there was a split of authority as to whether section 16-10-139 was limited to preincorporation activities or whether it could be extended to post-dissolution activities. Id. at 877. We elected to follow the majority rule as cited by the court of appeals in a earlier case that Section 16-10-139 applies to all persons who act as a corporation without authority. Id. at 878 ( citing Murphy 886 P.2d at 80 (Utah Ct.App.1994)). In Steenblik, we wrote, [N]othing in Utah's statutory history suggests Section 16-10-139 is limited to preincorporation activities.... As to corporations that have been suspended and not reinstated, we hold that officers and directors who continue the business of a suspended corporation are personally liable for all debts and liabilities arising from those types of activities the corporation performed. Under such circumstances, the relationship of persons who continue the operations of a suspended corporation is like preincorporation promoters .... Thus, persons who act as if pursuant to valid corporate authority after that authority has been suspended, are personally responsible for liabilities arising from the continued operations. Steenblik 906 P.2d at 878 (citing First Nat'l Bank of Boston v. Silberstein, 398 S.W.2d 914, 915-16 (Tex.1966)). ¶ 29 In the instant case, the trial court stated that when the UBCA was repealed in 1992, former section 16-10-139 and cases interpreting the statute as applicable to post-dissolution situations failed to survive. Referring to the repeal of former section 16-10-139 the trial court stated: Section 16-10a-204 is somewhat similar and provides ... (language of statute deleted). This section however, is specifically directed to actions taken prior to incorporation or when incorporation fails.... Thus, the statute [section 16-10-139] ... has not, in fact, been recodified. On the contrary, not only is former section 16-10-139 somewhat similar to present section 16-10a-204, it is its predecessor. [2] For reasons set out further below, I would hold that the difference in the wording of section 16-10a-204 is insufficient to warrant a different result from our decision in Steenblik that section 16-10-139 applied to post-dissolution agreements. ¶ 30 I draw support in that conclusion from Equipto Division Aurora Equipment Co. v. Yarmouth, 134 Wash.2d 356, 950 P.2d 451 (1998), where the Supreme Court of Washington held that a statute of that state, which is identical to our section 16-10a-204, did not change the meaning of a former statute, which was identical to our former section 16-10-139, and that both statutes applied to post-dissolution contracts of a corporation. The Washington court wrote: If the committee had planned on narrowing the scope of the liability rule to just preincorporation transactions, the official comment [to the model act] would have made some mention of such a substantial change. As it is, the official comment says nothing about removing postdissolution situations from the scope of the liability rule. Id. at 457. Minor changes in the statute did not alleviate the application of the statute to postdissolution situations. ¶ 31 Defendants contend that [p]arties allowing their corporate status to lapse should not be able to benefit from their disregard of corporate form at the expense of innocent third parties dealing with them in good faith. The majority holds that such contracts should be void ab initio or voidable by the party not acting for a dissolved corporation. I believe the majority fundamentally misconstrues the policy behind the former section 16-10-139 and the current section 16-10a-204. They seem to presume that these statutes were designed to punish individuals who sign contracts on behalf of a corporation that has been administratively dissolved. The history of the law, however, makes clear that these statutes were enacted in order to prevent individuals from escaping liability under these circumstances. See Murphy, 886 P.2d at 77; Morse, 881 P.2d at 921. Thus, I disagree with the holding today that contracts entered into on behalf of defunct corporations should be void or voidable for policy reasons. ¶ 32 In short, when a corporation does not exist, consistent with section 16-10a-204, a principal is individually liable for contracts he makes. Moreover, we clearly held in Steenblik that contractual obligations support the liability and such obligations are not nullified because a principal signs on behalf of a defunct corporation. Accordingly, section 16-10a-204 makes the corporate principal, who signs a contract post dissolution, a party to the contract; contractual liability presupposes the existence of a contract and, therefore, contracts in these situations cannot be void under URBCA.