Opinion ID: 682427
Heading Depth: 4
Heading Rank: 2

Heading: The Rationale for Holding Members of Unincorporated

Text: 45 Nonprofit Associations Liable for Contracts Entered into by the Association 46 At common law it was necessary to hold certain members of an unincorporated association personally liable for the association's contracts to protect third parties with whom the unincorporated association dealt. This was because an unincorporated association was not recognized as a juridical entity and thus could not be held liable for contracts entered into in its name. 41 Consequently, when a member contracted for services on behalf of an unincorporated nonprofit association, the common law treated that member as though he had represented himself to be the agent of a nonexistent principal. Under the law of agency, such a putative agent was and is held liable for the contract entered into on behalf of the nonexistent principal. 42 47 In the modern era, Texas, 43 Pennsylvania, 44 and many other states, 45 have enacted statutes permitting unincorporated associations to sue and be sued. In many of these entity states, third parties who contract with unincorporated nonprofit associations may now pursue a cause of action against the assets of the association itself. In such jurisdictions, therefore, a member of an association who enters into a contract on behalf of the association is not contracting for a nonexistent principal. One could argue, therefore, that it is no longer necessary or even appropriate for the laws of these jurisdictions to permit third parties to sue individually the members of an association for the contract debts incurred by the association in its own name. The argument would go as follows: The third party is no longer being misled or deceived about a nonexistent principal; such a party is contracting with a disclosed, juridical entity, the assets of which can be reached to satisfy any debt that the association may owe. 48 As appealing and logical as that argument might appear, however, that is not the way the law has developed. The courts of the states that have adopted statutes permitting suit against unincorporated associations have not altered or supplanted the preexisting common law rule governing the personal liability of association members. 46 The courts of both Pennsylvania and Texas have continued to hew to this line. 47 49