Opinion ID: 894731
Heading Depth: 3
Heading Rank: 1

Heading: Liability of the Willises Individually

Text: The Willises argue that their contract liability based on a ratification theory fails as a matter of law. We agree. The jury found that the Willises had ratified the letter agreement. The court of appeals held that the Willises can be held liable for breach of contract based on this jury finding, and further held that they had waived any argument that the evidence is insufficient to support liability on the contract based on ratification. Donnelly argues that the court of appeals correctly held that the Willises had waived any argument that they cannot be held liable under a ratification theory by failing to brief the issue in the court of appeals. As a general rule, a petitioner's complaint about the trial court's judgment must be raised in the court of appeals to preserve error in the Supreme Court. [6] However, we have recognized that a party should not lose its right to appeal based on an unduly technical application of procedural rules. [7] We conclude that the Willises' opening brief in the court of appeals preserved error on this issue. [8] On the merits, we agree with the Willises that they are not liable for breach of the letter agreement under the undisputed facts presented. The ratification claim can only be based on a theory that the Willises expressly agreed to be bound by the agreement or impliedly ratified the agreement by retaining the benefits of the agreement. The jury was so instructed as to these alternative theories of ratification, [9] and relying on the latter theory Donnelly argued to the jury that the Willises had ratified the agreement by accepting benefits under it. [10] As explained above, Willis is not a party to the letter agreement, and he incorporated two companies that by law would shield him from personal liability. While his name is included in the opening sentence of the agreement, the agreement obligated URH and WHE only to issue shares to Donnelly. Moreover, at the meeting where the agreement was signed, Willis crossed his signature line off the agreement and refused to sign it. As a matter of law, the corporate shield from liability should operate in these circumstances. A bedrock principle of corporate law is that an individual can incorporate a business and thereby normally shield himself from personal liability for the corporation's contractual obligations. [11] Avoidance of personal liability is not only sanctioned by the law; it is an essential reason that entrepreneurs like Willis choose to incorporate their businesses. Not surprisingly, Willis testified that his intent always was for the corporation to be bound by this agreement and not me individually. Donnelly's own counsel, in his opening statement to the jury, argued that Willis scratched his name off the agreement because he didn't want to have anything to do with it in an individual capacity. In Castleberry v. Branscum , we stated that incorporation normally protects shareholders, officers, and directors from liability for corporate obligations, but when these individuals abuse the corporate privilege, courts will disregard the corporate fiction and hold them individually liable. 721 S.W.2d at 271. We also stated that [w]e disregard the corporate fiction, even though corporate formalities have been observed and corporate and individual property have been kept separately, when the corporate form has been used as part of a basically unfair device to achieve an inequitable result. Id. The business community was displeased with the flexible approach to piercing the corporate veil embraced in Castleberry, and in response the Legislature in 1989 narrowly prescribed the circumstances under which a shareholder can be held liable for corporate debts. [12] Under current law, by statute, a shareholder may not be held liable to the corporation or its obligees with respect to. . . any contractual obligation of the corporation. . . on the basis that the holder. . . is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory . . . . [13] The liability of a shareholder for a contractual corporate debt under this statute is exclusive and preempts any other liability imposed for that obligation under common law or otherwise. [14] There is a statutory exception to this rule where the shareholder caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the shareholder. [15] The jury rejected Donnelly's fraud claim. There is also a statutory exception where the shareholder expressly . . . agrees to be personally liable to the obligee for the obligation. [16] We can find no evidence that the Willises expressly agreed to assume personal liability under the letter agreement. On the contrary, Francie Willis did not sign the agreement, and Donnelly admitted at trial that he never asked Francie to issue him the stock under the agreement. As to Michael Willis, Donnelly testified that in conversations Willis agreed to live up to the letter agreement, but Donnelly did not indicate whether Willis made such statements in his individual or corporate capacity. Willis expressly provided that he would not be liable personally on the agreement by creating two corporations to be the obligors on the agreement, and crossing his name off the agreement during the meeting when it was signed by other parties. To impose liability against the Willises under a common law theory of implied ratification because they accepted the benefits of the letter agreement would contravene the statutory imperative that, absent actual fraud or an express agreement to assume personal liability, a shareholder may not be held liable for contractual obligations of the corporation. We hold that characterizing the theory as ratification rather than alter ego is simply asserting a similar theory of derivative liability that is covered by the statute. Even absent the statutory impediment to Donnelly's theory of liability, ratification is a common law doctrine that simply does not fit the factual circumstances presented. Generally, ratification is a doctrine of agency law, and allows a principal to be bound by an agent's unauthorized contract in circumstances where the principal becomes aware of the contract and retains benefits under it. [17] Ratification, however, presupposes that the principal has an agent who, by agreement, is authorized to act on the principal's behalf. In the pending case, URH and WHE were not agents of Willis authorized to act on Willis's behalf and bind him to contracts. Quite the opposite, URH and WHE were separate corporations created to prevent the imposition of contractual liabilities on Willis personally. Again, the law allows an individual in these circumstances to incorporate a business and thereby protect himself from personal liability. The court of appeals quoted Hays v. Marble, 213 S.W.2d 329 (Tex.App.Amarillo 1948, writ dism'd), for the proposition that [o]ne may ratify the act or contract of another . . . whether the other was his agent and exceeded his authority as such or was not his agent at all. Id. at 333. Assuming that Hays was correctly decided, we find it inapposite. In that case, one heir entered into a contract to sell property on behalf of all the heirs to the property and subsequently persuaded the other heirs to sign the deed. The court held that the other heirs had ratified the contract. In the pending case, Willis expressly refused to be bound personally by the contract, since he created separate corporations to assume liability on the letter agreement and crossed his name off the agreement when it was signed by others. Donnelly argues that the corporate separateness of URH should be disregarded because the letter agreement indicates that URH did not exist at the time the agreement was signed, and instead refers to Urban Retreat of Houston, Inc., a corporation to be formed and originally owned by principals of Willis/Hite Enterprises, Inc. The corporate records of URH reveal, however, that it existed before the letter agreement was signed. [18] It is true that WHE is also a party to the letter agreement and was not incorporated until August 1989, shortly after the letter agreement was signed. [19] However, in these circumstances we think the better rule is that a contracting party must look to the unformed corporation for performance. The contract was made in the name of two corporations, stated that one of the corporations has not been formed, and the individual promoter, assuming Willis can be characterized as such, struck his name from the agreement, thus indicating that he would not be held personally liable under it. [20]