American Vending Services, Inc. v. Morse
881 P.2d 917, 1994 WL 477194 (1994)
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Rule of Law:
Under the Utah Business Corporation Act, the common law doctrines of de facto corporation and corporation by estoppel are abolished. Individuals who assume to act as a corporation before a certificate of incorporation has been issued are jointly and severally liable for all debts and liabilities incurred as a result.
Facts:
- Wayne L. and Dianne L. Morse built and operated a car wash.
- The Morses entered into a contract to sell the car wash to Douglas M. Durbano and Kevin S. Garn, who were acting as officers for a prospective entity named American Vending Services, Inc. (AVSI).
- At the time the contract was executed on July 10, 1985, Durbano and Garn had not successfully filed the Articles of Incorporation for AVSI.
- Prior to the contract, Durbano had made two unsuccessful attempts to file articles for corporations with different names, which were rejected due to name conflicts.
- The Articles of Incorporation for AVSI were ultimately filed on August 19, 1985, more than a month after the contract was signed.
- AVSI operated the car wash for approximately three years but failed to make any payments to the Morses on the balance owed under the sales contract.
- Unable to operate profitably, AVSI eventually allowed a bank to foreclose on the car wash.
Procedural Posture:
- The Morses sued AVSI, Durbano, and Garn in a Utah trial court, asserting Durbano and Garn were personally liable for breach of contract.
- AVSI filed a cross-complaint seeking rescission of the contract based on fraudulent misrepresentation and other claims.
- The trial court found that AVSI was a de facto corporation and a corporation by estoppel, concluding that Durbano and Garn were therefore not personally liable.
- The trial court entered a judgment for damages in favor of the Morses against AVSI, but dismissed the personal liability claims against Durbano and Garn.
- The trial court also ruled that AVSI had presented insufficient evidence to support its cross-complaint for rescission.
- The Morses, as Appellants, appealed the trial court's ruling on personal liability to the Utah Court of Appeals.
- AVSI, as Appellee and Cross-appellant, appealed the ruling against its claims for rescission.
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Issue:
Under the Utah Business Corporation Act, are individuals who enter into a contract on behalf of a business that has not yet filed its articles of incorporation personally liable for the resulting debts, notwithstanding the common law doctrines of de facto corporation and corporation by estoppel?
Opinions:
Majority - Greenwood, Judge
Yes, individuals who enter into a contract on behalf of a business before its articles of incorporation are filed are personally liable for the resulting debts. The Utah Business Corporation Act, which was modeled on the Model Business Corporation Act (MBCA), statutorily abolished the common law doctrine of de facto corporations. Section 16-10-51 of the Act establishes a bright-line rule that corporate existence begins only upon the issuance of a certificate of incorporation. Section 16-10-139 further imposes joint and several liability on 'all persons who assume to act as a corporation without authority so to do.' Because no certificate had been issued for AVSI when the contract was signed, the corporation did not exist, and Durbano and Garn are personally liable for the debt incurred.
Concurring - Garff, Judge
Yes, the individuals are personally liable because the Utah Business Corporation Act eliminated both the doctrine of de facto corporations and the doctrine of corporation by estoppel. The language of section 16-10-51 is unambiguous: corporate existence begins only when the certificate is issued, providing a clear cut-off point. There is no room in this statutory scheme for equitable exceptions like corporation by estoppel. It is immaterial whether the third party believed it was dealing with a corporation; before the certificate is issued, the individuals are liable.
Analysis:
This case is significant for formally abolishing the common law doctrine of de facto corporations in Utah, aligning the state's jurisprudence with the modern approach of the Model Business Corporation Act. It establishes a clear, bright-line rule that corporate status, and the limited liability that comes with it, begins only upon the state's issuance of a certificate of incorporation. By also rejecting the corporation by estoppel defense in this context, the court prioritizes statutory clarity over equitable defenses, thereby reducing uncertainty and protecting creditors who deal with promoters of unformed corporations. The decision serves as a stark warning to incorporators to complete all statutory formalities before transacting business.
