Frontier Refining Company v. Kunkel's, Inc.
407 P.2d 880, 1965 Wyo. LEXIS 169 (1965)
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Rule of Law:
Individuals who agree to invest in a corporation that is never formed are not liable as partners for debts incurred by the promoter, particularly when they did not authorize the promoter to act on their behalf or hold themselves out as a corporation, and the creditor dealt with the promoter as an individual.
Facts:
- Clifford D. Kunkel approached George Fairfield and Harlan Beach to provide financing for a service station venture.
- Fairfield and Beach agreed to invest on the express condition that Kunkel would form a corporation, in which each of the three would own one-third of the stock.
- Kunkel was given the sole responsibility for completing the incorporation process, but he never took any steps to do so.
- Without the knowledge of Fairfield or Beach, Kunkel began operating the service station.
- Kunkel entered into a sublease and a supply contract with Frontier Refining Company, listing the business as 'CLIFFORD D. KUNKEL DBA KUNKEL’S, INC.' and signing the agreements as 'C. D. Kunkel'.
- Frontier sold petroleum products to the station, and its invoices were billed to 'Clifford D. Kunkel dba Kunkel Inc.'
- Fairfield and Beach invested approximately $11,000 in the venture, unaware that Kunkel had failed to incorporate the business and had already begun operations and incurred debt.
- After the business became insolvent, Frontier obtained a chattel mortgage from 'Clifford D. Kunkel, individually and doing business as Kunkel’s, Inc.' to secure the outstanding debt.
Procedural Posture:
- Plaintiff Frontier Refining Company filed a lawsuit against Kunkel's, Inc., George Fairfield, and Harlan Beach in a Wyoming trial court to recover a balance due on an open account.
- The trial court found that the business was not a partnership composed of the individual defendants.
- The trial court entered a judgment dismissing Frontier's action.
- Frontier Refining Company, as appellant, appealed the judgment to the Supreme Court of Wyoming.
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Issue:
Does an agreement between individuals to form a corporation, which is never actually created, establish a partnership that makes passive investors personally liable for debts incurred by the active promoter when the creditor dealt primarily with the promoter as an individual?
Opinions:
Majority - Mr. Justice Gray
No. An agreement to form a corporation does not create a partnership imposing liability on investors for debts incurred by the active manager when the investors did not hold themselves out as a corporation and the creditor treated the manager as an individual debtor. The court found no evidence that Fairfield or Beach held themselves out as a corporation or authorized Kunkel to do so. Frontier's own conduct, including its contracts and billing, demonstrated that it was transacting business with Kunkel as an individual, not a corporation. Furthermore, Frontier's subsequent acceptance of a chattel mortgage from Kunkel as an individual was inconsistent with its claim that a partnership existed. Imposing liability on Fairfield and Beach under these circumstances would be unconscionable.
Analysis:
This decision limits the application of the 'defective incorporation' doctrine, which can hold individuals liable as partners when a corporation is not properly formed. The court emphasizes that liability is not automatic and depends heavily on the specific facts, particularly the creditor's knowledge and actions. The ruling protects passive investors from being held liable for the unauthorized actions of a promoter, shifting the focus to whether the creditor reasonably relied on the existence of a corporation or the credit of the investors. It establishes that a creditor who deals with a promoter as an individual, knowing no corporation exists, cannot later claim a partnership existed to collect a debt from the promoter's associates.
