Harry Rich Corp. v. Feinberg
518 So.2d 377, 1987 WL 3376 (1987)
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Rule of Law:
An individual who signs a contract on behalf of a non-existent corporation is personally liable for resulting debts only if they acted with actual or constructive knowledge that the corporation was not legally formed. A good faith, reasonable belief in the corporation's existence shields the individual from liability under Section 607.397, Florida Statutes.
Facts:
- Sometime between August and November 1984, Ira Feinberg became president of a business called Young Sophisticates Warehouse (Warehouse).
- Feinberg had been an officer and was told by the prior president's son, an attorney, that Warehouse had been formed as a corporation.
- On November 15, 1984, Feinberg, acting as president, signed a contract with Harry Rich Corporation (Harry Rich) for the purchase of carpeting for Warehouse.
- Harry Rich dealt with Warehouse as if it were a corporation and did not rely on Feinberg's personal credit.
- Later in November, Feinberg discovered from his own attorney that Warehouse had never been incorporated.
- Upon learning this, Feinberg immediately instructed his attorney to incorporate the business, which was completed by December 5, 1984.
Procedural Posture:
- Harry Rich Corporation initially sued Young Sophisticates Warehouse and related corporations for a dispute over a carpeting contract.
- During pre-trial discovery, Harry Rich learned that Warehouse was not incorporated when the contract was signed.
- Harry Rich amended its complaint in the trial court to add Ira Feinberg as an individual defendant.
- Following a non-jury trial, the trial court entered judgment finding the corporations liable but exonerated Feinberg from personal liability.
- Harry Rich Corporation, as appellant, appealed the judgment in favor of Feinberg to the District Court of Appeal of Florida, Third District.
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Issue:
Does Section 607.397, Florida Statutes, impose personal liability on an individual who signs a contract on behalf of a business, reasonably believing it to be a corporation, when the individual did not know that the corporation had not yet been formally created?
Opinions:
Majority - Daniel S. Pearson, Judge
No. Section 607.397, which imposes liability on persons who 'assume to act as a corporation,' does not apply to individuals who act without knowledge that the corporation is non-existent. The court adopted the reasoning of Mobil Oil Corp. v. Thoss, concluding that the statutory phrase 'assume to act' implies an intent to hold liable only those who knew or should have known of the corporation's non-existence. Here, Feinberg reasonably and in good faith believed Warehouse was incorporated. Furthermore, fairness dictates that because Harry Rich can recover from the corporation under the doctrine of 'corporation by estoppel,' it would receive an unjustified windfall by also recovering from Feinberg personally, especially since it never relied on his individual credit.
Analysis:
This decision rejects a strict liability interpretation of the statute governing liability for pre-incorporation transactions. It establishes that in Florida, an individual's good faith belief in a corporation's existence is a valid defense against personal liability. The ruling harmonizes the individual liability statute with the doctrine of 'corporation by estoppel,' preventing a creditor from recovering from both the corporate entity (which is estopped from denying its existence) and an innocent individual agent. This creates a more equitable outcome by focusing liability on those who knowingly or negligently act on behalf of a non-existent entity.
