Jacobson v. Stern
96 Nev. 56, 1980 Nev. LEXIS 522, 605 P.2d 198 (1980)
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Rule of Law:
A promoter who enters into a pre-incorporation contract on behalf of a future corporation is personally liable on that contract. The corporation's subsequent adoption of the contract does not release the promoter from liability unless the other party assents to a novation, which requires clear intent to substitute the corporation for the promoter.
Facts:
- In January 1969, Nathan Jacobson personally contacted Martin Stern, an architect, to design a hotel and casino project Jacobson referred to as 'my hotel'.
- In February 1969, Stern and Jacobson verbally agreed to a contract for architectural services with a fee of $250,000, and Jacobson instructed Stern to proceed.
- Between February and May 1969, Stern performed substantial architectural work, completing preliminary and foundation plans before Jacobson's business entities were fully formed or involved.
- On May 1, 1969, Jacobson acquired all the stock of A.L.W., Inc., the corporation that would operate the casino.
- On May 9, 1969, Jacobson formed Lake Enterprises, Inc. and Kings Castle, Limited Partnership, to serve as the ownership and management structure for the project.
- From June to October 1969, Stern received four partial payments totaling $150,000, all via checks drawn on the account of A.L.W., Inc.
- In February 1972, A.L.W., Inc. filed for bankruptcy, leaving a substantial portion of Stern's fee unpaid.
Procedural Posture:
- Martin Stern sued Nathan Jacobson in the Second Judicial District Court of the State of Nevada (trial court) to recover unpaid architectural fees.
- The trial court granted a continuance requested by Jacobson but sanctioned him $2,000 for Stern's costs of delay.
- After a trial, the district court found Jacobson personally liable and entered a judgment for Stern in the amount of $132,590.37, plus interest.
- Jacobson (appellant) appealed the judgment to the Supreme Court of Nevada, arguing he was not personally liable and that the sanction was improper.
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Issue:
Does a corporation's adoption of a pre-incorporation contract and subsequent partial performance on it constitute an implied novation that releases the promoter from personal liability, even without the creditor's clear assent to substitute the obligor?
Opinions:
Majority - Per Curiam
No. A corporation's adoption of a pre-incorporation contract does not, by itself, release the promoter from personal liability through novation; the creditor must clearly assent to the substitution of the new obligor. The court reasoned that Jacobson entered into the contract with Stern as a promoter before the relevant corporations (A.L.W., Inc., Lake Enterprises, Inc., and Kings Castle, Limited Partnership) were either involved or in existence. Therefore, Jacobson was personally liable from the outset. While A.L.W., Inc. later adopted the contract by accepting its benefits and making partial payments, this action only made the corporation also liable; it did not automatically release Jacobson. For a novation to occur, there must be clear intent from all parties, including the creditor Stern, to release the original obligor (Jacobson) and substitute the new one (A.L.W., Inc.). The court found no evidence that Stern ever agreed to release Jacobson or understood that a substitution was proposed. Stern's acceptance of checks from the corporation was insufficient to imply his consent to a novation.
Analysis:
This decision reaffirms the common law principle of promoter liability for pre-incorporation contracts. It clarifies that a corporation's adoption of such a contract creates concurrent liability, rather than substituting the corporation for the promoter. The case sets a high evidentiary bar for proving an implied novation, emphasizing that the creditor's intent to release the promoter must be clear and cannot be inferred merely from the acceptance of performance from the newly formed corporation. This holding serves as a strong protection for third parties who contract with promoters and reinforces the need for promoters to secure an express release if they wish to escape personal liability.
