Kridelbaugh v. Aldrehn Theatres Co.
195 Iowa 147 (1923)
Rule of Law:
A corporation becomes liable on a pre-incorporation contract made by its promoters if, after its formation, the corporation's board of directors expressly or impliedly adopts or ratifies the contract with knowledge of its terms.
Facts:
- Three promoters, J. L. Adams, Mrs. J. W. Adams, and W. D. Jamieson, hired a plaintiff-attorney to perform the legal services necessary to incorporate a new company.
- The promoters promised to pay the plaintiff $1,500 for these services.
- The plaintiff performed the work, and the defendant company was incorporated in Delaware on March 10, 1920.
- After incorporation, the three promoters became the sole directors of the new corporation.
- At the first meeting of the board of directors, the plaintiff's fee and expenses were discussed.
- During this discussion, a director, Adams, instructed the plaintiff to secure a permit to sell stock and stated, "we will pay you just as quick as we can sell some stock with which to pay you."
Procedural Posture:
- The plaintiff-attorney filed a lawsuit against the defendant corporation in a trial court to recover $1,530.32 in fees and expenses.
- The defendant corporation denied liability, arguing that the promoters were individually liable and that the corporation had not adopted their contract.
- The case was tried by the court without a jury, by consent of the parties.
- The trial court entered a judgment in favor of the plaintiff.
- The defendant corporation, as appellant, appealed the judgment to this court.
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Issue:
Does a corporation become liable for a pre-incorporation contract for legal services made by its promoters when the board of directors, post-incorporation, acknowledges the past services, discusses payment, and directs the attorney to perform additional related services?
Opinions:
Majority - De Graff, J.
Yes. A corporation becomes liable on a promoter's pre-incorporation contract when its board of directors, with full knowledge of the contract, accepts the benefits of the services and demonstrates an intent to be bound, thereby adopting the agreement. Promoters cannot act as agents for a non-existent corporation, so the corporation is not automatically liable upon its creation. Merely using the corporate charter is not adoption, as the corporation has no choice in the matter. However, liability attaches when the corporation subsequently ratifies the contract. Here, the board of directors, composed of the original promoters, had full knowledge of the plaintiff's services. At the first board meeting, they not only discussed the plaintiff's fee but also directed him to perform additional work (securing a stock permit) and expressly promised payment. This combination of acknowledging past services, accepting further benefits, and promising to pay constituted an express adoption or ratification of the promoters' original contract, making the corporation liable.
Analysis:
This case clarifies the doctrine of corporate adoption of pre-incorporation contracts. It establishes that while a corporation is not automatically liable for its promoters' agreements, it can assume liability through the subsequent actions of its board of directors. The decision moves beyond a theory of implied adoption merely by existence and provides a clear example of express adoption: when the board, with full knowledge, accepts the benefits of the contract and makes a new promise to honor it. This precedent provides a pathway for third parties who contract with promoters to hold the resulting corporation accountable if the corporation's leadership later affirms the deal.
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