Moneywatch Companies v. Wilbers
106 Ohio App. 3d 122, 665 N.E.2d 689, 1995 Ohio App. LEXIS 3522 (1995)
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Rule of Law:
A corporate promoter who executes a pre-incorporation contract remains personally liable, even after the corporation is formed and its name is substituted on the contract, unless there is a novation where the other party clearly and definitively intends to release the promoter and look solely to the corporation for performance.
Facts:
- In December 1992, Jeffrey Wilbers began negotiations with Moneywatch Companies to lease commercial space for a golfing business he intended to start.
- During negotiations, Wilbers stated he would form a corporation, but Moneywatch's manager, Rebecca Reed, informed him he would have to remain personally liable on the lease.
- At Moneywatch's request, Wilbers submitted a personal financial statement as part of the leasing process.
- On December 23, 1992, Wilbers signed a lease agreement naming the tenant as “Jeff Wilbers, dba Golfing Adventures.”
- On February 8, 1993, Wilbers' corporation, “J & J Adventures, Inc.,” was officially certified by the state.
- Following incorporation, Wilbers requested that the tenant name on the lease be changed to his corporation's name, and Moneywatch agreed to this change in a letter dated March 1, 1993.
- Rent was subsequently paid with checks bearing the corporation's name.
- Sometime in 1993, the corporation defaulted on the rent and vacated the premises.
Procedural Posture:
- Moneywatch Companies (plaintiff) filed a breach of contract action against Jeffrey Wilbers (defendant) in his personal capacity in the Butler County Court of Common Pleas (the trial court).
- Following a bench trial, the trial court found in favor of Moneywatch Companies and entered a judgment against Wilbers.
- Jeffrey Wilbers (appellant) appealed the trial court's decision to the Court of Appeals of Ohio, with Moneywatch Companies as the appellee.
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Issue:
Does the substitution of a newly formed corporation's name for an individual's name on a lease agreement constitute a novation that releases the individual promoter from personal liability?
Opinions:
Majority - Powell, Judge.
No. The substitution of a corporation's name on a lease does not constitute a novation releasing the individual promoter from personal liability without a clear and definite intent by the landlord to release the original signatory. A novation requires the extinguishment of a prior valid obligation by a new contract, with the consent of all parties. Here, there was no evidence that Moneywatch Companies intended to release Jeffrey Wilbers from his personal liability. Factors indicating a lack of intent to release include Moneywatch's initial statement that Wilbers would be personally liable, the continued mailing of correspondence to Wilbers' home address, the absence of an explicit release clause, and the fact that Wilbers' original personal signature remained on the lease. Furthermore, a promoter is only released from liability on a pre-incorporation contract if the contract explicitly states performance is solely the corporation's obligation, the corporation is formed, and it formally adopts the contract, none of which occurred here.
Analysis:
This decision reinforces the high bar for establishing a novation and underscores the default rule of personal liability for corporate promoters. It clarifies that merely substituting a corporate entity's name on a pre-existing agreement is insufficient to release the promoter; there must be unambiguous evidence that the creditor intended to extinguish the promoter's personal obligation. The ruling serves as a significant protection for parties contracting with promoters, ensuring they do not inadvertently lose the security of the individual's liability. For entrepreneurs, it highlights the critical importance of obtaining an express, formal release (a novation) to successfully transfer pre-incorporation liabilities to the newly formed corporate entity.
