Quaker Hill, Inc. v. Parr
148 Colo. 45, 364 P.2d 1056, 1961 Colo. LEXIS 375 (1961)
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Rule of Law:
Where a third party enters into a contract with a promoter on behalf of a corporation not yet formed, and the third party knows of the non-existence of the corporation and agrees to look solely to the corporation for payment, the promoter is not personally liable on the contract.
Facts:
- In May 1958, E. D. Parr and James P. Presba entered negotiations with Quaker Hill, Inc. to purchase a large quantity of nursery stock.
- Parr and Presba intended to form a corporation named 'Denver Memorial Nursery, Inc.' to be the purchasing entity.
- Quaker Hill was aware that 'Denver Memorial Nursery, Inc.' was not yet incorporated; this fact was noted in the initial contract.
- At the insistence of Quaker Hill's agent to complete the deal quickly, Parr and Presba signed a sales contract and promissory note on May 19, 1958, on behalf of the proposed 'Denver Memorial Nursery, Inc.'
- Quaker Hill shipped the nursery stock, which arrived on May 26, 1958.
- Due to a name conflict, the corporation was officially formed on May 27, 1958, under the name 'Mountain View Nurseries, Inc.'
- Quaker Hill subsequently prepared and accepted a new note and contract bearing the name 'Mountain View Nurseries, Inc.' and used this name in later communications.
- The nursery stock died during the following winter and spring.
Procedural Posture:
- Quaker Hill, Inc. filed a lawsuit against E. D. Parr and James P. Presba in the trial court to recover $14,503.56.
- The trial court entered judgment in favor of the defendants, Parr and Presba.
- Quaker Hill, Inc., as plaintiff in error, sought review of the trial court's judgment in the appellate court.
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Issue:
Are promoters personally liable on a pre-incorporation contract when the other contracting party knows the corporation has not yet been formed and intends to contract solely with the prospective corporation?
Opinions:
Majority - Mr. Justice Doyle
No. Promoters are not personally liable on a pre-incorporation contract when the other party knows the corporation is not yet formed and agrees to look solely to the corporation for performance. The general rule that promoters are personally liable for pre-incorporation contracts has a well-recognized exception where the parties' intent was otherwise. Here, the trial court found that Quaker Hill was fully aware that the corporation did not exist and, in fact, insisted that the contract be made in the name of the proposed corporation to expedite the sale. The entire transaction, including Quaker Hill's subsequent acceptance of a new contract from the corporation under its new name, demonstrated an intent to contract with the corporate entity, not with Parr and Presba as individuals. This present effort to hold the promoters personally liable is a mere afterthought, as no effort was made at the time of contracting to obligate them personally.
Analysis:
This case solidifies the significant exception to the general rule of promoter liability. It shifts the analysis from a rigid rule imposing automatic liability on promoters to a fact-intensive inquiry focused on the intent of the third party. The decision establishes that if a third party knowingly contracts with a non-existent corporation and the evidence shows they intended to look only to that future entity for performance, they are estopped from later seeking personal liability from the promoters. This precedent requires courts in future cases to carefully examine the circumstances of the negotiations to determine whom the third party intended to hold responsible.
