Robertson v. Levy

District of Columbia Court of Appeals
197 A.2d 443 (1964)

ELI5:

Rule of Law:

Under the District of Columbia Business Corporation Act, individuals who assume to act as a corporation before a certificate of incorporation has been issued are personally, jointly, and severally liable for all resulting debts. The statutory scheme abolishes the common law doctrines of de facto corporation and corporation by estoppel.

Facts:

On December 22, 1961, Martin G. Robertson and Eugene M. Levy agreed that Levy would form a corporation, Penn Ave. Record Shack, Inc., to purchase Robertson's business.
On December 27, 1961, Levy submitted articles of incorporation to the Superintendent of Corporations.
On December 31, 1961, Robertson and Levy, acting as president of the proposed corporation, entered into a lease assignment.
On January 2, 1962, the articles of incorporation were rejected, but on the same day, Levy began operating the business under the corporate name.
On January 8, 1962, Robertson executed a bill of sale to Penn Ave. Record Shack, Inc., receiving a promissory note signed 'Penn Ave. Record Shack, Inc. by Eugene M. Levy, President.'
On January 17, 1962, the certificate of incorporation for Penn Ave. Record Shack, Inc. was officially issued.
After the certificate was issued, one payment was made on the promissory note.
In June 1962, Penn Ave. Record Shack, Inc. ceased business operations and was left without assets.

Procedural Posture:

Martin G. Robertson sued Eugene M. Levy in the trial court for the balance due on a promissory note and other expenses.
The trial court found in favor of the defendant, Levy.
The trial court held that the relevant statute imposing personal liability did not apply and that Robertson was estopped from denying the existence of the corporation.
Robertson, as the appellant, appealed the trial court's judgment to the intermediate appellate court.

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Issue:

Does an individual who enters into contracts and incurs debt on behalf of a purported corporation become personally liable for those obligations if they were incurred before the certificate of incorporation was issued?

Opinions:

Majority - Hood, Chief Judge.

Yes. An individual who acts on behalf of a purported corporation before its certificate of incorporation is issued is personally liable for the resulting debts. The District of Columbia Business Corporation Act establishes a bright-line rule where corporate existence, and the corresponding limitation of personal liability, begins only upon the issuance of the certificate of incorporation. The court's reasoning rests on the combined effect of two statutory provisions: § 29-921c, which states that corporate existence begins upon issuance of the certificate, and § 29-950, which imposes joint and several liability on all persons who assume to act as a corporation without authority. The court concluded that these statutes were enacted to eliminate the ambiguous and confusing common law doctrines of 'de facto' corporations and corporations by 'estoppel.' Therefore, it is immaterial whether the third party (Robertson) believed he was dealing with a corporation. The issuance of the certificate is the definitive cut-off point; before it is issued, the individuals are liable. Liability incurred prior to incorporation is not relieved by the subsequent formation of the corporation or by a partial payment made by the corporation after its formation.

Analysis:

This decision solidifies a significant shift in corporate law, replacing subjective common law doctrines with a clear, objective statutory standard. By establishing the issuance of the certificate of incorporation as the definitive moment of a corporation's existence, the ruling provides certainty for both creditors and promoters. It serves as a stark warning to founders that they must strictly adhere to statutory formation requirements to gain the protection of the corporate liability shield. This bright-line rule simplifies litigation by eliminating inquiries into 'good faith attempts' at incorporation or whether a party is 'estopped' from denying corporate existence, thereby streamlining commercial transactions and disputes.

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