Sherwood & Roberts-Oregon, Inc. v. Alexander
525 P.2d 135, 269 Or. 389, 1974 Ore. LEXIS 396 (1974)
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Rule of Law:
A statute imposing liability on persons who assume to act as a corporation without authority does not apply to pre-incorporation agreements where all parties are aware the corporation is not yet in existence; in such cases, the promoter is personally liable unless the other party agreed to look solely to the future corporation for performance.
Facts:
- The defendants, a group of real estate developers, sought financing through the plaintiff, Dean Vincent, Inc., a lending company.
- To avoid usury laws applicable to individuals, plaintiff informed the defendants that any loan would have to be made to a corporation.
- Before seeking a loan commitment, plaintiff required the defendants to provide a 'good faith deposit' in the form of a promissory note.
- At plaintiff's request, defendant Alexander provided a corporate name, 'Iron Mountain Investment Co., Inc.', for the note.
- Plaintiff knew at the time the note was executed that this corporation did not yet exist.
- Alexander signed the note 'Iron Mountain Investment Co., Inc. By David Alexander.'
- Plaintiff secured a loan commitment, but the defendants rejected it as unacceptable.
- The defendants never formed the corporation.
Procedural Posture:
- Dean Vincent, Inc. sued the individual defendants in an Oregon trial court to recover payment on the promissory note.
- The trial court, sitting without a jury, entered a judgment for the defendants, holding they were not personally liable.
- Plaintiff, Dean Vincent, Inc., appealed the trial court's judgment to the Supreme Court of Oregon.
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Issue:
Are individuals who sign a pre-incorporation contract on behalf of a non-existent corporation personally liable under a statute imposing liability on those who 'assume to act as a corporation,' when the other party to the contract knows the corporation has not yet been formed?
Opinions:
Majority - Denecke, J.
No. The individuals are not personally liable on the note. The statute imposing liability on persons who 'assume to act as a corporation' was intended to abolish the common law doctrine of de facto corporations, not to supersede the common law rules governing pre-incorporation agreements where all parties know the corporation is prospective. The applicable rule is the common law principle of promoter liability, which holds that a promoter is personally liable on a pre-incorporation contract unless the other party agreed to look solely to the corporation for payment. Here, there was evidence that the plaintiff agreed to look only to the future corporation. The plaintiff was the party who insisted the transaction be with a corporation to avoid usury laws, knew the entity did not exist, and prepared the note for corporate signature only, while other related documents were prepared for the defendants' individual signatures. This evidence supports the trial court's conclusion that the plaintiff intended to hold only the future corporation, not the individual defendants, liable on the note.
Analysis:
This decision carves out a significant exception to modern statutes that impose personal liability on individuals acting for a non-existent corporation. The court clarifies that such statutes, modeled on the Model Business Corporation Act, do not apply to pre-incorporation scenarios where the third party is fully aware of the corporation's non-existence. By preserving the common law 'intent of the parties' test for promoter liability in these specific situations, the decision protects promoters who are transparent about a venture's status. It prevents the statute from being used as a strict liability trap and underscores that contractual intent remains paramount when all parties are fully informed.
