On March 13, GS Petroleum (GS) signed an agreement to sell a Shell gas station to R and S Fuel, Inc. (Fuel). On April 2, Fuel opened a corporate bank account and began writing checks on it. On April 15, Fuel took possession of the Shell station. Later, it took out insurance in the company€™s name. Unfortunately, what Fuel did not do was pay the money it owed under the contract.                                            

So far, this looks like just a breach of contract case. But there is one more fact that greatly complicates this simple picture: Fuel did not actually come into existence until March 27th, two weeks after the contract was signed. The introduction to the contract stated that it was €œentered by and between R and S Fuel, Inc., and GS Petroleum, Inc.€ The signature lines at the end looked like this:

R And S Fuel Inc. Buyer

Susan Stamm and Richard Simpson

GS filed suit for $124,000 against the corporation but also personally against Richard Simpson and Susan Stamm. The two individuals filed a motion for summary judgment.

You Be the Judge: Were Simpson and Stamm personally liable for the debts of Fuel?

Argument for GS: The corporation did not exist when the contract was signed, so someone else has to be liable. Simpson and Stamm were the promoters, their names appear on the contract and Simpson actually signed it. No corporate title is attached to his name on the signature line, which indicates he was signing as an individual, not a corporate officer. And when Simpson signed the contract, he was acting as Stamm€™s agent. So she is liable, too.

The defendants argue that the business was a de facto corporation, but they need to read the textbook more carefully. To qualify, they must have made a good faith effort to comply with corporate law, but here they had not bothered to file the forms with the Secretary of State. That is not a good faith effort. 

While they are reviewing the text, Simpson and Stamm should also note that even if Fuel adopted the contract, they are still liable until the parties sign a novation. That did not happen here. And no provision of the contract explicitly or impliedly released the two defendants. 

To find Simpson and Stamm liable is the only fair result. Someone is going to be out a lot of money. It should be the people responsible for losing that money €“ not the innocent party who sold them a perfectly good business. 

Argument for Simpson and Stamm: It is true that Simpson€™s signature line did not list a corporate title, but that was simply an oversight. He was clearly signing for the corporation. As for Stamm, she cannot be liable for an agreement she did not sign.

Promoters who sign an agreement on behalf of a corporation are only liable if the parties intended that result. GS entered into this agreement with a corporation. Note that the document states it is an agreement with just Fuel; not Fuel, Simpson and Stamm. Everyone understood that to be the case. GS has not alleged that Fuel was a sham corporation. Even before the corporate documents were filed, Simpson and Stamm ran the business as a corporation. They opened a bank account in the company€™s name, they used only business checks, they bought insurance in the corporate name. If GS wanted the two individuals to be liable, the document should have said so. 

Also, R and S Fuel was a de facto corporationat the time the Agreement was signed. Simpson and Stamm were in the process of organizing it, they were making a good faith effort and they were using the corporation to conduct business. In the case of a de facto corporation, third parties such as GS have no right to challenge its validity. 

Holding:The court ruled that the parties had not intended Simpson and Stamm to be liable, so they were not.

Question:

What is a de facto corporation?

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Richard Simpson