Promoter's Liability

Question 1

Promoter

Answer 1

A promoter (firm or person) who does preliminary work for the formation of a corporation, including its promotion, incorporation, and flotation, and solicits people to invest money in the company when its being formed.

Liability: A corp. won’t be liable for any K the promoter enters into unless the corp later adopts the K, either by (1)express acceptance–> direct action of the BOD or (2) implied action, by accepting the benefit of the K.

Promoter remains personally liable for pre-incorporation Ks he enters into, even after corporate adoption, unless and until there has been a novation.

Rule: Promoters are liable under the K of the corp to be formed unless one party did not intend to hold promoter liable (Cantor)

Question 2

De Jure Corporation

Answer 2

a fully incorporated company. The business has complied with all the requirements of its state incorporation statute and is legally allowed to do business as a corp.

Question 3

De Facto Corporation

Answer 3

legal recognition of a corporation, even if the articles of incorp. for a corp. are not properly filed.

Elements:

(1) Made a good faith effort to incorporate
(2) Had a legal right to form corporation (authorized purpose, ie not an illegal business)
(3) Acted if corporation was formed (hold BOD meetings, appoint officers, have letterheads/business cards)

Question 4

Cantor

Answer 4

Cantor and Sunshine Greenery entered into a lease agreement. Cantor had many properties that he leased to individuals and corporations. Incorporator of Sunshine was unable to give first month and security but signed a blank check, but later stopped payment.

Brunetti completed Articles of Incorporation and filed with SOS but SOS didn’t officially file until a month later.

Cantor tried to go after Brunetti for defaulting on lease.

Rule: If a corporation has a de faxto existence, there can be no liability of the incorporators or stockholders.

The court looks to the intent of the parties…Sued Sunshine Greenery, check was signed Brunetti, President of Sunshine Greenery,

A De Facto corporation exists if

(1) the promoter made a good faith effort to incorporate
(2) had a legal riht to for corporation
(3) Acted if incorporated

Question 5

Doctrine of Corporation by Estoppel

Answer 5

Applies to Cantor

Prevents a defendant from avoiding its obligations under a K by arguing that the entity was not formed at the time a K was made.

Also prevents P from trying to hold promoter liable by arguing that they thought they were dealing with the promoter not corp.

Rule: Treat entity as though it were a corporation if the person dealing with the entity:

(1) Thought it was a corporation all along (treated the entity as though it were a corporation) and
(2) Would earna. windfall (or obtain unfair advantage or benefit) if now allowed to argue that entity was not a corporation

Important Corporation by Estoppel DOES NOT APPLY TO TORT CREDITORS

Question 6

Duray Developement

Answer 6

Duray signed a contract with incorporator/promoter. Later signed another K with LLC, releasing incorporator from liability. Do de facto corporation and the Doctrine of Corporation by Estoppel apply to LLCs?

Rule: The de facto corporation doctrine provides that a defectively formed corporation . . . may attain the legal status of a de facto corporation . . . . The most important aspect of a de facto corporation is that courts perceive and treat it in all respects as if it were a properly formed de jure corporation.

“Where a body assumes to be a corporation and acts under a particular name, a third party dealing with it under such assumed name is estopped to deny its corporate existence.”