Articles
Corporate Officer Liability For Corporate Debts
Part I
A corporation that has been dissolved for non-payment of its franchise taxes, as illustrated in a line of New York cases beginning with Poritzky v. Wachtel, 176 Misc. 633, 27 N.Y.S.2d 316 (Sup. Ct. 1941), offers one way to impose liability on corporate officers for corporate debts.
Poritzky and its progeny pose the question: Is an officer of a corporation, which was dissolved by the New York Secretary of State for failure to pay franchise taxes, but which was thereafter reinstated upon payment of these taxes, personally liable on contracts entered into by the corporation during the period between dissolution and reinstatement. Poritzky answered the question in the affirmative.
In Worldcom, Inc. v. Sandoval, 182 Misc. 2d 1021, 701 N.Y.S.2d 834 (Sup. Ct. 1999), Justice Herman Cahn, a respected New York jurist, agreed with the decision in Poritzky and granted a motion for summary judgment in favor the plaintiff-creditor upon the majority rule that:
'the officer may be held personally liable for debts incurred by the continuation of business of the dissolved corporation, regardless of the corporation's subsequent reinstatement" (Annicet Assocs. v. Rapid Access Consulting, 171 Misc.2d 861, 864, 656 N.Y.S.2d 152 [Sup.Ct. Rockland County 1997]; Moore v. Occupational Safety & Health Review Commn., 591 F.2d 991 [4th Cir.1979]; Adam v. Mt. Pleasant Bank & Trust Co., 355 N.W.2d 868 [Iowa 1984]; Kessler Distr. Co. v. Neill, 317 N.W.2d 519 [Iowa App.1982]; 16A W. Fletcher, Cyclopedia Corporations SS 7997, 7998 [Perm. Ed.1979 Rev. & 1986 Cum.Sup.]). Indeed, such a view accords with the rule at common law (see, J.M. Lynne Co. v. Geraghty, 204 Conn. 361, 528 A.2d 786 [1987]; In re Booth's Drug Store, 19 F.Supp. 95 [W.D.Va.1937]).
Justice Cahn noted that Prentice Corp. v. Martin, 624 F. Supp. 1114 (E.D.N.Y. 1986), a case strongly criticized and rejected as a proper statement of New York law, had declined to follow Poritzky. Prentice had held that a corporate officer should only be liable for a corporate debt incurred between involuntary dissolution and reinstatement, if the officer acted fraudulently or in bad faith, relying on Held v. Crosthwaite, 260 F. 613 (2d Cir. 1919). In Held, the Court refused to impose personal liability on the corporate officers of a New Jersey corporation that was dissolved and later reinstated, since there was no evidence of fraud on the part of the corporate officers. Prentice also relied on dictum in Garzo v. Maid of the Mist Steamboat Co., 303 N.Y. 516, 104 N.E.2d 882 (1952), which said that, where a dissolved corporation 'carries on its affairs and exercises corporate powers as before, it is a de facto corporation as well, and ordinarily no one but the state may question its corporate existence.'
More recently, in Department 56, Inc. v. Bloom, - Misc. 2d -, 720 N.Y.S.2d 920 (Sup. Ct. 2001), Justice Frank V. Ponterio, Jr. held that New Jersey statutory law, as interpreted by the New Jersey Superior Court, is that "�the personal liability of corporate officers or directors for debts incurred during the period of revocation does not survive reinstatement." In well-reasoned dicta, Justice Pontiero Jr.strongly criticized the decision in Poritzky and stated that, if New York law was applied, he would not follow it.
The practitioner should consult:
(1) Thomas G. Fischer, Annotation, Liability of Shareholders, Directors, and Officers Where Corporate Business is Continued After its Dissolution, 72 A.L.R. 4th 419 (1989), and
(2) John P. Ludington, Annotation, Reinstatement of Repealed, Forfeited, Expired, or Suspended Corporate Charter as Validating Interim Acts of Corporation, 42 A.L.R. 4th 392 (1985).
The issuance of an NSF corporate check, as illustrated in a line of New York cases beginning with Lippman Packing Corp. v. Rose, 203 Misc. 1041, 120 N.Y.S.2d 461 (Mun. Ct. 1953), offers another way to impose liability on a corporate officer for a corporate debt.
In Lippman, a corporate officer was held liable for fraud when, with knowledge that there were insufficient funds in the corporate bank account, he issued a check for the purpose of inducing the sale of merchandise. In Marine Midland Bank v. John E. Russo Produce Co., 50 N.Y.2d 31, 427 N.Y.S.2d 961 (1980), the Court cited Lippman for the rule that, "�corporate officers and directors are not liable for fraud unless they personally participate in the misrepresentation or have actual knowledge of it."
In Viewsonic Corp. v. Famart Computer, Inc., - F. Supp. - (S.D.N.Y. 2000) (99 CIV. 4053 JSM), (citing Lippman), the court stated that, if a corporate officer obtained merchandise on the strength of a check drawn on a nonexistent account, he would personally liable to the plaintiff.
The Lippman rule does not apply to a post-dated check, Alpha Aromatics, Inc. v. Frisone, 50 Misc. 2d 341, 270 N.Y.S.2d 493 (Dist. Ct. 1966).
The practitioner should consult:
John D. Perovich, Annotation, Personal Liability of Officers or Directors of Corporation on Corporate Checks Issued Against Insufficient Funds, 47 A.L.R. 3d 1250 (1973).
Part II
A corporate officer who signs a check without indicating that the officer is signing in a representative capacity may be responsible personally for the amount of the check.
Uniform Commercial Code � 3-403, Signature by Authorized Representative, states:
A signature may be made by an agent or other representative, and his authority to make it may be established as in other cases of representation. No particular form of appointment is necessary to establish such authority.
An authorized representative who signs his own name to an instrument
is personally obligated if the instrument neither names the person represented nor shows that the representative signed in a representative capacity;
except as otherwise established between the immediate parties, is personally obligated if the instrument names the person represented but does not show that the representative signed in a representative capacity, or if the instrument does not name the person represented but does show that the representative signed in a representative capacity.
Except as otherwise established the name of an organization preceded or followed by the name and office of an authorized individual is a signature made in a representative capacity. [Emphasis added.]
Arde Apparel, Inc. v. Matisse Ltd., 240 A.D.2d 328, 658 N.Y.S.2d 627 (1st Dept. 1997), discussed the responsibility of an officer of a corporate buyer who signed a check payable to the seller of goods without indicating his corporate office, as follows:
While it is true that one who signs a negotiable instrument without indicating that his or her signature is made in an agency capacity will ordinarily be personally obligated upon the instrument (UCC S 3-403[2][a] ), it is also true that this rule of personal liability admits of exception where it is established that the immediate parties to an instrument have otherwise agreed that the signatory will not be held individually responsible (UCC S 3- 403[2][b]; Rotuba Extruders v. Ceppos, 46 N.Y.2d 223, 413 N.Y.S.2d 141, 385 N.E.2d 1068; Combine International v. Berkley, 141 A.D.2d 465, 466, 529 N.Y.S.2d 790). To come within this exception the signer must prove "an agreement, understanding or course of dealing" rebutting the presumption of personal liability (Rotuba, supra at 229, 413 N.Y.S.2d 141, 385 N.E.2d 1068). It is not enough for the signer simply to claim that he or she had no intention of being bound personally (id.).
The Rotuba requirements for what had be established to prove the U.C.C. � 3-403(2)(b) defense were established in Arde from documentary evidence of the plaintiff and pre-trial testimony. The defendant in Arde showed that plaintiff and the corporate defendant had had a longstanding vendor/vendee relationship in the course of which over $600,000 of business was transacted; that the checks were drawn in payment of amounts owing for goods purchased by the corporate defendant from plaintiff; that plaintiff's principal acknowledged that the only party contractually obligated to pay for the goods purchased with the checks was the corporate defendant; that none of the underlying transactions were with the corporate officer personally; that, although the checks had been signed by the corporate officer, plaintiff was aware that they had been issued by the corporate defendant and that they evidenced only its corporate obligation; and that the corporate officer was never requested personally to guarantee payment.
Even if the checks bear the printed name of the corporate defendant, the corporate officer has the burden to "establish" an agreement, understanding or course of dealing to rebut the presumption of personal liability, Thunderball Mktg., Inc. v. Riemer, 273 A.D.2d 29, 709 N.Y.S.2d 45 (1st Dept. 2000).
The U.C.C. � 3-403(2)(b) defense is of course only available where the plaintiff is an immediate party to the check and is not available as against a holder in due course, Bankers Trust Co. v. Javeri, 105 A.D.2d 638, 481 N.Y.S.2d 362 (1st Dept. 1984).
The practitioner should consult:
John S. Herbrand, Annotation, Construction and Application of UCC � 3-403(2) Dealing with Personal Liability of Authorized Representative Who Signs Negotiable Instrument in His Own Name, 97 A.L.R. 3d 798 (1980).
Part III
The most common form of corporate officer liability is a written guarantee.
For the practitioner, it is vital that the corporate officer, as guarantor, sign the guaranty in his or her individual name, without any corporate titles added. "Where an individual attempts to guarantee the liability of a corporation, his personal liability for breach of contract does not attach unless he subscribes to the contract in his individual capacity (General Obligations Law, S 5-701)." [Cavalla v. Ernest F. Elliot, Inc., 86 A.D.2d 884, 447 N.Y.S.2d 533 (2nd Dept. 1982)]
Gold v. Royal Cigar Co., 105 A.D.2d 831, 482 N.Y.S.2d 32 (2nd Dept. 1984), found no basis for personal liability in the below-quoted letter that was signed by the individual defendants in their corporate capacities:
"To Whom it May Concern;
"It is hereby understood and agreed by the officers of Royal Cigar Co., Inc. that the sum of 100,000 dollars will be paid to Irving Gold over a period of thirty six months starting Aug. 1st, 1979.
"/S/ Leonard Schwartz, Pres.
"/S/ Harold Krasner, Sec. Tres."
Whether a guaranty is part of a contract or an application for credit, the rule set forth in Salzman Sign Co. v. Beck, 10 N.Y.2d 63, 217 N.Y.S.2d 55 (1961), is that:
In modern times most commercial business is done between corporations, everyone in business knows that an individual stockholder or officer is not liable for his corporation's engagements unless he signs individually, and where individual responsibility is demanded the nearly universal practice is that the officer signs twice once as an officer and again as an individual. There is great danger in allowing a single sentence in a long contract to bind individually a person who signs only as a corporate officer. In many situations the signing officer holds little or no stock and if the 58 language of the agreement makes him individually liable his estate may be stuck for a very large obligation which he never dreamed of assuming. We think the better rule is the one used here that is, that the statement in the contract purporting to bind the signing officer individually is not sufficient for Statute of Frauds purposes without some direct and explicit evidence of actual intent. [Emphasis added.]
In Salzman, the printed form contract for the purchaser corporation read:
'Leslie 575 Corp. L.S.
Irving Beck pres L.S.'
In another paragraph of the same contract, the following sentence appeared:
'Where the Purchaser is a corporation, in consideration of extending credit to it, the officer or officers signing on behalf of such corporation, hereby personally guarantee the payments hereinabove provided for.'
Inclusion in the contract of the above-quoted clause does not furnish the direct and explicit evidence demanded by the law of the agent's intention to substitute or superadd the agent's personal liability for, or to, that of the principal, Savoy Record Co. v. Cardinal Export Corp., 15 N.Y.2d 1, 254 N.Y.S.2d 521 (1964). Star Video Entertainment, LP v. J & I Video Distrib., 268 A.D.2d 423, 702 N.Y.S.2d 91 (2nd Dept. 2000), held that inclusion in an untitled portion of a credit application of the language that "the undersigned personally guarantees payment of the account" signed by the corporate officer's followed by the word "Pres" created a triable issue of fact of the corporate officer's intention to substitute or superadd his personal liability for, or to, that of the corporation.
The practitioner should consult:
Gary D. Spivey, Annotation, Admissibility of Parol Evidence to Show Whether Guaranty of Corporation's Obligation was Signed in Officer's Representative or Individual Capacity, 70 A.L.R. 3d 1276 (1976).
Part IV
New York Courts have considered corporate officer liability upon an oral guarantee.
The Court of Appeals considered this question in Martin Roofing v. Goldstein, 60 N.Y.2d 262, 469 N.Y.S.2d 595, aff'g 91 A.D.2d 1065, 458 N.Y.S.2d 674 (1983). The Court stated:
When a party promises to answer for the debt of another, however, the benefit to the promisor is not apparent and so the promise, if it is to be enforceable under the statute, must either be evidenced by writing or plaintiff must prove it is supported by a new consideration moving to the promisor and beneficial to him and that the promisor has become in the intention of the parties a principal debtor primarily liable (White v Rintoul, 108 NY 222, 227; and see Bulkley v Shaw, 289 NY 133; Witschard v Brody & Sons, 257 NY 97, supra.; Richardson Press v Albright, 224 NY 497). Thus, it was plaintiff's burden within this rule to produce evidence showing a consideration moving to defendant and showing that the parties intended, as ascertained from the language used and from all the facts and circumstances surrounding the transaction (Clark v Howard, 150 NY 232, 238), that an independent contract was created between them which obligated defendant to satisfy the corporation's debt in any event.
The court described the facts and the promise in Martin Roofing, as follows:
Mr. Martin [President of the plaintiff] testified that he became concerned by the bookkeeper's telephone call because the corporation then owed his company $19,000 for work completed on various jobs. He threatened to leave the Lake View Village job, but one of the corporation's employees told him not to quit, that he was working for defendant and defendant always paid his bills. Martin then went to the corporation's office and asked defendant for his money. He testified that defendant (by then no longer an officer of the corporation but a director and stockholder of its parent, Bon-Aire Industries) put his arm around him and said, "Bill, I'm going to make sure you get paid. I have to have this work done. Otherwise we don't get paid for the job. I haven't become as successful as I am by not paying my debts. I guarantee I will make sure you get paid." With that Martin went back to work and his company continued to do work for the corporation and also for defendant until 1976. [Emphasis and bracketed material supplied.]
The Court held:
Stockholders are not liable for the debts of a corporation and thus a stockholder's promise to answer for the corporation's debts ordinarily provides no more than a remote and indirect benefit to him. That is particularly so in this case in which defendant owned no stock in the construction corporation but only a 10% minority interest in its publicly owned parent.
Plaintiff maintains, however, that the beneficial consideration to defendant for his promise is to be found in defendant's need to complete the job and free up the Urban Development Funds and his need of plaintiff to work on future jobs. Neither is legally sufficient. The benefit accruing from the Urban Development Funds was a benefit to the corporation and benefited defendant as a minority stockholder of the parent corporation only indirectly. The speculation that defendant wished to retain plaintiff's goodwill for the future was also insufficient because the evidence does not establish what pecuniary advantage, if any, flowed to defendant from that employment and any benefit to him was neither immediate nor direct.
More to the point, under New York law, when the original debt subsists and was antecedently contracted, an oral promise to pay it is enforceable only when there is consideration for the promise which is beneficial to the promisor and the promisor comes under a duty to pay irrespective of the liability of the original debtor (White v Rintoul, 108 NY 222, 227, supra.; and see Richardson Press v Albright, 224 NY 497, supra.; cf. Rosenkranz v Schreiber Brewing Co., 287 NY 322; see, generally, Calamari and Perillo, Contracts [2d ed], S 19-8, p 687). Thus, even if there was sufficient consideration to defendant, he could not be liable if he was acting as a surety of the corporation.
There are several recognized tests for determining whether the promise created an independent duty to pay irrespective of the original debtor's liability which may be applied here (see 3 Williston, Contracts [3d ed], S 462).
First, as noted, there was no beneficial consideration to defendant. Second, it is said that presumptively the new promise is unenforceable unless the corporation was discharged from its underlying obligation. Obviously the corporation's debt was not discharged by the promise here *268 because plaintiff sued the corporation on it. Further, the evidence supports the Appellate Division's finding that these parties assumed that the corporation was to remain liable and defendant's promise was to be performed only if the corporation defaulted. Plaintiff executed contracts with the corporation both before and after this job without additional assurances of payment and when it was not paid for the Lake View Village work, it looked to the corporation first for payment. Similarly, although defendant's oral promise was addressed to plaintiff's claim of $19,000, which sum included $8,000 due on jobs other than Lake View Village, plaintiff sought and received payment of at least part of $8,000 apparently from the corporation. (The sum of $2,500 was allegedly paid by defendant personally for Eastchester Savings Bank, but it is not clear from the evidence whether the payment was made after a demand on the corporation or after a demand on defendant.) Despite its difficulties, plaintiff never made formal or written demand for payment on defendant until it commenced this action. Indeed, it sued the corporation first, and did so without naming defendant as a party, and took judgment against it on the claim (see Bulkley v Shaw, 289 NY 133, 136, supra). Even when it did sue defendant, the original complaint sought only damage for work, labor and services, and did not allege that defendant had made an independent promise to pay plaintiff. It was not until the complaint was amended, some five years after the promise was made, that plaintiff's present claim was asserted for the first time. Finally, the form of the promise is significant. The language used, as plaintiff stated it, indicated that it was "guarantee", i.e., that defendant was acting as a surety "to make sure you [plaintiff] get paid" (see Witschard v Brody & Sons, 257 NY 97, 99, supra). [Emphasis supplied.]
In Kramer v. Harrington Wells & Rhodes, Ltd., 275 A.D.2d 302, 711 N.Y.S.2d 507 (2nd Dept. 2000), the Court sustained a complaint alleging an oral guarantee, but with a strong and compelling dissent by Mr. Justice O'Brien, J.P., that the plaintiff had failed to satisfy the second test discussed in Martin Roofing:
Accepting the plaintiffs' allegations as true, I agree with my colleagues that the plaintiffs presented legally sufficient evidence that their promise to forbear collecting on the promissory notes constituted new consideration beneficial to the appellants since the appellants were in the process of selling their interest in the corporation. However, the plaintiffs failed to present legally sufficient evidence that the parties intended to discharge the corporation from its underlying obligation if the appellants failed to personally pay the amounts due on the notes. Although the appellants allegedly expressed their desire that the corporation be sold free of these debts, the plaintiffs never asserted that they agreed to relieve the corporation of its liability on the notes. And, in fact, the plaintiffs sued the corporation on the underlying debt.
The practitioner should consult:
E. LeFevre, Annotation, Statute of Frauds: Promise by Stockholder, Officer, or Director to Pay Debt of Corporation, 35 A.L.R. 2d 906 (1954).
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