RKO-Stanley Warner Theatres, Inc. v. Graziano

Supreme Court of Pennsylvania · 1976 · Corporations

Corporationspromoter liabilitypre-incorporation contractnonexistent principalnovationcorporate adoptionratificationcontract ambiguity

Facts

RKO agreed to sell the Kent Theatre to Jack Jenofsky and Ralph Graziano for $70,000, but they failed to complete settlement after two continuances. At the time of contracting, Jenofsky and Graziano were promoting a corporation, Kent Enterprises, Inc., and added Paragraph 19 stating that if incorporation were completed by closing, the agreements, covenants, and warranties would be construed as made between seller and the resultant corporation and the documents would reflect that. Articles of incorporation were filed before the scheduled closing date. Jenofsky argued that Paragraph 19 and the filing of incorporation papers relieved him of personal liability for nonperformance.

Issue

When promoters sign a contract while organizing a corporation, and the contract states that if incorporation is completed by closing the agreements shall be construed as made with the resultant corporation, does mere incorporation before closing release the promoter from personal liability? Or does personal liability continue until the corporation is formed and adopts or ratifies the agreement absent an express release?

Rule

A promoter who contracts for the benefit of a projected corporation is personally liable because one who assumes to act for a nonexistent principal is himself liable absent an agreement to the contrary. That liability continues even after formation of the corporation unless there is a novation or other agreement releasing the promoter; where the contract is ambiguous, it is construed against the drafter and in favor of the fair, rational, and probable interpretation. Thus, absent express language releasing the promoter upon mere incorporation, the promoter remains personally liable until the corporation is formed and adopts or ratifies the agreement.

🔒

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Pittsburgh, Nina Patel signed a five-year equipment lease with Iron Gate Fitness Supply for a studio she planned to operate through a corporation not yet formed. The lease listed Nina as tenant and added a clause drafted by Nina's lawyer stating that if the corporation was organized before delivery, the final paperwork would be issued in the corporation's name. Nina formed the corporation before delivery, but the corporation never approved the lease and no payments were made.

Who is most likely liable to Iron Gate Fitness Supply for the lease obligations under the majority rule?

Explanation. The majority rule is that one who assumes to act for a nonexistent principal is personally liable absent an agreement to the contrary. That liability continues after incorporation unless there is a novation or other agreement releasing the promoter. A clause saying the closing or final paperwork will reflect the corporation does not expressly release the promoter, and without corporate adoption the corporation is not bound. Thus Nina remains personally liable. (Derived from RKO-Stanley Warner Theatres, Inc. v. Graziano (n.d.).)