RKO-Stanley Warner Theatres v. Graziano

Supreme Court of Pennsylvania · 1976 · Corporations

Corporationspromoterpre-incorporation contractnonexistent principalpersonal liabilitynovationcorporate adoptionratification

Facts

RKO agreed to sell the Kent Theatre to Jenofsky and Graziano for $70,000, with settlement postponed twice at the purchasers' request before they failed to close on the final date. At the time of contracting, Jenofsky and Graziano were promoting a corporation to be known as Kent Enterprises, Inc., and their counsel inserted Paragraph 19 stating that if incorporation were completed by closing, the agreements, covenants, warranties, and documents would be construed as between the seller and the resultant corporation. Articles of incorporation were filed before the scheduled settlement date. Jenofsky argued that Paragraph 19 and the filing of the incorporation papers relieved him of personal liability for the contract.

Issue

Whether a promoter who signed a contract before incorporation was released from personal liability merely because the contemplated corporation was formed before closing, where the agreement referred to the contemplated incorporation but did not expressly state that personal liability would end upon incorporation alone.

Rule

A promoter who contracts for the benefit of a proposed corporation is personally liable because one who assumes to act for a nonexistent principal is liable absent an agreement to the contrary. That liability continues after incorporation 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. In this setting, absent express language to the contrary, the promoter remains liable until the corporation is formed and adopts or ratifies the agreement.

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

In Columbus, Nora Patel signed a warehouse lease as "agent for Riverbend Packaging, Inc., to be formed." The landlord knew the corporation did not yet exist, and the lease contained no clause stating that the landlord would look only to the future corporation for payment.

If the corporation is never formed and rent goes unpaid, who is most likely liable under the majority rule?

Explanation. The majority applied the rule that a promoter who assumes to act for a nonexistent principal is personally bound unless the parties agree otherwise. Because the corporation did not exist at signing and there was no agreement that the landlord would look solely to the corporation, Nora remains personally liable. (Derived from RKO-Stanley Warner Theatres v. Graziano (n.d.).)