Category Archives: Copyright © 2014 Royce Barondes

Why Do We Still Encounter Issues of Promoter Liability? Menard, Inc. v. Dial-Columbus, LLC

The normal treatment where a promoter purports to enter into a contract on behalf of a corporation that has not yet been formed is that the promoter is personally liable. Here is a summary of the normal treatment:

  • The promoter is personally liable for pre-incorporation contracts.
  • The corporation becomes liable not merely upon formation but upon adoption. This is sometimes referenced as “ratification”. A somewhat tedious observation is that one formally cannot ratify a contract where the person purporting to ratify the contract was not in existence as of the time of the contract. Hence, avoiding tedious distraction is facilitated by referencing this as an “adoption”.
  • Acceptance of benefits constitutes adoption.
  • The promoter is not discharged upon corporation becoming bound, unless creditor assents to substitution (novation).
  • A novation exists where the newly-formed entity accept benefits “if performance is made with the understanding that a complete novation is proposed”.

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Ambiguity from Multiple Writings–F.A.L. Investments, LLC v. Hawthorne Bank

F.A.L. Investments, LLC v. Hawthorne Bank, 2014 WL 1663767 (Mo. Ct. App., W.D., Apr. 1, 2014), presents a number of interesting issues concerning interpretation of a contractual relationship memorialized in multiple writings.

The facts are not stated succinctly in the brief. And what I would like to see, in order to make my own assessment of the merits, a verbatim, unedited extract of from the operative agreements, is not reproduced in one place. So, understanding the brief would require moving back-and-forth between the brief and other documents. And the arrangements are messy, involving obligations owed by an entity, and LLC, and its members in their individual capacities. So, I do not envy the judges.

In essence, the appellant’s brief seems to reference the following basic circumstances:

  • Existing loans extended by the bank were refinanced by the bank.
  • During that refinancing, what had been unrelated personal debts of one of the members of an LLC (one Samson) were secured by a deed of trust on LLC-owned property (other obligations also being secured under that deed of trust).
  • The deed of trust appears to be a form that was not negotiated.
  • The loan agreement has some oblique provision in it, described on page 10 of the brief, as follows:

“Upon the sale of any portion or all of the 179 property,” proceeds were to be divided as follows:

a. agreed expenses and taxes were payable to Green [a borrower];

b. the Borrowers’ Obligations of $1.781 Million were payable to Hawthorne; and

c. “any remaining proceeds” were to be divided equally between Hawthorne and the Greens, with Hawthorn’s share applied “to the Samson Obligations”.

  • The real property is sold to an affiliate at a price the bank thinks inadequate.
  • The borrower claims that, under the loan agreement, the Bank, after other debt is paid, is limited to getting half the proceeds for purposes of satisfying the Samson Obligations. The Bank claims it is not; the sale of the property triggers a separate due-on-sale provision in the deed of trust, entitling the Bank to additional rights.

One can see that the brief here just provides snippets in quotes. To analyze this, I want to see the entire, unedited language.

The case illustrates that the memorialization of an agreement in multiple writings can create ambiguities, because the separate parts may not fit well together. I recently wrote about this problem in an article styled, Side Letters, Incorporation by Reference and Construction of Contractual Relationships Memorialized in Multiple Writings, 64 BAYLOR LAW REVIEW 651 (2012), which can be downloaded for free at:

I would think a form deed of trust unlikely to address satisfactorily the arrangements to provide collateral securing multiple obligations, only some of which are intended to be with recourse to the borrower.

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Proving Damages for MMPA Claim–Oitker v. K.C. Waterproofing, Inc.

Missouri authority allows a property owner to testify as to the value of property, in contexts where one might think that the property owner’s testimony would be excluded as being an expert testimony without proof of the ordinary prerequisites to expert testimony. Oitker v. K.C. Waterproofing addresses such an issue. It seems there were problems with the foundation work done by the contractor.

It seems to be the contractor’s position that the client was not entitled to claim that the promised services were worth at least what the contractor charged. Presumably the contractor would not have expressly disagreed at the time the contract was formed.

Let’s see if the contractor’s discussion of the foundation for the damages computation is “all wet”.

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If You Write “Flounder” on the Contract’s Signature Line, Are You Scrod?

For the uninformed, I note defines scrod as “a young fish (as a cod or haddock)”.

We voyage to the Southern District of New York for this yarn. An employee having an employment agreement is pressured to amend the agreement. He is found to have written “flounder” on the amended terms and and returned them. Does this manifest assent?

I cannot have made this up. It’s from Random Ventures, Inc. v. Advanced Armament Corp., No. 12 Civ. 6792(KBF), 2014 WL 113745 (S.D.N.Y. Jan. 13, 2014). Here’s what one Judge Forrest, formerly a partner at the Cravath firm, writes about the matter:

Brittingham consistently refused to execute his amended EA—which, based on the factual record and as explained in more detail below, was closer to an $8 million hold-up than a mutually agreed upon deal.44 While a copy of the amended EA was eventually faxed by Thompson to Cofield, Brittingham had never signed it; instead, it had the word “flounder” scribbled on the last page in the signature block. (PX 126.) At trial, Brittingham denied having written the word “flounder,” but the Court found this testimony lacking credibility. (Tr. 460–61.) The Court did find credible, however, his testimony that he intentionally did not sign his name to the amended EA and that, in his view, he never entered into the agreement. (Tr. 462–64.) As a sophisticated counter-party, Remington could not reasonably have been duped into believing Brittingham had adequately executed the proposed amended EA based on the scribbling on the last page.

As one might expect, the opinion goes on to address whether there had been assent by conduct. The opinion is quite long–too long to summarize here.

There is a difficult line to be drawn between the so-called “duty to read” and actions that are constructively fraudulent. Illustrative of the latter camp is Hand v. Dayton-Hudson, 775 F.2d 757 (6th Cir. 1985).  There the court reformed a release signed by an employee in connection with receipt of a severance payment.  The employee re-typed a form the employer provided, to appear superficially identical to the form the employer proffered, but in a few words limiting the scope of the form release.  The appellate court affirmed the trial courts reforming the release described by the appellate court as having been fraudulently altered.

I must say that I am not particularly a fan of much of the authority applying the “duty to read”. It’s often applied in contexts where one is seeking to obtain assent in contexts where it is not knowing and voluntary. So, here we have a case going the other way. The employer is “hooked” by the principle employers often use themselves. Or is it “foul” hooked?

Long-Term Lease Restricting Improvements–Mayer v. Lindenwood Female College

A long-term lease provides this:

The Lessee shall at all times during the term of this lease, subject to the terms and provisions of this lease, have the sole and exclusive right to erect, build, rebuild, repair, change, alter, or otherwise construct such buildings, appurtenances, or other improvements for commercial use as the Lessee in its sole discretion may determine, so long as same are in no instances used for an unlawful purpose, and so long as the value of such improvements shall not be diminished to less than One hundred Thousand Dollars ($100,000.00) as the result of such work.

The brief is at: Mayer v. Lindenwood Female College, No. ED100587, 2014 WL 2116410 (Mo. Ct. App., E.D.). The question: Does this language allow the tenant to replace a building, as long as the improvement value continued to meet the dollar amount? I would think so. The lessor disagrees. Let’s see the brief.

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